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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  A Fed Celebrity Death Match?

*** Investors await another rate cut...

*** "History is not on their side," says the IHT of 
bullish investors...

*** Manhattan feeling the pinch...what's up with the 
dollar?...yins and yangs...airport security...and more!

Market Notes:

Not much happened yesterday. Nothing much was 
supposed to happen. The big news happens today - when 
the Fed announces whether it will lower rates by an 
additional 25 basis points...or by 50. 

A month ago, Alan Greenspan acknowledged that: "A 
central bank can contain inflation over time under most 
conditions. But do we have the capability to eliminate 
booms and busts?" The answer, in my judgment, is no, 
because there is no tool to change human nature or to 
predict human behavior with great confidence. 

Nevertheless, nearly everyone expects the Fed 
Chairman to do what he cannot do: "Monetary policy and 
tax cuts will work," opines Mario Gabelli in Barron's. 
"For the next 6 to 12 months, price targets are 1550 on 
the S&P and 12,500 on the Dow," adds Abby Joseph Cohen. 
"There is no recession,' she says.

"Investors and pundits alike have taken the 
explosion in money growth as virtually de facto proof 
that the Federal Reserve has succeeded in engineering a 
monetary reflation and, ultimately, an economic 
recovery," writes the Prudent Bear's Marshall Auerbach. 
"If only it were that easy." (see: Global Economy: The 
Calvary Won't Be Riding In This Time) 

"History is not on their side," reports a lead 
article in the International Herald Tribune. "For the 
past 30 years, each time payrolls in the U.S. have 
shrunk as much as they have recently," the paper 
explains, "they have continued falling for months and a 
recession has ensued or has already been under way."

So what will happen this time? Just to add to the should realize that things can't stay as 
they are. Either the economy will pick up - or it will 
get worse. Eric, what do you have to report?


From Eric Fry on Wall Street:

- Merrill Lynch & Co. - a kind of concubine to the new 
economy - slashed its second-quarter profit projections 
by 37% due to weak stock market conditions. The news 
sent shares of MER tumbling. 

- On the news, the Dow fell more than 100 points early 
in the day, before managing to pare its losses to 32 
points by the closing bell. The Nasdaq managed a second 
straight day in the Black by moving ahead 13 points to 

- But who cares about yesterday? Today is the day that 
Greenspan and the boys at the FOMC will cut one interest 
rate and, in so doing, cure millions of economic 

- By cutting rates six times in six months, Greenspan's 
gang promises the future will be'll see.

- Unfortunately, the here-and-now remains obstinately 
sluggish as America's balance sheets - both professional 
and personal - steadily deteriorate.

- In American households, debts are growing while assets 
are shrinking. Household wealth created by appreciating 
stock portfolios and real estate equaled an 
extraordinary 82% of wage and salary income over the six 
years ended 2000, according to the Fed's "Flow of Funds" 

- A lot of folks came to consider this "normal." It 
isn't. Last year, household wealth destroyed by a 
falling stock market equaled 67% of wage and salary 
income in the year ended March, 2001. Is wealth 
destruction any less normal then wealth creation?

- A Daily Reckoning reader and New York City resident 
reports that while strolling around Manhattan last 
weekend, he was shocked to see how many businesses are 
either closed or closing. "On the three blocks of 
Bleecker Street near my apartment, there are five 
papered-over store fronts. Elsewhere, more than a few 
boutiques have going out of business signs. One upscale 
antique store even had a desperately optimistic window 
sign: 'SPECIAL ALAN GREENSPAN SALE - How low will he 

- Many of Manhattan's trendy shops and restaurants that 
once catered to dot-commers are no longer packed to the 
rafters. Several formerly "hot" eateries, like Eureka 
Joe Coffee Lounge, have closed their doors. Eureka Joe 
had the dubious distinction of being dubbed the city's 
"Internet economy power center" in a 1999 issue of 
Business 2.0.

- The gold price continued its winning ways ahead of 
today's Fed meeting by climbing $2.30. Does the gold 
market know something? Greenspan & Co. will almost 
certainly cut rates again and yet, almost no one expects 
the Fed's easy monetary policy to awaken the inflation 


Back to Bill...

*** Well, for every yin there's a yang. Greenspan has 
been trying to put money into the economy by lowering 
interest rates. But interest is not only an's also an income item for many people. 
There are $2 trillion in money funds and another $3 
trillion in interest-bearing CD's and bank deposits. 
Currently, the money funds are paying a paltry 3.63% on 
deposits - nearly equal to the inflation rate of 3.6%.

*** The greatest fear for the economy is that aggressive 
rate cuts will ignite inflation. No problem, says 
Greenspan. "With energy inflation probably peaking," the 
Fed chairman told an audience on May 24th, "and the 
easing of 'tightness' in labor markets expected to damp 
wage increases - prices seem likely to be contained." 
Not all governors at the Fed agree. More from's James Padhina in Wednesday's guest 
essay below...

*** What else? How about a real "money machine"? Karim 
Rahemtulla, who runs our venture capital club, tells me 
he's found a business that is a 'no brainer'. The 
company - which will present its business plan to our 
group in Boston on August 28th - is in the gift 
certificate business. Sales are rising at more than 100% 
per year. 

Bill Bonner

(If you'd like more information on the Supper Club e-
mail Vicky Beard:

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The DR presents a special 'Wednesday Guest Essay': "When 
Greenspan and Meyer spar over inflation, someone may 
lose an ear."

By James Padhina

It smells like a fight to me. 

In the near corner, just out of his warm bubble bath and 
wearing the powder blue trunks is Fed Chairman Alan 
Greenspan. And in the far corner, sporting the solid 
black trunks, is Fed Governor Larry Meyer. Being neither 
prizefighters nor kings, these guys aren't battling for 
money or for a come-hither woman named Helen. 

They're central bankers - so, of course, they're 
fighting about inflation. Ladies and gentlemen, are you 
rrready to rrrumble? The Tale of the Tape, so to speak, 
gives a sense of each fighter's thoughts about 
inflation, present and future. 

In a May 24 speech, Meyer said this: "Given that labor 
markets remain tight, that inflation remains above the 
rate that I would find acceptable over the longer run, 
and that core inflation has been edging higher..." In a 
June 6 speech, he stressed: "We have to be concerned 
that as we ease [The Fed Funds Rate]... we do not, at 
the same time, create conditions that would lead to 
higher inflation."

Meyer's thinking stands in stark contrast to that of 
Greenspan, who believes that inflation is contained and 
will stay that way going forward. In his May 24 speech, 
the chairman did note "some apparent deterioration in 
actual and expected CPI inflation," but he downplayed 
these developments by turning to a kinder inflation 
measure, the core PCE price index. "There has been 
little acceleration in the broader index of core 
personal consumption expenditure prices," he declared.

He went on to forecast: "With energy inflation probably 
peaking and the easing of tightness in labor markets 
expected to damp wage increases, prices seem likely to 
be contained." 

In a June 4 speech to the International Monetary 
Conference, Greenspan reiterated his views on the 
current inflation picture: "What we this moment 
is a very extraordinary lack of pricing power in the 
American economy, which means, in effect, that the cost 
increases are not following through into significant 
pressures on prices but rather on profit margins."

Greenspan's view - and hence the Fed's official view - 
rests on the notion that inflation is already contained, 
and that mass firings, slower economic growth and a 
lessening of energy inflation will keep the lid on in 
the future. 

Now that these two heavyweights have thrown a few jabs, 
how do we score the fight? Although the bout is still in 
the early rounds, Meyer is ahead on my card - not 
because he's inflicted a lot of pain, but because 
Greenspan's punches have been so feeble. 

In fact, the big guy's emphasis on the core PCE price 
index makes him seem like he's gasping for air. Sure, 
that index is rising at only a 1.7% year-over-year rate, 
but during the first quarter, it posted the biggest 
increase (2.6%) we've seen in six years. 

The acceleration of inflation measures confirms that 
many companies out there do have some pricing power and 
are, in fact, raising prices. So I'm subtracting a point 
from Greenspan for a low blow.

I'm subtracting another point for failure to separate - 
that is, for clinging desperately to "easing pressures 
on labor and product markets" as an inflation damper. 
Pressure in the labor market has been easing for more 
than a year now - employment growth peaked in May 2000. 
What has wage growth done since then? It has 
accelerated. The year-over-year increase in average 
hourly earnings speeded up to 4.2% from 3.4%. Other 
measures of wage growth, such as those released 
alongside the productivity numbers, show increases of 6% 
and more.

We hear a lot about mass layoffs, and we know the 
current unemployment rate has risen to 4.4% from a 
cyclical low of 3.9% last autumn. Yet wage growth is 
still accelerating. Unfortunately for Greenspan, his 
easing-tightness-in-labor-markets notion packs no punch 
at all if it doesn't bring slower wage growth along with 

Greenspan appears to be choking on his mouthpiece, while 
Meyer impresses the judges and the audience with solid 
jabs. He believes the kindly factors that helped keep 
inflation low in recent years have disappeared - every 
last one of them: 

Non-oil import prices? They were falling at rates 
greater than 4% less than three years ago, but now 
they're declining at just 0.6%. That's a swing of 
more than 3.4 percentage points. 

Energy prices? They were plunging at double-digit 
rates less than three years ago, but now they're 
rising at double-digit rates. Besides a change of 
direction, there's a 20-point swing. 

Oil prices? Down 44% less than three years ago, 
they're rising at a 9% rate now; a change of 
direction plus a 50-point swing. 

Health care prices? Rising at a rate of just 2.5% 
less than four years ago, they're shooting up at a 
4.6% rate now. That's the fastest increase since 
1995, and a two-point swing. 

Unit labor costs? They were falling at a 0.5% rate 
as recently as last year, but they're climbing at 
a 3.4% pace now. That's a four-point swing plus a 
change of direction.

Productivity? It was growing at 5.4% as recently 
as last year, but now it's growing at a 2.5% rate; 
a three-point swing. 

That's at least six good shots to the jaw. Now that 
Meyer has Greenspan in the corner where he wants him - 
the kindly inflation factors are gone and core price 
increases have been accelerating as a result - he can 
turn to the punishing body blows that lend his argument 
its power. 

He can refer to the fed funds rate, which has been 
lowered by 250 basis points in less than five months. He 
can use the real funds rate, which now stands at its 
lowest level since July 1994. He can bring in the M-2 
measure of the money supply, which has now accelerated 
by almost two and a half percentage points, to 8.1%, in 
just nine months. Not since 1983 have we seen such 
money-supply growth. Bam, bam! 

Finally, Meyer can invoke the gap between the 10-year 
Treasury note and the three-month Treasury bill, which 
now stands at 169 basis points, its fattest since 
January 1995, and an indication that debt markets see 
faster inflation than they have in more than six years. 
Bam, bam, bam. 

That's too bad for all of us, because a Meyer victory 
carries much worse consequences. If a bigger inflation 
problem emerges, the Fed will have to take back some, 
and perhaps all, of the easings it recently pushed 
through. And a higher fed funds rate won't help stocks 
or bonds. 

Because he is a thoughtful, methodical and real-world 
fighter, Meyer has the edge over Greenspan, who seems to 
rely mostly on hope and who gives the impression of 
someone running around the ring with arms flailing, 
looking for a way out. 

So I pick Larry to win this fight - and it won't 
surprise me if, at some point, Alan tries to bite his 
ear off.

James Padhina,
for the Daily Reckoning

James Padhina is a staff writer at 
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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 27, 2001

Published By Tulips and Bears LLC