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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  The Untold Story Of How A Bull Turned Into A Bubble

In Today's Daily Reckoning:
*** Consumer spending still outstripping earnings
*** Dow 12,000...21,500...or where?
*** Yeat's grave...Lisadell House...and a beautiful, 
deserted beach...

*** "WOW DOW 21,500 TO 43,000 BY 2008." So reads the 
headline of a letter I received from a stockbroker. "Hi 
again," begins the letter from a man I've never heard of. 
"I trust you remember me." The letter goes on to suggest 
that I follow the advice of Harry Dent's book, "The 
Roaring 2,000's" and prepare "for the greatest boom in 
history, from 1998 to 2008."

*** The source of the "WOW DOW" boom is identified as 
baby boomer spending. No mention is made of where the 
baby boomers get all the money they're supposed to spend.

*** The public's confidence in stocks is extraordinary. 
Over the last 12 months the gain from stock investing has 
only been about 1%. Still, in the last quarter a record 
$73.4 billion was invested in mutual funds.

*** Occasional rallies give cause for hope. The Dow rose 
another 84 points yesterday, for example. More stocks 
rose on the NYSE exchange than fell - 1675 to 1179. And 
more hit new highs than hit new lows - 98 to 40. 

*** But the Nasdaq continued its decline, giving up 81 
points. The Big Techs are slipping. Intel lost 2 1/8 
yesterday. Cisco lost 2 1/4. These big techs will be the 
source of much of investors' losses as the bear market 
develops, simply because there is so much of the public's 
money in them.

*** While the public continues to put its money in the 
stock market, the pros are taking their money out. 
Yesterday, Goldman's partners announced that they were 
getting out while the getting was still good - selling 
10% of their holdings to the public. 

*** And bonds and utilities - favored by professional and 
more serious private investors - both rose yesterday. 
Even a 6% coupon from a bond is better than a 1% return 
from stocks. 

*** The euro fell to a 2-month low against the dollar -- 
at 91 cents. The dollar is still below it's May peak, 
however. Two very important things happened in May that, 
I believe, signaled the end of the 'New Era" illusion. 
The dollar topped out. And first quarter productivity 
numbers returned to more normal levels - following rather 
spectacular numbers from the final quarter of '99.

*** If I'm right - admittedly a low-probability event - 
it is just a matter of time until confidence yields to 
anxiety and high prices yield to low ones. Foreign 
investors will lose confidence in the dollar as domestic 
investors lose confidence in stocks.

*** The big news yesterday was that baby boomers and 
other consumers are still spending more than they make. 
Consumer spending rose 0.5% in June, 25% more than 
expected...and 25% more than personal income. How much 
longer can spending exceed earnings? Until 2008? We don't 
know - but we're going to find out.

*** As I've been saying, today's high stock prices do not 
rest on higher earnings, greater productivity, new 
metrics nor a New Era. They repose upon a bed of debt. 
(See "How a Bull Turned Into A Bubble" below...Addison) 

*** The public, believing that it can get something for 
nothing in the stock market, has been willing to shed its 
savings in order to participate. But debt costs 
something. At an 8% interest rate, investors (who only 
earned 1% in stocks over the last year) paid 7% to own 
stocks. Unless stocks rise substantially, and soon, the 
public will begin to follow the professionals out of 

*** An increase in stock prices is just what many people 
are predicting. I got an email from InvestorPlace - a 
service of my friendly competitor, Tom Phillips. On it, I 
found a prediction - from Richard Band, I believe -- that 
the Dow would end the year above 12,000. And, of course, 
there's Harry Dent...and the 21,500 Dow.

*** "Cast a cold eye on life...on death...Horseman ride 
on" - these are the puzzling words W.B. Yeats wanted on 
his grave. And there they were. We paid homage to the 
great poet by visiting his grave in Drumcliff, near 
Sligo. Then, we went on a tour of Lisadell House nearby.

*** The house was built in the 18th century. It is an 
unusual place - perhaps the ugliest important country 
house I have ever seen. It sits at the end of an untended 
drive, on a dark gray cement unbroken by 
anything save the large windows. It looks as though it 
would make a good reform school.

*** But for pure unattractiveness nothing about the house 
could match the tour guide. A hefty German woman, she 
wore a pair of dirty, striped pants made of some 
unnatural fabric that had been long since stretched 
beyond its limits. She had a full red face and glasses 
that looked as though they had been taken from Leon 
Trotsky after the axe fell upon his head. 

But even less attractive than her appearance was her 
attitude. She welcomed us to the house as though we 
intended to spit on the floor and steal the silver. And 
she might have been giving a tour of a concentration camp 
- so little sympathy did she seem to have for the people 
who built the place and lived there. 

Indeed there had been some illustrious occupants. One 
owner was an Arctic explorer - who, according to our 
guide, must have exterminated several species single-
handedly. She made it clear that she did not approve of 
the heads of caribou and moose on the walls.

Nor did she approve of the way so many people were 
required to run the place. There were upstairs maids, 
downstairs maids, cooks, cleaners, gamekeepers, gardeners 
- all shamelessly exploited for the benefit of the rich.

(Where did they get this guide, I wondered?) 

But there was one former resident she seemed to like - 
Eva Gore-Booth, daughter of the explorer. She fought 
alongside the American, Eamon de Valera, in the Easter 
uprising against the English in 1916. The rebellion was 
put down and the ring leaders hung - except for Eva, 
because of her sex, and de Valera, because of his 
American passport and Britain's wish to keep the U.S. on 
good terms so as to bring American troops into W.W.I. 
Later, Eva went on to espouse women's rights issues.

Eva looked very attractive in her portrait. But hearing 
our guide speak of her so admiringly made me wish they 
had hung her, too.

*** We drove out to Horn Head in the far North of Donegal 
yesterday. Looking for a beach where we could have a 
picnic, we drove to the end of the road and asked. A 
blond woman at a farmhouse good-naturedly let us park in 
her yard and showed us a path down to the water. It took 
about a half hour of hiking through sheep pasture, but it 
was worth it. The sand beach was about 100 yards wide, 
between rock cliffs jutting out into the Atlantic. The 
water was too cold for swimming but the kids had fun 
playing on the rocks. It was a beautiful spot - 
completely deserted. 

*** Kathie Pediccord, publisher of International Living, 
moved to Ireland more than a year ago. She's fallen in 
love with the island. If you're interested she's leading 
a small group on a tour of the western counties of 
Galway, Kerry, and Clare, in mid-September. They'll be 
investigating retirement options... and other pleasures 
on the Emerald Isle. E-mail: 
for more information.

*** I'll be back on the boat tomorrow - and unable to 
write until Friday. Until then, your faithful 
correspondent in the land of Joyce and Yeats.

Bill Bonner

* * * * * * * * * Advertisement * * * * * * * * * * * * *

Inflation is out of control, despite what the numbers 
say. In our latest addition to the Investor Library, 
renowned economist Dr. Kurt Richebacher tells you 
everything you need to know about this misunderstood 
economic force and how it affects you and your 
investments. To read this free report, visit:
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *


(First aired September 23rd, 1999)

I recall the summer of 1985. Europe was cheap. The 
British pound was scarcely worth more than a dollar. And 
this was thanks to Paul Volcker.

Volcker squeezed inflation out of the U.S. economy by 
raising interest rates. Higher U.S. rates led to a higher 
U.S. dollar...which made things overseas seem cheap in 

But in September, at the very same hotel that Janet Reno 
alleges served as a meeting place for conspiracy-minded 
tobacco executives 30 years earlier, things began to 
change. Central bankers from the G-5 nations, no doubt 
pausing occasionally for a smoke, set the world monetary 
system on a course that would ultimately lead to the 
creation and destruction of the world's two biggest 

Readers will already be familiar with the blow-up of the 
first bubble. It happened 10 years ago, about 12,000 
miles and 11 times zones from the Plaza Hotel. Tokyo 
stocks fell from 38,000 to 12,000. Real estate fell by a 
similar margin. The economy stalled, then dived. It has 
yet to recover. 

But the second bubble? That is the bubble we explore and 
gawk at every day in these is the bubble on 
Wall Street...concentrated now on a few big Dow stocks 
and a few more tech and Net stocks...but held aloft by a 
whole economy that has adjusted itself to the promise of 
20% annual gains on Wall Street...without the risk of a 
major market collapse. 

Indeed, the average American household has leveraged its 
own balance sheet...doubling its debt the 
belief that the bull market on Wall Street that began in 
1982 will continue indefinitely. 

Let's go back to the Plaza Hotel in 1985. The most 
noteworthy decision made by the august group of bankers 
and officials present was to increase the value of the 
yen versus the dollar. This was not a decision welcomed 
by the Japanese. Because it made it harder for Japanese 
exporters (and what else was there?) to sell their goods 
at a profit. Japanese goods became more expensive. So, 
Japanese manufacturers scrambled to retool to make better 
quality goods with higher margins. Sensing the need for 
more capital and liquidity, the Bank of Japan lowered 
interest rates. From 5% in 2.5% in 1987. 
Cutting interest rates in half while U.S. consumers were 
becoming ever more acquisitive had the inevitable 
effect...a boom. Stocks rose. 

And rose. 

Companies bought stock in other companies. They bought 
office buildings and land too. Everything went up. The 
"psychological cycle" that made Keynes rich functioned at 
least as well in the Orient as it did in the Occident. 
The higher stocks and properties were valued...the more 
people thought they were worth. So they bought more. And 
eventually, the boom turned into a bubble, as interest 
rates remained at 2.5% and the yen rose. Americans were 
buying more and more Japanese goods. The idea was to get 
market share. Forget profits. Stocks rose to an average 
p/e of 70. Golf club memberships reached into the 
hundreds of thousands of dollars. A single piece of 
property in Tokyo, the Imperial Palace, was worth more 
than all of California. 

By June `89, the markets were so hot, the Bank of Japan 
got worried and decided to raise the Official Discount 
Rate above 3%. Nothing happened. Then, on Christmas Day 
they boosted it over 4%. This had the same 
sort of effect as interest rate hikes in the United 
States in `29. The market crashed. 

That is not the end of the story however. It wasn't long 
before the Japanese realized their mistake. If lower 
interest rates could produce a boom, surely they could 
reverse the sense of doom in Japan's markets and economy. 
The Bank of Japan began to lower rates again. And they 
continued doing so until rates reached a point where the 
Financial Times reported "short term rates are, 
effectively, zero." 

Wow. If 2.5% could touch off a spectacular boom and 
bubble in the world's second largest economy...what would 
zero do? 

Well...nothing. At least, not in Japan. Hmmm...Money is a 
little like any liquid. It cannot be compressed. Push it 
down somewhere...and it is bound to pop up somewhere 
else. In this case, the Bank of Japan had the spigots 
wide open...but little of it was showing up in Japan. 

What was happening? 

The trouble in Japan was that the psychological cycle had 
turned. Investors, so recently eager to buy stocks at 
1,000 yen...would not touch them at 400 or even 300. Golf 
memberships that were worth $100,000 a year earlier could 
not be sold for half that amount in 1990. No one wanted 
to go into debt...even at zero interest. 

What was true in the world's second largest economy, 
however, was not in the first. The psychological cycle in 
America remained fully bullish. And institutional 
investors soon found a way to put Japan's free money to 
use. They created the "carry trade." The idea was to 
borrow yen...and buy U.S. Treasuries...and then use the 
bonds as collateral in an equity account. This worked 
like gangbusters. In effect, it funneled borrowed money 
from Japan into U.S. stock markets. Stocks lifted off and 
never really looked back. As stock prices rose, more and 
more people saw the stock market as a money machine. You 
just had to get in line. Get a ticket. Climb on board. 
The machine would do the work. Heck, you don't even have 
to think about it. Just buy a index fund. Almost everyone 
in America wanted a piece of this action. 

After the Asian currency crisis, the money spigots all 
over the world were opened even wider. Again, most of the 
money seemed to flow in the U.S. markets. But into fewer 
stocks...the boom had become a bubble. American consumers 
did their part too. They eagerly bought the world's 
surplus production...and paid for it in dollars. 
Now the world is awash in dollars. And America is awash 
in wealth - on paper. The source of this wealth is not 
savings...not additional productivity...not the 
Internet...not the new era. 

It is debt. 

This can clearly be seen by looking at a chart of gross 
debt relative to GDP. Debt as a percent of GDP has gone 
from about 150% to 260% since the Plaza Accords. GDP is 
about $9 trillion. This implies an increase of about $10 
trillion in debt. Meanwhile, the paper value of the stock 
market has gone from in the neighborhood of $5 trillion 
to nearly $15 increase, coincidentally, of 
about $10 trillion. This is the juice...the expansive 
energy that has ballooned stock prices in America, taking 
them far above the ground of gold, oil and the economic 
output to which they were formerly tethered. Many stocks 
are now at prices equal to those in Japan at the peak of 
its bubble. AOL, which advanced yesterday, trades not at 
70 times earnings...but 200 times. (Note: Last Thursday's 
Commerce Dept. release puts the current total GDP at $9.3 
trillion... the NYSE estimates the total market cap of 
the US stock market as of May, 2000 at just over $16 
tillion... and today, AOL is down nearly 50% from it's 
52-week high of 94 - but it's still trading at 109 times 

The bubble in America must be near its end. Because, as 
Bill King puts it, "Japan has gone Volcker." Oil is 
priced in dollars. Japan imports all its oil. It can no 
longer afford to export valuable goods and get U.S. paper 
in return...pretending that each dollar is just as 
valuable as the last. It has to use those dollars to pay 
for oil...which has gone up more than 30% this year. 

The carry trade is finished, too. It only worked as long 
as the yen fell...or remained steady...against the 
dollar. Those days are over. (Note: by August of 1998 the 
yen had fallen to nearly 145 to the $US, today it's 
trading at 109...Addison)

This is the drama that is unfolding now...and why "all 
eyes are on Japan." If Japan really has "gone Volcker," 
the yen will rise further...the dollar will fall...and 
the bubble will burst soon. Stay tuned. 

Your correspondent staying tuned, 

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 01, 2001

Published By Tulips and Bears LLC