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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Leaving Gracefully

*** Where were the patriots? 

*** Strong selling, but no panic...yet...

*** Was bin Laden selling short? Cramer down, Cisco 
down, GE down...what's up?

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"Viewing Disaster Can Trigger Temporary Mental 
Disorder in Some" reveals a headline in today's 
International Herald Tribune.

Ah, maybe that explains it. I refer to the 
"Patriot Rally" that was supposed to happen yesterday.

Greenspan did his part - overnight bank rates were 
cut to 3%, the 8th cut in 9 months. And central bankers 
all over the world opened up the money throttles; $208 
billion was injected into the financial system between 
Wednesday and Sunday night.

And, of course, business and financial leaders 
were everywhere proclaiming their faith in America, its 
economy and its financial system...even Warren Buffett 
was on television, choosing his words carefully, 
declaring that he would not be a seller yesterday.

Still, the market functioned as it should - 
transferring the money of people who believed it was 
their patriotic duty to keep buying Krispy Kreme at 77 
times earnings to people who took the time to read the 
handwriting on the wall. 

"We were already headed for a debacle of epic 
proportions in the stock market with the economy 
slipping into recession and rampant overvaluation in the 
face of a post-bubble world," writes Lance Lewis of the 
Prudent "None of that has changed. Last week's 
events will likely only accelerate the decline."

But thank God for the patriots. Without them, to 
whom would foreigners sell? Eric, what's your take on 
yesterday's market?


Eric Fry in Manhattan:

- I returned to my Wall Street office yesterday and it 
was a very different place from the gleaming, self-
confident financial center I had left behind just a 
couple weeks earlier. 

- Wall Street and the surrounding area feel more like 
Beirut than Manhattan. Thick dust covers everything. 
National Guardsmen and police stand guard behind 
barricades on every street corner. Some wear facemasks 
and mini-respirators. Some do not. Tourists and 
professional photographers of one sort or another press 
up against the various barricades clicking off photos of 
everything in sight. Many of these folks also wear 
facemasks. I felt a little out of place not having a 
facemask of my own. 

- A weird kind of smoke still fills the air in lower 
Manhattan. But it's not really smoke and not really dust 
- more like "smust." And the odor is something quite 
unnatural. "Acrid" is too tame a word to describe it. 
Likewise, "sell-off" is too tame a word to describe what 
happened in the stock market yesterday. Both the air and 
trading action stunk - plain and simple.

- As most Daily Reckoning readers are aware by now, the 
Dow suffered its worst point drop ever, losing 685 
points, or more than 7%, to 8,921. The Nasdaq also 
logged a miserable day, following 116 points, almost 7%. 
The S&P 500 index managed a slightly better performance 
by falling a little less than 5%.

- Where were the patriots?

- Whatever became of the millions of Americans who 
pledged to buy stocks on Monday in a show of patriotic 
support? Maybe they did, but were outnumbered by those 
unpatriotic Americans and indifferent foreigners who did 
not refrain from placing sell orders.

- Turncoats: 1, Patriots: 0. We'll see if the patriots 
fare better tomorrow.

- Clearly, the stock exchange's week-long shut-down did 
nothing to calm investors' nerves. Nor did interest rate 
cuts by both Greenspan's Fed and by the European central 
bank seem to make any difference whatsoever.

- Selling ensued from the opening bell and most stocks 
got absolutely hammered. Oil and gold stocks put in a 
strong day, but not as strong as one might have 

- A 7% stock market decline would seem to reflect a 
boatload of anxiety. Yet, the XAU Gold Stock Index 
gained only 2.5%. Anglogold (NYSE: AU), a recent 
recommendation from the Daily Reckoning Investment 
Advisory, was one of the sector's better performers, 
gaining more than 4% yesterday.

- "The markets went back into battle yesterday," writes 
John Myers of Outstanding Investments, "The combatants? 
Deflation v. Inflation. On one side of the equation, 
money is being destroyed by falling stock prices, rising 
unemployment and even insurance claims. On the other 
hand, the Fed is slashing interest rates while the 
Treasury is promising to inject billions of dollars into 
the economy. The result of all this could be stagflation 
- a situation where you have a stagnant economy and 
stirring inflation."

- In the uncertain World that lies ahead it is not hard 
to imagine that investments in oil and gold will produce 
at least satisfactory returns. Maybe more than 

- Several "knee-jerk" trades punctuated yesterday's 
trading action. For example, the shares of Kroll Inc. 
soared 26%. Kroll "is a global risk consulting company 
specializing in investigative intelligence and security 

- Elsewhere in the knee-jerk trade category, defense 
stocks soared and airline stocks collapsed. The AMEX 
Airline Index fell a stunning 40% on the day. Congress 
is considering a $15 billion bailout of the airline 
industry. And rumor has it that Osama bin Laden had sold 
short airline stocks prior to last Tuesday's attack (I'm 
not making this up). Now that would be a new kind of 
terrorist indeed!

- Perhaps the most bizarre thing about yesterday's slide 
on Wall Street was how little most people I talked to 
seemed to care about it. A mini-crash on Wall Street 
seems trivial alongside the tragedy that has recently 
beset New York City and the rest of America.

- "On this day, even a sell-off qualified as a victory 
of sorts," said Igor Greenwald of "Wall 
Street reopened for business with its thoughts and 
prayers still focused on the smoldering mountain of 
rubble blocks away."

- And what a mountain of rubble it is. The skeletal 
remains of the World Trade Center rise from the ruins 
like a massive gnarled hand. It is a very disturbing 
sight. Healing will take a while longer.


Back to Bill Bonner in Paris:

*** So there you have it. Wall Street pulled comfortably 
ahead of Tokyo in the race to the bottom. The Dow closed 
yesterday at 8,921 while the Nikkei Dow lagged behind at 
only 9,810. But the Japanese are very good at losing 
money. One should think twice before betting against 

*** On the U.S. side, we note that while stocks sold off 
yesterday, there was no panic. That means that a panic 
probably still lies ahead. Perhaps next week. Perhaps 10 
years from now. But there is usually at least one day of 
panic selling in a major bear market. GE lost 11% 
yesterday. Cisco closed at $14. 

*** And poor James Cramer. A year ago, he put $2,500 
into each of 50 different mutual funds. He reports the 
results in New York magazine in an article entitled 
"Mutual Fund Hara-Kiri." 

*** "The results are in," he writes, "and I am staggered 
by the losses. I gave it to magicians who made my money 
disappear. My $125,000 has been reduced to $84,000. 
Forty-seven of the mangers lost money, only three made 
money, and of those, only one made me enough money to 
offset the fees I paid to open the accounts and keep 
them running. Some of the managers' performances were so 
shameful that I can't believe these folks are still 
running money." 

*** Cramer's experience is probably little different 
from that of other investors. How long will their faith 
in the system remain? When will they panic?


*** Last Thursday one of our publications, Taipan, began 
an "Open for Business" disaster relief drive...readers, 
including some from The Daily Reckoning, have donated 
more than US$25,000. 

Taipan will keep the drive alive until September 30th... 
to find out more about how you can chip in, please click 

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by Bill Bonner

"Consumer confidence is shaken," according to Johan 
Ruper, CEO of luxury watch maker Richemont. "It could 
take six months before it is restored."

Mr. Ruper is an optimist. We may never again, in our 
lifetimes, see consumers so confident.

Consumers have been feeling extraordinarily fat and 
sassy for a very long time. How do we know? Because they 
have been willing to spend more borrowed money than they 
ever did before. And, so sure are they that the future 
will be bright that they have been willing to mortgage 
more of their homes than ever before to do it. In the 
1990s alone, homeowners gave up an additional 10% of 
their homes to mortgage lenders.

Investors, meanwhile, were so cocky they ran up stocks 
to a level never before seen. The long-term trend for 
stock market capitalization is a horizontal line at 
about 50% of GDP. At one point in the late '90s, the 
figure had soared to 183% of GDP. Even now, 18 months 
later, stocks are valued at 135% of GDP.

And what kind of person buys a tech stock at 200 times 
earnings? Neither "timid," "reflective," nor 
"philosophical" seems to describe him. P/Es with three 
digits suggest a different state of mind...beyond mere 
faith "in the system." It presumes a confidence 
bordering on lunacy...a belief that the world has 
reached near-perfection - where there will be no nasty wars, no new technologies, no business 
cycle turnabouts, no inflation, no bear markets... 
nothing but good news.

This was the "Golden Age," that Treasury Secretary Paul 
O'Neill and millions of other Americans thought they saw 

It was madness, of course. But it is a kind of madness 
that the mad men can now deny.

"The Twin Towers disaster has acted as a convenient 
excuse for those economists, strategists and soothsayers 
who've been dead wrong about what lies ahead," explains 
Richard Russell in today's commentary. "'Oh,' they say, 
'we were on the right track, but this attack on America 
has changed everything. How could we have seen this 
coming? Yes, the economy won't do nearly as well as we 
thought it would. Instead of the rosy future we 
predicted, the nation may now be heading for recession. 
But please, the disaster in NYC has changed everything. 
We're innocent.'"

"There is always some leveling circumstance," wrote 
Ralph Waldo Emerson, 161 years ago, "that puts down the 
overbearing, the strong, the rich, the fortunate, 
substantially on the same ground with all others."

If it had not been for the terrorists, the process of 
leveling American consumers' confidence might have been 
slower, more gradual, more ambiguous. But, one way or 
another, it had to happen. 

Mind cannot be completely separated from matter. Sooner 
or later, even the dullest consumer was bound to feel 
the pinch of declining income and rising debt payments. 
And what investor is such a fool as to not notice that 
his portfolio has been in decline for the last two 

But now, consumers, investors and analysts all have a 
way to take their leave gracefully. They can cut back on 
spending without admitting that they ever spent too 
much. And they can sell shares without recognizing that 
they were damned fools for buying in the first place. 
Now, suddenly, unexpectedly, the world has changed.

Consumers no longer have to cut back out of financial 
necessity. Now they can downsize their lives simply 
because it is the fashion. They can now leave work a 
little earlier...and spend a few minutes more with their 
families. They can assume a more thoughtful pose, gazing 
out at the sunset or reading a book...and rediscover 
frugality as though it were a fancy new restaurant or 
the latest health craze. 

The half-empty glass is suddenly half-full - financial 
prudence is a la mode again. Getting and spending has 
gone out of style. 

Of course, there are fashion setters and fashion 
laggards. Here at the Daily Reckoning, you can just look 
at the cut of our coats and the styling of our hair and 
know that we are way, way ahead of the curve... 

But, poor James Glassman is hopelessly behind the trend. 
He urges investors to ignore short-term fads. Instead, 
they should focus on the very long term. "U.S. stocks 
have provided the best protection against the vagaries 
of world politics and economics," he argues.

"Imagine a baby girl born at the end of September 1929," 
he writes. If her parents had had the foresight to buy 
$10,000 worth of S&P stocks on the day she was born, 
she'd have $9,270,000 today."

Glassman is confident that the next 71 years will be 
like the last 71. Even if that is so, it is a source of 
little comfort. In real terms, the poor girl's capital 
was worth little more in 1989 than it was in 1929. 

Markets make opinions. In 1982 stocks were so 
unfashionably inactive that Business Week thought they 
were dead. "The Death of Equities," it reported in a 
cover story. It was only in the last 10 years of the 20th 
century that stocks came to life...and it was only at 
the end of that period that their long-term performance 
looked so good that investors' confidence knew no 

Had Mr. Glassman written his article in 1989, he might 
have suggested that the girl's parents buy her a house. 
She could have taken the money she would have paid out 
in rent and used it to buy other houses. Depending upon 
the neighborhood, she might have been far better off 
than if she owned stocks.

It is only the magic of compounding dividends and the 
bull market of the '90s that sent her wealth into the 
big numbers. And the dividend yield today is only 1.42%, 
itself a reminder of the momentum of bull market 

The inflation rate is running at approximately twice the 
level of S&P dividends, so you could compound your 
dividends until hell freezes over and still be poorer 
than when you began.

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 24, 2001

Published By Tulips and Bears LLC