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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  The Tipping Point

In Today's Daily Reckoning:
*** The sun is shining...stock prices summer 
nears its end. What, me worry?
*** But pity the poor retailers...
*** The euro has its back to the wall...the effect of 
stock options on profits...and I am now officially wrong: 
a humble, miserable, snivelly confession.

*** Well...another bumptious summer day on Wall Street. 
Everything was up - like corn in Iowa and the murder rate 
in Baltimore. 

*** The Dow rose 112 points - led by the brokerage 
houses. The Nasdaq was up 101 points - led by, what else, 
the Big Techs. 

*** "Investors welcomed economic data," says the Reuters 
report, "that suggested slowing U.S. economic growth." 
Slower growth = less worry about inflation = less concern 
about rate hikes. But wait, it also means lower profits.

*** Cisco, Oracle and Qualcomm all pulled ahead smartly 
yesterday. After all, they're New Economy companies, run 
by people with very high IQs. They're not concerned about 
P/E ratios. Nor interest rates, for that matter. They're 
the wave of the future. Progress!

*** But those poor retailers. Gap, Target, Best Buys - 
when the economy slows these Old Economy companies lose 
sales and profits. They're struggling with higher labor 
costs and higher interest rates. And consumer spending 
represents nearly 10 times as much of the whole economy 
as computers and information technology.

*** Volume was low yesterday, as we approach the Labor 
Day holiday and the end of summer. But maybe this time it 
really is different. Maybe this summer will never end. 

*** Everything looked good yesterday. There were 1714 
advancing stocks, against only 1149 declining ones. There 
were 138 new highs on the NYSE; only 31 new lows.

*** Bonds were up...utilities... Even gold - a metal that 
seemed to have been visited by the Black Grim - rose 
$3.90. Silver went up too. But platinum fell $4.70.

*** And, of course, the dollar rose. The dollar index 
shot up 49 - to a new high. And now I am officially 
wrong. The dollar hit a new high against the euro. The 
previous high was .8844 to the euro. Yesterday, the zero, 
I mean the euro, hit .8838. 

*** "The euro has been driven down not by speculative 
selling," said a Deutsche Bank official, "but by 
relentless investment flows in search of superior returns 
in the U.S." Gerhard Schroder, Chancellor of the Huns, I 
mean the Germans, said "the euro is a strong currency and 
will remain so." 

*** Yes, I was wrong. I thought the dollar topped out on 
May 17 at .8844 per euro. I thought that that date marked 
the beginning of the end for the biggest bubble in 
financial history. It all hinges on the dollar, after 
all. And it won't fall until that hinge finally gives 
out. But not yet, dear reader, not yet.

*** Meanwhile, Laurent Fabius, the frog finance minister, 
I mean the French Finance Minister, is following through 
on his promised tax cuts. Yesterday, he announced cuts of 
$16 billion. 

*** "Earnings at 122 companies [listed on the S&P 500] 
fell by more than half when adjusted for employee stock 
options." This according to a Bear, Stearns study by way 
of the New York Times. Of those, "12 companies that had 
an operating profit in 1999 would have had an operating 
loss if employee options were considered an expense. For 
instance, the $6-million in operating income that Micron 
Technology made last year would have been an operating 
loss of $120 million."

*** "Consumer spending surged as a share of GDP," writes 
Dr. Richebacher "from a long-term average of 66% to 94% 
in the first quarter of 2000... a growing share of this 
spending spree has bypassed U.S. domestic production and 
ended up in soaring imports. Still, in terms of share of 
GDP this measurement conveys the extreme excess to which 
U.S. consumer spending has gone in recent years." (See: 
The All Important Ill Effects of Savings Collapse

*** Today, a cool breeze is blowing at Ouzilly, as the 
summer comes to a close. Little golden leaves from the 
Aspen trees are beginning to litter the ground. A week 
ago, it seemed like the summer would never end...and now, 
all of a sudden...things are changing. 

*** This last week of summer - out in the remote 
countryside, was supposed to be relaxing and productive. 
Instead, it has been marked by one interruption after 
another. Heavy equipment arrived almost every day - each 
piece greeted like Caesar's legions entering Rome, with a 
mixture of alarm and admiration. They set to work on the 
pond, and as Mr. DesHais feared, have made a diabolical 

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What's on the table? Where in the world? Could a simple 
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At some point, things will change. They always do. In the 
markets. In public attitudes. In art, architecture and 
P/E ratios. Confidence, optimism and self-esteem - at 
epic highs in America today - will someday, somehow give 
way. One day, believe it or not, merchants will be 
reluctant to take dollars. But when? 

I missed Francis Fukuyama's piece in the Wall Street 
Journal. On New Year's Eve, he wrote proposing an 
alternative to TIME's Man of the Century: Albert 

Fukuyama nominated WWI German Gen. Alexander von Kluck. 

Inadvertently, and perhaps there is no other way, von 
Kluck changed the course of history. He brought Western 
Civilization to "the tipping point."

Von Kluck is the inspiration for the expression 'you dumb 
kluck.' He is blamed for having departed from the 
Schlieffen Plan which Germany followed in its attack on 
France in 1914.

I have told the story before, from the Frenc perspective. 
From the German perspective it is not such a happy tale. 
Seeing the French army in full retreat before them, von 
Kluck came to a conclusion that proved too optimistic. He 
thought the French were nearly beaten. Diverting his 
troops from the strategic objective - Paris - he decided 
instead to follow the retreating French troops in order 
to crush them.

Many German officers questioned the decision. If French 
troops were really close to giving up, more of them would 
be surrendering. But there were few prisoners - 
suggesting that the French still had the will to fight... 
and that they were merely retreating in good order.

But von Kluck had his way. And the old French warhorse, 
Galieni, saw his error almost immediately. "Gentlemen," 
he is supposed to have said to his colleagues, "they 
offer us their flank." Diverting his troops from the 
plan, von Kluck had opened a 30-mile gap between his 1st 
Army and von Bulow's 2nd Army. He exposed them both to 
counterattack. The French took advantage of it. They 
commandeered 600 Paris taxi-cabs to take troops to the 
front. The battle of the Marne had begun, which after a 
half a million casualties, brought an end to the German 

What would have happened if von Kluck has kept to the 
plan? Fukuyama speculates, via Ray DeVoe:

* The Germans [would have] swept on to Paris by the end 
of September, forcing a capitulation by the French 
government (which occurred in 1870-71 and again in 1940).

* "A quick German victory would have left unimpaired the 
cultural self-confidence of 19th-century European 

* "The 81/2 million casualties of WWI would not have 
spawned a radical revolutionary movement in Russia called 
Bolshevism"-and then Communism.

* With no German military humiliation there would have 
been no market for rabble-rousers such as Hitler-and no 
National Socialism.

Mr. Fukuyama states: "there's more"-

* No Russian Revolution
* No Cold War
* No Nazism, no World War II, no Holocaust
* No Chinese or Vietnamese revolutions
"And the U.S. which came of age as a great power due to 
the world wars, may have remained the isolationist 
paradise fondly remembered by Patrick Buchanan," 
according to the author.

Ray DeVoe refers to von Kluck's decision as a "tipping 
point" as defined by Malcolm Gladwell in his book, 
"Tipping Points." A tipping point, Gladwell says, does 
not only come after a meal or at the end of taxi ride; 
instead it is "that one dramatic moment when everything 
can change all at once." "Tipping points" can be very 
small things - with very large effects. Also, when 
changes occur, they often happen all of a sudden.
(see: The Tipping Point: A Strategic Alternative History

WWI may be said to have gotten underway after Archduke 
Ferdinand's chauffeur took a wrong turn and came upon a 
group of terrorists, who couldn't believe their luck.

According to Mr. Gladwell, "This possibility of sudden 
change is the center of the idea of the Tipping Point and 
might be the hardest of all to accept. The expression 
first came into popular use in the 1970's to describe the 
flight to the suburbs of whites living in the older 
cities of the American Northeast. When the number of 
incoming African-Americans in a particular neighborhood 
reached a certain point-20 percent, say...sociologists 
observed that the community would 'tip': most of the 
remaining whites would leave almost immediately. The 
Tipping Point is the moment of critical mass, the 
threshold, the boiling point."

Ray DeVoe: "This happens in technology as well. Cited in 
the book is the introduction by Sharp of low cost fax 
machines in 1984 which built up slowly until 1987. 
Then enough people had fax machines that it made sense 
for many others to have them. 1987 was the Tipping Point 
for fax machines-sales more than doubled that year to a 
million machines, and by 1989 two million units were 

Cellular phones and ATM machines followed similar paths. 
At first, people resisted ATM machines. Customers said 
they preferred to speak to a "real human being," and 
settled for bank clerks. 

DeVoe also mentions the Battle of Midway as the "tipping 
point" of WWII in the Pacific. After that battle was 
over, Japan could not win. And after April of '44, when 
45 German U-Boats were sunk, submarines became known as 
"Iron Coffins" in Germany and were virtually ineffective.

Gladwell is a staff writer for the New Yorker. He shows 
how small things seem to trigger a mass change in 
attitude - in the way the removal of graffiti seems to 
have led to a dramatic decrease in crime rates on N.Y.C. 
subways. And sometimes the actions of a very small number 
of people completely change the way most people think. 

Unfortunately, there is no way of knowing who, when...or 
what will be the 'tipping point.' 

At the end of the WWI, Germany could have kept fighting. 
The Kaiser could have pulled back East of the Rhine. The 
war might have gone on for many more years. 

But a tipping point had been reached. Hitler wrote about 
the war's commencement: "To all those who experienced it, 
the exaltation of the August days of 1914 belongs among 
the most unforgettable memories of the highest sort..." 
But 4 years later, the memories of most German soldiers 
had filled up with sickness and death. The arrival of 
fresh American troops to reinforce their enemies must 
have been a fatal psychological blow, like a case of flu 
in a room full of wheezing octogenarians.

The soldiers gave up. Dying for their country didn't seem 
like such a good idea. The German High Command merely 
recognized the inevitable.

Your WWI correspondent,

Bill Bonner

P.S. This poem, 'Dulce et Decorum est,' by Wilfred Owen 
shows how attitudes changed on both sides as the war 
dragged on:

Gas! GAS! Quick boys!...
If you could hear, at every jolt, the blood
Come gargling from the forth-corrupted lungs,
Obscene as cancer, bitter as cud
Of vile, incurable sores on innocent tongues, -
My friend you would not tell with such high zest
To children ardent for some desperate glory,
The old Lie: Dulce et decorum est Pro patria mori.
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...

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Last modified: April 01, 2001

Published By Tulips and Bears LLC