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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  'Wealth Effect' Has Lost Its Mojo

In Today's Daily Reckoning:
*** Wall Street enjoying the summer
*** The average investor gained 3% in first half of the 
*** Al Greenspan - the jazzman...Gates got off easy...and 

*** Wall Street looked healthy last week. The Dow rose 
260 points - or 2.42%. Friday gave the Dow a big boost - 
with a 119 point gain.

*** Twice as many stocks rose as fell over the week. And 
there were 3 times as many hitting new highs as there 
were hitting new lows.

*** The Nasdaq rose 29 points on Friday. This brought the 
index to a small gain for the week - plus 2.

*** So, things are looking up. The summer rally continues 
- with the Dow over 11,000 for the first time since 

*** Investor's Business Daily's mutual fund index - which 
is probably a good measure of how ordinary investors are 
doing - is up 3% for the year. This is less than you 
could have gotten from a risk-free bond. But, my brother 
in law, an investment banker with Goldman Sachs, 
explained why people do not pull out of stocks... 

*** A group of retailers are reporting earnings this week 
- including Home Depot, Toys 'R' Us and Nordstrom. Retail 
is 2/3rds of the economy, so this is important. On 
Friday, it was revealed that retail sales rose 0.7% in 
July, the biggest increase in 5 mo. But Gap shares went 
down anyway.

*** Dell computer also fell. Once again, we see the same 
problem - expectations are so high that good results 
aren't good enough. Dell trades at over 50 times 
earnings. You'd have to be growing at 50% per year in 
order to justify that kind of a multiple. Dell's 
operating results have been flat for the last three 
quarters. The stock fell to $37 and change. 

*** Japan has been threatening to raise interest rates. 
Friday, it finally did so. But no one seemed to notice or 
care. You may recall, however, that Japan's zero rate 
policy has been the source of much of the money that has 
driven the US boom to grotesque proportions. Traders 
borrowed yen and bought U.S. stocks and bonds. This 'yen 
carry trade' paid off big as long as the yen did not rise 
too much against the dollar. 

*** Currency markets were mostly quiet on Friday. The 
euro is still holding above 90 cents. 

*** As long as the dollar remains strong, it is probably 
clear sailing for Wall Street and the U.S. economy. Maybe 
there will be no huge gains... but there probably won't 
be any huge losses either. "The key," writes economist 
Bob Anderson, quoted by Gary North, "is trying to 
identify the catalyst that will precipitate the loss of 
confidence. My own opinion is that it will come from 
abroad... the growing foreign asset ownership in this 
country cannot continue as it has in the past. At some 
point, the 'call' will come, and it will be followed by 
massive panic."

*** "The old-economy rules of prudence," said Alan 
Greenspan, speaking to a meeting of the Council on 
Foreign Relations, "are as formidable as ever. We violate 
them at our own peril." This does not sound like the same 
'Harry Potter' Greenspan, the Wizard of the World's 
largest banking cartel, who was so recently proclaiming 
the marvels of the New Era. Gary North explains: "Let it 
never be forgotten that Greenspan began his academic 
career at the Julliard School of Music, and then toured 
with Henry Jerome's swing band. His is a jazz man. He can 
carry a tune, but he rarely sticks with it for long. He 
improvises." (See: He's a Jazz Man, He Can Carry a Tune

*** "Just tell me what tat is," asked one DR reader 
following my letter entitled, 'Tit for Tat,' "and show me 
where I can trade it."

*** "A guy gets rich, and suddenly all the
busybodies and crybabies who refuse to produce something 
for a living want to bring him down." Dan Ferris 
described an ancient tradition. Among Indian tribes of 
the Pacific Northwest, a man who failed to give away 
enough of his wealth might even be killed. Bill Gates can 
take comfort - he's getting off easy. (see: From Whom To 

*** And here's a note in the Financial Times "Megawati 
set to take more power from Wahid." The headline, which 
sounds like it might have something to do with a 
hydroelectric dam, actually refers to a shift in 
political power in Indonesia, where the president - a man 
whose brain has been certifiably damaged by a stroke - is 
giving up some of his authority to a woman with no 
obvious mental defects.

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"Does a person get richer when the prices of the stocks 
he owns increase."

This is among the questions posed by Dr. Kurt Richebacher 
in his August newsletter. (What Makes a Nation Wealthy

"Of course, his or her personal wealth has accordingly 
risen," says the economist. But what has really changed? 
Is the view out his office window any more pleasant? Does 
his luncheon hamburger suddenly acquire an added flavor? 
Does his wife appear more attractive? Are his labors 
eased or is his care-worn brow soothed?

The answer: well...maybe. A few more dollars in Warren 
Buffett's account will make no difference. Nor are George 
Soros or Donald Trump likely to upgrade their standards 
of living. At the upper reaches of the prosperity curve, 
money no longer matters - except, as Bunker Hunt once put 
it, "as a way of keeping score in life." 

But as you travel from Park Avenue to Queens, or from 
Kennebunkport into rural Maine, the marginal utility of 
money increases. The average American can use a few more 
bucks. And when the bucks appear on his portfolio 
statement - he is happy to spend them. But, as we will 
see, when they don't appear - he begins to act Japanese.

"People are not going to move out of stocks anytime 
soon," said my brother-in-law at last night's dinner. 
"Yes, they've taken some losses this year...but over the 
last five or ten years they are so far up it is 
unbelievable. Their lives have been changed."

The Dow ended the first half of this year down almost 
10%. The Nasdaq did better - down only 2.5%. Still, the 
habit of 20% plus annual gains is hard to break.

"Almost everyone now has a 401(k) or something similar," 
he went on. "If they had $50,000 in the plan in 1995 - 
they might have $250,000 today. They are waiting for the 
next big pop. And they'll wait years before they give 

My brother in law is not giving up. Like most Americans, 
I suppose, he has a house with a mortgage in an expensive 
suburb. He works in Manhattan and commutes an hour and 15 
minutes. He has a mortgage - at about 8% - and a 
portfolio of stocks that has risen 400% in the last few 

"I didn't begin as a tech investor," he explained. "I 
became one because those are the stocks that went up. 
Sun, Intel, Nortel - I've had good times and bad times, 
but overall, I'm way ahead of the game. And now these 
stocks make up maybe 80% of my portfolio."

Hmmm...I thought...maybe you should take some of your 
profits off the off the mortgage...

"And we're looking at a relatively long time horizon," 
his wife added. "We're not worried if the market goes 
down for a year or two. We have 20 years to make it up. 
We don't believe anything is better over the long term 
than stocks. We're in for the long term, so we're in 

All across America, there are millions of people who 
think like this. It is a reasonable line of thought. And 
I am in no position to argue with it. My investment 
returns, over the last five years, are a lot lower than 
those of my brother in law. 

Still, as the SEC is fond of advising us, past 
performance is no guarantee of future results. 

The lives of millions of people have changed in more ways 
than one. First, they discovered that savings were a net 
loss. A dollar invested in Qualcomm was worth five or ten 
dollars in a money market account. So, why save at all? 
It was stocks that made people rich - not savings.

As reported Friday, the savings rate fell from 8.7% of 
disposable income in 1991 to 0.6% in the first quarter of 
2000. This decline in savings - not technology, 
innovation, nor productivity - is perhaps the real reason 
for the financial boom of '95 - 2000...the boom of which 
Al Gore is so proud. 

Much of the money that would otherwise have gone into 
savings went into stocks. These were regarded as better 
than savings accounts (if you had the proper long-term 
orientation), because the rate of return was higher. 
Billions poured into stocks - which lifted stock prices 
and seemed to confirm the idea.

Second, people looked at their account statements and 
discovered that they were richer than they ever had any 
right to be. It was easy money. But they recognized that 
the gravy train would come to a halt if they took their 
'savings' out and spent them. So, they took out only what 
they needed - which wasn't much, thanks to the reckless 
generosity of the consumer credit industry. 

"Consumer spending surged as a share of GDP," reports Dr. 
Richebacher, "from a long-term average of 66%...up to 94% 
in the first quarter of 2000." The poor Japanese, by 
contrast, can't seem to get on the "bullet train of the 
New Economy." The silly losers keep saving their money.

Even in Europe, credit cards are rare. I've been here, 
off and on, for nearly 5 years. I have yet to receive a 
credit card offer in the mail. Instead, people use debit 
cards - with each purchase immediately debited from their 
bank accounts. And lending in Europe is done by stodgy, 
conservative banks. The free-wheeling, aggressive credit 
industry of the U.S. does not exist. 

But back in the U.S.A. the credit industry makes money 
available, when and where you want it. And people wanted 
it almost everywhere as long as the 'wealth effect' was 
working for them. As long as their portfolio statements 
showed dramatic improvements, month after month, they 
were happy to borrow, spend - and pump more money into 
the market. 

This year, account statements have been less pleasing to 
behold. And the 'wealth effect' seems to have lost its 
mojo. Retail spending went down right along with stocks. 
Consumer spending increased by 0.5% in January, and 0.8% 
in February, after a 5.3% boost in all of 1999. But in 
the next three months consumer spending declined to just 
0.2%. (Though yesterday's figures showed it has been 
growing again in the Summer of Love.)

Meanwhile, savings followed exactly the same pattern. The 
savings rate hit bottom in February - with only $21 
billion saved. But in May, Americans saved $38 billion. 

Is the vast Pacific - which separates the savers of 
Nippon from the spenders of North America - finally 

More tomorrow..

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...

"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)

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Last modified: April 01, 2001

Published By Tulips and Bears LLC