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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Awaiting the Big V's

*** The dogs and cats of rate lowest 
since '58

*** More job losses...defense IPOs?

*** Nasdaq erases all profits for last 5 years...and 

"There are still 600 basis points between here and 

That cheerful comment was made in happier times by 
Ed Yardeni, back in January, explaining how, even if the 
first rate cut did not revive the economy, there were 
plenty more where that one came from.

But, now the dogs of war have been unleashed. So 
have some stray cats. Rate cuts seem to have lost their 

All over the world, governments are mobilizing to 
fight the threats of bear markets, recession and 
terrorism. Rates are being slashed. Credits are being 
provided. New subsidies, bailouts, and spending projects 
are under way. Lock boxes are being pried open. Peace 
dividends are being cut. 

And the era of big government is back. 

Yesterday, the Fed took another step towards zero 
- its 9th so far this year - cutting rates another 50 
basis points, leaving only 250 bps to go.

The poor Japanese want to help by weakening their 
currency too. Alas, they can't cut rates; they have no 
more rates to cut. Key bank lending rates in Japan have 
been near zero for years. So, the Japanese have had to 
content themselves with intervening in currency markets 
to lower the value of the yen.

And yet, despite the flood of cash and credit, the 
bond market shows no signs of worrying about inflation. 
Long bonds rose sharply yesterday; inflation-adjusted 
bonds, relatively, sank.

Gold, too, went down a bit. 

The dogs of war are bound to bite a few innocent 
people...but - astonishingly - investors, so far, are 
not anticipating any collateral damage from inflation. 

Eric, how did the rate cut go over on Wall Street 


Eric Fry in New York...

- Like the future Hall of Famer, Cal Ripken, Fed 
Chairman Alan Greenspan has been striking out lately a 
lot more often than he has been hitting the ball. 
Despite nine interest rate cuts in little more than nine 
months, the economy and the stock market are both far 
worse off than when Greenspan began the process.

- But that doesn't mean that "The Chairman" can't still 
jack the ball out of the park every once in awhile - 
economically speaking. Yesterday, he reduced the Fed 
Funds rate by one half percent to 2.5% and the stock 
market rallied, just like old times.

- The Dow gained 114 points to 8,950. The Nasdaq fared 
slightly less well, advancing only 0.8% to 1,492. 

- The Nasdaq just seems to limp along - gaining less 
than the Dow on up-days and falling more than the Dow on 
down-days. One clear difference between the two indices 
is that most Dow stocks make money. "Nasdaq," quips Sean 
Corrigan of, "stands for No Actual 
Sales, Dividends, Assets or Quality." 

- Sales and assets are certainly in short supply these 
days, on Nasdaq and elsewhere. In a sign of the times, 
The Daily Deal introduced a new weekly section called 
'Bankruptcy Thursday.' "The Manhattan-based chronicle of 
mergers and acquisitions leads the section with two 
standing features," explains Paul Colford of the New 
York Daily News. "'Letter from Delaware' rounds up the 
latest bankruptcy filings and their casts. 'DIP 
Dimensions' looks at firms operating with debtor-in-
possession funds."

- Now that bankruptcy filings are a weekly news feature, 
the U.S. economy must be getting closer to hitting 
bottom, even if it is not quite there yet.

- Joblessness tells the tale of our economy...and the 
story line is a bleak one. Consumer confidence has hit a 
five-year low, and the unemployment rate is on target to 
hit a five-year high. Initial unemployment claims 
reported last week rose by 58,000 to 450,000, the 
largest weekly gain and highest level in nine years. The 
monthly unemployment report comes out on Friday and it 
won't be pretty.

- "In the first major cutback by a large Wall Street 
firm since the terrorist attacks, Morgan Stanley plans 
to let go as many as 200 investment bankers, or about 
10% of its banking staff," the Wall Street Journal 
reports. Remember, not a single IPO came to market in 
the month of September. So, one might be tempted to ask, 
what are the remaining 90% of the bankers going to be 
doing all day?

- Morgan Stanley reported a few days ago that its net 
income fell 43% in the quarter ending August 31. It's 
just a guess, of course, but maybe there will be more 
staff reductions in the future.

- Perhaps defense stock IPOs will be the new hot thing 
that bails out the investment banking departments on 
Wall Street. "Spending for defense-related activities is 
on the rise, but has a long way to go to reach levels of 
years past," writes, citing the work 
of International Strategies & Investments (ISI). "The 
defense sector has suffered through years of under 
investment...U.S. military employment is at its lowest 
level in postwar history, and down 50% from the peak 
reached in 1968. Although nominal government spending on 
defense equipment and structure has turned up over the 
past four years, [it] represents only 0.8% of GDP, a 
postwar low. Many things changed on September 11th, not 
the least being America's renewed interest in defense. 
Investors, take note."

- As defense spending increases, stocks like Boeing will 
likely benefit. Boeing has endured a very turbulent ride 
over the last three weeks, but it gained almost 6% 
yesterday to $34.25.

- Three unrelated news items bode well for the aircraft 
manufacturer. First, domestic air travel continues to 
rebound. Second, both the Air Force and the Navy are 
nudging Congress to speed up appropriations for new 
surveillance and tanker aircraft from Boeing. Third, 
yesterday China agreed to buy 30 aircraft from Boeing 
for $1.65 billion. Bloomberg reports, "Chicago-based 
Boeing has predicted that China will buy commercial 
aircraft worth over $144 billion during the next 20 
years, making it the second-largest market after the 
U.S." (see:

- Boeing may or may not be a good stock to buy. But it's 
nice to know that even if the U.S. economic news is 
mostly bad, it's not all bad.


Back in Paris:

*** "I've spent a lot of time traveling all over the
world...and I've seen situations similar to what's
happening in Nicaragua right now," Kathie Peddicord 
passes on from her recent travels there. One 
International Living reader points out that "Every time, 
within a few places with similar conditions, 
the prices skyrocket. The same thing's going to happen 
in Nicaragua...very soon." 

*** But for now...prices are still cheap. For example, a 
1.7 acre lot on the Pacific Ocean, 5 minutes outside of 
San Juan, is currently US$15,000. A private island in 
Lake Nicaragua - the largest body of fresh water south 
of the Great Lakes -is available for as low as US$8,000 
(the whole island). Or a lot at Rancho Santana, a 
private reserve on 2.5 miles of spectacular Pacific 
coastline, can be had for as little as US$25,900.(For 
more, click here: )

*** "The new data reveals a profits disaster," notes Dr. 
Kurt Richebacher in his latest letter. "Profits hit 
their peak in the 4th quarter of 1997...from there they 
have steadily declined." They are currently "below their 
level in 1995," Richebacher observes. 

*** Consider the Nasdaq alone and the profit picture is 
even worse. The Wall Street Journal reports that if you 
take all of the profits of all Nasdaq companies over the 
last five years, and subtract the losses, the result is 
a negative number. "Put another way," says the WSJ, "the 
companies currently listed on the market that symbolized 
the New Economy haven't made a collective dime since the 
fall of 1995, when Intel introduced the 200-megaherz 
computer chip."

*** "There Was No New Economy," Dr Richebacher reminds 
us. (also see: False And True Prosperity 

*** But markets make opinions...and years of rising 
prices on Wall Street led investors to search for an 
explanation. It felt like a "New Economy" to the right 
side of the brain. The left side merely had to invent a 
cluster of corollary propositions to support it.

*** Those myths and misapprehensions are now being 
destroyed. But more importantly, to the right side of 
the brain, it no longer feels like a New Economy. Greed 
is giving way to fear...

*** "You never know," said a New York secretary to a 
reporter from the French newspaper Liberation, "if there 
is a war...or if a recession is coming...I feel better 
saving my money..."

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The Daily Reckoning Presents: A Guest Essay in which 
the author tries to define the big "V"...

by Gary North

Asked to define "victory" in the war against
terrorism last week, Defense Secretary Donald H.
Rumsfeld had difficulty coming up with a concise
answer. After 500 words of hovering, he landed
on his definition. "I say that victory is
persuading the American people and the rest of
the world that this is not a quick matter that is
going to be over in a month or a year or even
five years," he said.

Washington Post 
Sept. 23, 2001 


Some of us remember a photo of Churchill, sitting in 
front of a camera - Karsh's, as I recall - displaying a 
V sign. It was V for victory.

Now we are told to expect two victories: one against
terrorism, the other a fast recovery of the stock 
market. But the only image I have of two V's is Richard 
Nixon waving them and smiling in 1972. This is not 

A few days before the attack, I was watching a show on
MSNBC (I think). The person being interviewed was an
academic type. He had completed a study of which month 
was worst historically for the U.S. stock market. 

"September," he said. The interviewer was all aflutter 
to hear the good news. This meant that the fall in the 
market might be temporary. The academic concurred. Then 
came September 11.

The fall in the market in the week following the
attack was a bad one - the worst in 70 years, several
media sources reported. The week began on MSNBC with the 
most intense stock market cheerleading I have ever seen 

The New York Stock Exchange had not yet opened. 

The cheerleader was Jim Cramer of The Street.Com. He was 
adamant: this was a great buying opportunity. His 
company had committed money to the market. This was the 
bottom. Get on board now! Another person being 
interviewed was judicious, saying that there were 
reasons not to be so optimistic. Cramer pitched the 
opposite line with great intensity and confidence. 

Then the market opened. Instantly, it was down 50. 
It kept going down, down, down. It was down by 250 
within an hour. Cramer kept saying this was a great time 
to buy. 

About the time it hit 500, he began to modify his
tone...somewhat. He said that it would be unwise to 
commit all of your money today. Save some extra money 
for the rest of the week, he said. The Dow closed below 

An hour before the stock market opened, Greenspan's
FED had lowered the short-term federal funds rate by 
half a percentage point. The market ignored it.

Economists call the turnover of money per unit of time 
the velocity of money. When it slows, it is deflationary 
in its impact. This is why Greenspan has more leeway to 
lower rates again by creating new money. We are heading 
into a massive slowdown of spending. 

Consumer confidence was already down in the week before 
the attack. When people are scared, they slow down their 
spending even more. They stop buying discretionary 

Lower rates won't solve the problem of reduced sales. 
Lower rates allow businesses to borrow more money, but 
businesses today are not interested in borrowing more 
money. Capital spending has fallen like a stone for a 
year. Even before the attack, entrepreneurs were 
convinced that the public was not going to buy what 
businesses produce. 

Despite all the cheerleading on TV and in the financial 
press, businesses decided a year ago that the consumer 
was tapped out. That's why businesses pulled the plug on 
capital spending long before September 11.

New York City is the center of the world's equity 
markets. The American financial industry is close-knit - 
one might even say "incestuous." These people run in 
packs and think in herds (or maybe vice versa). This is 
why none of them saw what was obvious to me in February 
and March of 2000: the Nasdaq was insanely overvalued 
and ready to crash. 

According to Fortune magazine, before the attack, 
183,000 people worked in the financial services industry 
in lower Manhattan. These people will be emotionally 
scarred for months, maybe years. Their professional 
lives will never be the same. They saw everything come 
crashing down around them, literally. One of them put it 
this way:

As traders, we are taught to stay at our desks
during fire alarms. You serve your clients. You
don't run. Well, in this case the people who ran
were the smart ones. The people who stayed are
dead. That's counter to everything you are
taught on Wall Street. But we're just moving
money around. It kind of makes you think.

It kind of does, indeed. Stock options? For your
widow. These people have been through what few Americans 
have seen since Vietnam. They have seen death face-to-
face. They have been through something that tends to get 
people's priorities straight. 

Now they must return to cheerleading. But how? The stock 
market is down, a long war is looming, and they or their 
colleagues are sitting at strange desks in new 

September 11 marks the end of an era. 

The markets will still function. People will still go to 
work in New York City and move all that money around. 
But the ones who moved it around from the caverns of 
lower Manhattan will never move it around with the same 
confidence or arrogance.

There is no more talk about a second half recovery of 
the economy or the stock market. That was the party line 
six months ago. Now there is endless chatter about the 
Big V. The V means a sharp downward move, followed by a 
sharp upward move. Presto: "It won't hurt any more! 
Uncle Alan will kiss it and make it all well."

What V? The Nasdaq, which is still under 1500, down from 
5040 a year ago March. So, where is the sharp upward 
move? It takes two moves to make a V. One move makes a 

Gary North
for The Daily Reckoning

At age 25, Dr. North was the youngest elected member of 
the Economists' National Committee on Monetary Policy. 
He served as a senior staff member of the Foundation for 
Economic Education and as a research assistant to U.S. 
Congressman Ron Paul.

For more see: Derailing the New Economy

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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: October 05, 2001

Published By Tulips and Bears LLC