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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Grand Theft Auto

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...

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*** 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 more and 
more specialized ways. But, as I describe below, there 
are limits...

*** Gold rose 50 cents. Platinum went down a big $8.60 

*** 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 

*** Earnings announcements by corporate America are 
coming in - some good, some bad. But overall, according 
to the Amernick Report ( 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 

*** "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 

***** "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 

*** 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?

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"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 

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 

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 

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 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 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"

" Your Daily Reckoning is the best in business commentary... mixing
serious warnings and the state of the market with gentle humor"

"It is actually better than some of the newsletters that I pay to

"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.

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Last modified: April 01, 2001

Published By Tulips and Bears LLC