In Today's Daily Reckoning:
*** Summer of Love continues
*** Will today's productivity numbers be strike two
against the New Era?
*** The euro bounced...IPOs are back...and saying things
that mean nothing...
A Perfect Financial Storm is gathering. Will the Nasdaq
and S&P 500 decline by half? Will the dollar fall, and
take the Dow with it? One expert in inter-market
relationships says yes. Find out how global stock, bond,
commodity and currency markets are brewing up the biggest
financial disaster in a generation--and what prudent
investors can do to prepare today. http://www.dailyreckoning.com/imra2
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
*** It must have stopped raining in New York. The 'summer
of love' spirit seems to have gotten a boost over the
weekend. The Dow rose 99 points yesterday - as hopes for
no further rate hikes spread and deepened.
*** The Nasdaq rose too - up 75 points. The market looks
strong. Advances led declines by 1708 to 1136. More than
4 times as many stock hit new highs as new lows. It looks
like the summer rally will continue.
*** The big number today will be the productivity report
- coming out this morning. The report, from the Bureau of
much-Labored Statistics, is expected to show non-farm
labor productivity increasing at a healthy, but not
spectacular, rate of 4.5%.
*** Meanwhile, Jim Grant, of Grant's Interest Rate
Observer, has commissioned his own shadow BLS and
anticipates a real productivity number closer to 2.5% -
taking out the imaginary, 'hedonic' gains from greater
computer power, leveraged by the 'substitution' effect of
declining computer prices.
*** All of this hocus-pocus is great fun. Most likely -
almost inevitably - the Internet and new communications
tools are increasing productivity. They are doing so by
extending the division of labor...making it possible for
people all over the world to work together...in more and
more specialized ways. But, as I describe below, there
are limits...
*** Gold rose 50 cents. Platinum went down a big $8.60
cents.
*** The euro bounced. It is now worth more than 91 cents.
Has the rally petered out? Has the world's demand for
green paper really peaked - as I suggested, on May 17th?
We'll see.
*** Bill King tells us that August, not October, is the
worst month for stocks. He also notes that this is the
biggest week for IPOs in 17 years.
*** "The Comeback Continues" announces Red Herring,
referring to the IPO market. New offers include techs,
medical companies, and plain, old-fashioned goofy long
shots - such as California Pizza Kitchen, and Krispy
Kreme Doughnuts (which even spells donuts in the old
economy way.) The doughnuts are up 180% since the April
offer.
*** Earnings announcements by corporate America are
coming in - some good, some bad. But overall, according
to the Amernick Report (amernick@hom.com) earnings rose a
very healthy 32.73% year to year. Still, stocks are down
for the year. Why?
*** One reason - among Nasdaq stocks, P/E ratios are so
lopsided - with so much P to so little E - that even a
big increase in earnings is meaningless. Prices are
running 145 times earnings. So even a 100% increase in
earnings still leaves stocks at an absurd 72.5 P/E.
*** Another reason: the best earnings are to be found
among the big companies. So, taking the S&P 500, for
example, the earnings yield is currently 3.44%. But the
CPI is now 3.67%. Earnings are not even keeping up with
inflation. This is something new. And surely dreadful.
*** Speaking of earnings, an LA Times piece explains that
dividends from earnings were a quarter of the total
returns from stocks until the 1990s. They were 40% of
total return in the 1960s, and 70% of the '70s total
return. The S&P dividend yield is currently only 1.1%. If
this represents a quarter of the total return investors
may expect from stocks - the total will only be 4.4%.
This is why the smart money is moving to bonds...and
utilities. Higher rates of return without the risk of
owning expensive stocks.
*** Miami, Manhattan, San Diego - from the 'Frisco bay to
the Chesapeake housing costs are soaring. This from a DR
reader: "I just received a rental survey from the New
Hampshire Housing Finance Authority. The statewide median
gross rental costs have increased from $665 per month to
$697 per month. Only a five percent increase but sill
much higher than the BLS says is happening. This study
also showed that Merrimack County, NH rents rose a
whopping 22.8%."
"For the BLS statistics to be accurate," continued my
correspondent, "wouldn't housing costs need to be
dropping somewhere in the country? Where are the costs
dropping?"
*** "It was just an election promise that had to be
kept," said one French employer interviewed by a
Washington Post reporter. He was referring to France's
35-hour work week. Widely viewed as a foolish joke in the
rest of the world - the French have been forced to take
it seriously. But they've found clever ways to live with
it...and even used it to increase the flexibility of
their labor rules, which are so complicated that no human
being could possibly understand them without drinking a
bottle of wine and eating a few slices of rancid cheese.
*** In Paris, officials of the labor ministry still try
to find ways to stop people from working more than the
allowable workweek - but all around them an explosion of
entrepreneurialism is taking place. Young, aggressive
business people work around the clock - at home, in
cafes, on laptop computers. Even fugitive innovators, who
fled France for the Silicon Valley or London, are
returning. "In France," said one former functionary
turned Internet entrepreneur, "the 'royal way' is no
longer civil service or big business, it's creating
companies."
***** "It's a city with history and charm and a large
central plaza surrounded by old Spanish colonial
buildings," writes Kathie Peddicord from Granada,
Nicaragua. "...the buildings are painted bright blues and
greens and reds. The women walk proudly to and from the
market balancing baskets on their heads, smiling, and
holding hands with each other. The children ride bicycles
in the main square." - and you can still pick up a
colonial mansion for $50,000... or less. We like it so
much we've recently opened an office there... (see: Nicaragua's Grandest City - At the Right Price)
*** "They've really got it together," reports another
friend, just back from the Republican National
Convention. "Nothing is being left to chance." All the
lies and humbugs have been carefully worked out in
advance.
*** Meanwhile, Al Gore seemed to take a big chance -
choosing an orthodox Jew, and Clinton critic, for a
running mate. Joe Lieberman had advocated an
investigation of Al Gore's campaign fund abuses. What
will he say now?
*** Gore said he wanted "someone who can be a good
partner with me in fighting for people." Fighting for
people? Against termites, potatoes, aliens? One of the
monumental talents of career politicians is the ability
to say things that sound nice to the mob, but have
actually no meaning whatsoever.
*** Bulls v. Bears, title bout? I have noticed an
interesting debate brewing in the Daily Reckoning
discussion board. Among the contributors the Fleet Street
Letter's Dan Denning writes "...whenever there's broad
public participation in the stock market, whenever there
is so little saving and so much borrowing - to pay for
profits that don't exist, and whenever it is so widely
believed that it's riskier to be out of the market than
fully invested in it...then stocks are about as
overvalued as they're going to get." His ideas have
sparked some interesting "bull" in response... (See: Dow
1620... Nasdaq 2000?)
A small group of investors are making money hand over
fist, safely. They don't worry about volatile markets.
They don't lose sleep over inflation numbers. Use the
underground investment secrets of a bona fide Wall Street
legend. You'll LIMIT RISK & INCREASE PROFITS. Read this
FREE report... click here: http://www.agora-inc.com/reports/OSTI/naturalprofits2/
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
"We will rape the horses and ride off on the women. And
we will trim the hedges of very small villages."
The Three Amigos
Word came from Baltimore yesterday, that someone had
walked into the office on Mount Vernon Square and stolen
a laptop computer.
Despite a full employment economy, a summer rally on Wall
Street and the approach of the November elections, some
people still decide to go freelance. Rather than get an
honest job, invest, or wait for the booty of politics to
come their way, they decide to go for it, the cash that
is, directly and immediately.
Jules' video game, Grand Theft Auto, is not the least bit
subtle about it. Its message: crime pays...and it can be
fun too.
As you will see, crime does pay. Because it pays so well,
people are forced to take precautions against it. One of
those precautions - dating back many centuries before the
founding of Wall Street - is owning gold.
The destination of today's letter is gold - and its
price. But we will visit some strange and wondrous places
before we arrive - including crime... punishment...
politics...and the real nature of marriage.
So let us begin. My oldest son, Will, and his girlfriend,
Suzannah, set out on a 12-mile hike this morning. They
will walk down country lanes, through quiet villages...
and have a picnic lunch beside a lake that was dug by
monks in the 13th century. This, of course, has nothing to
do with our journey today...but I envied them as they set
off.
I envied Jules too - briefly - as he played his game. It
looked like fun - stealing cars and careening through the
make believe streets of his video game. Running down
pedestrians and ramming police cars!
"If everybody could be trusted not to steal cars," writes
Matt Ridley in "The Origins of Virtue, "cars need not be
locked and much time and expense could be saved in
insurance premiums, security devices and the like. We
would all be better off. But in such a trusting world, an
individual can make himself even better off by defecting
from the social contract and stealing a car."
In a trusting world, gold would be just another element -
like mercury or chocolate. But the world is not entirely
free from sin. At least, it never has been.
There are still crimes, petty and grand, against which
you need protection. You can put a guard at your door...
or an alarm system. Petty criminals can be fended off
with petty measures. But protection against the great
criminals - the scam artists and politicians - takes more
care.
In the old days, the forebears of Bush and Gore - that
is, the emperors, dictators, pharaohs, and other rulers -
issued their currencies and decreed them legal tender...
just as the U.S. government in cooperation with the
Federal Reserve System does currently. As long as the
coin of the realm was minted honestly, it was difficult
to game the system. But crime paid, then as now. And it
didn't take rulers long to discover that it was cheaper
to issue money in paper form, rather than in gold.
Those in charge of currency were confronted with a rare
form of what is known as "the prisoner's dilemma." Two
prisoners are faced with the choice: give evidence
against the other and reduce your own sentence...or stick
together and both will convicted of a lesser charge. If
they stick together, as a group, they will serve the
least time. But each may serve less time - if he gives
evidence against the other. Naked logic suggests the most
rational choice - turn state's evidence. Squeal. Defect.
Look out for #1.
Paper currency was a disaster to society. But it paid off
for its issuers. They were able to steal from the people
they were supposed to be protecting. As Ridley put it,
"true logic leads you into collective disaster." The
world has lived through the collective disaster of hyper-
inflation many times. At one point, the Romans issued
coins made of leather. But the official currency was so
devalued by the market - Roman tax collectors refused to
accept it in payment of taxes. They demanded the real
stuff - precious metal.
The best protection was to own gold. The coins could be
hidden. They could be carried. An ounce of gold would buy
a good quality toga and a belt during Caesar's time. But
while the imposter currencies inevitably went bust, gold
retained its value.
That has happened even in our time. Throughout the entire
20th century, during which time the elder Bush and the
elder Gore were often in positions of power, the U.S.
dollar lost value. In fact, it lost about 95% of its
value.
But in 1900, an ounce of gold - which was worth about $15
back then - would buy a man a suit of clothes. Here it
is, the year 2000, and an ounce of gold - now worth about
$280 - will still buy a suit of clothes. Though not at
Brooks Bros.
But something has changed. The division of labor has
progressed to such a point that people no longer feel the
need to stock food. Or firewood. And there are new ways
to protect against inflation.
Adam Smith wrote that the division of labor increased as
the size of the market increased - and that it expanded
as communications improved. His guesses were later proven
by a biologist named John Bonner (no relation) who
studied slime mold. He discovered that slime mold cells
did indeed tend to specialize as the size of the colony
expanded. No proof has been offered on the communications
point - but it seems as though it must be true.
Thus, we may presume that the division of labor is making
rapid advances - with the advent of the Internet and
globalization. A person with wealth to protect has a
great number of options. He can buy inflation-indexed
bonds. He can buy foreign currencies. He can buys stocks
- which provide dividends, and whose value often rises
with inflation. He can even buy stocks of gold mining
companies. He can buy a chateau in France...or an island
off the coast of Scotland. He can go onto the Internet
and bid on paintings, jewelry, antiques - directly from
Christie's gallery.
The market itself - the universal joint and master-
switchboard for the division of labor...in which the
labors of millions of people all working for their own
self-interest are marked to market... priced... valued...
and exchanged - seems to have made gold unnecessary.
But in equal measure, it has made the dollar vulnerable
as never before. In a split second - the bond traders,
currency traders, and ordinary investors can switch out
of dollar-denominated investments. They can move to.
In a matter of moments - it could be over for the dollar.
But gold will still be in its position on the periodic
table. And an ounce of gold will probably still be worth
a suit - or at least a pair of pants.
"We are not ready to suspect any person of being
defective in selfishness," wrote Adam Smith in his Theory
of Moral Sentiments. If that applied to Roman Emperors,
it applies no less well to Republican presidential
candidates. And no less to the issuers of dollars as the
issuers of dot.com stock. What is good for the issuers is
not necessarily good for the market as a whole. And the
logic of self-interest could lead to a collective
disaster - a collapse of the dollar, as well as U.S.
stocks and bonds, against other assets.
As always...
More to come,
Bill Bonner
P.S. Tomorrow, I will describe the curious way 'the
market' transforms bad into good... and the curious
paradox of marriage.
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...
"My small portfolio has followed true to my wife's description of my
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" (Timothy)
" Your Daily Reckoning is the best in business commentary... mixing
serious warnings and the state of the market with gentle humor" (Makram)
"It is actually better than some of the newsletters that I pay to
get" (Joe)
"Your statements and philosophy have kept me from storming into the market and in fact [I'm]
making some money in put options" (Frank)
Open your mind with the most stimulating e-mail newsletter that you'll ever read, The Daily Reckoning. To receive this free daily email newsletter
click
here now.
Copyright � 1998-2002 Tulips and Bears LLC.
All Rights Reserved. Republication of this material,
including posting to message boards or news groups,
without the prior written consent of Tulips and Bears LLC
is strictly prohibited. 'Tulips and Bears' is a registered trademark of
Tulips and Bears LLC
Last modified: April 01, 2001
Published By Tulips and Bears
LLC
