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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
TUESDAY, 26 SEPTEMBER 2000 

 

Today:  Collective Action

In Today's Daily Reckoning:
*** They did something...but what happened?...
*** Markets are jittery...anxious...worried about the 4 
E's...
*** How the Romans invented the 'new economy'

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*** Friday was the big day. The world's governments 'did 
something' about high oil prices and a low euro.


*** Hey, what's this? The euro is falling again...and oil 
seems to be stabilizing at more than $31. Maybe the fix 
was only temporary.


*** And poor Ms. Wu. She was the one demanding that 
government take action to protect the prices of her tech 
stocks. Alas, South Korean stocks fell another 1.12% this 
morning. 


*** Stocks throughout Asia fell this morning - led by the 
techs. The Tokyo average is again below 16,000. 


*** "Global Markets," which expected clear sailing this 
week, after Friday's announcements, "on Alert" says one 
Reuters headline. Another tells us that "Stocks Sink on 
Earnings Jitters." The Autumn of Anxiety is underway.


*** The Dow fell 37 points and the Nasdaq dropped 62 as 
the Big Techs got swamped in the rough seas. Intel lost 
$2.50, to close a little above $45. Cisco lost $3, 
bringing it well below $60. Micron lost $6. 


*** Have they suffered enough? Has negativity already 
taken the wind out of their sails? Not even close. 
They're all burdened with the albatross of outrageous 
stock prices. Cisco is still selling at 87 times next 
year's earnings. Uniphase is priced at 167 times. Oracle 
is at 86. Sun Micro at 92. These companies would have to 
be growing at the speed of light to justify these prices. 


*** Instead, they're stuck in the doldrums of declining 
growth rates. The WSJ notes that tech spending is slowing 
down. Not only is this undermining the growth and 
earnings of tech companies, it also threatens the GDP in 
a major way. The Journal points out that 30% of GDP 
growth over the last several years has come from spending 
on new technology - information technology, to be 
specific. 


*** Of course, you and I know that that GDP figure is a 
fraud. People didn't really spend a third of new GDP 
growth on computers and information technology. Instead, 
the magicians at the Bureau of Labor Statistics magnified 
a rather small sum, using 'hedonic' measures, and turned 
it into a major component of the GDP. So, when tech 
spending goes down, the GDP is going down too. Easy come, 
easy go. (see: Lousy Economics, Statistical Wizardry... 
Who Gains?)


*** Oil fell yesterday by $1.11 - but seems to be 
stabilizing in overnight trading. Oil has declined from 
$37 to nearly $31. But the 4 E's still cloud the skies of 
Wall Street - Earnings, Energy, the Economy and the Euro. 


*** "The American Petroleum Institute has stated that 
crude oil supply is NOT the problem," says Kevin Klombies 
"so the release of 30 million barrels is simply an 
attempt to manipulate prices for political gain. In fact, 
it is refinery capacity that is serving as the 
bottleneck, with refineries operating at 95% capacity at 
present." According to Klombies, the trend towards higher 
oil prices remains in tact. (see: The Market Reacts (Not) 
To Mr. Gore)


*** 1269 stocks advanced on the NYSE yesterday, 1579 
declined. 80 hit new highs; 97 hit new lows.


*** Is this really a new era? "In knowledge-based 
production, in contrast to physical manufacture," wrote 
Marc Faber recently, setting up one of the New Era 
arguments for the purpose of knocking it down, "almost 
all the costs are incurred at the beginning."


"According to them," he continues, summarizing an 
argument of the New Era apostles, "the marginal costs of 
production [after the original capital investment] are 
far below the average."


Faber goes on to point out that Roman aqueducts, canals, 
and even the conquest of new territories by the Romans 
were front-loaded with costs. "In fact," he writes, 
"practically every canal or railroad ever built incurred 
almost all the costs during the initial construction 
period, while the subsequent marginal costs were 
minimal...[and] the Romans invented the 'new economy,' 
since they invested heavily in the conquest of 
territories and then forces those acquired 'colonies' to 
pay for the initial costs of the military campaigns."


*** Another interesting item from Faber: a chart from 
Morgan Stanley shows a widening gap between real personal 
income and consumption. For nearly two years, the growth 
rate for real personal income has been declining. But the 
rate of consumption growth has been accelerating. The two 
have to get in sync. Most likely, consumption - which 
already shows signs of heading down - will decline to 
match real income.


*** "The US economy in the 1990s missed one of its four-
year cyclical recessions; there had been two in the 
eighties and two in the seventies; in the nineties there 
was only one," writes William Rees-mogg. "...recessions 
are needed to clear the excesses of a long boom, and a 
postponed recession may well be a severe one... there 
will be too much debt to liquidate easily." (see: How 
Will The Next President Handle An Overdue Recession?
)


*** The Danes are said to be 'neck and neck' on the new 
euro vote. It could go either way. So, apparently, could 
the contest between Bush and Gore.


*** T.S. Eliot was born on this day in 1888.


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COLLECTIVE ACTION


Collective thinking is not a good way to begin a romance. 
Few women are swept off their feet by a man who 
introduces himself:


"Hi, I'm John and I'm like everyone else you've ever 
met."


Nope, the idea is to be different...to be unlike any man 
she's ever met. 


This is true in the business world too. The idea in 
business is not to go along in step with other businesses 
- but to establish a unique selling proposition. Not only 
do you need to distinguish yourself with products and 
services that are different from those of other companies 
- you also hope to be able to keep other competitors out. 
You do not want others at your side or at your back - but 
plenty of open space to develop and distribute your own 
products.


Artists and musicians rarely do exactly what everyone 
else does. Each tries to find his own style, or his own 
particular way of expressing himself. One paints 
angles...another circles. One splatters paint on a 
canvas, another oozes it on. One singer does sappy 
country western songs. Another does violent rap and beats 
up his girlfriend from time to time - just to keep his 
name in the news. Everybody has to have his own shtick.


I have been trying to understand collective thinking 
because it is what holds stocks at absurd levels. Imagine 
that there were no stock market and no collective 
thinking about stock investing. Who would pay $450 
billion to buy Cisco? The average P/E for the Nasdaq back 
in March was 260. Imagine that there were no Nasdaq...no 
CNBC...no analysts...no Wall Street. Who - left to his 
own analysis and own brain power - would pay 260 times 
earning for ANY company?


Why would volume on the Nasdaq go up 10 times over the 
last decade? And why would average p/es go up 7 or 8 
times? Why would any compos mentis person think a dollar 
of earnings in the year 2000 is worth 8 times as much as 
a dollar of earnings in 1990?


"The Nasdaq used to be dismissed as a home for cats and 
dogs - small companies engaged in unfathomable businesses 
that earned them meager, if any profits," writes Conrad 
de Aenlle in today's International Herald Tribune. 


"In the last few years," he goes on, "the Nasdaq has 
grown into the world's biggest market...home for enormous 
companies, [that] still engage in unfathomable businesses 
that earn them meager, if any, profits."


No logic can justify it. No individual, independent 
experience or first-hand observation can explain it. And 
yet, it is - proof of collective madness.


And to understand it, we have to go into another part of 
the brain - where collective thinking takes place. There, 
in the most primitive part of the cerebellum is a 
pathetic little corner where people decide which 
candidate for vote for, which team to support, and which 
Big Tech stock to buy. It is the part of the brain that 
is switched on when reading the editorial page of the 
newspaper...or forming up for battle.


I described yesterday how the ancient Greeks fought in 
tight formation - each soldier completely dependent on 
his comrades to do his duty. 


In this, they fortified themselves, according to "The 
Western Way of War," - like voters used to - with strong 
drink. But not too much - fighting took discipline. The 
unit had to think as one person and act, as Plutarch put 
it, "with no confusion in their hearts." The alcohol must 
have cleared up some of the confusion.


Once in position, as a number of military historians have 
pointed out, the sensible thing would have been to plant 
their spears and their shields in the ground and await 
the enemy charge. Especially, if they could get a 
position on the high ground, enemy soldiers would exhaust 
themselves in the charge against the fixed positions. 


Better yet, they could fall back in good order as the 
enemy charged...making it even more difficult for him to 
find his mark. The famous leader of the Mongul invasion 
of Europe, Subedei, perfected this tactic...deliberately 
retreating on horseback in order to let the enemy follow. 
Soon, the attacker's line would be in complete disorder 
and the attackers themselves worn out. At that point, the 
Monguls would wheel around and counter-attack.


But collective thinking has a logic of its own. Rarely, 
could any group of Greek soldiers sit tight while the 
enemy attacked. They had to act, to advance...to 'do 
something."


Thucydides' describes the scene of the first battle of 
Mantineia (418 B.C.): 


"The Argives and their allies for their part went forward 
eagerly and wildly, but the Spartans slowly and in time 
to the many flute-players who were at their side - not 
out of any religious custom, but rather so that they 
might march evenly and their order might not disintegrate 
- a thing which large armies are prone to do as they 
march forward to battle."


Force meets force on the battlefield. The greater the 
group cohesion, the more likely the victory. In the 4th 
century B.C., the Greek city states battled each other. 
In the 20th century A.D., the world's nation states duked 
it out.


But victory in investing cannot be had by collective 
action. When everyone rushes to buy a particular 
investment - it is soon overpriced, like today's Big 
Techs. Collective action turns into a disaster. 


Your reporter,


Bill Bonner
 
 
 
 
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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