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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

MONDAY, 25 JUNE 2001 


Today:  Turning Japanese

*** Inflation? Bond buyers don't see it. What do they 

*** Consumers 'hang in there...' When will they drop?

*** The big danger - turning 
burglars...and more!

Market View:

*** "Inflation? We don't see any inflation," say bond 
investors. Long bonds rose last week, with the yield on 
10-year Treasury notes falling to 5.12% on Friday.

*** The National Bureau of Economic Research says we may 
already be in recession. Even if they don't lose their 
jobs, people tend to earn less money in a recession: 
they get smaller bonuses and less over-time pay.

*** But Treasury Secretary, Paul O'Neill, is not 
concerned. He says we are entering a "golden age" of 
prosperity...thanks to the heroic efforts of consumers, 
who are 'hanging in there'...spending rates are quite 

*** Consumers do not lack the is the means 
that may get away from them. "A startling new study," 
done by MGIC Capital Markets Group and reported here in 
the words of the San Jose Mercury News, says "American 
homeowners are in the process of rewriting the 
traditional rules of refinancing: rather than getting a 
new mortgage at a lower interest rate, they are taking 
out larger loans at rates slightly higher than what they 
were paying before.

*** "After a statistical analysis of recent refinance 
transactions in a 14 million-loan national database," 
the article continues, "mortgage market researchers 
report that the average borrowers in the current refi 
boom took out loans $41,000 larger and at an interest 
rate 0.6 of a percentage point higher than they had 
prior to the refinance."

*** Why would people do that? Because they have credit 
card debt and other debts that at even higher rates! And 
it's getting harder and harder to pay them.

Eric, what's the news from Wall Street?


- Last Friday was a day for taking some chips off the 
table while waiting for the next hand of Greenspan 
deals. He and the other honchos on the Federal Open 
Market Committee will convene next Wednesday to decide 
how much to cut short-term interest rates.

- The Dow and the Nasdaq each fell about 1% - the Dow 
dropping 111 points and the Nasdaq 24.

- Contributing to the skittish tone in the stock market 
were reports of weakness from two sectors that had been 
bastions of relative strength - pharmaceuticals and 

- Merck shares lost $6.67 to $67.80 after the third-
largest drug maker warned that its second-quarter 
earnings might be a few pennies per-share less than 

- Meanwhile, shares of The Gap Inc. fell almost 9%, when 
the No. 1 U.S. apparel chain announced it would slash 
more than 500 jobs from its 10,000-strong workforce.

- Both Merck and Gap belong to the select minority of 
big-cap stocks that have posted gains over the last 12 
months. If the grim tidings that have become routine in 
the technology sector fan out into the economy at large, 
Mr. Market will become inconsolable.

- "At this fragile point," says James B. Stack, editor 
of Investment Research, "monetary policy has truly 
turned into a job of bubble management. And the Fed's 
number one objective is to prevent a Japan-style 
(deflationary) scenario." [More on this below...]

- Surely Greenspan will prescribe his interest rate 
tonic in sufficient doses to cure our ailing economy. 
But will the patient take the cure?

- International Strategy & Investment (ISI) points out 
that despite a blistering money supply growth rate that 
features MZM (money of zero maturity) zooming ahead at 
an annualized 23% pace, credit creation is actually 
heading into reverse - a 4% rate of decline. "In the 
past, the two have moved together, in sharp contrast to 
their current divergence."

- "Bottom line," says ISI, "the U.S. economy is still 
weakening... The good news is the rate of slowdown has 
slowed significantly."

- "In the past two years, 100 million miles of optical 
fiber - enough to reach the sun - were laid around the 
world as companies spent $35 billion to build Internet-
inspired communications networks," the New York Times 
reports. After spending all that money, the world has a 
lot more fiber-optic cable in the ground and then it 
knows what to do with.

- How much is $35 billion anyway? Well, for one thing, 
it is slightly larger than the total value of all the 
world's gold mining company stocks. Maybe these 
companies should be worth a lot more money. Or maybe, 
the world has a lot more gold in the ground that it 
knows what to do with.

- Then again, if the dollar should suffer an extended 
decline, somebody, somewhere might find a worthwhile use 
for all that yellow metal. My friend, gold-stock analyst 
and broker, Michael Martin, told me on Friday, "I know 
'they' don't ring a bell at the bottom, but I am. You 
need to own a few gold stocks right now. The Fed's going 
to cut rates again this week, Greenspan says he sees no 
threat of inflation and the dollar is starting to 
weaken... Owning a gold stock or two is not a bad idea."


*** Total derivative positions currently exceed US$95 
trillion, according to the Bank for International 
Settlements (BIS)... World GDP is only estimated to be 
US$30 trillion.

*** DR Blue Teamer Marc Faber: "Every major invention or 
innovation leads first to a boom, then inevitably to 
speculative excesses and a vicious downturn for the 
revolutionary new sector. But why should this well-
established pattern only apply to industrial and tech 
inventions and not also to financial innovations? Given 
the complacency and the intellect of the central 
bankers, it is a question of when - and not if." (see: 
Derivatives: The Risk of Systematic World-wide Failure)

*** "The glitzy Emerald Coast of Sardinia," writes 
International Living's Steenie Harvey, "is the 
summertime domain of the rich and famous...Italian 
millionaires and movie stars...but property is still 
cheap: a small apartment in a restored building in 
Alghero's centro storico (historic center) listed for 95 
million lire ($42,000). Out at the Alghero Lido, prices 
start at 52 million lire ($23,000)."

*** What else? A group of International Living readers 
has come to Paris to enjoy the epicurean delights of the 
city. And just in time. Paris is sweltering. The 
temperature must be in the low 80s. Few places have air-
conditioning. So, people leave their windows wide open 
at night - and Paris's famous 'cat burglars' take 
advantage of it.

*** No, they don't steal pets. But they sneak up onto 
the roof and then use ropes to lower themselves onto 
balconies or in through open windows. Obviously, they do 
not steal pianos this way either. Instead, they target 
the apartments of wealthy women and take their jewelry 
and small works of art - often cutting paintings out of 
the frame and rolling them up in order to make off with 

*** On Saturday night, the people who live in the top 
floor of our apartment building heard footsteps on the 
roof. They took a camera out onto the balcony and 
managed to get a photo of the prowlers - which they 
turned over to police.

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I think I'm turning Japanese
I think I'm turning Japanese
I really think so

The Vapors

"Japanese government warns of low growth and pain," says 
a headline in the Financial Times. There is no need to 
read the article. A busy man can turn the page, 
confident that he is not missing a thing.

The news from Japan has not changed since George Bush, 
pere, threw up on Prime Minister Miyazawa 10 years ago - 
it has been nothing but bad. The Nikkei Dow tells the 
tale. Nearly 40,000 at the end of 1989, the index stands 
today at 12,896.

What is the matter with Japan? Have they no central 

Yes, they do. If anything, the Bank of Japan is even 
more central to the Japanese economy than the Federal 
Reserve system. Then, what is the matter with their 
central banker? Why can't Mr. Masaru Hayami accomplish 
the feats of economic management that are credited to 
his counterpart in America, Mr. Alan Greenspan?

There are many explanations. Any competent editorial 
page editor will tell you that the Japanese have 'failed 
to restructure' their economy. Perhaps he has some idea 
what he means by that, but it is unlikely. Typically, 
'restructuring' only comes up when the conventional 
methods - monetary and fiscal policy - have failed.

The Japanese cut interest rates...and kept cutting until 
they were giving away money. Interest rates have been 
'effectively zero,' as the Financial Times put it, for 
many years. Nor did they let good sense stand in the way 
of fiscal policy. They spent money from the public till 
to such a point that they now have, proportionally, the 
world's largest government debt.

Despite these efforts, Japanese consumers resisted the 
lure of low interest rates. Instead of spending, they 
have saved. "The Fed's number one objective," to repeat 
James Stack's comment from above, "is to prevent a 
Japan-style scenario."

But how will it do so? Lower interest rates did not work 
in Japan, why would they work here? Perhaps they will 

Business profits, it is reported in this week's 
Barron's, fell 17% in the second quarter, over the same 
period a year ago. Why are business profits falling, 
when consumers are still "hanging in there?"

The answer is that capital spending has collapsed. When 
a company builds a new plant, it does not take the cost 
as a current business expense. Instead, it is entered 
onto the capital account and deducted over a period of 

But the company that sells, installs, and services the 
capital equipment takes the money it receives as current 
income - so its profits go up. Over the entire economy, 
capital spending has the effect of raising sales 
figures, with no offsetting cost in the current year. 
The result: profits go up overall. "Net investment is 
typically the business sector's most important single 
profit source," says Dr. Kurt Richebacher.

There is a parallel in the consumer area. Employees' 
salaries are a cost to employers. But, then, employees 
use the money to buy goods and services - so it comes 
back to the employers. But businesses get a real boost 
when consumers spend money that didn't come from salary 
checks. This is what happens when new credit is made 
available or when people take money out of savings and 
spend it. Consumers spend money that employers do not 
have to take as a salary expense. The net result: higher 
corporate profits.

"Within just two years," writes Dr. Richebacher, 
explaining America's financial boom of the late '90s, 
"consumer dissaving poured almost $300 billion into the 
economy...the absolutely dominating influence on the 
U.S. economy... The consumer's dissaving binge of 1999-
2000 became the business sector's profit bonanza during 
those years."

The problem with dissaving is that you can't do it for 
long. Pretty soon, you have no more savings to dis. 
Then, you have to start saving again - whether you want 
to or not. The virtue of spending more than you can 
afford becomes the vice of financial prudence: 
businesses pay out wages, but the money doesn't come 
back in sales. If consumers begin acting, ever so 
slightly, like the Japanese, business profits will fall 
even further.

This danger is compounded by the fact that the baby 
boomers are approaching retirement age - or at least the 
age when they begin taking retirement seriously. Suppose 
they decide to save just a little bit of their earnings? 
Suppose they decide that they are getting a little too 
close to retirement age to risk all of their savings in 
the stock market?

Welcome to Hiroshima, mon amour.

Your correspondent, going for out for some sushi...

Bill Bonner

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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 25, 2001

Published By Tulips and Bears LLC