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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Massive Deflation

*** Markets closed - no news is good news...

*** A new "bull" market indicator...the trouble with 

*** The good doctor and his silver-tipped cane...and 

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Markets were closed in America yesterday. Nothing 
much happened.

No news is good news.

But a friend who is visiting has noticed that one of 
Pierre's bulls seems to have a gift for stock market 

"I'm not kidding," he told me over dinner. "I think 
I've found a new bull market indicator. Since last 
week I've been watching the big bull in the field 
next to the house. If he's down in the south end of 
the field in the morning - stocks fall on Wall Street 
that day. If he's in the north end - stocks rise. He 
spent most of his time in the south end of the field 
last week. But on Friday, he was up a little."

Yesterday, my friend did not bother to check the 
bull. Markets were closed. I have not yet received 
today's report on "Ol Ferdinand."

"Bill, how do I get in on that tobacco program?" 
asked a DR reader, by email, this morning. "I figure 
I can not grow tobacco as well as the next guy. Heck, 
I can not grow a lot of tobacco. But, at $1 a pound, 
I'd be content to not grow just 50,000 lbs a year. 
I'm not a very ambitious farmer, as you can see."

"When are they going to start paying publishers not 
to publish?" asked another reader. "I'll bet you'll 
be happy when they introduce that program."

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"All over the Anglo-Saxon world," said Dr. Kurt 
Richebacher on Saturday's visit, speaking with a 
strong German accent, "it's the same. High debt, low 
savings...low real capital investment in real 

"And they all think they're getting rich. That is the 
amazing thing. They think they can get rich by 
spending their money. 

"Where did this consumer spending idea come from? 
That's what I want to know. It's crazy. No 
respectable economist ever thought you could get rich 
by spending your money. It's saving that produces 
wealth - the opposite of spending. It's saving and 
investing and profits. Anything else is pure mumbo-
jumbo, nonsense."

Dr. Richebacher was an infantryman in the German army 
in WWII. 

"I was injured after only a few days," he reports. 
"Then I spent two years in a hospital recovering. It 
was there that I discovered an interest in 

A half century later, Dr. Richebacher is retired from 
his post as chief economist of Dresdner Bank. He 
lives in the south of France, walks with a silver 
handled cane and drives a sporty BMW. 

Here at the Daily Reckoning, we recognize that 
predictions about the future are little more than 
tall guessing. Still, we can't quite break the habit.

Lately, we've been wondering how long the current 
business downturn and bear market might last. "How 
bad will it get?" Daily Reckoning readers want to 
know. Here we offer another guess.

Intuition tells us that nature is symmetrical. 
Americans climbed a mountain of rising stock prices 
and apparent economic prosperity over the last 18 
years. We imagine that the other side of the mountain 
will be similar. What goes up, we figure, will go 
down about as much. 

Experience tells us that this is how things work in 
the topography of markets as well as that of mountain 

Every bubble is fully corrected. Every one. There 
have been no new eras. None.

Each correction has taken prices - whether it was the 
price of gold or of Kuwaiti stocks - back to the long 
term trend. There have been no exceptions. Ever.

In the 20th century, there were two 17-year bear 
markets - one from '29 to '46 and another from '65 to 
'82. And there were two major bull markets, one 20 
years long, from '46 to '66, and another 18 years 
long, from '82 to 2000. 

Each major bull market has been corrected by a major 
bear market of nearly equal duration. How could it be 
that, this time, an 18-year bull market will be set 
right by only 18 months of falling prices? How could 
it be that prices at the bottom of this short bear 
market cycle are still higher than at the top of 
previous bull markets? The idea contradicts both 
intuition and experience.

Kurt Richebacher points out that it contradicts 
theory too.

"This is the worst bubble in economic history...worse 
than '29...worse than Japan...

"There is no theory of economics that says that 
consumer confidence is the key to prosperity," he 
says. "What matters is savings and business profits. 
It is profits that are the key. And this new 
Information Age. What a joke! It is the 
Misinformation Age. Everybody had so much information 
they didn't seem to notice anything important. That 
is true for economists too.

"Nobody noticed that profits were collapsing. Now we 
know that the new technology is essentially 

Dr. Richebacher is an essentialist. He reduces 
economics to its important features and rarely takes 
his eye off them. So concentrated is his attention on 
these economic verities that his conversation rarely 
strays. You feel a Maryland legislator could choke to 
death on a granola bar right in front of him and he 
would continue talking about productivity figures. At 
least you hope so.

"At the end of July, some new information came out 
that completely demolished the myth of American 
prosperity. Productivity proved to be no better than 
it has always been. In fact, the number is still 
flattered by these hedonic adjustments that they 
make. The real number for productivity growth is 
probably zero. All this new technology has made no 
improvement in productivity.

"And profits, too...the number was revised downward 
at the end of July. Now we see the whole technology 
sector is operating at a loss. And even at the height 
of the tech boom, profits were greatly inflated by 
stock market profits. Since the end of '98, the 
entire technology sector has made no profits. 
Nothing. It has been a profit catastrophe. 

"The real cause of the economic slowdown is the lack 
of profits - which has lead to a collapse in capital 
spending. But who notices? No one!"

No one but Kurt Richebacher and a handful of Daily 
Reckoning readers. 

Instead of guessing about the future, Dr. Richebacher 
noticed that Americans have been impoverishing 
themselves in the last few years. Believing that they 
were getting rich in stocks (and now real estate), 
Americans stepped up consumer spending - thus wasting 
the savings that real prosperity requires. 

"The problem in America is not consumer confidence," 
explains Dr. Richebacher, "but the excessive 
confidence that Americans feel in the future. And the 
Europeans believe in this American delusion even more 
than the Americans themselves. They continue to 
finance U.S. deficits. Total U.S. dollar assets 
outside of America have now reached $9 trillion - 
almost equal to U.S. GDP."

Foreigners may be dumb, Dr Richebacher believes, but 
stupidity runs in cycles, just like stock market 
prices and hemlines. Pretty soon, Europeans are going 
to feel they are a little bit too exposed to the 
dollar. They're not necessarily going to dump all 
their dollar holdings, but they are going to hedge.

"When the hedging begins," Dr. Richebacher ventures a 
guess, "we will have massive deflation of all kinds. 
The dollar, stocks, bonds, real estate. Everything."

Stay tuned...

Bill Bonner

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: September 06, 2001

Published By Tulips and Bears LLC