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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
FRIDAY, 28 JULY 2000 

 

Today:  An Air of Fin de Bubble

In Today's Daily Reckoning:

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*** Oh my... Wednesday's earnings warnings came home to 
roost on Thursday - and tech investors on Nasdaq flew the 
coop. The index plummeted 3.6% - 145 pts. - to 3,842... 
just a skosch above it's June 14th low of 3,797.


*** Worldcom was tech's biggest loser - down almost 6 to 
close at 39. Nokia got beat up, too. "We saw an adjustment 
of the 'P' in the 'P/E' ratio," an analysts observed in 
Reuters, speaking of the index as a whole. Wednesday's 
warnings "...forced a lot of people to reassess high-tech 
valuations." No kidding.


*** AMZN, too, continued to get punished - second day 
running - for naughty earnings per share behavior. The 
'river of no returns' closed the day at 31 - its most 
dismal showing since December of 1998.


*** The Nasdaq's troubles sent shivers down the spine of 
the Asian markets, too. Investors "in Tokyo dumped high 
tech shares on fears of a prolonged slump in 'new 
economy'," this also according to Reuter's. The Nikkei was 
down 2.12 percent to its lowest close since March 31, 1999. 
Korean stocks were down almost 5%. European analysts are 
expecting the tremors to make their way all around the 
world. Raphael, who covers La Bourse - the French stock 
market - here in Gay Paris, appears unusually chipper this 
morning... and since he's a bargain hunter, my guess is, 
he's expecting the same.


*** By contrast, however, the Dow - despite a late-day 
selling spree - finished up 69 points to 10,586. Oil and 
energy were among the strong sectors showing tech who's 
boss.


*** Still the bear appeared to be lingering close by. Only 
1392 advanced whiled 1448 declined on the NYSE.


*** The S&P slipped a mite.


*** Could slumping earnings be evidence that that Fed's 
attempt to hit the brakes is working? Who knows. But, "if 
Greenspan achieves a soft landing," reports USA today "the 
economy will grow only about 5.5% in coming quarters, down 
about 2 percentage points from the growth that contributed 
to this strong earnings season... [in which case] it would 
be enormously difficult for profits to continue to grow 
about 20% a year." Marc Faber sees the situation in 
significantly more dire terms. Faber: "The recent spate of 
corporate profit disappointments and the poor performance 
of so many equities belies a period of very disappointing 
profits - dead ahead." (see: The Coming Corporate Profit 
Squeeze
)


*** But there are alternatives... Steve Sjuggerud, 
investment director at the Oxford Club: "Because 7-year 
Argentine government bonds are currently paying 16%... if 
interest rates come down to 10% over the next two years, 
your total return on this plain-old government bond will be 
over 70%." In fact, he's figured out a way you can make 
even more from the Argentinean fixed rate system and the 
movement towards dollarization there. Might be worth a 
look. (see: A Safe, Simple Way to Make 183% in Argentina)


*** Nothing happened in history today... at least nothing 
interesting. But you'll be happy to here this: I spoke to 
Bill on the phone this morning. He's reached Donegal, 
family in tact. He says the weather is beautiful... alas, 
Compuserve - our erstwhile ISP - not so much.


*** And so... the hit parade continues: "An Air of Fin de 
Bubble" was first run on August 23, 1999. But it remains 
fresh as an Irish breeze... I've attached the Contrarian 
Glossary too. Mostly because I think it's cool. 


Thanks again for staying tuned...


Addison


* * * * * * * * * * * * * * * * * * * * * * * * * * * * *

AN AIR OF FIN DE BUBBLE 



You can measure centuries literally...by the pages of the 
Gregorian calendar. If that is your yardstick, the 20th 
century will end on the last day of December in the year 
2000. 


Of course, almost everyone is prepared to celebrate the end 
of this century on the last day of December of in 1999. By 
the following December, the new millennium will seem old 
hat. (...already does... Addison) 


But you can also look at centuries in terms of the "spirit 
of the age," or zeitgeist. 


In that sense, the 19th century really ended, and the 20th 
century began, one day in August, 85 years ago. On that 
day, The Archduke Ferdinand of Austria, on an imperial 
visit to Sarajevo, was shot by an anarchist. This set in 
motion a whole series of events and mistakes that ended the 
"fin de siecle" spirit of the Edwardian age. No one really 
intended for the war to begin as it did. Nor could anyone 
scarcely imagine the horrors that it would unveil. But bad 
things happen, without anyone, good or bad, intending them. 
Now we are coming to another end...and another beginning. 
The 20th century is coming to a close. But it will really 
end when the Fin de Bubble zeitgeist gives way to something 
new. 


People at the end of the 19th century were very optimistic. 
Apart from brief "panics" on Wall Street, which affected 
few people, the economy had been growing rapidly since the 
close of the war between the states. There were only two 
back-to-back recession years since 1869. Plus, people had 
seen the awesome power and payoff of the industrial era. 
Printing technology had become so cheap that even the lower 
classes had learned to read and were reading newspapers. 
Trains and telegraph lines had connected the East and West 
coasts. Subways were constructed. The Eiffel Tower in Paris 
proclaimed the almost infinite possibilities of engineering 
and the machine process. It looked as though it would be 
onward and upward forever. 


This fin de siecle attitude lasted for many years... 
throughout the "Gay `90s" and into the next century...until 
that August day 85 years ago. Then, it was all over. The 
can-do spirit of progress, based on faith in bourgeois 
ideals and machine-age engineering disappeared, perhaps 
forever. 


On our recent visit to Le Dorat, we discovered a little of 
the town's history. During the long warfare between England 
and France that dominated this part of Aquitaine in the 
middle ages, Le Dorat was often on the front lines. In one 
instance, the town was betrayed by an English sympathizer, 
whom raised the gates so the enemy could invade. Later, the 
traitor was drawn and quartered, with a quarter stuck on a 
pike at each of the town's four entrances. Whether this was 
done as a warning, or as revenge, we don't know. 


"Fortunately," said my mother, "things like that don't 
happen any more." 


This, too, must be a sign of Fin de Bubble thinking, in 
which the historical tableau of my mother's own time has 
been airbrushed to remove the unpleasant episodes. 
My mother served in the army during WWII. While she looked 
after German prisoners of war in Texas, other German 
prisoners were sent to labor camps in Russia, where they 
invariably died of starvation and over-work. Of the 700,000 
German soldiers taken prisoner at Stalingrad, only a few 
hundred lived to return to their homeland after the war. 
While my mother and her Jewish friends in the WACs showed 
propaganda films to GIs on their way to Europe - Kill or Be 
Killed was a popular show - the Nazis rounded up Jews 
wherever they went. The population of Eastern Europe's 
Jewish Pale was almost completely wiped out, a victim of 
machine-era efficiency. 


Fin de Bubble thinking ignores unpleasant history. Just as 
barbarism is thought to be a thing of the past, so are 
economic cycles, panics, inflation, real war with real 
casualties, recession, gold and unemployment thought to be 
barbaric relics. Fin de Bubble is a period in which the 
nastiness of markets and life itself are airbrushed out. We 
see only the good side...the possibility that Amazon.com 
may become a huge, profitable business that grows at 70% 
per year indefinitely and produces a 10% profit margin - 
rather than the more likely reality...that the company 
never produces a profit, its shares decline by 95% and it 
is eventually abandoned by investors and taken over by 
creditors. 


Fin de Bubble thinkers believe that people can borrow more 
and more and thereby increase economic activity and wealth. 
They think a huge Internet revolution can sweep the 
globe... and produce only favorable effects on existing 
institutions. They think savings are unnecessary and 
leaving money in the bank is almost criminal negligence. 
They think corporate profits can go down...and still 
corporate share prices should go up. They forget the fact 
that the dollar has lost 94% of its value during my 
mother's lifetime and now believe it will remain stable 
forever. 


The Fin de Bubble world is one in which paper assets of 
almost all sorts are priced for perfection. Trouble is, we 
live in an imperfect world. 


Your correspondent,



Bill Bonner


(A work in progress, the Contrarian Glossary was begun on 
August 26th, 1999)


FIN DE BUBBLE - This is the term I use to describe the 
spirit of our age. We live in a world, which is waiting for 
something to happen. In the meantime, people are all very 
optimistic about the future - especially the financial 
future. Like people during the "fin de siecle" period of 
the Gay '90s and pre-WWI, they are impressed by 
technological progress and see few clouds on the horizon. 
WWI ended the "fin de siecle" sentiment. What Archduke 
waits to be assassinated so our fin de Bubble can be 
entered in the history books?


BED & BREAKFAST STAGE - This is a new phase in the life 
cycle of humans...wedged in between the career phase and 
traditional retirement. It usually kicks in when children 
have left home, careers have run their courses and a man's 
balance sheet begins to look better than he does. 


BONNER'S LAW - This one is eponymous. It describes the 
interaction of Moore, Metcalfe and the process of creative 
destruction. Moore and Metcalfe are used by Internet 
investors to justify high prices. Why not pay a lot, they 
say, when the whole industry is evolving at an exponential 
rate? Bonner's Law predicts that the revved up speeds of 
creative evolution in the Internet marketplace will produce 
revved up rates of destruction too. Moore + Metcalfe = 
Creative Destruction squared. Investors may want to gamble 
on Internet companies. But they should pay very low prices, 
not high ones. Low prices recognize the truth - that the 
company is most likely to fail. 


BUFFETT VS. GATES - This is shorthand for the conflict 
between the older, Graham and Dodd investment 
approach...and the younger, Bill Gates/Jeff Bezos wealth 
creation formula. The eminent Graham and Dodd investor, 
Warren Buffett, for example, won't buy Internet stocks or 
even Microsoft...though he knows the company and plays 
bridge with Bill Gates. Internet investors, on the other 
hand, who tend to be younger, believe that Moore and 
Metcalfe trump Graham and Dodd. This technology is 
exploding so fast, they say, the old standards no longer 
apply. The old guys just don't get it. Who will "get it" in 
the end remains to be seen. 


America's Last Great CAPITALIST - New Era advocates 
maintain that the end of communism and the rise of the 
Internet have ushered in a golden age of capitalism. Not 
so. Instead, capitalism is dying. Marx defined capitalism 
as the system in which investors put up the money to build 
factories...and workers were then exploited by them. This 
is no longer the case. The new workers don't need 
capitalists to provide the machinery of wealth building. 
They own their own laptop computers. They've seized the 
factories. This is bad news for capitalists. Money no 
longer counts. It's human capital that is important. This 
is the capital that workers carry around in their capitas. 
Microsoft's main competitor, the Linux operating system, 
was built as freeware...an "open source" product that 
relied on voluntary efforts from programmers all over the 
world, cooperating without the benefit of payrolls or 
health insurance. No capitalists were involved. And no 
investors could profit from it. Linux is also made 
available free over the Internet to anyone who wants it. 
The pros say it is better than MS-DOS.


CHATEAU - This French word might be translated as "money 
pit" or "place for people who don't like Internet stocks to 
lose their money." By way of introduction, I am the 
publisher of a group of investment services, called Agora 
Financial Publishing. We have offices in Paris, London and 
Baltimore. I had a choice. I shuttle back and forth between 
these offices. But I chose to live in France and bought a 
chateau not far from the late David Ogilvie's much larger 
pile. Chateaux are the only investments that have lasted - 
in a single family - for the very long run...a period of 
1,000 years or more.


CREATIVE DESTRUCTION - The economist Josef Schumpeter came 
up with this expression. It describes the natural process 
of open markets: old companies and old technologies are 
destroyed by new ones. Dirigisme tries to block the forces 
of creative destruction. By contrast, laissez-faire, 
another French term, lets the chips fall where they may. 
Bill Gates, America's Last Great Capitalist, built his 
company on the dirigiste model. Linux is an example of the 
laissez-faire approach. Gates created vast wealth. Linux, 
and/or the process of Creative Destruction, will destroy 
it. (...if not, the government will... Addison)


DIRIGISME - This is also a French term. It is the modern 
French version of Plato's ideal form of government - where 
you get smart people together and they tell everyone else 
what to do. 


DOLLAR - more valuable than gold...the dollar has 
nevertheless been going down in value since the Federal 
Reserve system was set up more than eight decades ago to 
protect it. 


ESPERANTO MONEY - this is the term I apply to the euro. 
Esperanto was a made-up language designed to make it easier 
for people to communicate. It flopped. The euro will flop 
too. Gold - Gold is a heavy, yellow metal, rarely seen or 
spoken of. It is a barbaric relic that has been going down 
in dollar terms for the last 20 years. It is about the only 
thing you can leave on the seat of your car in Baltimore 
without worrying about the windows being smashed. 
GAMBLING - what you do with your excess money when you are 
too lazy to invest the way Buffett does.


GRAHAM AND DODD - These are the guys who wrote the book on 
investing. Warren Buffett - their most brilliant student.


HEAD AND SHOULDERS PATTERN - Not to be confused with the 
dandruff shampoo, a head and shoulders pattern on a chart 
vaguely resembles the head and shoulders of a man. A very 
strangely shaped man. It is thought to be a precursor of a 
decline. But if the market doesn't go down...the 
technicians take another look and tell you that it didn't 
look like a head and shoulders after all. It was really a 
horse's rear end. 


HEART OF DARKNESS - where Internet investors go...the 
horrors.


THE INFORMATION AGE - the handle given to today's post-
industrial, post-modern economy. The successor to the Age 
of Ignorance, the Age of Information is characterized by 
such an abundance of useless facts and senseless data that, 
now, everyone knows everything...and almost no one knows 
anything. 


INTERNET INVESTING - This oxymoronic term describes what 
people who don't speak French do with their unwanted money. 
For example, they buy Microsoft, or our "River of No 
Return" stock, Amazon. The convention among Internet stock 
buyers is that the company is worth a p/e equal to it's 
rate of growth. Thus, MSFT, growing at 25% per year, should 
sell for 25 times earnings. It sells for twice that much 
now...50 times earnings. That's a lot of money for a mature 
company that is bound to be the victim of creative 
destruction. AMZN is growing at 70% per year. But the 
trouble is, it has no earnings. So you can't apply the 
formula. Most likely, AMZN will never make money. Most 
likely, it will disappear...just as the 400 radio publicly-
traded radio companies of the `20s disappeared...and the 
497 auto companies.


INVESTING - This the activity that many people say they do 
but few understand. It involves studying the likely stream 
of income from an investment, anticipating its growth or 
decline and adjusting for risk. Most of today's "investors" 
wouldn't know a balance sheet if it bit them on the 
derriere - which, I predict, it will.


METCALFE'S LAW - Metcalfe noticed that a system like the 
Internet becomes more valuable the more people use it. Like 
the telephone, the first phone is virtually useless. The 
millionth, by contrast, is exceptionally useful. Thus, the 
value of the system itself increases exponentially as its 
use becomes more widespread. Another curiosity, Metcalfe's 
Law helps explain why the dollar has been such a hit all 
over the world. Investment Biker, Jim Rogers, driving 
around the world with his girlfriend, Paige Parker, reports 
that he can use dollars almost everywhere - and in many 
places where even the government won't accept its own 
currency. Dollars have become a worldwide medium of 
exchange - made more valuable simply because they are so 
ubiquitous. 


MOORE'S LAW - a key to understanding new tech investing. 
Moore said that computer power would double every 18 
months. Interestingly, statisticians use this device to 
ramp up the GDP figures...arguing that a computer purchase 
today is worth more than the actual dollars exchanged. They 
never applied this logic to autos or any other sector, but 
some $300 billion of these fictitious "chained dollars" 
have been added to the nation's GDP.


SPECULATING - This is what you call gambling when your wife 
asks what you doing.


SAND, SMALL TOWNS AND OLD TOWNS - Where people go to have 
their mid-life crises.


SIGNIFICANT BASE FORMATION - This is what you get when you 
sit around and eat too many donuts while reading the 
financial news.


TRIFFIN PARADOX - The trouble with making a currency the 
world's leading brand is that do to so, you have to print a 
lot of them.... and export them vigorously. Each dollar is 
an IOU from the government. The more outstanding... the 
weaker the issuer's balance sheet, and the less each one is 
worth. Eventually, Triffin and Metcalfe will have to come 
to terms. 


UNIFIED THEORY OF GREED (UTG) - The insight that we're all 
greedy SOBs, but the real SOB is the guy whose greed - 
whether for power, money or love - is not held in check by 
his wife, the market or the law. 
 
 
 
 
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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Last modified: April 02, 2001

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