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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
MONDAY, 18 SEPTEMBER 2000 

 

Today:  The Trouble With Europe

In Today's Daily Reckoning:

*** The Big Techs are still alive - but trapped in a 
Kursk of sinking prices. None will escape.


*** Friday, Oracle was torpedoed after announcing 
earnings that beat its forecast, but still weren't good 
enough. The stock fell 8%. But what could you expect? 
Oracle is selling for 100 times earnings. This implies a 
spectacular growth rate. The company should be doubling 
revenues every year. But guess how much Oracle's revenues 
went up? Just 14%. 


*** Microsoft is struggling to stay above $60 (down from 
$119). Cisco, too, is battling around the $60 mark (down 
from $81.) Intel, Micron, Broadcom - you name it, 
practically all the Big Techs are taking on water. 


*** And these were the 'must own' stocks of the New 
Economy? Don't believe it. There is no such thing as a 
'must own' stock. And any company that gets a 'must own' 
reputation is a sell candidate, not a buy.


*** The Nasdaq fell 78 points on Friday. That takes it 
down to a 5.75% loss for the year.


*** Naturally, many of the companies that hoped to launch 
themselves in the public markets this fall are having 
second thoughts. Many are being withdrawn. These IPOs... 
all ready to go...act as a ceiling on the techs. As soon 
as demand increases and prospects improve, these new IPOs 
will swamp the market again.


*** The Dow fell sharply on Friday too. I warned that Mr. 
Bear may be getting ready to do some more serious damage. 
Friday he was warming up. Still, we saw a little preview 
of what he can do. The Dow fell 160 points, with 
substantially more declining stocks on the NYSE than 
advancing ones - 1748 to 1086.


*** This brings the Dow down to a nearly 5% loss for the 
year too. 


*** The money supply is still rising twice as fast as the 
economy. This money has to go somewhere. But not 
necessarily into the stock market.


*** Much of it is probably going to pay for oil. Oil rose 
on Friday, hitting an intra-day high of nearly $37. It is 
now trading at $35.59 (Oct. light crude). It was only $27 
a barrel at the beginning of August.


*** Still, the Bureau of much-Labored Statistics reported 
that energy costs DECLINED in August - by the largest 
amount since Feb. of '91. Gasoline, for example, fell 6%, 
according to the BLS number magicians. And yet, every 
other measure of inflation is rising. Goldman's commodity 
index rose 17.4%. CRB index rose 4.69%. The Journal of 
Commerce price index went up 3.7%. And anyone who drives 
a car knows that gasoline is more expensive than it was a 
few months ago.


*** The dollar index rose to another record on Friday. 
The euro fell to 85 cents. And gold, the dollar's rumored 
competition, dropped another 20 cents to close at $275.


*** Asian markets do not like the sinking tech stocks on 
Wall Street...or the price of oil. "South Korean stocks 
caved in" this morning, reports Reuters. Stocks in South 
Korean lost 7%. Taiwan fell below 7,000. The Japanese 
index was down 204 points, or nearly below 16,000. 


*** "Bad Times Ahead," concluded the Reuters reporter... 
in a sentiment that might soon find its way to Wall 
Street, perhaps smuggled to Manhattan in a container 
shipment of running shoes. All of Asia's 8 major equity 
markets are in the red for the year. 


*** The Reuters piece covered a lot of ground. "Rising 
energy costs globally are bad for earnings," remarked one 
wide-awake analyst. "Everybody is freaking out about 
oil," said another, perhaps a road manager for the Stevie 
Wonder Band in a former career.


*** And then it gets interesting...speaking of oil: "This 
is a classic case of how the market under-reacts to 
emerging trends...And if they follow the usual course, 
once they realize something's going on, they over-react." 
Aha! Even the analysts are catching on. Analog Man... 
driven by passion, emotion and near-absolute ignorance 
rules the markets!


*** But what is true for the oil market might be even 
more true for the Big Techs and the rest of the market. 
Oil, like bread, has limited usefulness as a popular 
sensation. It is too common...and too closely connected 
with real economic activity...to be a subject of pure 
fantasy. The Big Techs and the dollar, on the other hand, 
like the dot.coms, offer plenty of elastic to the 
imagination. They can be worth a fantastic fortune. Or 
next to nothing at all. We have already been through the 
top part of this cycle. The bottom part should be at 
least as entertaining.


*** Readers of the international news may recall that the 
Jakarta Stock market experienced a boom last week - 
someone set off a bomb that killed 15 people. "Buy when 
there's Blood in the Stock Exchange?" asks Steve 
Sjuggerud of the Oxford Club. Steve recommends an 
Indonesian telecommunications giant selling at a P/E of 
4. Hey... pretty darned cheap. How can you go wrong? 
(see: Buy When There's Blood in the Stock Exchange?)


*** Well, Lynn Carpenter explains how you can go wrong. I 
mentioned Fleetwood - maker of prefab housing and mobile 
homes - in these messages a few months ago. The stock was 
'pretty darned cheap' I said. Well, if you liked it then 
you'll like it even more now. 


*** "It's down 40% since January," Lynn tells me. "But it 
does pay a 6% dividend. It might go even lower yet, but 
it isn't going to go away. Fleetwood just posted its 
worst quarterly earnings loss in 50 years. Things can 
start getting better now. Values are P/E 11.8, price-
sales 0.13 (Yes, I typed that correctly), price-book 
0.76, and PEG 0.6. 


*** "Fortunately," Lynn reminds me, she didn't recommend 
Fleetwood. Her darned cheap builder, Centex, is up 28.8% 
since she picked it. 


*** Nothing much happened at Ouzilly this weekend. The 
weather was spectacular - with crisp, cool mornings and a 
bright blue sky. The light in late summer is especially 
nice...I don't know why.


*** I decided to take advantage of the good weather to 
paint some of the windows in the barn. The doctors 
ordered me to stay off of scaffolds and ladders, but they 
didn't mention anything about hanging out of second-story 
windows. Thus was I engaged, painting one of the frames, 
when Dr. Besseau drove up. I felt a little sheepish about 
it...but he had a sense of humor. 


"Well," he said, as he handed me a bill "please call me 
again if you need me."


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THE TROUBLE WITH EUROPE


"For of course, there's no such thing as the New Economy. 
It's strictly a Wall Street conceit, enthusiastically 
and, as always, thoughtlessly propagated by our fellow 
wretches in the media."
Alan Abelson



"The Trouble With Europe Is..." begins the editorial in 
the International Herald Tribune. 


You can fill in your own predicate. For some reason, the 
blessings of the New Economy have not been showered on 
the Old World. Maybe it is because of the way the E.U. is 
structured...bureaucratic inertia...institutional 
rigidity, high taxes, labor restrictions, the welfare 
state, the cheese, the aging population, vestiges of the 
Holy Roman Empire, Cartesianism, socialism - you name it. 
Once it is widely accepted that there is something wrong 
with Europe, the next question - 'what? - arises without 
begging. And answers present themselves like candidates 
for federal election - usually shallow, self-serving and 
stupid.


Mass thinking produces mass ideas - simple-minded slogans 
which, when deconstructed, turn out to be accretions of 
wobbly facts, empty abstractions, miscalculations, 
misinterpretations, and balderdash.


And yet, on such mass thinking, huge financial bets are 
placed. Currently, for example, people are betting that 
the dollar will remain triumphant, for now...and perhaps 
forever. Because, Japan is finished...and there is 
something wrong with Europe...


Mr. DesHais, my gardener-philosopher agrees. "There is 
something wrong in France," he told me, as I chauffered 
him to the store to get more canning jars, "it is not the 
way it used to be. People don't want to plant gardens... 
they have forgotten how to do things."


What people have forgotten how to do are things like how 
to can your own ratatouille...or make your own alcoholic 
drinks. Or follow the phases of the moon to plant a 
garden. 


Mr. DesHais sees Europe from a different vantage point. 
In America, we think of Europe as hopelessly 
conservative. There is no credit card industry. And 
people are reluctant to move, or take up new careers. 
They are stuck in the past. Or, as Doug Casey puts it, 
"Europe is a living museum."


But Mr. DesHais doesn't think so. "Things are changing so 
fast," he laments. "I can hardly keep up with it."


Things are changing fast in Europe. Mr. DesHais's own 
son, Benoit, reads books on the Internet and has his own 
dot.com business idea he's trying to get started. More 
and more, people in France are becoming entrepreneurial. 
There is even an area of Paris where cyber start-ups are 
concentrated.


London is booming too. And Berlin. And dozens of other 
European cities. 


But Europe is profoundly conservative too. People still 
save money. And they're less eager to take up popular 
sensations - whether it is running shoes or Big 
Tech stocks. Europe suffered much more than America from 
the popular sensations of the 20th century. Perhaps it is 
now less vulnerable to them.


Beyond the impressions of a casual observer, the case for 
the dollar over, say, the euro is largely statistical. 
Even digital. The digits representing productivity, 
growth, and employment are higher in the U.S. than in 
Europe. 


But so are the digits representing debt, current account 
deficits, and inflation.


The trouble with digits, if I may borrow from the IHT 
headline, is that they are like all facts - that is, 
nothing without their nuances.


And no numbers are quite as nuanced as the U.S. digits 
for productivity, economic growth and inflation. The more 
carefully you look - the more wobbly the facts become.


"The appalling divergence between America and Europe," 
writes Dr. Kurt Richebacher, "...derives overwhelmingly 
from the existing gross difference in their statistical 
measurement." (see: The Great Fudge)


Europe keeps its figures the way Mr. DesHais keeps the 
garden - in the old fashioned way. American number 
crunchers have found a more modern way. 


The simplest of their innovations was merely to report 
the numbers on an annualized basis. U.S. GDP growth is 
thus reported to be 5.3% - taking the 2nd quarter and 
multiplying by 4. In Euroland, the quarterly number is 
reported without annualizing. Most recently, the number 
was 0.9%, which sounded pathetic next to 5.3%. But the 
difference is really not much. The actual quarterly 
number in the U.S. was only 1.3% - and even that, was 
mostly a statistical fiction and an accounting fluke.


As I have reported before, U.S. statisticians use 
'hedonic' prices to measure GDP, productivity and 
inflation measures. Hedonic measures take into account 
the computational power of a computer, not just its 
price. No other nation does so - and certainly not 
Europe.


Between the last quarter of 1998 and the 2nd quarter of 
2000, for example, Americans spent an additional $28 
billion on information technology. The statisticians then 
applied the 'hedonic' miracle grow...and presto, they 
stretched the $28 billion to $127 billion...which was 
then added to GDP. To make a long, complicated and 
nauseatingly complex story short, this extra GDP was 
achieved without people working any longer or harder (why 
should they...they weren't really making more computers, 
just more powerful ones). So, it looks as though the U.S. 
economy was getting a lot more productivity per unit of 
labor. And consumers were getting a lot more computing 
power for their money - so inflation went down too.


The quants showed computer prices falling by 30-40% 
annually...even though people were actually spending 
about the same amount of money. (They were getting more 
for their money, supposedly.) And it all depended - like 
a Rumanian weightlifter - on the artificial stimulant of 
'hedonic' price measures.


Meanwhile, on this side of the Atlantic - that is to say, 
in Europe - the numbers are more reliable. While they do 
not show economic growth at fantastical levels, they show 
impressive improvement. Employment rose in 1998 by 1.4%. 
In 1999, it moved up another 1.5%. Inflation of around 2% 
compares favorably to inflation in the U.S., officially 
3.5% - but probably more like 5%.


Instead of showing the prices of computers falling by 30 
or 40% per year, as is the wobbly, hedonic measure in the 
U.S., computer prices have fallen only by 20% over the 
entire period from 1991 to 2000. (Based on German 
statistics.) This divergence, not the many reasons given 
why Europe is a laggard, is the real source of most of 
the statistical difference between the two economies. 
Europe counts actual dollars spent. In the U.S. they 
count digits of computational power.


"The great digital divide between America and Europe," 
concludes Dr. Richebacher, "is not in the economies. It 
is in vast differences in statistical measurement and in 
the propaganda."


"U.S. economic growth, deprived of the hedonic deflator," 
he continues, "is anything but illustrious. Not only 
that. It's obvious propellant was the consumer borrowing 
and spending binge... Credit excesses have many parallels 
in history, but those in the U.S. are of such extreme 
magnitude that they suggest a form of collective, manic 
euphoria." A popular sensation, in other words.


Your European correspondent,


Bill Bonner


PS: Another wobbly feature of the U.S. economic miracle 
is the logic behind it. Europe is portrayed in the media 
and the popular imagination as having much more rigid and 
expensive labor. That is the reason commonly given for 
the failure of Europe to benefit from the greater 
productivity of the Internet age. And yet, the only real 
attraction of information technology is that it reduces 
labor costs. Europe, with its higher per-unit labor 
costs, should be benefiting more from the new technology 
than America.
 
 
 
 
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

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