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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

FRIDAY, 27 JULY 2001 


Today:  Pursuit of Mediocrity

*** The "encircling gloom" encircles more gloom...

*** Retirement plans postponed...but Wall Street more 
bullish than it's been in 16 years...

*** Free "commercial space" in Denver...Centex up 93%...
and the Daily Reckoner takes a break...

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The Financial Times calls it "the encircling 
gloom"...the earnings announcements continue. Carly 
Fiorina of Hewlett Packard told investors not to expect a 
2nd half recovery. HWP fell 7%.

JDS Uniphase will be a source of interest today, 
after news last night that the company had managed to lose 
$46 a share, a remarkable achievement for a $9 stock.

Dividends from the S&P 500 are off 6.6% this year - 
not since the '70s have dividends dropped as much. 

Meanwhile, Wall Street strategists are the most 
bullish they've been in 16 years. But Wall Street analysts, 
once idolized, have become a laughingstock...or a 
scapegoat. The same financial press that reported their 
recommendations as if they were important, now record the 
results of their recommendations with indignation.

Addison, more details on yesterday's Wall Street 
action, please...


Addison Wiggin reports from Paris:

*** "I don't feel too good..." says Tom Ahrens. 

Six months ago, Mr. Ahrens, a Canadian soybean farmer, had 
approximately $210,000 in Nortel - comprising about 2/3 of 
his expected retirement funds. Today, his shares are worth 
about $45,000 - and he owes $30,000... to his broker.

"We milked cows for over 10 years," Mr. Ahrens told the 
International Herald Tribune. "I should have stayed with 
John Deere."

Nortel's stock - trading at $89 when Tom Ahren's retirement 
years gleemed brightly - now sells for $12.

*** JDS Uniphase announced it's 4th quarter loss had 
reached near $8 billion...HP revised its sales forecast 
downward for the second time this year... and both 
companies announced another round of layoffs.

*** Japanese electronics maker Sony announced a loss of 
$242 million through June. The giant French telecom Alcatel 
weighed in with $2.73 billion in losses. British telecom 
registered a 70% drop in first quarter profits. As Bill 
mentioned yesterday, the only thing new in the "news" these 
days... is the names of companies getting mauled, torn-up 
and spit out by the worldwide depression in telecom...

*** "When Federal Reserve policies create low interest 
rates that lure entrepreneurs into markets that would not 
pay a profit without fiat money, the boom is sure to become 
a bust," writes Gary North. "That is what has happened 
to tech stocks. It is what is in the process of happening 
to the conventional markets. I don't mean stock markets as 
such; I mean markets in general, i.e., the economy."

*** "The crucial, precarious aspect of the negative saving 
rate," writes Dr. Richebacher, "is that it reflects an 
unprecedented, bubble-related escalation of consumer 
spending. If the Fed's drastic easing fails to revive the 
bubble, the massive overspending by the consumer will burst 
just like the massive malinvestment of businesses in the 
high tech sector." 

(See: The Key To Capital Formation: Savings!)

*** All the same, yesterday on Wall Street the investment 
horde didn't seem to notice. The Dow gained 49 to 10,455; 
the S&P 500 rose 12 to 1,202 and Nasdaq was up 38.64 to 
close at 2,026 ... even the Russell 2000 and the Amex 
composite rose slightly. 

*** John Mauldin points out: "Despite the 20% plus decline 
in the S&P in 2001, the current p/e is 29. Comparatively, 
the average p/e of the S&P during the boom years 1990-
2000 was 22... even during the greatest bull market in 
stock market history 1980-2000 the average p/e on the 
S&P was 17.

"If the markets dropped to a more historical p/e ratio 
level of just 20 - that would mean a drop to around 900." 
That - if you'll permit me to do the math - is another 25% 
drop from here...

*** "Commercial real estate is quickly becoming the 
proverbial 'next shoe,'" writes Chad Hudson at the Prudent 
Bear. "A recent survey indicates the vacancy rate along the 
northwest corridor [In Denver] jumped to a whopping 32% 
from 3.8% at the beginning of the year." According to Chris 
Ball, a real estate analyst in the area, "landlords are 
upfront that you can get six, nine, or 12 months of free 

*** "Boston is another area that boomed with the 
technology," reports Hudson. "Yet the occupancy rate in the 
Greater Boston area declined almost 5% in the first six 
months of the year" with another 8.6% drop in industrial 

*** But consumers are undaunted. Home builder Centex - up 
93% since we first covered it here in the Daily Reckoning - 
reported its best ever first quarter, with sales up 19% and 
backlogs growing 17%. Beazer Homes also announced its best 
ever third quarter with revenue and closings up 15%, new 
orders and backlog - up 34% and 31% respectively.

*** A DR Reader writes: "This is the biggest bubble in 
history. I will wretch if I hear the word 'saving rate' 
again. Walk up to a 60-year-old guy. He'll get about 
$18,000 in SS, he has an IRA with $75,000, his retirement 
from XYZ corp is $20,000 and THE HOUSE HE PAID OFF TWO YEARS 
AGO IS $365,000. Get it yet? Need some help with this? It's 
all about houses and what they are worth, not about 
'savings'. The f***ing house is the savings." 

*** Modest question: What happens when on the heels of 
commercial real estate... residential follows?


Back to Bill...

*** It's summertime here in Baltimore. And the livin' is 
easy. The fish are jumpin' and the cotton is high.

Hazy, hot humid weather settled on Baltimore last night, 
like distant relatives arriving for what looked like a long 

For every advance in human progress, alas, there is a 
retreat. People used to gather on the sidewalks for a 
breath of air in the evenings - and talk. Music would come 
from open windows and the smells of summer living - both 
good and bad - would drift through the fetid air like trash 
floating in the harbor.

But air-conditioning and television changed everything. 
People now stay indoors - watching "Sex and the City" or 
surfing the worldwide web...

Returning from a restaurant late at night, the woman next 
door was sitting out on her marble steps - the way people 
used to do on hot summer nights. She was beautiful, but 
like the neighborhood, touched by decay - a woman who 
looked as though she might have retired from a career in 
Hollywood or perhaps from playing Blanche Dubois in 
regional theatres. 

She had a serene look, but also a bit of sadness in her 
eyes...the kind of look people have when they realize that 
they are out of scotch and the liquor stores have closed. 

"Nice evening," I said.

"Yes, and so quiet."

"Can I give you a hand?" I asked, noticing that she was 
struggling to open a bottle.

"I have always depended on the kindness of strangers," she 

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"There is always some leveling circumstance."

Ralph Waldo Emerson, 1841

"Napoleon Bonaparte and his generals did an excellent job. 
So masterful were they that they managed to bring an entire 
army all the way across Europe, from Paris to Moscow. What 
a pity they almost all died on the way home."

Bill Bonner, 2001

Yesterday's modest insight is followed today by an even more 
modest one:

You should always try to do the best you can, dear reader. 
But there are things at which it is better to fail than to 
succeed...and times when mediocrity beats excellence.

We have enjoyed an excellent boom in America...followed by 
an excellent bubble...followed by an excellent end to the 

Shares on the Nasdaq are down more than 50%. Those on the 
Dow have gone nowhere for two and a half years. Will we 
now get to enjoy an excellent bear market...or just a 
mediocre one? Will the boom of the last two decades be 
followed by a truly exceptional bust...or just an ordinary 

The worse thing that can happen to a young man is that he 
succeeds too early and too easily. For he fails to develop 
a proper respect for failure...and sufficient modesty to 
protect him from future mistakes. As Edmund Burke put it, 
"No man had ever a point of pride that was not injurious to 

Facile good fortune has befallen several men of my 
acquaintance - and usually with disastrous results. 
Getting rich too early, they became poor later...when it 
was much more inconvenient. 

My own career, as I informed our employees at an annual 
meeting on Wednesday, has been blessed by failure and 
incompetence. A more capable man might have taken a 
different route...marginally succeeding at one task or 
another. But, in my case, my failures were unequivocal - I 
was forced to try something else, eventually stumbling upon 
something that suited me. 

As Emerson put it, "Every man in his lifetime needs to 
thank his faults." 

All of this is prelude, of course, to revisiting our own 
Secretary of the Treasury, Paul O'Neill, a man who seems to 
have no faults to thank. 

Mr. O'Neill's point of pride is that he brings the pursuit 
of excellence to all that he does. There is nothing wrong 
with that, in itself...except that it fails to prepare him 
for a circumstance in which even mediocrity will be an 

"We have amazing flexibility in our capital and labor 
markets, broader and deeper capital markets that match 
resources to good ideas faster than anywhere else in the 
world, creating greater return on capital here than 
anywhere else in the world. " said the Treasury secretary 
recently. Mr. O'Neill was referring to the same capital 
market matchmaker that put thousands of investors' money 
together with and telecom bonds, now trading at 
pennies on the dollar. But he seemed not to notice.

"We have the world's most productive workers and the 
world's freest labor market. Free markets, productive 
labor and lower taxes will in turn keep capital flowing 
here, even during a downturn like the one we are 
experiencing today." 

That may be. Or it may not.

Stephen Roach, appearing before Congress on Wednesday, 
testified as to why even the most excellent treasury 
secretary in America's history may not b able to keep 
capital flowing here: 

"The world is in the midst of what could well go down in 
history as the first recession of this modern era of 
globalization. It's a recession whose seeds were sown in 
the depth of the financial crisis of 1997-98. . America 
moved aggressively to save the world nearly three years 
ago, it has paid a steep price for those noble efforts. 
That rescue mission fostered a climate that took the US 
economy to excess -- resulting in a destabilizing asset 
bubble, an overhang of excess capacity, and an 
extraordinary shortfall of consumer saving. It also left 
the United States with its largest balance-of-payments 
deficit in modern history. 

In Roach's opinion, the current worldwide slump is the 
result of the excellent management of previous slowdowns by 
previous Treasury secretaries 

"It all started in the fall of 1998. The global currency 
crisis that began in Thailand had cascaded around the 
world, eventually leading to Russian debt default and the 
related failure of Long-Term Capital Management. The result 
was what Federal Reserve chairman Alan Greenspan dubbed an 
"unprecedented seizing up of world financial markets." US 
President Bill Clinton and Treasury Secretary Robert Rubin 
went even further, both calling it the world's worst 
financial crisis since the Great Depression. 

"The Fed swung into action to save the world, [and] the 
world economy sprang back with a vengeance that few 
anticipated. In the midst of the Fed's emergency easing 
campaign, America's real GDP surged at a 5.6% annual rate 
in the fourth quarter of 1998. Far from faltering, the US 
economy was on a tear. I cannot remember when such an 
aggressive monetary easing had occurred in the context of 
such an outsized gain in economic growth. Although our 
central bank began to take back its extraordinary monetary 
accommodation by mid-1999, by then it was too late -- the 
damage had been done. 

Moreover, it was compounded by the Fed's now infamous Y2K 
liquidity injection of late 1999. America was on the brink 
of a runaway boom. A Fed-induced, Nasdaq-led liquidity 
bubble gave rise to the great IT overhang that has since 
wreaked such havoc on the US and the broader global 

It probably would have been better if the "Committee to 
Save the World" - Robert Rubin, Larry Summers, and Alan 
Greenspan - had failed. A modest boom would have been 
followed by a modest bust. Instead, they succeeded so well 
that it looked as though the world's central bankers had 
finally mastered the secrets of managed currencies. All 
they had to do was to provide liquidity at crucial moments. 

That - and not letting markets run their natural courses - 
became the definition of excellence in central banking. 
And so, investors bought stocks and bonds - particularly in 
the most excellent market in the world, the U.S - while 
consumers bought cars, houses, and whatever else they 
wanted. And here we are.

"The other shoe is about to fall," guesses Roach. "That, in 
my opinion is the painful legacy of a financial asset 
bubble that took our real economy to excess. Consumers have 
over-spent. Businesses have over-invested. And the United 
States funded these excesses by borrowing from abroad... 
the math is straight-forward: An ever-widening current-
account deficit implies that foreign investors will 
ultimately end up "owning" America - unless, of course, 
something gives. And it usually does."

But Paul O'Neill is not the sort of man to let things 
happen. He would prefer to make them happen. "I don't 
think we should accept the notion [of a contagious global 
slowdown] as something God intended for us to have."

Here at the Daily Reckoning, we do not presume to know what 
God intended. But we feel pretty sure that, whatever it 
is, even Paul H. O'Neill's most excellent management will 
not stand in its way.

Your editor,

Bill Bonner

P.S. In a bull market, an investor aims for the stars - for 
excellent returns. But in a bear market, he should lower 
his sights - if he can merely achieve mediocre results, he 
can count himself lucky

P.P.S. Sunday, I leave for a 2 1/2 week vacation. For the 
first time in two years, dear reader, you will get a relief 
from my letters. I hope you will miss me, but the Daily 
Reckoning will continue during my absence with Addison 
reporting from Paris...and Eric from Wall Street.

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 27, 2001

Published By Tulips and Bears LLC