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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

FRIDAY, 6 JULY 2001 


Today:  Cramer vs. Cramer

*** Why would anyone care what Cramer thinks? The S.S. 
Cramer takes on water...

*** Euro sinks too...almost at the new record lows I 
said it wouldn't hit.... 

*** Americans getting poorer, faster than anytime since 
the Great Depression...consumers still spending, but not 
so fast...Charm City...and more!

Let's begin by going directly to Eric's report from New 


Eric Fry on Wall Street:

- "Why would anyone care what James Cramer thinks?" Bill 
asked rhetorically in yesterday's column. "Because 
knowing what Cramer thinks can be very rewarding...but 
only if you remember to do the opposite."

- How true that is. Contrary indicator enthusiasts, your 
ship has come in - and its name is the "S.S. James 
Cramer." About 3 months ago, Cramer began posting his 
"personal stock portfolio" on So how's he 
doing so far? Not too well, I'm afraid. Through the end 
of trading yesterday, Cramer's portfolio had slipped a 
little more than 1% since he first posted it on April 
1st. Over the same span, the S&P 500 and the Nasdaq 
Composite advanced more than 6% and 16%, respectively. 

- Of course, the time frame in question is too brief to 
be conclusive. Still, I recalled my 10th-grade geometry 
teacher, who'd surely be telling Mr. Cramer what he so 
often told his struggling students, "Mr. Cramer, a blind 
monkey selecting at random would have fared better than 
you did on this test." Pity the monkey.

- Cramer's not-so-model portfolio was not the only one 
to suffer large losses yesterday. Stocks fell across the 
board - rebounding energy stocks being among the few 
standout winners of the session. The Dow fell 91 points, 
while the Nasdaq dropped a more disquieting 61 points, 
or almost 3%. Despite the rate cuts and all the blather 
that "the bottom is in," the Nasadaq flirts with 2,000 
once again.

- "Are markets headed for a Summer Rally?" the Wall 
Street Journal asked hopefully yesterday. Strictly 
speaking, a summer rally is inevitable, the question is 
from what level. The Journal might not, for example, 
exult in a rally from Dow 5000 to Dow 6000.

- At the current levels, the S&P 500 sells for about 28 
times its earnings for the past 12 months, which as 
hedge fund manager Michael Lewitt points out, is "far 
greater than the post-World War II average of 15.3 and 
previous bear market low of 7 times earnings in 1974..."

- Over in the currency markets, Europe's beleaguered 
single currency - you know the one - slid to a new 
eight-month low against the dollar. At 83.6 US cents, 
the euro stands less than a penny away from its all-time 
low of 82.7 pennies.

- European auto manufacturers aren't complaining. The 
June sales numbers are in and the American car companies 
lost market share to the foreign competition...again. 
This time the Big 3's combined market share fell to 
63.9% in June.

- "In 2001's first quarter, the household-sector's 
liquid financial assets [i.e. assets readily convertible 
into cash] fell by 12.5% from a year earlier," Moody's 
John Lonski observes. "Perhaps not since the Great 
Depression have the liquid financial assets of 
households plummeted so deeply year-to-year. Yet," 
Lonski marvels, "household expenditures still grow." 

- Lonski: "First-quarter 2001's yearly drop by the 
liquid financial assets (LFAs) broke under the former 
plunge of record depth - the 8.0% year-to-year decline 
from 1974's recession-bound third quarter."

- muses, "Maybe the current mood 
among those who watched their wealth balloon in the 
bubble market is one of 'easy come, easy go.' Of course, 
should the downturn in the stock market and the economy 
as a whole continue to siphon off liquid financial 
assets in the months ahead, American consumers may at 
last be forced to abandon their jaunty brand of devil-
may-care complacency. Only time will tell."

- Intriguingly, yesterday's notable stock market losers 
included Federated Department Stores - owner of Macy's 
and the high-brow Bloomingdale's - which lowered both 
its quarterly and annual earnings forecasts. Federated 
shares fell almost 6%. "The consumer" is still spending, 
but he seems to be spending less. 

- At "Gray's Papaya" - a hot dog stand on Manhattan's 
Upper West Side famous for its "Recession Special" - a 
papaya drink and two all-beef franks retails for $2.45. 
The special cost $1.95 when proprietor Nicholas Gray 
cooked up the idea back in the 1990 recession. But as 
memories of the 1990 recession faded, Gray altered his 
sign to read: "The Recession Special: For the one that 
was and the one that is to come." Gray doesn't know if 
the recession "to come" is here yet, but he says that 
hot dogs sell well in a recession, and that business is 
booming. You figure it out.


Back to Bill in Baltimore:

*** "Silicon Valley Becomes a Ghost Town for a Week," 
says a headline on the SF Gate website. The tech world 
is suffering. Tech funds, reports Lipper, are down 22.4% 
this year. To save money, the firms are requesting that 
employees take off this week - which an estimated 25,000 
workers are doing.

*** And the bust in technology shows no signs of being 
over anytime soon. A British telecom maker, Marconi, 
announced yesterday that it saw no 'second half 
recovery' coming. Instead, it admitted that earnings for 
the year would be only half of what was expected and 
said that perhaps, maybe, things might be better in 

*** Meanwhile, "Over the past 40 years," writes IL's 
Kathie Peddicord from the 'Valley of Flowers and Eternal 
Spring' - Boquete, Panama - "this country's inflation 
rate has averaged less than 2% - that's simply unheard 
of south of the United States. This country is an 
anomaly in Central America. And right now... it's still 
very cheap. A full-time, live in maid costs $120 a 
month... first-run movies cost $1.50."

*** Plus, Panama boasts the most attractive "pensionado" 
program in the world, Kathie says, "giving you discounts 
of up to 50% off everything from public transportation 
to movies and sporting events...from doctor's visits to 
your electric bill...from restaurant dining to 
airfares..." see: The World's Best Kept Retirement 
Secret - Won't Stay That Way For Long)

*** Here in Charm City things go on in their own quirky 
way. There was no boom in the city of formstone and 
beehive hairdos... but neither is there a bust. 

*** "But have you seen the prices houses are selling for 
down near the harbor," asked a colleague. "I bought my 
house for $62,000 just 8 years ago. Now, the house 
across the street is selling for $350,000." Even in 
Baltimore, it seems, easy money finds an outlet. Stocks 
are not moving - but, in many parts of the country, 
property prices are still rising.

*** A hard rain storm drove through Baltimore last 
evening. It came just as a band was warming up in the 
park in front of my office. Dark clouds rolled over, the 
wind picked up, there was a crack of lightening...and 
suddenly it poured. 

*** The musicians, standing up on stage, clutching their 
microphones and electric guitars - wires running 
everywhere - must have felt the crack of doom 
approaching. They unplugged themselves in seconds and 
ran for cover.

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Rumors are circulating.

It is said that Alan Greenspan would like to retire in 2 
years. Naturally, the Fed chairman would not like to 
leave office in a recession or immediately after one. 
Greenspan has more name recognition than any public 
servant since Pontius Pilate. And he got it by nurturing 
the idea that he can keep an economy growing and 
resurrect a fallen stock market. 

It might have been different, of course. The Fed 
chairman seemed to spot the beginnings of a bubble 
economy several years ago, when he made his "irrational 
exuberance" remark. But rather than fight it, Greenspan 
decided to join it - adding even more exuberance by 
ballyhooing a 'productivity miracle' and the wonders of 
information technology.

"Greenspan wants to avoid a recession in the worst way 
possible," said one commentator.

What would be the 'worst way possible?' In answer to 
that question, I offer the following reflection. 

"Consumers are still hanging in there," said one Fed 
governor recently. 'Buy, buy, buy' says another regional 
Fed governor. 'Lend, lend, lend,' says the chairman to 
member banks. As long as consumers are willing and able 
to increase their spending, they reason, there can be no 

But consumers' household debt is now equal to 100% of 
disposable income. It was only about 70% when Alan 
Greenspan became Fed chief.

And consumers just suffered the worst hit to their ready 
cash since the 1930's... as Eric points out above... 
with households' liquid financial assets falling 12.5% 
from the previous year. Yet, they continued to increase 
spending more than twice as fast as the increase in 
their incomes. (Those salaries - like the Fed funds rate 
- are increasing barely more than the inflation rate.)

The only way consumers can continue borrowing and 
spending is by going further into debt. 

What is the worst thing a person who is deeply in debt 
can do? Borrow more money, of course. And when would be 
the worst time for a debtor to borrow more? Just before 
a period of major deflation. And there we have our 
answer: the worst possible way for Greenspan to try to 
avoid recession would be by tempting American consumers 
to borrow in advance of a serious decline in prices.

Thus, we have an answer to a number of mysteries:

Why has the dollar failed to fall - even as the Fed cuts 
rates and the current account deficit rises?

Why does the price of gold go nowhere - even when the 
world's central bankers attempt to destroy their 

Why have long-term bond yields failed to decline - even 
when the Fed was pushing down on the short rates?

Why does the gap between inflation-adjusted TIPS and 
regular 10-year notes remain stubbornly near 2% - even 
when the inflation rate has only been at such a low 
level once in the last 30 years...and even now is nearly 
twice that number?

Why, why, why.

And why are we not already in recession? 

"In May," writes James Grant, "for the 8th consecutive 
month, industrial production declined...and factories 
operated at 77.4% of capacity, down from 79.2% in April, 
the lowest level of utilization since August 1983. High-
tech production fell by 1.2 percentage points, to 70.3%, 
the lowest rate in a quarter-century."

A chart in Grants' newsletter puts the figures into 
perspective. Every period in which industrial production 
fell by 5 or more months - since WWII - was accompanied 
by recession. We are already at 8 months. The record is 
only 3 months away - at 11 consecutive months of 
declining industrial production, set in 1960, coincident 
with the recession of '60-'61.

"Given that the indicators that define a recession - 
industrial production, employment, manufacturing and 
trade sales - are going down in a way seen only during 
recessions," says Anirvan Banerji, an economist at the 
Economic Cycle Research Institute, "either we are in a 
recession, or this is the worst non-recession ever."

Is it only a matter of time before a non-recession 
becomes a recession...and the debts, so light and 
portable on the carefree backs of consumers in the last 
decade of the 20th century, become almost impossible 
burdens in the 21st?

In a moment of philosophical weakness, we are tempted to 
ask another question: what kind of God would invent such 
a pernicious world...where ordinary people are lured 
into imprudence and insolvency by the very person who is 
supposed to be the custodian of the national accounts?

"There is always some leveling circumstance that puts 
down the overbearing, the strong, the rich, the 
fortunate, substantially on the same ground with all 
others," wrote Ralph Waldo Emerson in his "Compensation" 
essay. Americans have enjoyed nearly twenty years of 
falling interest rates, low inflation, rising equity 
prices, and full employment. Debt has been no problem.

Thanks to the strength of the dollar and easy money 
policies of the Federal reserve, American consumers have 
become the freest spenders and most indebted consumers 
in the world. 

And now, Mr. Greenspan brings his 'leveling 
circumstance' - setting up consumers so they can be 
knocked down hard by the coming deflation.

Your correspondent,

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 06, 2001

Published By Tulips and Bears LLC