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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Greenspan's Peak  Was Nasdaq's

*** Wall Street still sliding sideways...tough market to 
make a buck...

*** Japan and the U.S. - into the Petrie dish of 
history...the IMF disses the "productivity miracle"...

*** "Civilization is merde!"...James Grant takes issue 
with the Fed chairman...and other holiday surprises!

*** Oh, ho...can this be a good sign?

*** The Bank of Japan announced in a "surprise decision" 
Tuesday that they would further open the spigots on 
their already torrentially loose monetary policy... in 
an effort to pull themselves back from the edge of 
recession and "ease the pain of [necessary] structural 

*** "There still exists such general views," reports the 
BBC, "that around the end of the year, ongoing inventory 
adjustments in IT-related goods worldwide are likely to 
peak out and overseas economies - PARTICULARLY THE U.S. 
- will start to recover." Emphasis added, of course.

*** It will be laboriously clear to Daily Reckoning 
readers that "ongoing inventory adjustments in IT-
related goods" are precisely the challenge faced by a 
spiraling U.S. economy. And furthurmore, that 6 rate 
cuts and a loose, loose monetary policy have thus far 
been completely ineffectual at avoiding a Kamakazi-style 
post-bubble nosedive in the U.S., too.

*** "Japan and the U.S. are now in the financial Petrie 
dish," writes Bill King. "Since the Great Depression, 
many economists, monetarists, and financial solons have 
averred the Great Depression could have been avoided by 
copious money pumping." Now, we will truly see if money 
pumping - which we have opined was the source of the 
bubble in the first place - can double as its remedy. 

*** Meanwhile, on Wall Street...Eric?


Eric Fry reporting from New York:

- Yawn, yet another summer snoozer...The Nasdaq fell 17 
points to give back most of Monday's gain. The Dow 
dropped a whopping 4 points to bring its two-day loss to 
5 points. 

- In other words, the stock market is doing a whole 
lotta nothin''s tough to make a buck in a market 
like this. But that's not stopping Warren Buffett from 
trying. According to a filing with the Securities and 
Exchange Commission, Buffett's Berkshire Hathaway Inc. 
purchased a 5-million share stake in Office Depot Inc. 
during the first quarter.

- "Buffett is not the 'value investor' people say he 
is," writes Lynn Carpenter of The Fleet Street Letter, 
who first recommended Office Depot in April of 2000. "He 
simply buys good companies, at a good price, at the 
right time. Even when it fell last year, [FSL advised 
readers very strongly in January to hold on, load up, or 
get in at the bargain price of $8.19] Office Depot 
turned around and is up 86.5% so far this year." 

- Continues Lynn: "In December, we recommended H&R Block 
in the Fleet Street Letter at $18.60 - Buffett announced 
a position in Block shortly thereafter - and it just hit 
another new high today, up 98.7% in 8 months so far."

- The dollar dropped to a 3 1/2 month low against the 
euro yesterday to 90 cents and change - the greenback's 
fifth losing day in a row. This is starting to look like 
a trend, folks.

- The flip-side of the weak dollar is of course the 
strengthening euro. "The Eurozone's strong net creditor 
position relative to the rest of world's is reflected in 
its stable Aaa foreign-currency [rating]," reports 
Moody's. "Above-average gross domestic product, moderate 
inflation, low interest rates, and declining 
unemployment have helped these nations sustain a 
declining trend in government deficits and debt."

- Several commentators blamed the IMF for the dollar's 
weakness yesterday. Isn't that a bit of a stretch? It's 
true that the bureaucrats had a few unkind words for the 
U.S. economy and its currency, but we musn't confuse 
cause with effect.

- On July 27, 2001, the Executive Board of the IMF 
convened to chat about various macroeconomic trends over 
which they exercise absolutely no control. "Directors 
[of the IMF Executive Board] indicated that the size of 
the U.S. external current account deficit did not appear 
to be sustainable in the longer-term," says a summary of 
the meeting, "and it raised concerns that the dollar 
might be at risk for a sharp depreciation, particularly 
if productivity performance proved disappointing." No 
argument there...

- But "what productivity?," asks the latest Moody's 
Credit Perspectives. "Many analysts tripped over each 
other to offer praise for the increase in measured 
productivity in the second quarter. Notwithstanding an 
increase in quarterly productivity growth, corporate 
profits plummeted, credit rating downgrades held a wide 
lead on upgrades and job losses mounted. Some 
productivity miracle!"

- On a related note, Moody's observes that "The U.S. 
credit card loss rate has seen its steepest increase in 
four years. The amount of bad loans written off as un-
collectable rose to 6.39% in June 2001 compared with 
5.26% in June 2000..." Credit delinquency trends are 
unlikely to improve until the unemployment rate 

- Maybe exports will buoy our economy until the consumer 
regains his financial footing...maybe. 

- "Unlikely," says's Andy Kashdan. "It 
was the bursting of the U.S. technology bubble - both in 
terms of share prices and real economic activity - that 
kicked off the slowdown in world growth. Now the rest of 
the world is in a position to return the favor by 
cutting back on demand for U.S. goods and services just 
as exports are becoming increasingly important in 
deciding the fate of the U.S. economy. 

- "None of the major export markets is stepping up to 
help Uncle Sam in his time of need...In Singapore, for 
example, the government is forecasting 0.5% to 1.5% GDP 
growth this year, a mere shadow of last year's booming 
9.9%. Industrial production fell 16.1% year-over-year in 
June... Those calling for a bottom in the U.S. economy 
will be right eventually, but the lack of strong export 
markets is just one more force restraining the mighty 
U.S. economy."


Back to Addison Wiggins, in Paris...

*** Today is Fete de la Vierge here in France - a quiet 
bank holiday in honor of the Virgin Mary. We Americans 
in the office - three of us today - have developed the 
awful habit of working through the French holidays. The 
French have given up asking "Why?". 

"Er, The Daily Reckoning?...It must go on?" I offer 
sheepishly. To which they simply shake their heads in 
dismay and head off for parts unknown. Just as well, the 
office is quiet and the atmosphere relaxed.

*** These holidays do seem to bring out the crazies. 
Last night in the Metro, Jennifer and I happened upon a 
man yelling directly at anyone who would listen. He was 
saying: "They all run away...everyone I speak to - runs 
away... look there you go again!" 

"Maybe you should stop yelling at them," I thought.

When he noticed Meritt, our 20-month-old son, perched in 
a backpack on my back, he started cooing in the curious 
voice all French people are apparently trained to use 
when they see young children. 

"The little one is so cute," he said.

"Don't let that man touch him," Jennifer said with a 

*** Another lost soul I happened upon while traversing 
rue Monge this morning was talking very loudly. There 
was no one else on the street. 

"Civilization is merde!" he decried. "Why must the 
Frenchman pay taxes to the United States?! The United 
States is merde!" 

I walked a little faster so I could pass. He may have 
had a point... I don't know. His voice trailed off 
behind me as I turned the corner toward Notre Dame and 
the Hotel de Ville. 

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The Daily Reckoning Presents: A Guest Essay by James 
Grant, editor of Grant's Interest Rate Observer 

The first of a two-part essay in which the author 
explores Fed Chairman Alan Greenspan's culpability in 
accommodating, celebrating, and defending the most 
excessive investment bubble in the history of mankind.

By James Grant

Sen. Phil Gramm (R., Texas): "If this is the bust, the 
boom was sure as hell worth it. You agree with that, 

Alan Greenspan: "Certainly." 

The Wall Street Journal, which last week reported this 
committee-room exchange, omitted an important detail. 
The Federal Reserve chairman is no impartial observer of 
the boom he was asked to appraise. He seeded it, 
accommodated it, celebrated it and defended it from 
those who believed they saw it turn into a bubble. He 
was as uncritically and besottedly bullish as the 
luckless brokerage-house analysts who have fallen under 
the gaze of the Washington inquisitor, Rep. Richard H. 
Baker (R., La.). Not long ago, Greenspan even believed 
the analysts. 

The chairman's analytical record, hazy in most memories 
(though not in that of the vigilant Bill Fleckenstein, 
author of the daily Market Rap on, constitutes an important piece 
of the U.S. interest-rate equation. The structure of 
forward rates is set by the market in partnership with 
the Second Most Powerful Man in the World. Insofar as 
Greenspan leads the market, it is a case of a one-eyed 
man leading people with two. Perhaps, after they refresh 
themselves on the chairman's errant judgment - 
especially off the beam on the eve of the 2000 stock-
market peak - the sighted will have more confidence in 
their own judgment. 

As it is, they seem to yield to the chairman. The money-
market interest rate and domestic equity markets are 
priced for a prompt recovery from a downturn neither 
unusually severe nor protracted. By the shape of the 
forward Eurodollar curve and the bull-market P/E affixed 
to the S&P 500 (33 times trailing net income), Mr. 
Market has thrown in his lot with Greenspan and Gramm. A 
few quarters of weak GDP growth? A collapse in capital 
spending offset, in part, by the indomitable leveraged 
consumer? Is that all there is? 

No, it seems to us. In support of this contention, we 
offer two preliminary propositions. No. 1: Booms not 
only precede busts, they also cause them. No. 2: Busts 
are indispensable. At least - behold Japan - no proper 
boom can be built on the uncleared debris of a preceding 

What is this debris? Business and financial error as 
reflected in misbegotten investment projects, bad debts, 
impaired balance sheets, wild expectations. The job of 
the bust is to redress these mistakes - in effect, to 
mark them to market. Americans, quick to acknowledge 
their own error and quick to forgive it in others (after 
the resolution of pending litigation, of course), 
disposed of the wreckage of the 1980s in short order. As 
the bubble of the late 1990s dwarfed that of the late 
1980s, the cleanup will take longer than the market 
currently seems to allow for. Thus, we believe, money-
market interest rates will continue to fall, the pattern 
of business activity will describe no letter "V," and 
the long-awaited recovery in corporate earnings will be 
pushed well into 2002. 

With the telecom and Internet bubbles popped, some would 
say that the adjustment is nearly complete. In the last 
cycle, the pace of adjustment was checked by the nature 
of the problems - overvalued buildings and illiquid 

Neither was susceptible to an instant cure. In contrast, 
stock prices, when they get around to falling, fall 
fast. However, we think, the millennial adjustment is 
far from over. Telecom and tech were not the whole 
bubble, only the most visible portion. The bubble was 
global. It distorted not only the structure of the U.S. 
economy but also the patterns of world trade. It 
exaggerated the economic feats of the one and only 
superpower and enlarged the U.S. current-account 
deficit. It caused an even greater round trip of dollars 
- into the hands of overseas creditors and back into 
U.S. securities markets - than might have otherwise 

It would be just like Gramm and Greenspan to agree that, 
with respect to these huge foreign inflows, "no harm, no 
foul." So concluding, however, they would underestimate 
the risks of investing in highly valued markets in a 
highly valued currency. The sheer persistence of 
overvaluation in the United States has dulled investors' 
perceptions of it. News that $10.6 billion had flowed 
into U.S. equity mutual funds in June did not elicit the 
logical question: At these valuations, why was there 
any? Commentators, instead, wondered why there wasn't 
more. ("Asset levels for equity mutual funds are much 
higher now than in 1998 or 1999," writes a dissenting 
commentator, James Bianco, proprietor of Bianco 
Research, Barrington, Ill. "Despite the stock market 
sell-off, only two months have seen outflows since the 
market peak in 2000.")

The fundamental cause of the bubble was the mispricing 
of capital and credit, therefore of risk. In the 
hottest, most bubble-like sectors of the economy, 
investment projects were undertaken purely because money 
or credit was available to finance them. The viability 
of these ventures depended on the continued availability 
of ultra-cheap financing. When capital and credit became 
less cheap, the boom-time ventures became less viable. 
The massive write-downs of goodwill by Nortel Networks 
and JDS Uniphase begin to suggest how far from viability 
it is possible to wander. In the case of JDS, $44.8 
billion of acquisitions made during "The Fabulous 
Decade" (to borrow the title of a new book on the 1990s 
by Clinton Fed appointees Alan Blinder and Janet Yellen) 
turn out to be worthless. 

Money was easy late in the decade, and when the capital 
markets chose to make it tight, as in the wake of the 
1998 Long-Term Capital Management affair, the Fed 
insisted on making it easy again. The Fed raised the 
funds rate three times in 2000, at last to 61/2% on May 
16, two months after the Nasdaq peaked. 

Was the Fed therefore leaning against the wind? Not the 
chairman, who contributed to the pro-cyclical gale in a 
speech on March 6, 2000, before the Boston College 
Conference on the New Economy. His subject: "The 
Revolution in Information Technology." As he spoke, 
orders for high-tech durable goods in the second quarter 
were on their way to registering a year-over-year gain 
of 25%. 

Four quarters later, in April-June 2001, following a 
sharp rise in the cost of speculative capital, they 
would register a 31% decline, the steepest on record. 
John Lonski, Moody's chief economist, aptly describes 
the nearby graph (which depicts the surge and plunge) as 
"the picture of a bubble." 

It was no bubble to the chairman when he rhapsodized on 
information technology and productivity growth. Thanks 
to computer technology, Greenspan declared, business 
managers were increasingly able to formulate decisions 
using "real-time" information. Not anticipating how rare 
a commodity "visibility" would shortly become, he said 
that this knowledge had reduced uncertainty. "When 
historians look back at the latter half of the 1990s a 
decade or two hence," he told his Boston audience, "I 
suspect they will conclude we are now living through a 
pivotal period in American economic history. New 
technologies that evolved from the cumulative 
innovations of the past half-century have now begun to 
bring about dramatic changes in the way goods and 
services are produced and in the way they are 
distributed to final users. Those innovations, 
exemplified most recently by the multiplying uses of the 
Internet, have brought on a flood of start-up firms, 
many of which claim to offer the chance to revolutionize 
and dominate large shares of the nation's production and 
distribution system. And participants in capital 
markets, not comfortable in dealing with discontinuous 
shifts in economic structure, are groping for the 
appropriate valuations of these companies. The 
exceptional stock price volatility of these newer firms, 
and, in the view of some, their outsized valuations, 
indicate the difficulty of divining the particular 
technologies and business models that will prevail in 
the decades ahead." 

Striking the pose of a benevolently optimistic monetary 
statesman, Greenspan appeared hopeful, yet heedful of 
the risks. Heedlessness set in a few paragraphs later. 
"At a fundamental level," he said, "the essential 
contribution of information technology is the expansion 
of knowledge and its obverse, the reduction in 
uncertainty. Before this quantum jump in information 
availability, most business decisions were hampered by a 
fog of uncertainty. Businesses had limited and lagging 
knowledge of customers' needs and of the location of 
inventories and materials flowing through complex 
production systems. In that environment, doubling up on 
materials and people was essential as a backup to the 
inevitable misjudgments of the real-time state of play 
in a company. Decisions were made from information that 
was hours, days, or even weeks old." 

Thanks to the clarity afforded by instantaneous 
communications, Cisco Systems had to write off only 
$2.25 billion in excess inventories during its third 
fiscal quarter, in addition to just $1.17 billion in 
restructuring and other special charges. Using the older 
technologies -telephone, fax, the mails, citizens' band 
radio, etc.- the loss would undoubtedly have been 

Throughout Silicon Valley, makers of PCs, chips, 
servers, printers and other digital products have 
admitted to monstrous miscalculations of final demand. 

Lucent, Corning, Nortel and JDS Uniphase have been 
devastated by one of the greatest misallocations of 
investment capital outside the chronicles of the Soviet 

Who can conceive of the size of this waste had there 
been no e-mail? 

More tomorrow...

James Grant,
for The Daily Reckonning

James Grant is the founder of Grant's Interest Rate 
Observer (, and author of several 
books including Money of the Mind: Borrowing and Lending 
in America from the Civil War to Michael Milken, and The 
Trouble with Prosperity. Mr. Grant recently hosted "Time 
Machine: The Crash" on The History Channel and is a 
regular commentator on CNN and a panelist on "Wall 
Street Week with Louis Rukeyser," as well as a frequent 
columnist with the Financial Times and Forbes.

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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 16, 2001

Published By Tulips and Bears LLC