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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Bull Market In Blame

*** Oh la la - the big day - will GDP growth go 

*** Stock market rally collapses...consumer confidence 
falls...Friedman's reputation in jeopardy... 

repulsive as cannibalism...bull market in blame...and 

Mr. Greenspan won't be the only one to see his 
reputation return "to trend" in the downturn. 
Yesterday, the Italian press caught up with Milton 
Friedman, who remarked: "The key problem after the 
recession ends in 2002 will be how to control 

We don't know how Mr. Friedman could know that the 
recession will end in 2002. But we know why he thinks 
inflation will be a problem. His analysis of the Fed's 
monetary policies has made him famous and won him a 
Nobel Prize. Friedman believes you can control 
economic growth with monetary policy. In this, we 
believe, he is about to be proven wrong. 

The price of gold isn't moving. And the spread between 
TIPS (inflation adjusted 10-year notes) and regular T-
notes has narrowed to a new low of only 1.53%. 

Deflation is what the market fears - not inflation. 
And deflation is what the market is going to 
get...deflating stocks, houses, the dollar, computers, 
cars, just about everything.

Here's Eric's report on yesterday's deflating market:


Mr. Fry in Manhattan...

- Just two trading days after Cisco wowed tech-stock 
investors with the pronouncement that its sales would 
be no worse than it had forecast two weeks earlier, 
the long faces returned to Wall Street.

- Stocks fell hard Tuesday, with the Dow dropping 160 
points to 10,222 and the Nasdaq sliding 47 to 1,865. 
Cisco, for its part, fell more than 5% to 17.

- A downbeat consumer confidence report, released one-
half hour after the start of trading, accelerated the 
sell-off that was already underway. The Consumer 
Confidence Index fell to 114.3 in August from a 
revised 116.3 in July. For some inexplicable reason, 
consumers feel less confident when jobs disappear.

- Friday's rally now looks to have been the kind of 
one-day wonder that typifies bear markets.

- Watching the stock market fall is enough to make you 
lose your appetite. And, in fact, we Americans have 
been: we are dining out less and less frequently, and 
that is toxic for restaurant company profits.

- The Smith & Wollensky Restaurant Group Inc. - owner 
of Manhattan's famous steakhouse of the same name - 
reported a 12.3% drop in sales in its latest quarter. 
The company blamed the slowing economy for its 
troubles and said its three New York restaurants, 
Cite, Park Avenue Cafe and Manhattan Ocean Club, were 
hit particularly hard.

- Likewise, Morton's Restaurant Group, a chain of 61 
steakhouses nationwide, saw its same-store sales drop 
9.6% in the second quarter. 

- "As the shaky economy gives more consumers the 
jitters," writes the Wall Street Journal, "the $258 
billion restaurant and bar industry is grappling with 
the biggest slowdown in a decade." - The weakening 
economy is also pushing consumers not to indulge 
themselves in at least one other way: we're playing 
less golf! Yes, sadly, it's come to this. "Hard times 
have hit the links," reports the Wall Street Journal. 
"National Golf Properties, which owns 146 courses in 
23 states, reported [recently] that same-course 
revenue fell 5.1% in the first half largely due to the 
weakening economy." 

- The Journal continues: "Big companies are hosting fewer 
charity benefits and tournaments for employees and clients. 
Membership sales also are down. 'Uncertainty over jobs has been

impacting people's willingness to pay initiation 
fees,' says National Golf spokesman Edward Sause." 

- Does the U.S. golf slowdown remind anyone else of a 
bubble economy from a different place and time? Let me 
give you a hint: Nikkei 1989. 

- Yes, that's right, the average market value of a Japanese 
golf club membership hit its peak on March 10, 1990 - just 
three months after the Japanese stock market touched it's 
now-infamous record high. (For financial bubble trivia 
buffs, the Nikkei reached its peak level of 38,915.87 
on December 29, 1989. The hapless index closed Tuesday 
at 11,189.40) 

- Meanwhile, the Nihon Keizai Shimbun Index, which tracks 
the average price of golf club memberships at 530 major 
Japanese country clubs, has collapsed more than 90% from 
its all-time high. Even one decade after the bubble burst, 
this index continues to make new lows. Fore! 

- But just because some U.S. consumers are reining in their 
spending here and there doesn't mean that the entire country 
has suddenly become as thrifty as "Poor Richard." 

- Rather, typifying America's thrift ethic - or lack of 
it - the Daily Express relates, "In a recent poll of 
1,205 people 21 to 35 years of age, 54% of the women 
surveyed said they were more likely to own 30 pairs of 
shoes than to have saved $30,000 in a retirement 
fund...70% said it's important to look 
successful...48% of the women surveyed said that their 
money was to spend, not save." Imelda Marcos wannabes 
- 1; U.S. Savings Rate - 0. 

- On Monday, the Daily Reckoning noted the withering demand 
for new office furniture in the wake of the dot-com implosion.
Tuesday, Herman Miller Inc., known for its stylish 
office furniture, brought the grim situation into high 
relief by announcing that its sales are slowing and 
its earnings will be lower than previously forecast. 

- In lowering its sales outlook, the furniture company 
cited a forecast from the Business and Institutional 
Furniture Manufacturers Association suggesting that 
the industry's decline this year will be one of the 
deepest in history. 


Back to Ouzilly...

*** Today's the big day. GDP figures are to be 

*** The BBC says it sees "Fresh Signs of a U.S. 
Slowdown." Insider stock purchases are at an 8-year 
low. Tannette Johnson-Elie says she sees "Pay Day 
Loan" sharks doing a bustling business in Milwaukee. 
And Warren Buffett says he is preparing for an 8-year 
period of hard times.

*** Will the new GDP number be negative, showing a 
deflating economy? 

*** We will see, dear reader.

*** Meanwhile, Pierre has gone all-out to make sure 
the attendees at our writers' conference eat well. 
We've had platters overflowing with various dead 
animals - chicken, duck, lamb, beef.

*** Imagine Pierre's expression when he learned that 
several guests were vegetarians. At first his face 
registered shock, then denial...and then betrayed an 
unmistakable look of disgust. 

*** "Why would these people not want to eat meat? Why 
would they come to France?" he asked.

*** To Pierre, vegetarianism is as repulsive as 

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The Daily Reckoning Presents: The following is a 
portion of the recent testimony by financial 
commentator Christopher Byron before the House 
Committee on Financial Services, which is currently 
investigating the actions of Wall Street analysts. We 
produce it here for its insight into the bubble that 

By Christopher Byron 

"For nearly four years...the analyst community on Wall Street,
the media organizations that covered it, engaged in 
what amounted to a massive, shameless and totally 
irresponsible free-for-all riot in pursuit of money."

The huge amplification of voices now provided by the 
digital age is creating new and increasingly difficult 
challenges for the self-regulators and the Securities 
and Exchange Commission. One can make a strong and 
convincing case that the entire tech-sector bubble, 
which swelled the Nasdaq stock market to three times 
its size in barely 24 months, then popped in March of 
2000 like a champagne bubble in a glass, was caused by 
Wall Street's amplified megaphones of cable television 
and, most especially, the Internet - megaphones 
through which the analysts shouted "come and get it" 
to uninformed investors all over the earth.

That fact has huge and obvious public policy 
ramifications for Congress, because the collapse of 
the Nasdaq market has brought an end to the longest-
running bull market in the nation's history, and now 
threatens to tip the economy into a recession that no 
expert has yet shown a convincing way to avoid.

Trillions of dollars in national treasure have been 
drained from the economy by the implosion of what 
Federal Reserve Chairman Greenspan has termed the 
"wealth effect" created by that bubble, and the Bush 
administration and the Federal Reserve are now engaged 
in an uncertain effort to replace it with a 
combination of tax rebates and lowered short-term 
interest rates. Yet if stock prices had not been 
pumped up to the indefensible heights they eventually 
reached in the first place, they would not now have 
fallen as far as they have and we would not now be 
groping for a way to pump them back up again.

This bubble was financed largely by individual 
investors. And it is the Wall Street analysts and the 
media voices that helped turn the analysts into 
pseudo-celebrities who must now bear responsibility 
for the consequences. In some cases, we have even seen 
the spectacle of professional investors simultaneously 
purporting to be analysts, investors and journalists 
all at once.

For nearly four years - from the Yahoo IPO in April of 
1996 to the deluge of IPOs that spread across Wall 
Street in the first three months of 2000 - the analyst 
community on Wall Street, and the media organizations 
that covered it, engaged in what amounted to a 
massive, shameless and totally irresponsible free-for-
all riot in pursuit of money.

In stories and columns I wrote during this period, I 
attempted to call the public's attention to the 
colossal pocket-picking to which it was being 
subjected. Most particularly, I wrote repeatedly about 
the outrageous situation in which IPOs would be 
offered to investment bank clients at a cheap "pre-
market" price, even as the bank's analysts engaged in 
nonstop commentary designed to pump up demand for the 
stock among individual investors in the aftermarket. 
Then, when the stock would come public, the insiders 
would instantly dump their shares into the waiting and 
outstretched arms of individual aftermarket investors 
at four and five times their pre-market price. Within 
hours thereafter, the stock price would collapse. You 
can call it what you want, but I view schemes like 
that as nothing more than swindles and fraud.

You may review the trading histories of literally 
dozens of tech-sector IPOs during this period and find 
this precise pattern repeating itself over and over 
again. To that end, I would thus respectfully call the 
Committee's attention to the following IPOs, which are 
simply illustrative of the process I have described:

-- VA Linux Systems Inc. (Insider price, $30; first 
sale to individuals, $320.)

-- theGlobe. com Inc. (Insider price, $9; first sale 
to individuals, $97.)

-- WebMethods Inc. (Insider price, $35; first sale to 
individuals, $336.)

There are many, many more like them. These stocks, and 
countless more, were pumped to wildly unsupportable 
prices by impossibly grand claims from analysts 
regarding their potential as businesses. The fact that 
these claims echoed through the megaphones of TV and 
the Internet, to reach individual investors [in] every 
corner of the globe, simply underscores just how much 
capital can be raised on Wall Street now that the 
whole world has access to the same information 
simultaneously. And this is only the first instance in 
which this unexpected alliance of analysts and the 
electronic media has come to bear on the market. 
Unless efforts are undertaken now to prevent a 
recurrence, we may look for even more disruptive 
performances in the future.

To that end, I would respectfully suggest 
consideration of the following: 

That so-called Section 17B of the Securities and 
Exchange Act of 1933, which, in layman's terms, 
requires anyone who is paid by an issuer to circulate, 
publish, or otherwise disseminate stock recommendations, 
be augmented to require - as a matter of law - that anyone 
publishing or disseminating such information disclose, on 
the same document in which the dissemination takes place, 
any financial interest, either direct or indirect, that he 
or she may hold in the stock in question. It is not enough 
for self-regulatory bodies such as the Securities Industry 
Association and individual investment firms to do this 
on a "voluntary" basis. In this particular area, 
volunteerism has shown itself to be inadequate, and 
the law should be brought to bear. If Section 17B of 
the 1933 Act does not violate anyone's First Amendment 
rights, then I doubt that the augmentation I have 
suggested would do so either.

Secondly, I believe that Section 10B of the 1934 Act, 
which deals with fraud on the market, should be 
aggressively enforced by the SEC. In the now famous 
Foster Winans case, a Wall Street Journal reporter ran 
afoul of the Act by using information obtained in the 
course of his work for that newspaper to trade in 
stocks before publication of his stories - in 
violation of an agreement he signed with his newspaper 
not to do so. 

His essential violation thus amounted to promising not 
to do something, then doing it anyway. That basic 
principal can, and I think should, be applied to an 
implied covenant that can be presumed to exist between 
all disseminators of financial information that is 
offered to the public under color of impartiality. Any 
conflict of interest can be waived by disclosure, to 
be sure, but the regulatory authorities, and 
ultimately the Congress, can set clear, convincing and 
unambiguous standards as to what sort of disclosure 
constitutes adequate disclosure. 

The goal should not be the "minimum" disclosure 
necessary to give comfort to the disseminator of the 
information, but the minimum necessary to give comfort 
to the consumer of the information that he or she is 
being fully informed as to any hidden agendas lurking 
in a recommendation. I thank you kindly for your time 
and patience. 

Christopher Byron, 
for The Daily Reckoning

Christopher Byron is a magazine, newspaper and 
Internet columnist and a radio commentator. His 
columns appear weekly in the New York Observer 
newspaper and on MSNBC Interactive on the Internet. He 
also hosts a daily webcast radio program entitled 
"High Noon on Wall Street." A version of these 
excerpts first appeared on the 

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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 29, 2001

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