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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  The Bellyache Brigade

*** Whoa! 9th month in a row of falling industrial 

*** Consumers "are going down..." but not gracefully...

*** Well, how did we do? The Daily Reckoning has been
rocking and rolling for 2 years now. What would you have if 
you had followed our advice? Gulp...the naked truth, below.

Whoa! Industrial production fell again in June - for 
the 9th straight month. If this isn't a recession, it is the 
worst non-recession in U.S. history. Among the longest- 
running periods of declining industrial production since 
WWII, our present slump now ties for 3rd place - equal to 
the 9-mo. setback in the year I was born - 1948 - and 
corresponding to the 13-mo. recession of that era.

What makes the picture look a little brighter today 
is that consumers continue to 'hang in there.' And the Fed 
continues giving them additional rope to hang themselves 
with. In the first half of this year MZM, or 'cash' as we 
used to call it, rose at an unheard-of rate of 23.7%.

But Barton Biggs, Morgan Stanley's economic 
strategist, doesn't think it's believable that "the toxic 
combination of the wealth effect, record layoffs and higher 
energy prices won't take its toll on an already leveraged, 
undersaved and overspent American consumer." 

"In the next couple of months," predicts James 
Paulsen of Wells Capital Management, "there will be more 
job losses, and the consumer will capitulate."

"I think the consumer is going down..." adds another 
Morgan Stanley economist, Stephen Roach.

But these are baby boomers we're talking about. They 
won't go down gracefully...or sensibly. Instead, they will 
have to be knocked down and carried out. Stay tuned.

Eric, what happened yesterday on Wall Street?


- 'Tis the season for earnings reports. And in the same way 
that Christmas has its jingle bells and Thanksgiving has 
its turkey dinners, the earnings season has its own 
peculiar trappings - namely, manic overreactions to "a 
penny shy of estimates" here or "a penny better than 
estimates" there.

- Let's be serious, if investors really cared so much about 
earnings, would the Nasdaq be selling for more than 100 
times its component companies' annual profits?

- Center stage yesterday was heavy-machinery maker 
Caterpillar. The stock raced ahead about 6% after topping 
the consensus estimates by seven cents with earnings of 78 
cents a share. "Continued strength in electric power and 
heavy construction and improved demand in coal mining and 
oil and gas sectors helped fuel second-quarter sales," said 
Chairman & CEO, Glen A. Barton.

- Apparently, some parts of the old economy keep on 
chuggin'...even as the new economy sputters.

- The stock market celebrated Caterpillar's strong report 
with the Dow gaining 134 points to 10,606 and the Nasdaq 
climbing almost 2% to 2,067.

- Maybe Wall Street is simply caught up in the global 
"feel-good" phenomenon that appears to be circling the 
globe at the moment. Consider that inside of one 24-hour 
period earlier this week, PLO leader Yasser Arafat had a 
face-to-face with Israel's Shimon Peres; Pakastani 
President Pervez Musharrat engaged in a "frank and 
constructive" private chat with Indian Prime Minister 
Vajpayee; and Russian President Vladamir Putin embraced 
Chinese President Jiang Zemin.

- Will these centuries-long enemies suddenly become 
friends? Not likely. Nor has Wall Street suddenly become a 
welcoming investment destination for every rube who gets 
off a bus at Pennsylvania Station. For every one 
Caterpillar, there are numerous Intels and GMs.

- Intel on Tuesday reported a whopping 76% plunge in 
second-quarter profits. General Motors announced a 
similarly severe 73% drop in second-quarter earnings.

- What does a bubble look like? David Hale, Chief Global 
Strategist for Z�rich Financial Services: "1) 70% of all 
technology venture capital funding in the U.S. since 1980 
occurred in [only] two years, 1999 and 2000; (2) the value 
of venture capital funding shot up to $114.6 billion in 
2000 from $4.4 billion in 1995; and (3) the value of IPOs 
for the technology sector surged to $37.5 billion in 2000 
from levels of $2 to $3 billion per annum during the early 

- As Walter Bagehot, who lived and chronicled many 19th-
century panics, once said, "[A]t particular times, a great 
deal of stupid people have a great deal of stupid money."

- Does history repeat itself? In "100 Years of Land Values 
in Chicago," written in 1933, Mr. Hoyt observed: "Real 
estate loans, not failed stockbrokers' accounts, were the 
largest single element in the failure of 4,800 banks in the 
years from 1930 to 1933."


Bill asks:

*** Well, has it been worth it? 

*** I pose the question on or about the 2nd anniversary of 
the Daily Reckoning. For two years, I have been writing 
these letters - with hardly even a pause. Was it 
worthwhile, after all, putting up with my gratuitous 
reflections on war, politics, love and poetry? You decide, 
dear reader. 

*** I've mentioned dozens of investments...some positive, 
some negative. How did they do? Well...the investments on 
which I was bullish rose an average of 13%. Not great, but 
better than the Dow or the S&P - and far better than the 
Nasdaq. And the stocks on which I was negative fell an 
average of 43.21%. 

*** So, maybe you won't get rich quick by reading the Daily 
Reckoning. But you won't go broke either.

*** Many thanks to you for reading. I enjoy writing; I hope 
you've enjoyed reading half as much. And tune in a suspicion grows - that the Fed, like 
Lincoln's war and all government programs, may be leading 
us to a "deadweight loss."

Bill Bonner

p.s. Sometimes over the past two years, I've been accused 
of sounding like a broken record. In an effort to counter 
that perception, we offer a Wednesday Guest Essay, by's James Padhina below.

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Daily Reckoning Presents: a Wednesday Guest Essay in which 
the author explains why stock prices have predicted exactly 
"nine of the past two recessions."

by James Padhina

Much as some people want to believe otherwise, this 
slowdown is not so bad.

There are a lot of whiny, doom-and-gloom brats out there, 
and I want to grab them by the collar, get right in their 
teary red faces and tell them, "Quit crying - or I'll give 
you something to cry about." These crybabies are filling 
the air with desperate warnings that things are going down 
the tubes.

Consider: CNBC now flashes its terrifying jobless-claims 
chart more frequently than it does close-ups of Maria 
Bartiromo and Liz Claman. Not long ago, the mention of 
"Challenger" drew blank stares from analysts; now every 
good Street moron can cite the outplacement firm's latest 
harrowing layoff statistics. There's even a rumor going 
around that the manufacturing sector has lost a ton of jobs 
lately. Can anyone confirm this?

Quit it already. I don't know how things got this way (I 
have in my head visions of overeager beavers combating 
contrarian thinking with more contrarian thinking, which 
lands us right back at conventional tripe), but this 
thinking's all wrong, and it's got to stop. If you think 
what's gone on in labor markets lately is nasty, you either 
weren't around for previous cycles, or you haven't done 
your homework. 

For the whiniest of the whiners, it's both.

When economic growth peaked during the first quarter of 
last year, the unemployment rate was hovering at 4% and 
average hourly earnings were growing at a 3.7% year-over-
year rate. Now, five quarters later, the unemployment rate 
sits at 4.5% and average hourly earnings are growing at a 
4.2% year-over-year rate. Since the slowdown began, then, 
the jobless rate has climbed by a half-point and wage 
growth has accelerated by the same amount.

A brief look at other economic slumps reveals an altogether 
different scenario. Five quarters into the 1990 episode, 
the unemployment rate had risen by 1 1/2 percentage points 
- three times greater than the increase this time around - 
and average hourly earnings were growing at a rate half a 
point slower than when the deceleration began. 

Five quarters into the 1981 episode, the results were more 
striking: The unemployment rate was up by 2 1/2 percentage 
points - to 9.9% from 7.4% - and wage growth was down by 
3.7 percentage points - to 5.5% from 9.2%. The 1968 episode 
followed the same pattern, though on a lesser scale. A 
little more than a year after the slowdown began, the 
unemployment rate had risen by 0.8% and average hourly 
earnings growth had slowed by half a percentage point.

Clearly the latest episode is different in that (a) the 
unemployment rate hasn't risen much at all, and (b) average 
hourly earnings are growing faster, not slower - as was the 
case in the three prior instances - than they were when the 
deceleration in overall growth began. One major difference 
is consumption, which has held up well. Why? 

First, because jobs (and the income they produce) are far 
and away the most important determinant of consumption. 

This isn't intuitive to lots of people out there - not to 
the piggish popular press, not to the analysts who feed it 
corn and not to the public that happily imbibes from its 
teat. They all now believe that as share prices go, so goes 

So let's emphasize this: Jobs are important - more 
important than the housing market, than who's president, 
than the number of alcoholic and depressed Backstreet Boys 
- and, yes, even more important than stock prices. 

If you're paying an economist or a consultant who's using a 
consumption equation in which jobs don't carry the greatest 
weight, or in which stocks carry more weight than housing, 
or in which the Nascrack predicts retail sales or some such 
nonsense, then you've been pointed in the wrong direction 
the past few years - and you're wasting your money. 

There's a reason that stock prices have predicted nine of 
the past two recessions, and it's this: For completely 
opposite reasons, traders and investors (i.e., the people 
who move stock prices) can't accurately predict such things 
any better than a coin toss can - traders trade no matter 
what's going on, and investors are looking out over an 
obscenely long time horizon. 

You can aggregate as many millions of these wise minds as 
you like, but the inescapable fact is that their predictive 
power is zero.

The second reason consumption has held up is because 
average hourly earnings have held up, and that poses a 
threat to the kind inflation outlook the Fed embraces (and 
encourages us to embrace, too). No, continued acceleration 
of wage growth does not guarantee an inflation problem to 
which the Fed would react by hiking rates, and yes, wage 
growth might well begin to decelerate presently. 

Yet the fact that wage growth is proving so sticky this 
time around certainly isn't helping the mild-inflation 
case. And the longer wage growth stays stubborn, the 
greater the chance the Fed's tremendous easing to date will 
keep it high and exert further upward pressure. Given that 
wages and core inflation are both still cruising at faster 
clips than when the economic slowdown began five quarters 
ago, one wonders what they might do if the Fed's first-half 
stimulus produces a meaningful growth rebound by the year's 

Finally, the reaction of the jobless rate and hourly 
earnings so far hints at how much longer the economic 
slowdown might last and the potential strength of the 
rebound once the deceleration has run its course. Income is 
still turning in quarterly increases north of 4% because 
wage growth has held up so well, and this will put an 
important floor under spending for as long as it continues. 

That throws cold water on the notion that we're in for a 
long, drawn-out, U-shaped recovery. With so much fuel for 
spending in the form of income growth, rebate checks, 275 
basis points of easing in the pipeline and real interest 
rates that, in some cases, are the lowest in 10 years, the 
environment is not the kind in which slowdowns remain stuck 
in neutral.

For those who argue otherwise, the scanty half-point 
increase in the unemployment rate so far threatens their 
forecasts. Most doom scenarios seem bound to - and driven 
by - a jobless rate that rises all the way up to 5%. 

Five percent? Stop with the crocodile tears, people. 

That would mark a peak-to-trough increase in the 
unemployment rate of just one percentage point, whereas 
past economic slowdowns have delivered increases two to 
three times bigger than that. And how hard will it be to 
rebound from a drawn-out "recession" during which the 
jobless rate rises by only one percentage point? About as 
hard as it is for Tiger to score a new Buick.

So quit the whining. The employment situation has been much 
worse at this stage of previous economic slowdowns. The 
fact that it's not so bad this time around makes the 
crybabies even harder to bear than usual.

James Padhina
For the Daily Reckoning

James Padhina is a staff writer at As a 
reader of the Daily Reckoning, you are welcome to a 30-day 
free trial of Simply click here:

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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 18, 2001

Published By Tulips and Bears LLC