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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Prisoners of the Average

*** Another day, another rate cut...what more can you ask 

*** Mr. Market doesn't seem impressed...has the point of 
diminishing returns from rate cuts already diminished to 
below zero?

*** Consumer confidence... and why things can't stay as 
they are... 

Market Views:

"Fed's Magic Tonic Isn't Working," says John Crudele 
in the NY Post. Why not? Because banks are tightening 
lending standards to protect themselves from a wave of 
defaults. Corporate bonds yields are up since January. 
Credit cards have reached minimum interest levels. And 
mortgage rates are higher than they were before Greenspan 
began cutting rates. 

Greenspan can lower the fed funds rate - but that 
doesn't necessarily cause the price of credit to fall. 

Still, what else can the Fed chairman do? 

"If Greenspan were truly a manly man," Eric Fry 
reports from Manhattan, "he'd have marched out today and 
barked, "Inflation be damned!" and ordered interest rates 
cut by one-half a point. Instead, we got a wimpy 1/4-point 
cut. Chairman 'Baby-steps' returns to form."

That is the problem with having fame and power, dear 
reader, it robs a man of strength. "The President [pays] 
dearly for his White House," observed Ralph Waldo Emerson. 
"It has commonly cost him all his peace, and the best of 
his manly attributes. To preserve for a short time so 
conspicuous an appearance before the world, he is content 
to eat dust before the real masters who stand erect behind 
the throne." There is a price for everything... Every 
credit has a debit. For every village idiot there's a 
genius. And for every period of above-average returns in 
the stock market, there must be a period when returns fail 
to measure up. More below...

But first, let's hear from Eric about what happened 
on Wall Street yesterday:


From Eric Fry in New York:

- Bloomberg news succinctly captured the Street's view, 
calling the Fed's 1/4 point cut "an action that suggests 
they expect the economy to rebound and don't want to risk 
stoking inflation by reducing rates too much."

- Because the 25-bps reduction seems more measured than 
desperate, bonds and the dollar both "liked" the modest 
cut. Gold, on the other hand, "hated it" - falling $4.20 on 
the day.

- Mr. Market's reaction fell somewhere in between. A little 
more irrationally exuberant rate cutting from the Fed might 
have been nice. On the other hand, the modest rate 
reduction means that Greenspan and Co. think the economy is 
recovering (right?), which should be good for stocks 

- After weighing the pros and cons. Mr. Market reached no 
clear conclusion. The Dow dropped 37 points - its fourth 
losing session in a row - while the Nasdaq tacked on 10 

- America's economy is probably the largest ever to run on 
"hope" for extended periods of time. Greenspan, like any 
good "Confidence Man," fans those hopes to achieve his goal 
of keeping the US economy moving along. With his interest 
rate cuts of various sizes, he encourages folks to attempt 
heroic acts of consumption and indebtedness they might 
otherwise avoid.

- Consider, the impressive resilience of home and auto 
sales... while consumers are fully aware that current 
economic conditions stink, they remain resolutely persuaded 
that the near-future will be much, much better. (Keep hope 

- Consumer confidence bounced Tuesday to its highest level 
of the year - rising to 117.9 from 116.1 in May. That too 
is good, right? Yes, but the consumer is not quite so 
confident as he appears. The Consumer Confidence Index 
contains two other indices - one that measures current 
conditions and one that measures future expectations. 
Bridgewater Associates reports that while consumers' 
expectations for the future are rising, "consumer attitudes 
towards their present situation continue to decline." 
Specifically, as the future expectations index surged 7%, 
the overlooked present situation index fell 3%. 

- Faith in future economic prosperity cannot sustain 
consumer spending indefinitely. Only 6.7% of the survey 
respondents said that they would buy a car in the next six 
months, the lowest number in years.

- Likewise, despite the recent resiliency of housing sales 
numbers, consumers' plans to purchase a home dropped in 
June. ISI confirms the findings: "Our survey of 13 
geographically diversified homebuilders slowed for the 
third week in a row...traffic has been slower again in 
Northern California, and cancellations are occurring in the 
Bay Area. As one [survey] participant puts it, 'The lights 
are out!'"

- A lot of folks in the know agree with the consumer that 
the "present situation" isn't so great.

- Delta Air Lines' President, Fred Reid, told Business 
Travel News this month, "Business travel is dropping off 
precipitously... We are in the deepest slump I've seen in a 
decade or more... We don't see it getting deeper, but we 
also don't see it getting better."

- Anivan Banerji, director or research at the Economic 
Cycle Research Institute, speaking to Grant's: "Given that 
- industrial production, employment, manufacturing and 
trade sales - are going down in a way seen only in 
recessions, either we are in a recession, or this is the 
worst non-recession ever."

- The "Stock Market for the Next 100 Years" just announced 
its first job cuts in 15 years. Blaming - what else? - 
"market conditions," the Nasdaq plans to trim its workforce 
by 11%. The most debilitating market condition of all is 
the fact that the number of IPOs has collapsed 78% so far 
this year. When you're in the bubble business, there is 
nothing fun about bubbles bursting. 


Back to Bill in Paris...

*** Yesterday, I reported that things will either get 
better or they will get worse. "The current stagnation of 
the US economy is unstable," adds Martin Wolf in the 
Financial Times. "The US central bank is in a race against 
time. If it does not succeed in re-starting the economy 
soon, a further slide seems almost certain."

*** Why is this? "Suppose then that the present stagnation 
continued," Wolf explains. "Given the excess capacity, 
downward pressure on profits would increase. Productivity 
growth would initially remain slow, further squeezing 
profits. This would force large-scale redundancies, 
accelerating the rise in unemployment. The combination 
would threaten a still highly valued stock market. It would 
almost certainly shrink investment. Above all, it would 
shake consumer confidence. The overwhelming probability 
would be a deep recession, followed by a painfully slow 
recovery, as in almost all post-bubble economies."

*** But who knows? Yesterday, the Fed put the key interest 
rate down to 3.75%. With inflation at 3.6%, this puts the 
real rate at near zero. Will free credit have the same 
effect in the U.S. as it had in Japan?

*** "In early 1929, after the markets had gone through a 
choppy period and just months before the worst stock market 
crash of the 20th century," John Myers tells me, "Bernard 
Baruch - one of the great speculators of his time said: 

'For the first time in history, we have sound reason to 
hope for a long period of peace. For the first time, the 
business men of all nations are supplied with statistical 
information, together with some understanding of the laws 
of economics. For the first time, we have sound centralized 
banking systems in all the countries and closer cooperation 
between those systems internationally. Because all these 
factors are favorable, and because of the universal 
stirrings of desire and ambition... I believe in the 
industrial renaissance.'"

*** "Baruch was already shorting stocks during that 
period," Lynn Carpenter, editor of The Fleet Street Letter, 
explained it to me: 'The government asked Baruch to talk up 
the economy.'" 

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"Every sweet hath its sour; every evil its good....
For every grain of wit there is a grain of folly...
Nature hates monopolies and exceptions..."

Ralph Waldo Emerson

"We are all going to paradise!"

He sings this popular French song from time to time, but he 
is neither a singer, nor French. He might be Chinese, 
Korean, or maybe Japanese... He speaks both French and 
English...both with a heavy accent. No one seems to know 
where he came from nor what he is doing in the neighborhood 
where I have my office.

Yesterday, he was stretched out on the rue de la Verrerie - 
lying on his back with his head resting on a paving stone, 
as peaceful and serene as an abandoned car. His ribs stood 
out as though he were starving, with deep hollows where 
most men his age have slabs of fat.

All we know about him is that he is our village idiot. He 
sings at the top of his lungs, gets drunk, and passes out 
on the pavement. 

In paradise, dear reader, perhaps a man can drink all he 
wants, and stay happily drunk forever. But in this world, a 
binge of inebriation comes at a price...a headache, or 
perhaps only a period of quiet repose.

That is the way of all nature. Every extraordinary event is 
compensated by many boring ones. Every big debt is offset 
by a big credit. Every large breath of air we take in must 
be followed by one just as large that we let out. 

We are all prisoners of the average. This is not merely an is based on observations too varied to try 
to organize by genus and phyla. So I will just heap them up 
in front of you: darkness and light...yea and nay...heat 
and cold...good and evil...sickness and health...wealth and and ugliness...subjective and objective... 
positive and negative...big, little...high, low...just, name it.

There are times, of course, when things seem to get so out 
of balance that it is hard to recall where the average was.

Stock market investors, for example, enjoyed an 
extraordinary period of returns from August of 1982 until 
January 2000. During that period, the Dow went from under 
1,000 to over 11,000, giving investors a rate of return of 
18.2% per year. 

"Stocks do not always do as well as they did in the '80s 
and '90s," notes David Tice. "In fact, those were the best 
back-to-back decades for stocks in 200 years." (See: Why 
The Bear Market May Just Be Beginning) 

After such a binge of profits, is it any surprise that, for 
the last two years, the Dow has taken a rest? Dow stocks 
have gone nowhere since May of 1999.

The Fed has helped twist the U.S. economy into an 
extraordinary, almost grotesque, form. By keeping the price 
of credit too low for too long, and giving the impression 
that it could guarantee boom-like conditions forever, 
America's central bankers have encouraged people to act in 
a way that previous generations would have thought 
imprudent: buying too many stocks at prices that were too 
high, spending too much money, and borrowing too much to 
pay for it.

Alan Greenspan nurtured the idea that the U.S. economy of 
the late '90s was an exception to nature's demand for 
ordinariness. Information technology was supposed to be so 
different that the old averages would no longer apply. And 
the central bank itself was credited with a talent that no 
central bank had ever before had: an ability to keep the 
economy expanding forever, without interruption. 

Mr. Greenspan was allegedly capable of preventing the 
return to average debt levels and average stock prices. His 
trick? Cutting rates whenever normalcy threatens. Yesterday 
the Greenspan team cut rates for the sixth time. Five 
previous cuts failed to produce the desired effect. But 
there is always hope for the 6th, or 7th. If a real fed funds 
rate of zero doesn't do the job, perhaps - 1% or -3% will. 

Paul Kasriel reports that total debt as a percentage of the 
nation's nominal capital stock has gone from about 45% in 
1982 to more than 90% today. 

"The U.S. borrowed from the rest of the world on average an 
amount equal to 4 �% of nominal GDP," in the 12 months 
ending in March, Kasriel elaborates, adding that this was 
"the highest absolute and relative borrowing form the rest 
of the world in over 40 years."

Will this unusually carefree spending be followed by a 
period of penny-pinching? It seems a good bet.

'Res nolunt diu male administrari," you might say. Of 
course, practically no one, apart from perhaps the Pope, 
would have any idea what you were talking about. So, 
translate: "Things refuse to be mismanaged long."

Your editor, 

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 29, 2001

Published By Tulips and Bears LLC