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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

FRIDAY, 22 JUNE 2001 


Today:  Mers El Kabir

*** Are bankers really smarter than they used to be?

*** CEOs get rich...shareholders get exploited...

*** 'Dead' stocks...coal getting hot?...gratuitous 
sartorial advice...and more!

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Market Update:

*** "Have bankers gotten a lot smarter since they 
financed the stock bubble of the 1920s, or the Emerging 
Market loan bubble of the 1970s, or the Texas oil bubble 
of the 1980s...or nearly every real estate bubble that 
has ever happened?" I asked earlier this week.

*** "Absolutely not!" comes the reply from my colleague, 
Eric Fry on Wall Street. "If anything, bankers have 
evolved into even less intelligent forms of life. 
Instead of loaning money to risky Internet start-ups, 
they now purchase stock in risky start-ups through their 
venture capital subsidiaries. For example, JP Morgan 
Chase's venture capital subsidiary invested more than $9 
billion - or 35% of the entire company's tangible net 
worth - in various start-ups and (ad)venture funds."

*** "If bankers are making better loans," Eric 
continues, "it is only because their VC subsidiaries 
found the least credit-worthy borrowers before the loan 
officers could. Bankers never met a bubble they didn't 
like. Yesterday, Alan Greenspan told Congress that 
although the quality of loans at US banks has 
deteriorated, there is no sign yet that lenders are 
denying credit to sound borrowers. Very true, Alan. In 
fact, there is no sign yet that lenders are denying 
credit to unsound borrowers, either.

*** "Revolving credit debt is soaring 16% annually, 
thanks to declining repayment rates. In other words, 
folks continue to obtain and use credit cards, they just 
find it inconvenient to pay down their balances 
sometimes - like when they don't have a job, for 


Here's the rest of Eric's report:

- Yesterday was the longest day of the year in the 
northern hemisphere. But it wasn't long enough. The 
longer the trading day wore on, the higher stocks rose. 
At the closing bell, the Dow had gained 68 points and 
the Nasdaq 27 points. No single news item can claim 
credit for the modest advance, but there was a wee bit 
of hopeful news on the employment front. Initial jobless 
claims in the week ended June 16 fell 34,000 to 400,000 
from a revised 434,000 in the prior week.

- The encouraging news is welcome, to be sure, but the 
discouraging news is legion. Extended-stay hotels in 
Manhattan are "feeling a chill," reports. 
Demand for rooms is softening as the "high-tech 
conferences and corporate transitions that fueled their 
expansion run out of gas."

- "The Baltic Freight Index shows that cargo ships have 
a lot more room to spare...for stowaways and the like," 
writes Jay Akasie, of The index, 
which measures freight rates for dry bulk cargo like 
coal, iron ore and grain shipped on 11 major trade 
routes, is a handy indicator of global economic 
activity. "When economic malaise takes a bite out of car 
sales in Japan, for instance, steel manufacturers need 
less iron ore and coking coal, which drives down freight 
rates (and opens up space for the aforementioned 
hitchhikers)." Since peaking last fall, the Baltic index 
has been sliding steadily.

- You may consider yourself lucky...but don't think that 
makes you one of the "Fortunate 100" - a list of the 
highest-paid chief executives in New York, as compiled 
by Crain's New York Business magazine. How does one 
become so fortunate? There's no simple answer, but 
suffice it to say that a scrupulous devotion to 
reasonableness and fairness won't advance the cause. 

- Consider Michael Mahoney, CEO of Viatel and newly 
admitted member of the Fortunate 100. In March of last 
year, Mr. Mahoney exercised 200,000 options to buy and 
then quickly sell Viatel stock. How fortunate for him 
that his prescient sales netted him $6.6 million dollars 
before his company filed for Chapter 11 bankruptcy 

- And what about Kevin Ryan, CEO of DoubleClick Inc? He, 
too, was a very fortunate lad. Kevin exercised almost 
400,000 options on his company's stock last year to net 
himself a cool $16.8 million. He initiated his sales 
last February when the stock hovered around $100. 
DoubleClick is still with us, if just barely. The stock 
sells for around $11.

- Mahoney and Ryan, while fortunate indeed to have 
cashed in so many options last year, were hardly alone. 
The top 50 "earners" (more like lottery winners) 
received better than three quarters of their total pay 
via stock options and the like.

- By contrast, Greg Maffei deserves a spot in the 
"Unfortunate 100." In 1999, Mr. Maffei swapped his 
title, CFO of Microsoft, for the title, CEO of 
360networks - a tech start-up. In his new role as go-
for-broke entrepreneur, Maffei tried very hard to go 
broke. He borrowed $77.5 million from his new employer 
to buy its stock. Now that the shares of 360networks 
sell for 25 cents each, Mr. Maffei's 62 million shares 
are worth about $15 million - a cool $62 million or so 
less than the amount of money he borrowed to buy them. 
Maffei has got to be asking himself, "Was it really so 
bad counting beans for Bill Gates?"


*** Well, the second half is here...where's the second 
half recovery? Wouldn't it be a surprise if there were 
no recovery? Suppose instead the economy limps along for 
the next 10 years, always on the verge of recession, 
like Japan. Could it happen? Yes, dear reader, it could. 

*** Both individuals and corporations need to reduce 
debt. But they could do it little by little over a long 
period of time. Cutting back on spending gradually - 
while Greenspan cuts rates even more - might prevent a 
sharp break in the economy, while almost guaranteeing a 
long period of very sluggish growth.

*** And what about stocks? Richard Russell argues that 
the stock market is going 'dead.' After 5 years of high 
volatility, we could be facing 5 years of low 
volatility. In this case, investors would be stuck with 
high-priced, low dividend stocks that go nowhere for 

*** "The recent levitation of the Nasdaq is not only a 
testament to the power of bear market rallies," writes 
the DR Blue Team's David Tice, "but also to the 
willingness of investors to renew their faith in the 
riskiest stocks. For example, the quartile of $1 
billion-plus companies with the highest P/Es soared 30 % 
from April 4 to May 16. Risky tech stocks did especially 
well [while] the fundamentals get worse by the week. 
These stocks are prime for a fall... " 
(see: If Bubbles Have Consequences...  note: Blue Readers Only) 

*** French consumer spending fell for the 2nd month in a 
row. The euro, which I thought was a bargain early this 
year, is an even bigger bargain now. It is down 9% 
against the dollar since January.

*** Maybe people are cutting back on air travel, but how 
did so many Americans get to Paris? The streets are 
packed with them...walking around with maps and water 
bottles as if they were crossing the Sahara. 

*** May I offer some sartorial advice? The whole point 
of most of our striving in life is so that we can feel 
superior to our fellow human beings. After food, sex and is vanity that prods us forward. But how 
superior can you feel - especially in an elegant, 
sophisticated city - when you are wearing baggy shorts 
and running shoes? Think Audrey Hepburn. Or Cary Grant.

*** Now let me take up a particularly natty subject: 
pants. Of course, women should never wear pants in 
public - unless they are gardening. Summer dresses are 
appropriate. Or maybe a dignified blouse with a very 
form-fitting skirt. And, oh yes, make sure the top is as 
low-cut as you dare. 

*** But how about khakis on men? I've wrestled with this 
problem for a long time. Are khakis acceptable? The 
answer I have come to is 'no.' Linen or wool are okay, 
but khakis are just too casual. And men, don't forget 
jackets and ties are de rigueur at all times - even when 
you are playing croquet.

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"People for the most part stood their ground, but the 
ground itself gave way beneath them."

Joseph Schumpeter
Describing the beginning of 
the Great Depression

"Your comparison of the British attack on the French 
fleet in 1940 with the Japanese attack on Pearl Harbor 
in 1942 is ridiculous," writes one English reader of the 
Daily Reckoning. 

"It was hardly a surprise attack on the French," he 
continued, "Europe was already at war." 

Even my old friend, Adrian Day, protested. The Vichy 
government had gone over to the German side, he pointed 

61 years ago, Paris was an occupied city. The German 
army had arrived on the 14th of June. 

And on this day, the 22nd of June 1944, France and 
Germany signed an armistice. France had been beaten in 
what it calls its 'funny war' - a 6-week conflict in 
which the biggest army in Europe was whipped decisively.

What went wrong? 

As the threat of war increased in Europe in the late 
'30s, France put her faith in two things: the Maginot 
Line - a line of fortifications along the west bank of 
the Rhine - and the 'elan' of its fighting men. 

"Elan" can be roughly translated as 'spirit' or 
'enthusiasm.' The idea was taught in France's military 
schools - that as long as the army maintained its 
'elan,' it would not lose.

But elan only goes so far. In a matter of days, the 
fortresses of the Maginot Line were by-passed and nearly 
the entire French army was either outflanked, cut off, 
or in full retreat. French commanders had no 
understanding of blitzkrieg warfare; they didn't know 
what was happening to them and had no plan to deal with 

The French government could talk all it wanted about 
preserving the fighting spirit of its troops - but with 
the wehrmacht bearing down on them, the soldiers 
themselves threw down their guns and fled. 

Will American consumers do the same? Will they throw 
down their credit cards? Will they reject McTeer's 
patriotic appeal to 'spend, spend, spend' and decide to 
look out for their own balance sheets?

Two things, it is believed, stand in the way of 
recession (and further stock market declines), dear 
reader: rate cuts and consumer confidence. 

So far, the rate cuts have failed to produce an economic 
turnaround. "We notice a total failure of the Fed's rate 
cuts," writes Dr. Richebacher in his latest letter. But 
as long as the elan of American consumers holds out, it 
is widely believed, the economy will not fail.

"It is not so much the recession call itself that 
matters," explained Alan Greenspan in one of his recent 
Congressional testimonies, as long as there is no 
"breach of confidence." 

"We note in the public discussion," adds Dr. 
Richebacher, "a peculiar emphasis on the key role of 
confidence in sustaining economic growth." Interest rate 
cuts are made, it is said, not merely to reduce the cost 
of credit but to increase consumer and investor 
confidence, in the same way that the huge Maginot 
fortifications increased the feeling of security among 
the French, even though they were already useless from a 
military point of view. 

"To us," Dr. Richebacher continues, "this focus on the 
fuzzy concept of confidence suggests a general refusal recognize the true nature of the unfolding 
economic and financial quagmire..."

What menaces the U.S. economy and Wall Street is not a 
lack of confidence, but too much of it. Investors were 
so confident that stocks would rise in price that they 
bought shares at preposterous prices. Businessmen, 
feeling the whoosh of easy money in their hair, 
increased investment in all manner of projects, some 
sensible but many not. And consumers, confident that the 
good times would last forever, stopped saving 

Confidence, a virtue in moderation, turned out to be a 
vice in excess - like a drunken soldiers on leave in a 
foreign country, Americans thought they could get away 
with anything.

Meanwhile, the tanks are advancing. 

Businesses are "facing a savage profit squeeze...the 
sharpest in the whole post-war period" says Dr. 
Richebacher. But here too, the facts are distorted by 
what he calls "a confidence game." 

The profits that were supposed to have been turbo-
charged by information technology "never happened," he 
charges. Instead, profits actually fell in the second 
half of the 1990s - that is, after information 
technology had been put in place. 

Even then, profits were amplified - using options and 
other accounting tricks to inflate the real picture, 
while keeping investors' confidence up. And now, 
companies are producing profits down 10% to 50%...but 
still reporting that they earned 'a penny more than 

Faced with falling profits, businesses are cutting back.

"Everybody is cutting expenses and laying people off," 
reports the Mogambo Guru. "But those expenses were 
somebody else's revenue. In fact, a lot of people's 
revenue. And now there is less money to pay the crowd of 
creditors outside the door."

"We learn from the Levy Institute that something unusual 
happened in the first quarter," observes Dr. 
Richebacher, mortgage refinancing and credit card debt 
both went up. "In the past, households always used part 
of their mortgage refinancing to pay down costlier 
credit card debt. This time, sharply slower income 
growth forces them to step up their credit-card 
borrowing to maintain their lifestyle."

How long will consumer confidence hold out? We don't 
know. But we doubt that it will collapse on it own - 
instead, it will be smashed, like the French fleet at 
Mers el Kabir.

The French entered the 'funny war' with all the 
confidence in the world. They could scarcely imagine 
that their elan and their Maginot line would both be in 
ruins less than two months later. Days later, their 
former allies, the British, attacked the French fleet. 

"Were the French at war with the British in July of 
1940?" I asked Luc, a French colleague with whom I share 
an office. "Had the French committed a single hostile 
act towards the British?" I might have added.

"Non," came the answer.

And yet, provoked only by the gritty reality of the 
situation, the British fleet steamed up to the harbor 
near Oran in North Africa and demanded the French 
surrender their ships. 

No naval commander with a shred of dignity or honor 
could have consented to the request. The French stood 
their ground. But, as it happened, the ground gave way 
beneath them.

The British opened fire. When they were finished, the 
French fleet had been demolished, and 1200 sailors were 

Your correspondent, reporting on what the French call 
their "day of mourning."

Bill Bonner

P.S. The French destroyed what was left of their fleet 
themselves. They blew it up in the harbor at Toulon 
rather than let it fall into German hands.

About The Daily Reckoning:

Daily Reckoning author Bill Bonner

Bill Bonner is, in spite of himself, a natural born contrarian. Early each morning, Bill writes The Daily Reckoning—his take on the financial markets and what’s going on in the world—and sends it off by e-mail before most Americans’ alarm clocks have buzzed. Many readers say it's the first thing they want to read when they get up—not only because it's informative and thought provoking, but also it's inspiring, in its own quirky and provocative way.

Of course, there's much more to Bill than his daily market commentary. He's also the founder and president of Agora Publishing, one of the world's most successful consumer newsletter publishing companies. Bill's passion for international travel and big ideas are reflected in the company he's successfully built. In 1979, he began publishing International Living and Hulbert's Financial Digest . Since then, the company has grown to include dozens of newsletters focusing on health, travel, and finance. Bill has vigorously expanded from Agora's home base in Baltimore, Maryland since the early ’90s—opening offices in Florida, London, Paris, Ireland, and Germany.

Agora's publication subsidiaries include Pickering & Chatto, a prestigious academic press in London and Les Belles Lettres in Paris, best known as a publisher of classical literature in bilingual editions.


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Last modified: June 22, 2001

Published By Tulips and Bears LLC