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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

BALTIMORE, MARYLAND 
THURSDAY, 26 JULY 2001 

 

Today:  The Great O'Neil

*** Earnings fall...stocks rise...consumers dip into 
their 'savings accounts'...

*** When will the economy recover? A billion Chinese 
with credit cards....might that do it? Or a 7th rate 
cut?

*** Doctoring doesn't pay so well...Social Security 
heads for bankruptcy...oil prices retreat...and more!

Dow Jones CEO, Peter Kann: "We have no reason to 
expect an advertising turnaround in the third quarter, 
and we have certainly not seen one so far in July." 
Earnings at Dow Jones fell by more than half on 18% 
lower revenues in the second quarter.

Kodak: "we have yet to see signs of economic 
recovery." Dana Corp: "we're less optimistic today 
about the rate of recovery in the North American OE 
markets than we were at the outset of the year." 

From almost every industry, the reports are the 
same. On Tuesday, Amazon was hit for a 25% loss...after 
investors figured out what 'pro forma' meant. 
Yesterday, Compaq reminded them, again, that the real 
world of creative destruction is a dangerous place. 
Compaq's profits fell 81% in the second quarter. GM's 
dropped 74%...

Siemens reported losses of a billion dollars this 
week; Dupont lost $213 million in the second quarter 
and announced significant job cuts. Lucent - having 
gotten whacked in the market for a 16% loss on Tuesday 
- announced that 20,000 jobs are on the block... 

The only thing new about the "news" these days 
seems to be the names of the companies announcing 
missed estimates and layoffs...

What else? Well, Eric is on vacation today...and 
Addison is keeping an eye on Wall Street in his 
absence. Addison, what's going on?

*****

Addison Wiggin, writing from Paris:

- "There is no economic theory that I ever heard of," 
sez the Mogumbo Guru, "that espouses continual, 
accelerating debt...as a magic-bullet method of 
achieving prosperity."

- Still...Greenspan, speaking before Congress on 
Tuesday, said: "should conditions warrant, [the Fed] 
may need to ease further." Of course, it should be no 
surprise to DR readers...we ask simply, even naively: 
if six cuts ain't enough... what will seven do?

- "The situation is bigger than any one man, government 
or entity," an analyst told the Industry Standard 
yesterday... "[Greenspan] has to have more than a band-
aid to fix this. He has to have a tourniquet." 

- "When will the recovery will begin?" asks Mogumbo, 
"The answer is simplicity itself; when some big group 
of people get the financial wherewithal to buy a deluge 
of global output. The Americans are just about tapped 
out, bless their greedy little hearts. If Greenspan 
were the hotshot that people think he is, he would be 
pushing for Visa and MasterCard to send unsolicited 
credit cards to the Chinese, Russians and Indians. When 
that huge group of debt-free people starts consuming, 
THEN the global recovery will begin."

- The Dow rallied big yesterday - up 164 to close 
10,405 - reversing the 335 point slide it had coming 
out of Monday and Tuesday. The S&P 500 and Nasdaq rose 
more modestly - 18 to 1,190 for the former, 25 to 1,984 
the latter. 

- Still, the Dow is off more than 3 percent for the 
year, the S&P down nearly 10 percent and the Nasdaq has 
fallen close to 20 percent. 

- Americans are nothing, if not optimistic... the 
Dismal Scientist reports: most consumers recently 
surveyed believe that "business conditions will improve 
six months hence and 92% expect job availability to be 
the same or better than it is today." 

- And they are refinancing their homes in order to keep 
spending. According to the WSJ, half of GDP growth in 
the first quarter came from home refinancing. The 
typical homeowner took $20,000 to $40,000 out of his 
equity...a total of nearly half a billion dollars in 
the first half of the year. One of the people profiled 
in the WSJ used the money to pay off credit card debt 
and buy a home theatre system. Another bought a 
vacation home, which he considered an "investment." 
Another, an airline stewardess, said she "just didn't 
want to let $70,000 sit in my home." 

- People are treating home equity as though they were 
"savings accounts," says the WSJ. What kind of saving 
account is it that you have to make a mortgage payment 
on every month...or you lose your home? In 1945, 
American homeowners owned 86% of the value of the 
houses. Now, they own only 55% - losing 10 percentage 
points in the last decade alone.

- Gold traded evenly - as always, it seems - at $267. 
The dollar fell again... down to almost 88 cents per 
euro. 

- "What if the market decides it no longer believes in 
the dollar as a safe haven?" asks the Prudent Bear's 
Marshall Auerback... "What if views on the dollar shift 
as rapidly as they did in respect of the Korean won or 
Thai baht in 1997?" One thing is for sure...my cheaper-
than-water liter of red wine begins to get a lot more 
expensive. (see: Cracks In The 'Strong Dollar' Policy?)

- "The retreat in the oil price - bothersome as it is," 
says our energy man John Myers, "is not entirely 
unexpected, given a couple of very important factors: 
the slowdown in the U.S. economy and the previous sharp 
runup in prices. But fret not; the long-term trend 
towards higher prices is as powerful as ever."

**** 

Back to Bill in Baltimore...

*** "The world is aghast at the admission of Treasury 
chief O'Neill that there are no assets in the Social 
Security Fund!," writes Richard Daughty. "Well, duh! 
Congress has been taking the money and putting in IOU's 
for decades, and suddenly this is news!" 

*** There seems to have been some doubt as to what was 
actually in the Social Security system's vaults. So, a 
presidential commission headed by former senator 
Patrick Moynihan was appointed to have a look. Sure 
enough, when they peeked into the nation's retirement 
hidey hole, what they find? Nothing! 

*** The system works like all government programs - by 
robbing Paul in order to pay Peter. The trouble is, 
there will be a lot more retiring Peters in the years 
ahead.

*** "The only question," says a comment from the 
Independent Institute, "is whether the government will 
shore up the system by 1) enacting huge tax increases 
(the recent tax cut was one-tenth the size of the $12 
trillion current Social Security shortfall); 2) cutting 
Social Security benefits significantly; 3) cutting 
other government spending; or 4) increasing public debt 
(i.e. delaying a tax increase). Like the old Midas 
Muffler TV commercials that said, 'You can pay me now 
or you can pay me later.'

*** And, last but not least, a comment on Henry's 
career choice from a DR reader - "My wife, married 21 
years, is a physician, as is her father and brother. 
I've got lots of doctors as friends. The next time 
Henry says he can make lots of money as a doctor, you, 
as his father, should tell him to...RUN, not walk. 
Seriously, as you probably already know, he can make 
lots of money as a doc, but the 'hourly' wage is a heck 
of a lot less than most people realize."

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now: 

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The Great O'Neill 

"Rise from bed - 6:00AM
Dumbbell exercise and wall-scaling - 6:15-6:30
Study electricity, etc. - 7:15-8:15
Work - 8:30-4:30PM
Baseball and sports - 4:30-5:00
Practice elocution, poise - 5:00-6:00
Study needed inventions - 7:00-9:00"

The Great Gatsby
by F. Scott Fitzgerald


"I came across this book by accident," said the old 
man. "It just shows you, don't it?"

"It just shows you."

"Jimmy was bound to get ahead. He always had some 
resolves like this or something. Do you notice what 
he's got about improving his mind? He was always great 
for that."


I picked up Fitzgerald's 1925 novel out of curiosity. I 
wanted to recall how the story ends. What happens to 
these thoroughly American self-improvers...these 
Gatsbys, Babbitts and Citizen Kanes?

The question arose as I read the latest issue of 
Grant's Interest Rate Observer. A profile of the 
"nation's CFO," Paul O'Neill, triggered an emotion. I 
could not tell whether it was pity, envy or an 
irritating irony. Or it was perhaps the sense of 
delicious dread you have just before a pompous man 
makes a great fool of himself.

"If your organization is not striving to be the best in 
the world at everything you do," said the Great O'Neill 
to the Economic Club of New York in April, "then you 
are unlikely to be truly excellent as an organization."

Paul O'Neill is the type of character who exists only 
in America. He is a straight talker, and an optimist by 
avocation as well as vocation. He believes that all 
problems can be solved by direct assault - making lists 
and applying oneself to the tasks at hand.

"None of you will be surprised to learn that I have 
brought my devotion to the idea of excellence to my new 
pursuits in the government," he announced to no one's 
surprise.

"Excellence, to O'Neill," opines Jim Grant, "is a 
quality to be achieved through discipline and 
management. There is no place in his worldview for sub-
optimal outcomes, including recessions, bear markets, 
debt liquidations, currency crises and hedge-fund 
implosions. Listening to the secretary, one gets the 
sense that there is no such thing as an unmanageable 
event. Excellence overcomes everything."

But a man who speaks of excellence so freely cannot 
really understand it...or know how to get it. He tosses 
the word out as though he were giving fashion advice. 
For O'Neill, excellence is merely a suit of clothes - 
you choose to wear it or not as you might choose to put 
on a fedora one day and a baseball cap the next. In 
O'Neill's mind, those who are not excellent are merely 
too lazy or too contrary to go to a decent haberdasher. 
He does not seem to realize that that "excellence" - 
like so many other things in life - depends on the 
situation. A hat that may look good on one man, may 
make another look like a clown. And a style that looked 
smart on a man 10 years ago, may make him look like a 
hopeless dork today.

And so I arrive at today's modest insight: fashions 
change.

"Even when I play a game of pure chance, like slot 
machines..." said a friend at dinner last night, "when 
I have a winning streak, I begin to think I'm a 
genius."

Paul H. O'Neill has been having a winning streak. A 
self-made man, he earned his degree in economics from 
neither Harvard nor Yale, but from Fresno State 
College. He went to work for the U.S. Veterans 
Administration in 1961 as a computer-systems analyst. 
In 1977, he joined International Paper Co. and rose to 
become president of the firm in 1985. Hired away by 
Alcoa in 1987, he had such success, Grant's tells us, 
that he was made the subject of a Harvard Business 
School case study.

Now, he has brought his can-do winning ways, including 
his pursuit of excellence to Washington, as Secretary 
of the Treasury. 

But O'Neill takes on the job at a difficult moment. All 
the excellent work done by previous Treasury 
secretaries - aided and abetted by the excellent 
policies of the still-sitting head of the Federal 
Reserve System - have brought the nation to such a peak 
of excellence that the entire world should hold its 
breath in envy. 

Instead, it holds its breath in anticipation. 
America has been on a winning streak paralleling that 
of its Treasury Secretary. Indeed, looking more 
closely, one might guess that both winning streaks came 
from the same splatter of chance. Rather than O'Neill's 
genius for excellence...or America's genius for hard 
work and innovation...the real grease of the U.S. 
economic miracle may be nothing more than its genius 
for credit creation. 

And now, approaching the threshold of the Post-Credit 
Bubble Economy...and carrying bags of debt like a man 
brings home his Christmas shopping - America seems more 
likely to stumble upon it than to stride across it.

"The American economy, O'Neill told the National 
Association of Business Economists, "will remain the 
great engine of prosperity for the world because 
innovation thrives here. If you have a good idea, this 
will always be the best place to make it happen....

"...the U.S. has recaptured the lead and we are not 
ever going to back down again. We are determined to 
lead the world. That is how we have actually gotten the 
huge tax surpluses we have in Washington today. They've 
come from hardworking Americans making things, creating 
jobs, improving productivity and achieving higher 
wages."

Twelve years ago, almost all of these things might have 
been said by a shorter man about a smaller, but - at 
the time - no less dynamic economy: Japan. Then, it was 
the Japanese who were on a winning streak. It was they 
who seemed to have a genius for hard work and 
management. 

But even ardent self-improvers stumble. And fashions 
change. 

More 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 26, 2001

Published By Tulips and Bears LLC