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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

MONDAY, 2 JULY 2001 


Today:  Making The World Safe For Profligacy

*** Greenspan cuts rates - and nothing happens the way 
it is s'posed to... 

*** Why have long term rates refused to fall? Why has 
the dollar gone up? Why didn't stocks go up? Inquiring 
minds want to know...

*** Cutting salaries at HP - pretty please...JC Penny, 
up more than 100%...airport insecurity ... countries 
going public ...and more !

Yesterday, we returned to America for our summer 
vacation. No one at Charles de Gaulle airport asked if 
we packed our own bags. Nor did anyone care if a 
stranger had given us something to carry on-board. That 
only seems to happen in America...

"Oh yes," you might be tempted to reply, "a nice 
man with a turban on his head gave us this little box to 
take to his mother. It's a clock; see, you can hear it 
ticking..." But you don't. Because you know that the 
half-wits at the airport security stations take 
themselves seriously. 

Nobody seems to be interested in blowing up Amtrak 
trains, greyhound buses or crowded escalators. But who 
can honestly say that they have not tried to blow up a 
747 at least once in their lives?

Actually, almost everyone. According to the 
International Herald Tribune, the last and only reported 
domestic incident happened in 1955 - when a man gave his 
own mother a bomb to take on airplane, in the hope of 
claiming the insurance money. Because of this, 
supposedly, for nearly half a century, Americans have 
been forced to submit to such remarkably transparent 
questions that a terrorist or matricidal maniac would 
have to be a total imbecile to get tripped up by them.

I found more evidence of this cultural difference 
driving into work this morning. No one dared to drive 
faster than 75 mph - despite the fact that it was a 6-
lane highway at 4 am. The French would be driving at 100 
mph and more.

A friend of mine in France was astonished recently 
when I told him I had made an honest income tax 
declaration. "Why would you do that?" he asked. "Nobody 
but a fool would tell the government the truth."

Are we law-abiding Americans fools?

I don't know, dear reader. So, let's change the 
subject. Here's Eric's report from Wall Street:


- A technological glitch shut down a promising tech-
stock rally last Friday. With an hour left in the 
trading day, the Nasdaq's systems seized up. Nasdaq 
officials tried to keep the party going by allowing 
trading to continue until 5 PM. But most of the guests 
had already left.

- When trading finally ended, the Nasdaq Composite Index 
clung to a 35-point gain - capping off a 6.3% advance 
for the week. The Dow finished 64 points lower on the 
day and lost 1% on the week.

- Interestingly, even after Greenspan's "cautious" 
quarter-point rate cut, bond yields soared higher. The 
30-year Treasury bond yield climbed to 5.76% Friday from 
5.68% the day before. Maybe inflation is not quite dead 
after all.

- Nor has Greenspan's helping hand been enough to keep 
stocks from falling into the red during the first six 
months of the year. None of the major stock market 
indices gained ground. The Dow fell 2.6%, the S&P 500 
dropped 7.3% and the Nasdaq brought up the rear with a 
12.6% decline. "Fighting the Fed" has been a profitable 
stance so far this year. 

- However, within the losing indices were some very 
notable winners. S&P 500 member JC Penney topped the 
other 499 stocks with a 139% year-to-date gain.

- The CBOE's Volatility Index - a measure of investor 
fear reflected in stock options trading - is now below 
the bearish levels that correctly predicted last year's 
initial puncture of the tech bubble. Illustrating 
complacency in full-flower,'s Igor 
Greenwald observes, "The herd is back to graze on tech 
bargains, meaning apparently the shares of any chipmaker 
whose warning falls short of outright bankruptcy."

- Hewlett-Packard Chief Carly Fiorina, must think the 
1960s have returned to San Francisco, man. The latest 
wacky idea out of Fiorina's HP is to ask each of its 
45,000 US employees to take a voluntary pay cut. That's 
right, it's optional. They don't have to, if like, ya 
know, they don't want to.

- The best that anyone can say about this touchy-feely 
cost-cutting effort is that it is not the worst 
initiative to emerge from HP since Fiorina took charge. 
That distinction belongs to the knuckled-headed idea of 
spending billions of dollars over the last couple of 
years to buy Hewlett-Packard shares. Thanks in part to 
the extravagant buyback campaign, the thousands of 
employees now being asked to forego pay are certainly 
not "feelin' groovy." 

- Don't think that Fiorina will not share their pain, 
however. Spokesman Dave Berman says that she might be 
turning in her company car.

- Lucent spinoff, Agere Systems Inc, said it plans to 
cut about 4,000 jobs, or about 24% of its remaining work 
force (any volunteers?), as it tries to deal with the 
severe downturn in the semiconductor industry. These 
latest cuts are in addition to the 2,000 announced in 

- Thanks to these job losses and the many others 
occurring in the tech sector, more folks are leaving San 
Francisco than are moving in. USA Today reports: "Nor-
Cal Moving Services...says 60% of its Bay Area traffic 
is outbound this year, vrs. 20% last year. 'It's a 
dramatic shift in population,' says company President 
Peter Mazzetti."

- Lucent also reported this week that a single strand of 
fiber optic glass could transmit ten times more 
information than previously imagined. "So what?!" asks 
the DR Blue's Dan Denning. "We already have too much of 
the stuff anyway. There are 39 million miles of glass 
fiber ready for use in the U.S - and only 5% of that 
fiber is lit - the definition of overcapacity." But 
optic fiber is just the beginning...

- "There is so much unsold product on the shelf," 
explains Denning, "that 'capacity utilization' - 
currently at 77% - is at its lowest rate in 18 years. In 
other words, companies are going idle just to draw down 
existing inventories.

- "So here's the question of the week: with too much 
inventory, falling profits, and a slowdown in consumer 
spending, why would any sane CEO take advantage of Alan 
Greenspan's generosity to take on more debt - to build 
more factories to make more products - which they can't 
even sell right now? This is not a trick question." (See 
this week's DR BLUE: It's The Economy, Chairman...) 


Back to Bill in Baltimore...

*** Hmmm...Greenspan lowers rates...and long-term 
interest rates go up! They're supposed to go down. And 
the dollar goes up; it's s'posed to go down too. And 
stocks - which are supposed to go up - have come down 
since Greenspan began cutting rates in January. 

*** Do rate cuts have any effect? Edward Leaner, 
director of UCLA's Anderson Business Forecasts: "We're 
like a primitive tribe, in which we want to pray to a 
god and have him cure the problem. The god happens to be 
Alan Greenspan. When that volcano is going off we pray 
to him, and if the volcano stops, we think he did it. 
Right now we're praying pretty hard to him."

*** All over America, graduates of high schools and 
universities - that is, people who have no idea how the 
world actually functions - are being encouraged to 
change it.

*** But my old friend, Doug Casey, has been trying to 
change the world for many years. His most recent 
newsletter reveals how: "In case you're wonders what my 
other hobby, besides polo, is, it's pitching this plan 
to Third World governments. They've bought every 
cockamamie scheme that's come down the pike since the 
days of Karl Marx. Why shouldn't they go for something 
that actually makes sense?"

*** What makes sense to Doug is to take one of these 
basket-case countries, such as Haiti or Surinam, public! 
Doug made his pitch to Haitian officials recently. Watch 
this space for the IPO.

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"Things do tend to regress to the mean," explained a 
Daily Reckoning reader, (or words to that effect). "But 
there's no law that says they have to. What we're seeing 
is just the feedback loops in nature that tend to limit 
change. And yet, men today are much taller than men used 
to be. Does this mean that they will soon be shorter 

And so, dear reader, the much-anticipated second half 
arrives today. And we greet it with a familiar question: 
will there be a 'recovery' as predicted...or must the 
economy and the stock market sink lower, so that the 
long-term averages can be re-established?

Since this is a new half, a new answer would be nice. 
Either affirmative or negative, either way, a simple 
'yes' or 'no' would be an improvement on the 'who knows' 
long-time Daily Reckoning sufferers have come to expect.

But some things never change. Here at the DR, we put our 
faith in the eternal verities - including the 
inalterable, inevitable ignorance of our species. We did 
not know what the future would produce in the last half. 
Nor do we know what the second half will bring.

Still, we daydream about what the future might bring - 
so that we may be ready for it.

Since WWII, Americans have suffered only fairly mild 
recessions and a relatively few casualties of war. So 
long has this period of peace and prosperity lasted that 
most people feel it is permanent. 

Our greatest enemy - the Soviet Union - is not only in 
retreat; it has ceased to exist! And we get richer as we 
are getting bigger and taller, year after year, with no 
counter-trend expected. 

While the total amount of credit in our economy has 
doubled in the last 8 years - from $15 trillion in '92 
to an estimated $30 trillion today - the risk of default 
has been spread out all over the globe. The trillions of 
dollars... and U.S. dollar-based assets (stocks, bonds, 
business, real estate)...all depend on the continued 
economic health of the U.S. economy and the strength of 
its currency.

As described in these pages, government-sponsored 
agencies, Fannie Mae and Freddie Mac, have been the 
fastest-growing lenders of the last decade. Borrowing 
money and selling shares in the capital markets, these 
GSE's use the money to buy mortgages, taking advantage 
of an implied federal backing. Formerly, banks 
themselves bore the risk of default on their own 
mortgage lending. Now, the risk is globalized - banks 
are insured by the Federal Reserve, whose dollars are 
held by Bavarian dentists... as well as car dealers in 
Baton Rouge. 

"Re-packaging and transformation of various kinds of 
debt instruments from mortgages to credit card 
receivables has led to layer upon layer of financial 
intermediation," writes economist Paul Kasriel. 
"Financial risk can be more easily shifted today. But 
risk shifting is just that - shifting. The amount of 
risk is not reduced." 

Just the opposite. In the pernicious way nature works, 
the appearance of smaller risks encourages people to 
take bigger ones. While everyone, individually, may feel 
protected by hedges, counter-trades, swaps, derivatives, 
and flexible capital markets...collectively, all are 
exposed to a risk roughly equivalent to the sum of open 
credit positions.

>From 1952 to 1982, Kasriel reports, total debt as a 
percentage of capital stock never exceeded 52%. But as 
new means were found to spread the risk around - 
apparently reducing the risk to individual players - the 
total amount of credit grew spectacularly. "Debt as a 
percent of the capital stock had moved from about 48.5% 
in 1982 to 92% in 1999." 

Globalization of risk is not new. During the last 19th 
and early 20th centuries, the governments of Europe 
globalized their security risks, by entering into an 
extended web of alliances. If Germany invaded Serbia, 
Russia would come to its aid. If France were to attack, 
Austro-Hungary, Germany would defend it. Each nation 
figured that these alliances reduced its exposure to 
military catastrophe. 

>From 1870 until 1914, Europe enjoyed peace and 
unprecedented prosperity. People began to think that 
they had grown in stature and would never again have to 
go to war with one another. Marxists believed the 
working classes of all nations would make common cause 
with one another and refuse to fight. The bourgeoisie 
believed that economic growth and education would make 
war a thing of the past. 

As it happened, the system of globalized security risks 
may have reduced small conflicts, but it made big ones 
much more likely. Could the globalization of financial 
risk do the same?

The Financial Times, commenting on Greenspan's rate 
cuts: "This just might work, though the success of 
central banks in rescuing post-bubble economies is 
decidedly limited. But it may also merely postpone the 
economy's day of reckoning. The central bank risks 
making the world safe in the short run by rendering it 
still more dangerous in the long run."

More on this tomorrow...

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: July 02, 2001

Published By Tulips and Bears LLC