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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  The Second Most Powerful Man In The World

*** "Kamakazi" policy on both sides of Pacific - look 
out below..."Forget The Fed, Save Yourself!"...

*** Nasdaq drops to a 4-month low..."capacity 
utilization" to a 18-year low...

*** Daytraders down 77% on average - quelle surprise?... 
Insiders expect 4 to 5 year hiatus for IPO market...many 
are the blessings of IT...and still more....

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*** "ohayougozaimasu" - the saga continues...yesterday 
we noticed Japan's economic minister announced a 
"surprise" drop of interest rates in the hopes that they 
can stave off recession until the U.S. economy gets back 
in gear this fall. Economic minister Heizo Tekenaka has 
labeled the new quantitative ease "super-zero rates"...

*** Meanwhile, on the front lines of the global economic 
"resurrection" effort...things are looking bleak. 
"Forget the Fed," urges a Financial Post headline, "save 

*** "Investor confidence in Mr. Greenspan rests on a 
string of Federal Reserve successes," the article 
suggests. "Rate cuts brought us safe landings after the 
1987 crash, and again during the Asian crisis in 1998. 
But it's Mr. Greenspan's very success that is to blame 
for today's difficulties. Believing in the omnipotence 
of the Fed, consumers and businesses have imprudently 
racked up unsustainable levels of debt."

*** But why, we ask with tedious regularity, won't the 
Fed's elixir nurse the U.S. economy back to health this 

*** Here's a clue: Since January 3rd of this year the Fed 
has chopped rates 6 times... a feat they're likely to 
repeat on Tuesday. The Fed funds rate has fallen from 
6.5% to 3.75%... But interest rates on credit card debt 
- at over 15% - have barely budged. Consumers - with 
U.S. $650-billion of debt - are not getting any relief 
from Fed inducements to pile on more debt.

Furthermore, banks have taken the Fed's cue and slashed 
the interest they pay on cash accounts. Those who rely 
on short-term interest income are likely to be hit with 
a 30% decline in "interest income". Mortgage rates are 
heading down, but the refinancing binge is simply paying 
down personal debt.

*** "Students of economic history will know we've been 
here before," the FP reminds us. "In Japan, stock prices 
are down 65% from their 1989 peak - even though interest 
rates have been cut to nearly [super]-zero. In the Dirty 
Thirties, interest rates fell from 6% to 1.5% [oh, so 
similar to our current pace], but it was not enough to 
prevent stocks from delivering their worst performance 
in history. 

"Both crises had this in common: They happened in the 
aftermath of heavy speculative bingeing, massive buildup 
of public and private debt and steep declines in 
personal savings." 

*** Modest prediction: when the glow of summer evenings 
fade, so will "investor confidence" in the Fed and its 
chairman. Then what? Look out below.

*** So it goes...what's up on Wall Street, Mr. Fry?


Eric Fry reporting from New York:

- During the nuttiest phase of the bubble, Charles 
Schwab Inc. just had to have a Wall Street address. And 
so...last year, the discount brokerage firm opened a 
gleaming new office just down the block from me on Wall 
Street. Across the front of the office, a very large 
sign continuously flashed price updates for the Dow, the 
Nasdaq and, of course, the Schwab Index. 

- During the bubble, it became a pleasant daily 
diversion for the local office workers passing by to 
gaze up at the sign, watch the stock market go up for a 
while and mentally recalculate their soaring wealth. Now 
the sign is dark. In fact, it has been dark for weeks. 
It is not missed. 

- Yesterday was a good day for new lows. The Nasdaq 
slumped to a four-month low; the dollar dropped to a 
three-month low; and capacity utilization, at 77%, hit 
an 18-year low.

- The Nasdaq tumbled 45 points to 1,919, its lowest 
close since April 16. The big stocks in the Nasdaq 
seemed to suffer the brunt of selling, as the Nasdaq-100 
dropped 3.6%. The Dow fell 66 to 10345. 

- Lately, the commodities markets are playing host to 
the hottest trading action. Yesterday, natural gas 
grabbed the excitement with its largest one-day gain in 
eight months. Kicking off the rally was a report from 
the American Gas Association indicating that natural gas 
supplies are well below expectations. Gas for September 
delivery rose 37.4 cents, or 12.1%, to $3.47 per million 
British thermal unit.

- Natural gas stocks soared as well. The rally was 
probably overdue, as these stocks have suffered mightily 
during the past couple of months. You'd think the 
natural gas companies were struggling to make money. 
They aren't. At current gas prices, most companies in 
the sector are minting money.

- Moody's points out, "In contrast to the 6% revenue 
growth rate and the 20% decline in profits of all U.S. 
companies, oil and gas concerns posted aggregate revenue 
growth rates of around 86% year-to-year and aggregate 
profits growth of nearly 57% year-to-year." Keep a close 
eye on this group, folks.

- Elsewhere in the commodity sector, U.S. gasoline 
inventories fell for a fifth consecutive week. Come what 
may, we Americans still drive our cars. Amazingly, even 
in a slowing economy, gasoline demand since June 1st is 
3.8% higher than during the same period last year. 

- Finally, as noted in the Daily Reckoning earlier this 
week, coal prices remain very strong. "Although natural 
gas prices have dropped about 70% this year," reports 
Bloomberg News, "market prices for coal had remained 
strong. In July, prices for low-sulfur coal...reached 
their highest levels since 1989."

- And while commodities climb, so do most foreign 
currencies against the greenback. The euro shot up to 
more than 91 cents yesterday. The dollar is looking a 
little worn (pun intended).

- Are you sitting down? Last year, a Senate study found 
that 77% of all day traders lose money (It's hard to 
believe, I know). Ironically, one Harvey Houtkin 
testified before Congress to refute these claims.

- As (bad) luck would have it, Mr. Houtkin, the self-
proclaimed father of day trading and also chief 
executive of All-Tech Direct Inc., a Montvale, N.J.-
based brokerage for active investors, has had more than 
a few bad trading days. He lost $392,000 in 1998 trading 
a company account. 

- The news of the loss became public in an arbitration 
that four former clients of All-Tech brought against the 
firm, claiming they were misled by the company's 
aggressive advertising. Do you think they have a case?

- The high-end home construction industry is living off 
of last year's harvest. Friends of mine who build $2 
million to $5 million homes tell me that business is 
slowing... future business that is. Says one, 
"everyone's living off projects commissioned one or two 
years ago. I'm not seeing anybody getting new jobs for 
next year and beyond."

- Says the other, "The spec market for $2 million homes 
is dead, but my bread-and-butter custom home 
construction business is booked for the next twelve 
months. After that, who knows. I just hope things pick 
up by then."

- So do I, my friend. So do I.


Back to Addison Wiggins, in Paris...

*** What else? How about this e-mail I recently received 
from friends "in the business" in New York. The CEO of a 
firm that hosts conferences for venture capital 
professionals and tech start-up entrepreneurs seeking 
funds wrote to his troops recently:

"Although our customers are startups and those who 
provide them with capital, we have been relatively 
unaffected by their troubles - until recently. Now, 
however, we are suffering, too, and we must adapt.

"The process of creating new companies, of which we are 
a small part, seems to be returning to its historic 
patterns. This year, I look for fewer than two dozen 
technology IPOs; that's down from 300 last year. Going 
forward, I expect four or five years to pass before the 
typical start-up is ready to sell shares to the opposed to the 18-month pace of last year 
and the year before."

*** The e-mail goes on to announce the closure of the 
San Francisco office, layoff of the staff there, and the 
early retirement of its biggest cheese. 

*** Apart from the usual "negative drivel" we normally 
publish at the Daily might be worth 
noting that the author of this e-mail is a CNN 
correspondent, a columnist for Fortune Magazine and the 
Wall Street Journal and a personal adviser to Bill 
Gates, Michael Dell and Steve Jobs. 

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

The second 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 

The Fed chairman did not get to where he is in life by 
forgetting to hedge. Yesterday, you'll recall, we 
posited that Greenspan contributed to the current bubble 
by heedlessly ignoring the risks of the technology boom. 

"[L]arge voids of information still persist," Greenspan 
told the Boston College Conference on the New Economy on 
March 6, 2000, "and forecasts of future events on which 
all business decisions ultimately depend will always be 
prone to error." 

Unfortunately, he neglected to point out that high-tech 
revolutions inflame the right portion of the brain even 
as they enable the left-hand side. They stir up the 
speculative juices, thereby introducing a new source of 
potential business error. It is an especially potent 
source as when, late in the 1990s, the chairman of the 
world's leading central bank lends his imprimatur to a 
supposed new age. 

Many are the blessings of information technology, 
Greenspan proceeded. He mentioned the mapping of the 
human genome, the refinement of financial derivatives 
and the explosion of big-company mergers: "Without 
highly sophisticated information technology, it would be 
nearly impossible to manage firms on the scale of some 
that have been proposed or actually created of late." 

Yet, he noted, "At the end of the day, the benefits of 
new technologies can be realized only if they are 
embodied in capital investment, defined to include any 
outlay that increases the value of the firm. For these 
investments to be made, the prospective rate of return 
must exceed the cost of capital. 

"Technological synergies have enlarged the set of 
productive capital investments, while lofty equity 
values and declining prices of high-tech equipment have 
reduced the cost of capital. The result has been a 
veritable explosion of spending on high-tech equipment 
and software, which has raised the growth of the capital 
stock dramatically over the past five years."

Having climbed so far into a logical trap, the chairman 
pulled the door shut behind him. "The fact that the 
capital spending boom is still going strong indicates 
that businesses continue to find a wide array of 
potential high-rate-of-return, productivity-enhancing 
investments. And I see nothing to suggest that these 
opportunities will peter out any time soon." At least, 
not for the next 96 hours (the Nasdaq peaked on March 

Here was a remarkable set of ideas. What drives a 
capital spending boom, said the central banker, was not 
- even in part - an excess of bank credit or an 
artificially low money-market interest rate. It was the 
cold and detached analysis of cost and benefit. Here the 
chairman was being unwontedly modest. 

Fearful of a Y2K calamity, the Fed stuffed tens of 
billions of dollars of credit into the banking system 
late in 1999. Not for the first time in monetary 
history, excess credit raised speculative spirits, 
inducing a sense of optimism bordering on invincibility.

Greenspan spoke only 18 months ago, but it was an 
eternity in speculative time. In March 2000, B2B 
promotions commanded preposterous valuations, which the 
chairman proceeded to validate. "Indeed," he said, "many 
argue that the pace of innovation will continue to 
quicken in the next few years, as companies exploit the 
still largely untapped potential for e-commerce, 
especially in the business-to-business arena, where most 
observers expect the fastest growth...Already, major 
efforts have been announced in the auto industry to move 
purchasing operations to the Internet. Similar 
developments are planned or are in operation in many 
other industries as well. It appears to be only a matter 
of time before the Internet becomes the prime venue for 
the trillions of dollars of business-to-business 
commerce conducted every year." 

The Gartner Group had forecast that business-to-business 
commerce would generate $7 trillion of volume by 2004. 
Greenspan, a more experienced forecaster, gave no date 
and said only "trillions," but even that was wide of the 
mark. B2B stock prices crashed, and hundreds of Web 
sites went dark. He was, however, prophetic on one 
important detail: The potential for e-commerce remains 
"largely untapped." 

The Fed was slow to raise the funds rate in 1999 and 
early 2000. It was slow to reduce the rate when, in the 
second half of 2000, boom turned to bust. The Austrian 
School economists who originated the theory of the 
investment cycle prescribed aggressive monetary ease in 
the bust phase, lest a depression feed on itself to 
become a "secondary depression." 

Greenspan, having failed to call a bubble a bubble, was 
slow to recognize a bust as a bust. In his New Economy 
talk, he did acknowledge a connection between interest 
rates and technology investment. However, because 
information technology was an absolute and unqualified 
good thing, it followed that it could not be held 
responsible for a bad thing - for instance, the bottom 
falling out of capital investment and, therefore, out of 
the GDP growth rate. Blame for the downturn must lie 
elsewhere - with inventories or even the weather, as he 
proposed to the Senate Banking Committee on February 13, 
2001. "[A] round of inventory rebalancing appears to be 
in progress," he told the senators. 

"Accordingly, the slowdown in the economy that began in 
the middle of 2000 intensified, perhaps even to the 
point of stalling out around the turn of the year. As 
the economy slowed, equity prices fell, especially in 
the high-tech sector, where previous high valuations and 
optimistic forecasts were being reevaluated, resulting 
in significant losses for some investors...the 
exceptional weakness so evident in a number of economic 
indicators toward the end of last year (perhaps in part 
the consequence of adverse weather) apparently did not 
continue in January." However, he added, the FOMC 
"retained its sense that the risks are weighted toward 
conditions that may generate economic weakness in the 
foreseeable future." What portion of the future was 
"foreseeable" the chairman did not specify. 

He refused to waver from his previously established 
line, the transforming significance of new technologies. 
Productivity growth and the availability of real-time 
information would cut short this inventory and profits 
slump, he said. 

Besides, Wall Street wasn't worried: "[A]lthough recent 
short-term business profits have softened considerably, 
most corporate managers appear not to have altered to 
any appreciable extent their longstanding optimism about 
the future returns from using new technology... 
Corporate managers more generally, rightly or wrongly, 
appear to remain remarkably sanguine about the potential 
for innovations to continue to enhance productivity and 
profits. At least this is what is gleaned from the 
projections of equity analysts, who, one must presume, 
obtain most of their insights from corporate managers. 
According to one prominent survey, the three- to five-
year average earnings projections of more than a 
thousand analysts, though exhibiting some signs of 
diminishing in recent months, have generally held firm 
at a very high level. Such expectations, should they 
persist, bode well for continued strength in capital 
accumulation and sustained elevated growth of structural 
productivity over the long term." 

Such expectations, needless to say, have not persisted, 
and the Wall Street analysts who held them have been 
scorned and mocked. Not only have earnings plunged, but 
sales have weakened, undercut by the unforeseen 
disappearance of demand. "Business sales," observes 
Moody's 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. Manufacturing got clobbered - it is down 4.5%. 
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. 

"Before that was the five quarters from the first 
quarter of 1982 to the first quarter of 1983. And before 
that, it was in the 1970s, when inflation made the 
numbers do funny things, but it was in the first quarter 
of 1970. All the previous declines occurred in and 
around recessions." 

Alan Greenspan never understood the problem. This defect 
does not mean he will never hit on the solution. What it 
does suggest, however, is that he will come to it 
belatedly, and likely for the wrong reasons.

James Grant
for The Daily Reckoning

James Grant is the founder of Grant's Interest Rate 
Observer ( 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. 

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