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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
MONDAY, 6 AUGUST 2001 

 

Today:  Nerves Steady Your Money

*** Time to rethink the Reagan Era 'bias' factor? 
Unemployment numbers bushwhack the Dow... 

*** Cisco may make numbers - but what about those write-
offs? Dollar Demise...Time to go global!...

*** The "productivity miracle" was just a sick joke? Say 
it ain't so...tomorrow will be the final day of 
reckoning...(not for us, for the market)... 

*** Says the BLS...the unemployment rate in July held 
steady at 4.5%, but businesses slashed another 42,000 
jobs during the month. 

*** So what? Why do we watch these BLS numbers anyway?

*** Purportedly, as our friend John Mauldin points out, 
"unemployment is The Final Answer connection to consumer 
spending. Consumer spending is what is holding up the 
economy. As high consumer debt and unemployment problems 
wreak havoc on consumer spending, we will see the
economy continue to weaken. This in turn is going to 
produce another round of negative earnings warnings and 
more heartburn for investors."

*** And "in the past 50 years," writes analyst Tony 
Glennon, "the US economy has never experienced a full 1% 
increase in unemployment without a full-scale 
recession..." As jobs go, so goes the economy. Easy 
enough, right?

*** Well, maybe not. Here's an interesting little 
observation from Bill King, a trader in Chicago: "In 
1985, the Reagan BLS understood that white collar 
workers jettisoned by Fortune 500 companies were being 
assimilated into start-up enterprises - tech firms - or 
forming their own companies. The government could not 
count that type of job creation, so they had the BLS 
computer add 35,000 jobs/month to employment. This is 
the 'plug' or 'bias' factor - jobs the government can't 
count, but believe are being created." 

*** Under Bush, The Elder, the 'bias' was increased to 
55,000 jobs per month...and again under Clinton the bias 
was boosted to 155-165k. Where it remains today... 

*** "We now have an environment where high tech jobs are 
being destroyed, not created, and the BLS computer still 
assumes 155k+ jobs are being created that they can't 
count," says King. "If job creation during a decade and 
a half boom couldn't be counted, how can BLS count job 
destruction in small entities?"

*** Hmmmnn... as Eric reports below, the BLS numbers had 
a negative effect on Friday's markets. What would 
happen, in this post-bubble era, if the BLS computers 
should delete X amount of jobs per month rather than 
tack on 150k?

*** Let's check in with Eric:

*****

Eric Fry reports from Wall Street:

- To dispel any notions that we here at the Daily 
Reckoning are a bunch of doomsday-prophesying crepe-
hangers, allow me to offer the following prediction: the 
economy will recover. Of course, it may head lower 
first.

- As Addison mentioned, the stock market did not take 
kindly to the employment report. The Dow declined 38 
points Friday to close the session at 10,513, while the 
Nasdaq fell about 1% to 2,066.

- Despite the Friday fade, stocks chalked up small gains 
on the week. The Dow climbed 96 points and the Nasdaq 
tacked on 36.

- Cisco Systems, which will assail us with its latest 
earnings tomorrow, is grabbing the spotlight once again. 
According to Sanford Bernstein analyst Paul Sagawa: "To 
justify current valuations, Cisco would need to deliver 
more than 20% growth and sustain more than 20% operating 
margins over the next decade, performance that is 
unprecedented for a company of Cisco's size in the 
history of modern public companies... Investors have 
high expectations that are ripe for disappointment."

- Even if Cisco "makes the numbers," Smartmoney.com's 
Igor Greenwald points out, "[I]t has yet to write off 
billions in soured investments and high-priced 
acquisitions, as Microsoft, JDS Uniphase and a host of 
other tech firms have done already... The company 
investors used to love and once rewarded with the 
largest market cap in America is, these days, only about 
three-fourths as valuable as a boring and vastly more 
profitable insurer like American International Group."

- When it comes to declining revenues, Cisco has plenty 
of company in corporate America. "Business sales," 
observes Moody's John Lonski, "are down minus 0.7% in 
the second quarter of 2001 from the second quarter of 
2000. This is the sum of retail sales, manufacturing and 
wholesale sales...The last time business sales were down 
year-over-year was the three quarters from the first 
quarter of 1991 to the third quarter of 1991."

- For months, we've been reading about how the patriotic 
consumer continues to buy houses and cars, no matter how 
little money he makes. The stories usually include 
accolades for these stalwart consumers whose spendthrift 
ways are rescuing our economy from recession.

- It's true, auto sales have held up over the last few 
months, but mostly because manufacturers have enticed 
car shoppers with lavish incentives. That game may have 
played its final inning for this cycle. "Even with 
generous incentives costing U.S. automakers most of the 
new vehicle profits," USA Today observes, "auto sales 
slipped in July."

- Now that the stock market waffles and business sales 
slow down, the U.S. dollar has started to struggle just 
a bit. That's good news for gold, says Greg Weldon: "As 
the USD teeters at key long-term support levels, gold 
teeters, on the verge of a MAJOR upside breakout..." We 
will certainly see...

- "What would happen if the dollar bubble actually 
bursts?" we wonder from time to time. According to 
Dismal.com, you could stand to make some money: "If the 
bubble takes 3 years to deflate, which is not 
unreasonable since that's how long it took the dollar's 
previous bubble to unwind... [t]he following annualized 
rates of return would be realized for G7 assets from the 
perspective of U.S. investors: 

Italy 14.7%
Canada 14.4%
France 9.1%
Germany 9.1%
United Kingdom 7.1%
United States 5.8%
Japan -5.4%

- "It's a good time to be global," says the peripatetic 
Mark Mobius in a recent interview with Delta's Sky 
Magazine. The long-time manager of the Templeton 
Emerging Markets Fund predicts, "This is a good time to 
be in emerging markets...these markets have been beaten 
down pretty low, and there's a good opportunity to get 
cheap stocks." Mobius' favorite emerging market? South 
Africa, where he has invested about 14% of the funds 
under his stewardship. 

*****

Back to Addison in Paris...

*** "Investing in the U.S. miracle will, in retrospect, 
be seen as a sick joke," predicted Dresdner Kleinwort 
Wasserstein Global Equity Strategist Albert Edwards in a 
note to his clients on Friday. Nooo... say it ain't so.

*** "The markets will be forced to confront this harsh 
reality on August 7. Make a date in your diary! The U.S. 
'new paradigm' will then be officially revised away! The 
risks of an equity crash are high."

*** August 7th... wait, isn't that tomorrow? Oh man. Note 
to self: "don't invest in stocks. Tomorrow the markets 
will crash." Damn... I just wish we were on to this 
productivity story sooner. 


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

The Daily Reckoning Presents: A DR Classique originally 
broadcast on October 21, 1999.


NERVES STEADY YOUR MONEY
By Bill Bonner 

"I don't care about money," said "Smokin' Joe" Frazier. 
"It just steadies my nerves." The former champ, after 
having been hammered by Ali and numerous others in his 
career, seems to have suffered less brain damage than 
the president of Indonesia.

I was thinking about that last night on my long walk 
home from the office. It came to me just as my attention 
was distracted by a beautiful woman entering the church 
at St. Sulpice. She was tall with swept-back blond hair. 
And there was something about her expression. She was at 
ease in some personal way...not vacant like a Hare 
Krishna at an airport terminal...her nerves were steady, 
not deadened.

Yesterday's comments contained a provocative idea: that 
virtue can improve your financial performance [see: "The 
Sacred and the Profane", a DR essay dated October 20, 
1999]. As I mulled that idea over, I realized how absurd 
it was.

Think about the very rich people you know. The 
boneheads, the morally-challenged, the perverts and the 
profane. Ted Turner, Donald Trump...the corporate 
raiders...the stock market mavens...

I mean...if the battle for wealth is won with weapons of 
virtue...a lot of these guys are, well, unarmed. 

The subject of morality has certain parallels...and 
intersections...with investing. Both can be dull. And 
both can be perplexing and paradoxical. So, fortify 
yourself with a cup of coffee. Today's reflection has no 
practical application. But it could be interesting.

I am coming more and more to the belief - first 
announced by Jim Grant - that markets work on the 
principle of irony. More and more, I find irony to be 
the driving force...as well as the secret key to 
understanding market movements. The very moment when the 
public comes to believe that stocks will go up 
forever...stocks begin to decline. When a technology is 
certain to be a big success, you can almost be sure that 
an investment in the company's stock will be a big 
loser. When gold is pronounced dead...that is the moment 
to hold a mirror to the nostrils and recheck the pulse.

The same may be true for the way morality affects your 
investments.

We are dealing here with cause and effect relationships. 
Primitive peoples, lacking a sophisticated view of cause 
and effect, partake of a primitive one. They see spirits 
hiding behind every bush. And the spirits are dangerous. 
The spirit of a tree may get mad because you chop off a 
branch. The sun spirit may decide to hide himself if he 
doesn't like the way you dress. A volcano may hunger for 
a maiden or two.

In the Old Testament days, it was still thought that God 
would punish sin in this life rather than the next. 
Sodom and Gomorrah did not prosper...they were 
obliterated. If a person fell ill...or a drought ruined 
crops...the elders would ask, "who sinned?"
This sentiment is still a strong part of our emotional 
programming. We feel we will be punished, in some way, 
for sin. What better way, in this materialistic age, 
than in the stock market? And from yesterday's example, 
it is obvious how certain sins (avarice) at certain 
times (a bull market top) may produce negative returns. 
Wouldn't it be ironic, and perhaps poetic, for a jealous 
God to punish the mammon worshippers in such a way? By 
putting their mammons through the wringer of a bear 
market?

Wouldn't it be fun to watch the yuppies and masters of 
the universe get what they deserve? Uh-oh...taking 
pleasure in their loss...that delightful sensation of 
"schadenfreude," as the Germans say, that is probably a 
sin too! Maybe not a capital sin...maybe a sin of the 
lower case...or sub-prefecture variety. But still a sin. 
And if God is going to punish the big ones...he's bound 
to punish the little ones, too. Those who delight in 
irony will have irony done unto them, too.

But, if God is to punish sin...will he really reward 
virtue? Think about the virtuous people you know. Are 
they rich? All major religions have a similar vision of 
a virtuous person. And in none is he long the Internet 
stocks or filthy rich. The virtuous soul cares not for 
material things. I learned yesterday that the 
philosopher Wittgenstein, born into one of Europe's 
wealthiest families, gave away all his money. One of 
Julius Nyerere's virtues was that he didn't seem 
interested in money. 

Virtuous people are beyond caring...and not just about 
money. They are satisfied if not happy...people who can 
walk by a Paris pastry shop in their bare feet, with no 
desire to stop in have an eclair. They can get a tip on 
an IPO and have no urge to call their broker. They can 
watch a beautiful blonde pass on the street and not lust 
after her...neither in their hearts nor other anatomical 
parts. 

Shakespeare was not describing a virtuous man... 
translated into Swahili by Nyerere... when he spoke of 
Cassius as having "a lean and hungry look." Virtuous 
people do not have a hungry look. They lust not. Neither 
do they sin. And neither do they make a lot of money. 
They don't care about money.

I don't care about money either. But as "Smokin' Joe" 
put it, it steadies my nerves. I am not a virtuous man. 
I lust after profit, pulchritudinous company and 
profiterolles just like everyone else. Besides, I need 
to lust after money. I have six children to put through 
college. Six times $20,000 per year...times four 
years...after tax...well, you can do the math. 

I don't know if God will punish me by sending me to the 
poorhouse. But, like Blaise Pascal, I'd rather not find 
out. And I'm not desperate for money, anyway. Or 
pastries. Or blondes, for that matter. And maybe that's 
the real key. Desperate gamblers are bad gamblers. 
Starving people will eat anything...even Dinty Moore 
stew. A man who hasn't had sex in 12 years...well...you 
fill in the rest.

I am not desperate. So, I can tolerate a little virtue 
in my life, from time to time...within reason. And a 
little virtue is probably not a bad thing in investing, 
just as it is not necessarily a bad thing in the rest of 
life... It helps prevent you from doing something really 
dumb. 


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: August 08, 2001

Published By Tulips and Bears LLC