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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

TUESDAY, 18 JULY 2000 


Today:  Under the Big Top, Part 1

In Today's Daily Reckoning:
*** Rally slows...the descending peaks of a bear market
*** Stocks are likely to return less than 5% per year
*** Bricks fight back...tobacco companies become 
government utilities...the EMH dis-proven.

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*** The summer rally in the Dow seemed to stall yesterday 
- 11 points below the peak of the last rally on June 5th. 
Richard Russell ( notes 
the following pattern:

The June 15 peak was 119 points below the May 16 peak
Which was 210 points below the April 25 peak.
Which was 163 points below the April 14 peak
Which was 435 point below the highest point ever achieved 
by the Dow - on January 14, 2000.

*** These descending peaks are typical, he believes, of a 
bear market. 

*** Also, yesterday, the trend in the advance/decline 
ratio turned around. Three were only 1314 stocks 
advancing, while 1517 declined. 

*** So, even in the middle of this 'Summer of Love,' it's 
important to remember what is really going on. We appear 
to be working our way down from the biggest bull market 
top of all time. Every major index has topped out. And 
the most absurdly priced bubble stocks - those dot.coms I 
wrote about yesterday - have crashed. 

*** Wall Street and na‹ve investors seem to think the 
worst is over. Even though some of the foam has been 
blown off the top, stocks are still preposterously 
overpriced. Which is not to say they couldn't become even 
more preposterously priced. But buying them now is 
speculating on the future - not serious investing.

*** The Dow and S&P are at nearly twice their normal 
P/Es. And the Nasdaq 100, though lower than it was 6 
months ago, is still trading at 144 times earnings.

*** "History shows," writes Lynn Carpenter, "that when 
the S&P is selling as high as 22 times earnings (it's now
selling at an unheard of 29.6 times earnings) over a ten 
year period you will make only about 5% a year by holding 
stocks. But this was calculated on an historically 
average dividend return of around 4%. Today the yield on
the S&P is only 1.07%. This means that over the next ten 
years you would probably earn less than 5% per annum on 
your money by holding stocks."

*** "Against this," she continues, "a ten-year Treasury 
note (as of today) yields 6% free of state taxes. Thus, 
the odds say that if you assume and hold a position in
stocks over the next ten years, you will probably NOT do 
as well as if you had simply purchased 10-year T-notes."

*** Perhaps the most important top was the one that went 
unreported. On May 19th, the Dollar Index hit 112.07. It 
declined to 105.50 on June 15th. Since then, it's come 
back to 108. The dollar rose again yesterday, for 
example. If it continues, it may surpass the May 19th 
high. I'm watching, because the whole shebang rests on 
the dollar - stocks, bonds, the economy...inflation - 
everything that doesn't really matter.

*** Gold rose $2.30 to bring it to $284. At this rate, 
the heartbreak metal will return to its high of two 
decades ago sometime before the next millenium. Platinum 
rose $14.80. Is gold finished? See below. 

*** The Wall Street Journal confirms the death of the 
Internet mania. May it rest in peace. In a supplement 
section entitled, "Bricks Fight Back," it records a 
rather predictable trend: "Today, established companies 
are starting to recapture customers who had threatened to 
leave them forever." How? By entering cyberspace and 
competing with the "pure play" Internets. And guess who's 

*** According to the WSJ - the "multi-channel" firms are 
already bringing in 59% of the e-business...and gaining.

*** Another piece in the WSJ tells the story of the $145 
billion judgement against the tobacco companies. Though 
likely to be overturned on appeal, the judgement can only 
be understood as another step towards turning the tobacco 
companies into a regulated state industry, run for the 
benefit of the lawyers in and out of government. The 
tobacco companies are slated to pay out $6 billion this 
year...and more the next...with most of the loot going to 
shyster lawyers. 

*** "There's no question," said a spokesman for Value 
Line Investment Survey, "our methodology refutes the 
efficient market theory." The Efficient Market 
Hypothesis, you may recall, is the notion that the market 
as a whole is always better informed than any individual 
investor. Thus, the prices set by the collective wisdom 
of the marketplace will be superior to the guesses you 
might make about what the prices should be. This being 
the case, you will do as well throwing darts at the stock 
pages as you will by laboriously poring over charts and 
quarterly reports.

*** But the results of Mark Hulbert's 20 years of study 
show that the market is not as efficient as academics 
might think. Most people will do as well throwing darts. 
But some will do better by actually studying the facts 
and figures - such as Value Line. The stock picking 
service sticks to a tight discipline based on known, 
quantifiable information, "with no emotionalism in it," 
and is the only service Hulbert followed which managed to 
beat the Wilshire 5000 over the two decade period.

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Yesterday brought news that a "single sheet study" by 
Michelangelo sold for $12.3 million at Christie's auction 
house in London. A new record.

And a DR reader, catching up on his email after slopping 
the hogs out behind the trailer, reports that even in the 
Ozarks property prices are rising smartly. Y2K escapists 
may find they've made a shrewd move after all.

Doodles by great masters...backwoods property...what 
isn't rising in price? Fact is, practically everything 
and anything you might have bought in the last 20 years 
has turned out to be a good investment. 

"Let's say that for some reason you decided back in 1980 
that you wanted to lose money on your investments over 
the next twenty years," writes James Collins in the July 
17 edition of the New Yorker magazine. "Succeeding in 
this would have been a very difficult thing to do."

Collins set himself too easy a task - making fun of 
'goldbugs.' Aficionados of the heartbreaker metal have 
performed like circus clowns. Every year for the past two 
decades has brought new pratfalls and punch lines. It has 
been yucks aplenty as the world's ultimate money has 
declined against almost everything else the world has to 
offer - even the ersatz money printed at negligible cost 
with the negligible backing of negligible governments in 
negligible backwaters of the planet. 

The Dow was at 800 in 1980. It's now near 11,000. Value 
stocks, growth stocks, stocks with neither value nor 
growth - all have gone up. High tech. Low tech. No tech - 
you name it, virtually every scam and pipe dream has been 
a big winner.

Bonds soared too. And real estate almost everywhere. Old 
masters like Michelangelo and no-talents like Jackson 
Pollack - all rose nicely. Antiques. Comic books. 
Motorcycles. Kitsch. Manuscripts. The efficient market 
hypothesis seemed to apply - not just to the stock market 
- but to the entire world. If you'd launched a dart from 
Cape Canaveral in 1980 and bought whatever it fell upon - 
you probably would have made money.

Unless, that is, if it landed on a gold mine.

Yesterday, you could have purchased an ounce of gold for 
$284. On January 21, 1980 - that is to say, two decades 
ago...about the same time Mark Hulbert began tracking the 
performance of investment could have 
bought that very same ounce of gold for $825. You would 
have lost about 70% of your money over the period if 
you'd been holding gold. (See: Special Presentaion: Gold

If that were the scope of the loss - gold bugs would be 
delighted. Unfortunately, when the market gods decide to 
destroy you - they don't do it by half measures. Two 
hundred and eighty four dollars ain't what it used to be. 
The suit that you might have bought with that money in 
1980 now costs at least twice as much. The monthly rent 
you might have paid during the Carter Administration is 
now probably three times as much. For while the dollars 
put out by the Bureau of Printing and Engraving rose 
against the heartbreak metal...they fell against 
everything else.

An ounce of gold would have bought one unit of the Dow 
when the year began in 1980 - both were at about 800. 
Today, you will need about 33 ounces of gold to buy a 
single unit of the Dow. 

"Goldbugs tend to be more intellectual than other 
investors," writes Mr. Collins, graciously, "more 
interested in ideas and in history, and once they get a 
theory in their heads they are incapable of letting it 

The theory to which the author refers holds that, over 
time, all paper currencies will be rendered worthless by 
the people who produce them...but gold will retain its 
value. The theory turned out to be perhaps the most 
spectacularly imbecilic investment tool of all time. But 
that doesn't mean it is wrong. And if there is any 
justice in the world, those who were so thoroughly 
infected with the goldbug for so long...and who suffered 
such terrible losses for the last 20 years...might now 
have built up a little immunity from further ailment. 
They might have realized that trends are usually cyclical 
- not permanent. And the very moment when something 
appears as though it will go up forever is precisely the 
moment that it is most likely to fall. 

Twenty years ago, gold bugs were on the top of the world. 
They are a laughingstock today. But they are by no means 
the only clowns under the Big Top.

Andy Smith, a commodities analyst in London is quoted in 
the New Yorker article: "We're going on a fifty-five or 
sixty-year aboveground supply. Gold has been marginalized 
because the world has changed. We have the most robust 
financial system we've ever had. The thing undermining 
the many-thousand-year myth of gold is progress!"

"Sure," the voice of progress continued, "gold is on the 
periodic table. Why not choose boron? It's over. Of 
course, it's over."

Is it really over? Have the lessons of thousands of years 
been made irrelevant by the central bankers and f****** 
bond traders of the year 2,000? Have goldbugs been 
betrayed forever by their own vestigial instincts? Is 
today's robust financial system a major revolutionary 
innovation - equal, say, to the introduction of the 
internal combustion engine? Or just a cyclical top?

Tune in tomorrow for the exciting sequel to today's 
episode of the Daily Reckoning.

Your unreconstructed goldbug in Baltimore,

Bill Bonner
About The Daily Reckoning:
The Daily Reckoning... "more sense in one e-mail than a month of CNBC."  That's what readers are saying about The Daily Reckoning.

Bill Bonner, recognized internationally as a brilliant writer, entrepreneur
and publisher of The Fleet Street Letter, offers you his daily market
commentary absolutely FREE. For the first time, outsiders are getting a peek into his powerful and profitable investment insights. Bill's practical contrarian advice empowers even average investors to protect their hard-earned wealth and achieve amazing gains.

Bonner writes his email letter from Paris, France, each morning --
describing the wacky, wonderful world of investment, politics and everything remotely related. Irreverent. Sharp. Honest. Thoroughly, unabashedly contrarian. It's also among the fastest growing e-letter on the Internet.  It's a brand new service... but it has a distinguished history..

For nearly 62 year, The Fleet Street Letter, the oldest investment
advisory letter in the English language has consistently delivered
invaluable economic and political foresights to savvy investors. Current readers regularly enjoy impressive investment gains even as the market falters. Here's more from his online readers...

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investment philosophy, "buy high and sell low." However, that has changed since I started religiously reading DR... I credit this reversal of fortune directly to The Daily Reckoning"

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Last modified: April 02, 2001

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