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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Backwards Walking ll

*** Epithet for the boom years: "Kind of a bubble 
situation..." is now "spread to every geography..."

*** "Where's the recovery?" What happened to the 
surplus? And other amusing questions.

*** But stocks up...even as the "situation...remains 
very grave..." Best performer so far this year - 
gold!... The end of the cold war...and more!

"We got in kind of a bubble situation..." 
explained Tom Seibel, describing the progress of the 
technology sector over the last 5 years.

And now, "the economic downturn has spread to 
every geography," said Carly Fiorina, with "no signs of 
improvement in the market before 2002." Fiorina is 
living proof that an illiterate woman can make it to the 
top of a major tech company...and drive it into the 
ground as well as any man.

Abby Cohen, another woman at the top of her 
profession, lowered her targets for stocks. But she 
still expects the S&P to end the year at 1500 - about 
30% higher than it is today!

It is the 2nd half...we've just had the 7th rate 
cut... "So where's the recovery?" asks a USA Today 
headline...And what happened to the federal surplus? 
"White House concedes near wipe out of surplus," reports 
the Financial Times, as the nation's mortgages - public 
and private - walk backwards again...more below.

But first, let's check in with Eric:


Eric Fry in New York:

- If you were squinting real hard, you might have 
spotted a little good news in yesterday's headlines - 
very little.

- For one: Semiconductor equipment sales improved in 
July for the third month in a row. The numbers, although 
improving, still look more bust-like than boom-like. The 
July book-to-bill ratio was .67 - meaning that chip-
equipment makers picked up $67 in new orders for every 
$100 in deliveries. By comparison, the ratio in July of 
last year was nearly twice as strong, at 1.22.

- The news really didn't seem like much, but it was 
enough to attract investors back to their favorite 
semiconductor stocks. The Philadelphia Semiconductor 
Index (SOX) gained about 5%. The rest of the stock 
market followed suit.

- The Dow climbed 103 points to 10,277, while the Nasdaq 
rose 29 points to 1,860.

- "Good News" item No. 2: General Motors weighed in with 
an announcement that it would meet its previous forecast 
of 83 cents a share in earnings for the quarter ending 
in September. GM's stock rose 3%.

- But while GM put on a brave face, Volvo laid bare the 
grim truth. The Swedish industrial group warned that its 
truck division will reduce production to combat a severe 
drop in orders from the United States.

- Said Tryggve Sthen, president of Volvo Global Trucks, 
"The situation in North America remains very grave."
Also making headlines was news that the American Gas 
Association miscalculated the nation's gas storage 
levels by about 50 billion cubic feet last week. If that 
sounds like a big number, that's because it is. To say 
the error was "significant" would be an understatement. 

- AGA's initial estimate implied that the nation had 
consumed a mountain of natural gas during the prior 
week, and gas prices soared 12% on the news. But this 
week, the AGA "corrected" its earlier estimate and, 
predictably, the natural gas price collapsed to a 16-
month low of $2.80.

- It's a wonder traders believed either number. The 
announced totals are so vastly different from one 
another that they undermine the "counter's" credibility.

- It is noteworthy that on the very same day that the 
AGA reversed itself by announcing that natural gas 
supplies are abundant, the American Petroleum Institute 
(API) reported "smaller-than-expected" inventories of 
crude oil and gasoline.

- Gasoline supplies fell for the sixth week in a row and 
crude oil supplies posted their largest decline in two 
months. Obviously, somebody is using this stuff. If 
demand for crude oil and gasoline is not evaporating, 
it's a fair bet that demand for natural gas will not go 
away either. 

- "Today's sell-off in the natural gas stocks just might 
be a buying opportunity," says John Myers of Outstanding 
Investments. We'll see.

- One Daily Reckoning reader offered an insightful 
modification to my suggestion yesterday that billions in 
VC capital simply went "poof": "The imaginary market 
wealth that investors thought they had all went away to 
money heaven as market caps came down. The VC money, on 
the other hand, didn't go poof. The VC money was spent - 
every dime of it. It was spent on everything from 
Ferraris to Faberge eggs. All that money changed hands, 
and that has contributed greatly to the mess we are now 
in. Great chunks of those billions were spent on 
routers, servers, high-end office furniture, and 
hundreds of other types of goods. Sales of everything 
boomed. For the suppliers, this was the equivalent of 
giving a condemned man his last meal."
[What's Your Opinion?]


Back to Bill in Ouzilly - with a couple additional 

*** Who's making money in this market? Investors 
Business Daily reports that the leading mutual funds are 
down an average of 21% so far this year. But investors 
in gold are doing well. Ed Bugos of the Goldendar 

"Outside of the REIT index, there is not a better 
looking stock chart than that of the average gold chart 
today. And any analyst that can disentangle from their 
anti-gold bias should be able to spot that. Another fact 
is that gold has outperformed every single paper 
currency this year - including the dollar." The DR Blue 
Team's Gold pick is up 12%+...

*** "The Cold War ended 10 years ago this week, with a 
whimper," writes Bob Bauman. "That was when the 'red 
barons' of the Soviet Communist party, the KGB, and the 
Red Army tried to oust Mikhail GORBACHEV. The effort 
died in drunken disarray after 3 days, only to be 
replaced by the alcoholic Boris YELTSIN atop his 
signature tank in Red Square."(For more, check out the 
Sovereign Society:

*** I've returned to the country to spend the last few 
days of summer. Earlier this week, we drove to Paris to 
check out a new school for Maria, 15. Maria has not been 
doing well in the French school system, so we're going 
to try the international system...schools that teach in 
English and award the equivalent of U.K. or U.S. high 
school diplomas. 

*** Does it make any difference what school Maria 
attends? Or if she attends any school at all? Carly 
Fiorina, Abbey Cohen, and Paul O'Neill all graduated 
from high school. I wouldn't want Maria to turn out like 

*** The school we visited proudly announced that it 
emphasized environmental studies: "Teaching children how 
to protect planet Earth..." To that end, students are 
indoctrinated with the latest green fads - whether it is 
sorting trash or using cloth diapers. The gods must be 

* * * * * * * * Advertisement * * * * * * * *

After The "Tech Wreck": Waiting For The Other Shoe To 

In the first wave, big, big companies - among the 
largest in the world - dropped like cement blocks in the 
Hudson. Hard-working investors were forced to foot the 
bill. $4 trillion lost...on paper. The real cost? 
Private retirement "dreams" on hold...indefinitely.

How could it happen so fast? Worse, if Intel or Cisco 
can be on the ropes in a matter of months - which Dow 
titans will follow? Most investors don't have a clue... 

Do you? 

Before you invest another dime - read this free report. 
It will make you think twice about "safe" investing in 
the Dow:
* * * * * * * * * * * * * * * * * * * * * * *

By Bill Bonner

"You must admit it's getting better, it's getting better 
all the time..."
The Beatles

"The official Gross Public Debt is back up to $5,740 
billion," reports the Mogambo Guru. "The lie known as, 
'The Great Debt Buyback Hoax' is now exposed. True, the 
debt level stopped getting bigger for a couple of years, 
but it never declined. This indicates that we didn't go 
farther into debt. But that is a long, long way from 
actually reducing it.

"And government debt will accelerate from here. 
Consider that during the peak of economic boom when tax 
revenues were flooding into Washington, the best they 
could do was meet expenses. Now, Congress has stepped up 
its spending even as the Treasury reports that tax 
revenue is shrinking. The shortfall has to be made up 
from, as always, debt."

Thus does the greatest nation in the world, the world's 
only superpower, blessed with the greatest central 
banker who ever lived and more communications technology 
per square mile than any civilization in history, begin 
walking backwards.

Who would have imagined it, a few years ago? That was 
when the stocks were still rising at 18% per year and 
Alan Greenspan was still alive. But, the prosperity that 
stocks brought proved to be as foamy as the head on a 
draft beer or the Federal surplus. A few months later - 
it was gone. As the Federal Reserve itself calculates 
it, stockholders have backed down from a asset value of 
$12.3 billion to just $8.7 trillion since the end of 

$4 billion of stock market losses rarely goes unnoticed. 
Since the end of '99, more people have come to agree 
with us - perhaps 2 out of a hundred - that it was all 
an illusion. The rest remain convinced that this is 
merely a pause in the inevitable forward march of 
progress, perhaps with a little retrogression while we 

Harry Dent, for example, believes the Dow may drop down 
to the 7,000 level - before resuming its race to the 
stars. James Glassman still expects the Dow to hit 
36,000 - eventually. Abby Cohen expects extraordinary 
growth in stock prices - even in the current year! 

But many Americans have become skeptical of stock market 
forecasts. They now know that share prices can back up 
as well as go forward. So, they've turned their 
attentions to another asset class, one presumed to have 
no reverse gear. That is the subject of today's letter - 
not the nation's public backwards walking mortgage, but 
its private ones.

A "backwards walking mortgage" is what people in the 
industry call a mortgage in which the mortgage payments 
fail to keep up with the accumulated interest, so the 
principal gets bigger. If the mortgage walks backwards 
long enough, or if real estate prices fall, the 
mortgagee could soon be "upside down"; he would owe more 
on his house than the house is worth. At this point, a 
man who measures his wealth by his real estate holdings 
has a negative net worth. He no longer feels the burden 
of wealth upon his shoulders...because he is bankrupt, 
busted, broke.

Ever since 1945, homeowners have been trading more and 
more of their homes for ready cash. At the end of WWII 
homeowners had mortgaged only 15% of the value of their 
houses. Forty years later, the percentage had risen to 
twice that amount. But then, the desire to tap into the 
purchasing power of one's own home seems to go the way 
of all flesh in the boom years. By 1998, owners' equity 
had fallen to its lowest level ever...Americans' 
mortgages had walked backwards to the point where they 
owned less than 55% of their own homes.

America could perfectly well get rich - even as a nation 
of renters rather than homeowners. Your editor rents his 
principal residence - an apartment in Paris - and feels 
none the worse for it.

But Americans typically count their wealth in square 
feet of housing space multiplied by the caliber of the 
neighborhood. This is their main capital asset. When 
real estate values go up, they feel richer. And unlike 
stock prices, property prices never fall - or so it is 

A chart from the Office of Federal Housing Enterprise 
Oversight reveals no contrary evidence. For the last 
quarter of a century, every quarter has produced a 
positive movement in U.S. housing prices. While 
Americans have lost $4 trillion on their stockholdings 
since the end of '99, they have gained nearly a trillion 
on their real estate. Property is, once again, the big 
item on Americans' balance sheets and their main chance 
of capital gains.

So sure must Americans be that home prices will continue 
to levitate that they spend the equity almost as soon as 
it appears. The rate of refinancing has skyrocketed to 
50% of mortgage originations, up from just 15% a year 
ago. Fannie Mae's "book of business" shot up at a 21% 
rate in July. And Fannie, sibling Freddie, and half-wit 
cousin the Federal Home Loan Bank system, have now 
accumulated $3.2 trillion in debt - an amount equal to a 
third of the nation's GDP.

"Living standards can only be increased in two 
diametrically different ways," writes Dr. Kurt 
Richebacher. "The normal one is for the long run and 
occurs through capital accumulation, that is, through 
saving and capital investment. The other one, the 
abnormal one, is for the short run and occurs through 
capital consumption, that is, through dissaving and 
massive borrowing...for consumption. America is 
practicing the second combination with abandon."

Reducing the facts to their essentials, homeowners are 
borrowing against their main assets - and spending the 
money. The cars, home theatre systems, and vacations 
they buy lose their value quickly. But the debt remains. 
As more and more houses are refinanced, the nation's 
homeowners walk backwards - rather like or - using capital to finance current 
operations. They stay in business, but they get poorer 
by the day. How long will it be before they fall down?

We will see, dear reader, we will see.

Your ever-optimistic correspondent, enjoying the 

Bill Bonner

* * * * * * * * Advertisement * * * * * * * *

ANOTHER CRASH...OR ANOTHER BOOM? Why the surprise of the 
next 18 months might be NEITHER! 

The tug of war between Wall Street's bulls and bears 
shows no signs of ending. Neither side seems quite 
capable of finishing off the other. 

Are we in a stalled bull market...or are we in the midst 
of a genuine bear market...or is the worst of the bear 
market already behind us? It's quite likely that we 
won't have clear answers to these questions for many 
months. In the meantime, the clock ticks. And the 
question remains: 

How do we make money in this market? 

In every market situation there are moneymaking 
opportunities. And this year's Agora Wealth Symposium in 
Las Vegas will reveal many investments that will yield 
substantial profits - no matter where the market goes... 

Click here...
* * * * * * * * * * * * * * * * * * * * * * *

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 23, 2001

Published By Tulips and Bears LLC