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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

OUZILLY, FRANCE 
MONDAY, 20 AUGUST 2001 

 

Today:  Nicaragua

*** Three weeks - and not a single e-mail...what do you 
really need to be happy?

*** Greenspan - Hall of Famer - in for "just one more 
season" - maybe tomorrow would be a good day to play 
golf... Nasdaq down 10% in the last two weeks...

*** Henry's "Super-Soaker" - obviously a dangerous 
weapon... Nicaragua, Sandinistas, dusty roads, quick-
witted chickens...and much, much more... 

*** No phone. No TV. No radio. No newspapers. No e-mail. 
For the last three weeks, I've been on vacation in 
Nicaragua. (About which, more below...)

*** Our vacation began idiotically and ended the same 
way. Henry had gotten a giant "Super Soaker" water toy 
for his birthday, which he tried to take on the airplane 
in Baltimore. The toy is either a water cannon or a 
water-powered rocket(I have never seen it in action). It 
is so big and clumsy that it might be mistaken for the 
space shuttle - if you thought the space shuttle were 
made of transparent plastic. But only a complete moron 
would believe it could be used as a weapon.

Nevertheless, the security guards took the Super Soaker 
toy away and put it in with the checked luggage on the 
grounds that Henry might be planning to use it to hijack 
the plane.

"When was the last time someone used a Super Soaker in a 
hijack attempt?" I asked the guard.

"Best to be careful," he replied without a trace of 
humor.

*** But it's a good thing I didn't ask the question in 
Houston. Returning to the U.S., we discovered that the 
security forces of Houston were just as blockheaded as 
those of Baltimore. "Security regulations are taken very 
seriously," proclaimed a regular airport announcement, 
"jokes or inappropriate comments may lead to your 
arrest." But they would never take me alive...not as 
long as I had my Super Soaker.

*** Nothing much seems to have happened in the markets 
while I was away. The Dow and Nasdaq are not far from 
where I left them. Neither is Gold, although it is up a 
little. Amazon looks like it has fallen below the $10 
mark. Still, let's check in with Eric to see what 
happened on Friday...Eric?

****

Eric Fry reporting from Wall Street:

- Greenspan is beginning to resemble the Hank Aaron of 
1976 or the Mike Schmidt of 1989 - certain Hall of 
Famers who decided to play "just one more season."
- Aaron, a lifetime .305 hitter, and the all-time home 
run leader, batted .229 for the Milwaukee Brewers in 
1976 and managed to hit only 10 balls out of the park.
- Schmidt batted .203 during the 42 games he played in 
1989 and hit only six home runs. At least he had the 
good sense to hang up his cleats in May of that year.
- But the chairman of the Fed keeps suiting up every day 
and taking his hacks at the plate. His teammates 
politely pretend that the Hall of Fame central banker 
can still hit for power. But the fans are embarrassed 
for him. "The Chairman's" bat no longer packs a wallop.
- It's kind of pathetic really. The more he tries, the 
more the economy stumbles, the more stocks slide, and 
the more the dollar falls.
- Nevertheless, he will step up to the plate once again 
tomorrow and take another cut at driving the economy out 
of the park. I predict he will strike out - for the 
seventh time this year.
- Once the FOMC game is over, we will return to a world 
of withering corporate profits, declining employment, 
and leveraged consumers.
- Is it any wonder that on Wall Street these days 
sellers seem a little more anxious than buyers?
- SmartMoney.com's Igor Greenwald offers some friendly 
advice to the chairman: Stay home on Tuesday.
- "Tuesday sounds like a fine day to go golfing. Maybe 
take your hard-working wife on a nice daytrip... Just so 
long as you cancel that Federal Open Market Committee 
meeting widely expected to produce another interest 
rate...Make up an excuse. Phone in a bomb threat. Go fly 
a kite." He should do anything but show up and embarrass 
himself, says Greenwald.
- The prospect of another rate cut certainly did nothing 
to help the stock market last week. The Nasdaq fell more 
than 4%... again. The troubled index has now lost nearly 
10% in the last two weeks. 
- At this pace, the Nasdaq will hit 1,000 by 
Thanskgiving. In which case, cranberry sales may be very 
soft this year.
- As stocks struggle, the so-called defensive assets are 
gaining: namely bonds and gold.
- Treasury bonds soared, driving the 10-year yield down 
to 4.84%. Meanwhile, Newmont Mining and Barrick Gold 
each gained more than 7% on the week. 
- Just when it looked like it could not possibly happen, 
gold revived and demanded attention. As we have noted 
once or twice in the Daily Reckoning recently, the gold 
price has been firming gradually for several days, 
coincident with the dollar's weakness. But still, gold's 
reaction to the falling greenback had seemed a bit 
muted, until Friday, when the monetary relic gained 
$4.10 per ounce to $282.00.
- But for non-gold stocks, last week was rough. Stocks 
tanked Friday in a disheartening fall sparked by an 
earnings warning from Dell Computer. 
- The Dow dropped 152 points, to 10,241, while the 
Nasdaq fell 63 to 1867.
- "If the Dow Jones Industrial Average drops under 
10,000 in the coming weeks or months," observes Jim 
Stack's Investech, "it will have done something that 
investors have never seen except in the depressionary 
1930s - fall more than 4% in the six months after a 6th 
Discount Rate cut by the Federal Reserve."
- Perhaps the Dow will manage to hold above the 10,000 
mark, but a major rally seems highly unlikely.
- "Only an extreme bout of earnings optimism might put 
the major stock indexes in positive territory for 2001." 
Moody's writes. "Rallies of 11.6% in the S&P 500, 11.3% 
in the Wilshire 5000 and 25.8% by the Nasdaq composite 
are necessary to restore those market averages to year-
end 2000 levels. Likely declines in 2001 would produce 
the first back-to-back annual drops in broad equity 
market averages since 1973-1974..."
- "The S&P 500 price-earnings ratio stood at a miniscule 
9.3 at the end of 1975," Moody's continues, "whereas the 
P/E ratio still resides at a highly optimistic 26 at 
present." Despite the very low valuations in 1975, 
"Stock prices did not definitely recoup the losses of 
1973-1974 until 1980." Six years later. Ouch.

****

Back to Bill in France:

*** Three weeks of splendid isolation. Did anyone miss 
me? "The graveyards are full of indispensable people," 
says my friend Michel. 

*** The dollar has fallen too - to less than 91 cents 
per euro. The big surprise of the next few months may be 
how far the dollar goes down. Ford announced 5,000 
layoffs over the weekend. Instead of holding up the 
economy, the automakers are beginning to drag it down. 

*** That leaves only housing - the last man standing. 
People are still borrowing the equity in their homes in 
order to maintain current spending levels. Business has 
been very good at the federally-backed lenders, Fannie 
Mae, Freddie Mac, and the Fed. Home loan systems now 
have debts of $3.2 trillion - about a third of GDP. And 
probably a third of this is in foreign hands. 

*** These foreign holders of dollar assets must be 
getting a little nervous. If and when they decide to 
lighten up... the dollar will drop below the euro... and 
may keep falling.

*** September and October are often bad months for 
stocks. Consumer spending and stock prices have both 
held up through the summer. Just a guess: both will give 
way in early autumn.

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NICARAGUA
By Bill Bonner


"The Sandinistas did some good things and some very bad 
things," said Antonio.

We were racing along dirt roads near the Pacific Coast. 
Antonio was pointing out the big ranches that the 
Sandinistas had confiscated. 

Now, landowners are getting their property back - or 
compensation. It is a long, hard process, though. The 
land may have been sold several times since the early 
1980s. It will take years to sort out the mess in the 
land registry records.

"People come down here and they think they can do a 
title search like they do in America," he continued. 
"But it isn't that easy. You have to ask around. Some of 
the title claims are not recorded. You have to know who 
owned the property and how they got it."

"But one of the good things the communists did was to 
make people appreciate a good patron," he continued.

Longtime Daily Reckoning sufferers are familiar with the 
twisty roads we sometimes take. But it is a rare road 
that doesn't lead somewhere. Not always where we 
intended to go...but often where we should have been.

Antonio is a patron. He employs hundreds of local men 
and women - building roads, building houses, tending 
cattle, cooking breakfast, doing laundry. He has teams 
of workers with machetes who cut the tall grass in the 
rainy season. 

"Wouldn't it be better to use a tractor with a bush 
hog?" I ask.

"Well, maybe, but this way gives people work," comes the 
reply.

"At least you could give them scythes, so they didn't 
have to bend over so much," I suggest.

"What's a scythe?"

Antonio's family once owned 100,000 acres of cattle land 
in Southwest Nicaragua. Now, Antonio spends a good deal 
of his time trying to get the land back.

It is beautiful land, a tropical paradise along the 
Pacific coast. But nature rarely gives something without 
taking something away. Nicaragua has been hit by tidal 
waves, earthquakes, and volcanic eruptions. Antonio's 
grandfather's house, for example, was located just a few 
feet from our lodge - before it was swept away by a 
tidal wave in the early '90s. Likewise, Managua was 
leveled by an earthquake which killed more than 20,000 
people. The nearby town of Masaya was also hit - it has 
many houses with collapsed roofs and walls, still 
waiting to be repaired a decade later.

There are also dangerous bugs. My wife is a healthy 
woman. But when I found her unconscious on the bathroom 
floor, with her eyes rolled back in her head and foam 
coming out of her mouth, I knew that something about 
Nicaragua did not agree with her. (Dr. Rosales from 
nearby Rivas gave her a shot and some pills and she was 
soon as good as new. After Elizabeth recovered, we spent 
our days in idyllic bliss. We walked along the beach in 
the morning...and then took an early swim. In the heat 
of the day, we read and studied Spanish. Then, in the 
evening, we went horseback riding and took another swim 
in the warm ocean surf. There was little else to do, but 
we were happy doing little else).

Antonio drove his pickup down the narrow dirt road as 
though he were trying to outrun a tornado. Storms of 
dust followed us, choking the poor campesinos walking 
along the roadside, and covering the schoolchildren in 
their bright white and blue uniforms. He rarely slowed 
down - even for cows, chickens or humans. Instead he 
just tooted his horn and counted on the survival 
instinct of his fellow mammals to keep them out of his 
way.

Gradually, Antonio is cleansing the gene pool of animals 
with slow reflexes. "One time, when I was in a big hurry 
to get to Rivas," he explained, "I hit five chickens 
along the way."

"You know, another good thing the Sandinistas did - they 
made people poor. Rich people can afford to be 
communists. But people in Nicaragua began to see 
themselves getting poorer and poorer as their relatives 
in Miami and Costa Rica were getting richer. People 
don't mind being poor, as long as everyone else is poor. 
But when other people are getting rich, they don't like 
it..."

Antonio is helping to answer one of the most puzzling 
questions of our time. Why has the level of government 
spending continued to rise in America? Government is an 
economic deadweight activity. That is, it is a cost...a 
net consumer of capital - a black hole into which wealth 
disappears. Typically, ceteris paribus, the more 
government, the poorer people are. That is why "the 
government that governs least, governs best." 

Since the fall of the Berlin Wall, there has been less 
need for defense spending in the U.S. And with the full 
employment, boom economy of the '80s and '90s, there is 
less need for social spending. Yet, taxes and government 
spending continue to rise. Why? Americans would be 
considerably richer if they didn't give up so much of 
their income to government.

But, it is not absolute wealth that matters, it is 
relative wealth. 

We drove through a small village. Looking into the 
houses through open doorways, I could see the simplicity 
and poverty in which the people of Nicaragua live. 
Their houses often scarcely have walls - just rude 
boards nailed onto posts. Nor do they have much 
furniture - little more than a hammock and a rocking 
chair. But what do they need? They have a tin roof over 
their heads - and chickens and pigs running around the 
yard. Occasionally, there is fish, too - taken right out 
of the ocean with a simple hook and line. They don't 
even need fishing rods; the hooks are swung around and 
tossed into the sea, with the line wrapped around a 
short board as it is trolled in.

Some kind of festival was underway in the village. 
Several men were mounted on horseback, with a few dozen 
cheerful onlookers standing by the road. In the middle 
of the road, overhead, a chicken was tied to a rope 
stretched between two trees.

"They are playing a game," Antonio explained. "The idea 
is to see who can grab the chicken's head and tear it 
off. And it's hard to do."

"Is the chicken alive?" I asked, wondering what the SPCA 
might think.

"Well, not for long."

The sight of the happy, well-fed natives enjoying their 
sport reminds us how little we really need to be happy. 
Just food, clothing, shelter. And a chicken that is 
smart enough to escape Antonio's truck. Everything else 
is vanity, little more than an attempt to feel that we 
are better than others - or at least to avoid allowing 
other people to feel superior to us... 

There are a lot of ways to feel superior, but in this 
age of materialism we gauge our superiority in dollars 
and sense. Nicaraguans can't afford more government, 
because they are poorer than their neighbors. But 
Americans are rolling in credit (which they confuse with 
real money) - and don't mind giving up some of it to a 
government that promises to tie up the rich - and wrench 
their necks off. 

Your correspondent, back on the job... but still 
dreaming of the tropics...

Bill Bonner

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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 20, 2001

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