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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Getting Paid In The Internet Era

In Today's Daily Reckoning:
*** No mo' mojo fo' 'wealth effect'
*** Investors on pins and needles...what will the Fed do 
*** How you really make money on the Internet - cast your 
bread on the digital water

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*** Today's the big day. Will the Fed hike rates again? 
Not likely.

*** But will the market celebrate? It will try. But the 
good news is already built into stock prices. Expect a 
weak rally...and then, most likely, a weak sell-off. But 
if I could really tell you what to expect from the market 
on a day to day basis, I wouldn't be writing this letter, 
would I? Nope...I'd be paying no mortgage, and living 
among the gods.

*** The Nasdaq managed a lame 22-point gain investors bought the rumor of no further 
rate increases. Likewise the Dow rose 33 points.

*** The leaders were the Big Techs - Cisco and Intel. 
More money will be lost in these two stocks than in any 
others...but we will have to wait for the market to tell 
its story to give you the details. Intel rose 1 �. Cisco 
added $2 to its price.

*** But while the crowded trades got more crowded, the 
average stock actually fell. There were only 1325 
advancing issues on the NYSE yesterday, compared to 1477 
declining ones. 

*** The stocks that fell most were the big retailers. 
Walmart, for example - the world's biggest retailer - 
fell below $50. Home Depot is only just a bit above the 
$50 mark. Bradlees has fallen 85% below its 12-mo. High. 
Land's End is down 66%. J.C. Penny is down 65%. American 
Eagle - 62%. And Saks - 60%.

*** The retail sector is getting crushed. How come? "The 
wealth effects that have powered the U.S. economic 
growth," writes Dr. Kurt Richebacher, "are gone, and 
there is no chance for their return."

*** The wealth effect, just to remind you, is what you 
get when people see their stocks rising. They feel richer 
- and spend more money. The extra spending looks and 
feels like real demand - which triggers more hiring and 
greater production from businesses. It all works as a 
kind of 'virtuous circle.' But beneath it, there's no 
virtue at all - but a dangerous illusion. Stocks are not 
the same as savings. They go down as well as up. And when 
they go down (or nowhere), as they have this year, mo' mojo fo' the 'wealth effect.' 

*** Plus, there's something else going on. Americans earn 
money in the good ol' U.S. of A. But they spend it buying 
goods made overseas. The cash goes out of the U.S. Then, 
the foreigners come back to the U.S. and buy capital 
assets - stocks, bonds, real estate and businesses. In 
big transactions - those over $1 billion - foreigners 
purchased $168 billion worth of U.S. assets last year. 
Americans, on the other hand, bought only $3 billion of 
foreign assets. 

*** Remember when the Arabs were rich on the oil crisis? 
Pundits worried that they were buying up precious 
American assets. That was the 70s. Then, in the 80s, the 
Japanese got rich. And what did they do? They bought U.S. 
assets - especially big, over-priced prestige properties 
like Rockefeller Center.

*** But now it's the Americans themselves who are 
supposedly on top of the world. So, you might think we're 
out buying up valuable businesses all over the world. Uh 
uh. We're still selling our own businesses to foreigners 
- while we buy stereos, autos, vacations, designer jeans 
and other consumer items.

*** This has two major, immediate effects. First, the 
dollar goes up. Because you need dollars to buy things 
from Americans. They won't take zlotys or ringgits. So, 
the dollar rises as demand for it increases. The dollar 
rose against the euro yesterday - as the battle between 
these two currency blocs continues. German GDP increased 
in the last quarter by 1% - putting the German economy in 
very good shape. But still the euro lost about 50 cents.

*** The other major effect is that the money that U.S. 
workers spend goes onto the revenue figures of foreign 
companies, not U.S. companies. They get paid by U.S. 
firms, but they buy from the foreign firms. So it's the 
foreign companies that make the profits. This effect - 
exporting U.S. profits abroad - and the fact that the 
'wealth effect' has lost its mojo are hurting the retail 

*** announced that it lost $40.6 million last 
quarter - on sales of $2.5 million. How could any company 
do so badly? This is an achievement. 

*** DrKoop is actually a very small company - smaller 
than most of the companies here at my Internet 
conference. But the companies here are not losing money 
on the Internet - they're making it. It is almost as if 
they were two different worlds. Entrepeneurs sell their 
losing companies with the well-known names to public at 
insane prices. And they keep the profitable companies 
private. DrKoop - which the market still believes to be 
worth more than $40 million - will soon be bought out or 
go bankrupt. And the little companies you never heard of 
will keep making money.

*** The secret to making money on the Internet - from 
what I heard at yesterday's session - seems to be to use 
it to serve your customers and forget about making a 
profit from it directly. Then, guess what, you make a 
profit on it. Ain't it amazing? Give - and you get. 
Reciprocity works. 

*** Gotta's session is about to begin.

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More DAILY RECKONING Greatest Hits 


I am fascinated by trying to figure out the real 
effect...and future...of the Internet revolution. So much 
money, dreams, hopes, hoopla and folderol are staked on 
the New Era of the seems worth the effort 
to understand what is really going on. 

So far, we have seen that there is no evidence that the 
Internet really is increasing productivity. The numbers 
are a statistical mirage...hedonic measures, which as 
described in the Contrarian's Glossary, produce the kind 
of pleasure you have pay for later - like drinking too 

Now come more numbers, from the Economic Policy 
Institute...relayed to me by Bill King...that prove the 
same point. Turns out that the last 10 years have not 
been especially rewarding for most working people. The 
average income was $38,885 in 1998. That's not much 
different, in real terms, from the average income 10 
years ago. Productivity has increased...the average 
person produces 12% more per hour. But this is an annual 
rate of increase less than half as great as it was in the 
`60s and `70s. What's more, the average person only gets 
1.9% more income per hour. 

Men, by the way, actually have lower incomes today than 
they had 30 years ago, adjusted for inflation. Household 
income has only increased because women are working...and 
everyone is working a lot more. Mothers worked six weeks 
more than they did in `69. Fathers worked an entire extra 
month. Americans work more than the citizens of any other 
industrialized nation, including Japan. This is progress? 
While productivity and hourly earnings have not risen 
significantly during the `90s...taxes have. Since Bill 
Clinton walked into the Oval Office, federal tax receipts 
have risen to 21.7% of GDP. Between 1945 and 1990, they 
averaged only 18.6%. 

This is what is going on in the real world...not the 
virtual world. People are working harder. Earning 
scarcely a dime more money for their efforts. And paying 
more in taxes. This doesn't sound like Eden to me. 
But there is something else going on. Bruce Bartlett 
explained in yesterday's "WSJ" why there has been no tax 
revolt. People shifted their money from banks to mutual 
funds in the `90s. Stocks rose. The wealth effect made 
them feel wealthier, even as their hourly incomes went 
nowhere. What's more, the tax burden actually a 
percentage of income plus capital gains. 

Thus the central illusion of the Internet era has had 
broad implications. Investors believe the Internet is 
making businesses more productive. This drives up stock 
prices and makes stockholders feel wealthier. This allows 
tax collections to rise. 

A bear market and recession can be expected to reverse 
the whole process. Stocks are already falling. Soon, 
people will not feel wealthier, they will feel poorer. 
They will then shift their eyes from the income side of 
their personal ledgers to the debit side. And there they 
will find big outlays to government...which they will be 
concerned to reduce. 

They will also shift their attention from stock market 
gains to paycheck increases. Internet companies, in 
particular, have been able to keep employee costs 
artificially subdued by offering workers a cheap currency 
- stock options. In a bear market, these options, so 
highly prized today, will become more like collectibles 
than currency. They will resemble Confederate war bonds, 
without the fancy engraving. Companies do not report 
stock option compensation as a current expense. If the 
value of the options were properly accounted for, as Dr. 
Richebacher has remarked, Microsoft, to cite one example, 
would go from a profit of $4 billion to a loss of $18 
million. This is exactly what will happen on the P&L 
sheets when options lose their currency. 

Workers are not incidental to the Internet economy. They 
are not the standardized, replaceable parts of the 
machine age, arriving every day into the ports of 
Baltimore and New York along with the bananas from 
Central America. They are the essential ingredient. 
Capital was the essential ingredient of the Industrial 

Marx was right to call it capitalism. But this New Era is 
different. The workers are going to want to get paid real 
money, not the virtual stuff. And, after they are paid, 
there won't be much left for capitalists. 

Your correspondent,

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"

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serious warnings and the state of the market with gentle humor"

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Last modified: April 01, 2001

Published By Tulips and Bears LLC