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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

TUESDAY, 26 JUNE 2001 


Today:  The NEW New Economy?

*** "Tell it like it is..." - what's the Fed really trying 
to do? 

*** Barrick buys a gold stock...

*** Fed rate cut tomorrow? Which way lies Japan...? The NEW 
new economy...and more!

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Market News:

*** "Why don't you tell it like it is," asks a Daily 
Reckoning reader. "Greenspan and his cronies at the Fed 
couldn't care less about the economy or the markets. Their 
job right now is to save the banks. Where is all of the 
liquidity infusion going? And why is it remaining in the 
banks? ...The Fed is doing what it was created by the banks 
to do, bail them out of bad loan portfolios at the expense 
of the taxpayers."

*** Well, yes, that is what the Fed is doing. But the banks 
are not independent of the rest of the economy or of the 
markets. And Mr. Greenspan has his reputation to worry well as the banks' bottomlines.

*** Tomorrow, the Fed chief will probably cut rates 
again...maybe by 25 basis points, maybe by 50. What else 
can he do?

*** "The Fed...doesn't have a choice," opines Alan Abelson 
of Barron's. "Its strenuous hacking away at rates, frequent 
and substantial as the cuts have been, and a wide-open 
monetary throttle have failed to right the listing economy. 
Wall Street's hopes and cries to the contrary, things are 
not getting better; they seem to be getting worse."

*** "At last tally," Abelson explains, "operating rates [in 
the manufacturing sector were the lowest since '83, when 
the U.S. was emerging from a killer recession. Business is 
spending on capital projects at the droopiest pace in 
nearly a decade... Unemployment is taking on some chronic 
overtones: Nearly three million people filed continued 
claims for jobless benefits the past three weeks, more than 
at any time since '92..."

*** "The Federal Reserve," he continues, "has not been able 
to turn the economy around...What it has to shore 
up a very wobbly stock market. Which is nothing to sneer 
at, since that way lies free-fall, panic, and Japan."

*** Which way lies Japan? More below...

But, first, let's hear from Eric...what's new on Wall 


- As investors tire of beating up on technology stocks, 
they are starting to pick on some of the big stocks inside 
the Dow. Yesterday, the big board fell another 100 points, 
even as the Nasdaq managed a modest 16-point gain.

- The biggest losers? Several stocks that have been holding 
tough through most of the year: Home Depot, Caterpillar, 
General Electric, and Wal-Mart.

- Walgreen's, another pillar of strength in the stock 
market, crumbled yesterday as well. Shares of the nation's 
No. 1 drugstore chain fell more than 10% after the company 
reported fiscal third-quarter earnings that did not meet 
Wall Street estimates.

- "We don't call ourselves recession-proof, but we're 
certainly recession-resistant," said President David 
Bernauer. Maybe so, but that's cold comfort to Walgreen's 

- From Merck to Gap Stores to Walgreen's, the list of 
"recession-resistant" companies announcing disappointing 
earnings is growing longer by the day. Apparently, there 
are not enough credit card-wielding patriots out there 
buying goods they can't afford. 

- It looks like Peter Monk and the other boys at Barrick 
Gold read the Daily Reckoning. Less than 24 hours after we 
quoted Michael Martin saying, "I know 'they' don't ring a 
bell at the bottom, but I am. You need to own a few gold 
stocks right now," Barrick elected to own one - Homestake 

- In a $2.3 billion all-stock deal, Barrick Gold will 
acquire rival Homestake Mining to become the world's 
second-largest gold producer behind South Africa's 
AngloGold Ltd. Homestake shares soared 20% on the news.

- Two UK inmates gained their freedom under a 900-year-old 
royal decree by saving the life of a prison worker who was 
attacked by a boar, the BBC and the UK's Independent 
newspaper reported. The decree, named the Royal Prerogative 
of Mercy, provides for prisoners to gain their freedom by 
performing "acts of courage or other meritorious conduct." 
If only it were that easy to get out of a losing stock.

- Now that George W. and the Republicans occupy the White 
House, a couple noticeable fashions are back in style: 1) 
drilling for oil in pristine wilderness regions; 2) Wearing 
coats and ties. Republicans couldn't be happier, of course. 
But they're not alone. Because ties are making a comeback, 
so are the stocks of companies that sell traditional 
business attire. Shares of Nautica and Polo both hit new 
52-week highs recently. Even Phillips-Van Heusen is surging 

- The slowing economy is also contributing to the changing 
business fashion trends. "We're in an economic situation 
where the boss can say, 'Go home and come back wearing 
something with a collar.' We didn't have that a year ago," 
Crain's reports.

- We Americans may be "turning Japanese" but the Japanese 
have been "turning American" for several years. Note the 
upcoming IPO of McDonald's Japan Ltd. The $1 billion share 
sale is the biggest one in Japan so far this year. 
McDonald's has been selling Big Macs in Japan for 30 years 
and now sells two out of every three fast-food burgers 
consumed by the Japanese. [But at lower prices than a year 
ago....more below...Bill]

- "It was just a few months ago, it seemed, that it was 
almost impossible to book a hotel around in Manhattan," 
observes "But those days are over - at 
least for now - because of a slackening economy and a 
record construction boom." According to a recent report by 
Pricewaterhouse Coopers, the occupancy rate during the 
first quarter of 2001 was 72.3%, down from 78.2% in the 
same period last year. 


*** "The greens have beaten the coal industry silly over 
the past quarter decade," writes John Myers. "In 1975, at 
the height of the energy crisis, the price of coal hit $100 
a ton. In constant 2001 terms that would put the price of 
coal close to $300 a ton. Of course, seal-huggers, more 
interested in trees than humans, have declared war on coal 
and thrown roadblocks against its use. By 1999 the price of 
coal had fallen to just $20 a ton. That was just one-tenth 
of its price during its heyday. Even after a revival, the 
price of coal is selling for only $40 a ton, a fraction of 
what it was fetching 25 years ago." see: (Suffocation, War 
or Coal)

*** Paris is hot. I'm ready to leave. But Baltimore is 
even hotter. Oh la la...

*** Henry, 10, got his report card yesterday. All A's. It's 
nice to have at least one good student in the family. 

*** And Maria's dance group did a hip hop performance at 
the Casino de Paris theater on Sunday evening. The theatre 
was sold out...I couldn't get I avoided the sweaty 
spectacle and instead drifted over to Trinity church, where 
I was just in time for a cool evening mass. 

*** Elizabeth reported that Maria danced well... but was 
unimpressed with hip hop. "It was jerky and graceless," she 
reported, "I think Maria should stick to ballet." 

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The NEW New Economy?

The Seattle Times updates us on what life is like in a 
country with neither a new economy nor even an old Alan 
Greenspan: "Last month consumer prices in Tokyo fell 0.6 
percent from the previous year, marking the 21st 
consecutive month that prices dropped," the government 
said. "And there is no sign they will stop falling."

"Indeed, falling prices have ruined corporate profits, 
saddled banks with hundreds of billions of dollars in bad 
debt and wrecked home values. Ordinary Japanese are 
worried, and policy-makers are puzzled about what to do."
No one fully understands what went wrong in Japan. But 
almost every economist in North America is sure that it 
won't be repeated here, whatever it is. 

For some reason, the Japanese abandoned their 
boom/borrow/spend psychology after stocks crashed in 1990. 
Despite a full-time central banker, interest rates of zero, 
and lavish fiscal spending - nothing has induced ordinary 
Japanese to resume their bubbly ways. Consumer spending, 
for example, fell 4.4% this April, over the same period a 
year ago.

Japan's economy lost ground in the first three months of 
the year, with negative GDP growth of 0.2%...suggesting the 
nation is headed into its fourth recession in a decade.

"I don't think you can point to a single, post-World War II 
case of national deflation on such a massive and continuous 
scale," comments Robert Alan Feldman, economist for Morgan 
Stanley in Tokyo. "These are just not normal times." 

But as they say at the bar across the street, the Bear's 
Den... "who's to say what's normal?"

In today's letter I take up the issue with both a simple 
question and a simple answer.

To the question: "why won't Japan's consumers consume 
more?". I offer the following hypothesis: because they are 
getting old. 

All of nature breathes in and breathes out, expands and 
contracts, booms and busts... The lifecycle of a human 
being is no different. We begin as small animals; then, we 
grow into big ones. If we are lucky, we contract again... 
and finally whither to dust.

I offer no judgment on this process, nor a remedy. I merely 
report it.

At a certain point in our lives, the desire to expand 
ceases and is replaced with a desire to cut back, to 
downsize, to take life more slowly... and reduce the level 
of risk and excitement. We give up rock climbing and begin 
rock gardening, for example. We sell our big houses - in 
which we raised our children and endured the sturm and 
drang of the teenaged years - in favor of a smaller place, 
perhaps with a smaller yard...or maybe even a condo in an 
adult community.

Economists may argue about whether Mr. Greenspan's 
counterparts at the Bank of Japan lowered rates...or failed 
to increase the money enough, or whether the 
government has propped up failing institutions, or been 
unwilling to 'restructure' the economy (whatever that 
means). Meanwhile, the Japanese - with the oldest 
population of any major nation - grow older. And as old 
people have always done, they seem to be downscaling their 
lives. They are saving, rather than spending...and 
preparing for retirement.

The Japanese are demonstrating what economists call "the 
paradox of saving." An economy needs savings in order to 
invest in new and better means of production. But taking 
money out of the consumer economy reduces sales and profits 
in the near term. Companies pay out wages - but the money 
doesn't come back in sales. Instead, it gets squirreled 
away for the future.

The New Economy was supposed to be one in which this didn't 
happen - because information technology was thought to 
require less in the way of capital investment (less 
savings) and because it was supposed to reduce costs so 
fast that it generated huge savings and huge profits. Money 
would not have to be taken out of the consumer economy. 

There are many new things about our economy. But what if 
the most important new thing really has nothing to do with 
technology...and everything to do with aging populations? 
What if Japan's deflationary economy, rather than America's 
recently booming one, represents the wave of the future... 
the NEW new economy? 

Imagine millions and millions of people preparing for 
retirement. They no longer borrow money to finance a bigger 
home. They no longer buy bigger cars for taking family 
vacations. They have all the time savings devices and 
household appliances they need. And they are no longer 
buying stocks 'for the long run.' They bought stocks 'for 
the long run' 10 or 15 years ago. Now the long run has 

A Japanese investor who was 65 years old in 1989, is now 
72. And if he had $300,000 worth of retirement savings - 
invested in stocks in December of '89...and left there 
until yesterday - he now has only about $75,000. What will 
he live on?

Nor do public social security systems offer much comfort or 
hope of fiscal stimulus.. "We are living in a fool's 
paradise," writes Dr. Gary North., "as all citizens of 
Western industrial democracies [including Japan] have pay-
as-you-go funding (i.e., unfunded) for their government-
guaranteed retirement and medical insurance systems. Every 
Western nation has a birth rate lower than 2.1 children per 
family, which is the replacement rate. The number of 
workers coming into the economy will be insufficient to 
fund the old-age pension systems."

The U.S. benefits from young immigrants, who help support 
America's retirees. But Japan has never cottoned to 
immigration. The Japanese look only to themselves. Is it 
any wonder they save their money?

"For the U.S. the day of demographic reckoning may be as 
far away as 2017, but 2011 should see preliminary signs of 
crisis in the Social Security/Medicare systems," Dr. North 
concludes. "For Japan, the crisis will begin soon: in 

Did it begin, in fact, 13 years ahead of schedule - as baby 
boomers anticipated their retirement years and decided to 
take precautions? Did the shock of falling asset prices in 
the early '90s frighten Japan's 50-something population 
into taking a more modest and conservative approach to 
their personal finances? And could this New Economy arrive 
in America years ahead of schedule too - as 76 million baby 
boomers begin to scale down their lives, pay down their 
debt, reduce their spending and their stock market 

Could it be that whether Mr. Greenspan's Fed heads East or 
West...sooner or later it will find itself in Japan?
Maybe, dear reader, maybe.

Your editor, thinking about cutting back...
Bill Bonner

P.S. Deflation has its bright side. You can buy a hamburger 
in Tokyo for only half what cost a year ago. Shirts are 
down by 60%. Other consumer items - from houses to golf 
club memberships - are available at deep discounts.

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 26, 2001

Published By Tulips and Bears LLC