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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Star Struck

*** The rockets' red glare fails to light up Wall 

*** Investors "hanging in there"...but squirming a 

*** Gunfire in Alaska...brisk business in 
N.Y....mortgages flying off the bonds/sell 
GE...and more...

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The cannons boomed Sunday...and again last night. 
And the stock market stood its ground...more or less. No 
panic. No euphoria either.

Investors are still "hanging in there" - even as 
the economy goes sour and the Wilshire 5000, the 
broadest measure of the stock market, has fallen 40% 
from its high.

"We are depressed about the news and about what 
happened," says Paul Watkins, member of an investment 
club quoted in the Philadelphia Enquirer, "but we are 
confident the market will rise again, like it always 
does. Once you get yourself to accept that this is real, 
you have to look at what will happen in the future."

I don't know what that last sentence means. But I 
feel a little sorry for these poor naifs. Mr. Watkins 
said that his portfolio has grown 11%-12% a year since 
he joined the club in '84. He can't walk away from that 
kind of growth, he says. "And however it goes, whether 
there's full-blown war or recession," he went on as if 
he had a clue, "(the economy) is going to come back, 
because people are going to need the same goods and 

Yes, they will need goods and services...but not 
necessarily stocks at 30 times earnings. Mr. Watkin's 
group's latest purchase included shares of GE - which 
fell another 2% yesterday.

Eric, what else happened on Wall Street?


Fry in New York:

- Considering all the obstacles that the stock market 
faces these days, it looks like it's performing pretty 
darn well. Looks can be deceiving, of course. A dead cat 
only bounces so high, and then it falls right back down.

- The Dow fell 52 points yesterday to 9,068. The Nasdaq 
gained a sliver to 1,606, but these stocks seem to be 
lacking their recent �lan - they're "trading heavy."

- Maybe it's the gunfire in Alaska - not in Afghanistan 
- that's weighing on the market. "Get this, a 37-year 
old drunk with a high-powered rifle caused the second-
largest oil spill ever in the Alaskan pipeline on 
Friday," observes the DR Blue's Dan Denning. "The 
single-gunshot wound to the pipeline effectively shut 
down one-fifth of all domestic U.S. oil production." 

- The pipeline is reportedly built to withstand 
gunshots. "It has an outer coating of galvanized metal, 
four inches of insulation, and a half-inch of steel," 
says Denning. "But that wasn't enough to stop a bullet 
from a .38-caliber rifle. Let me ask you this, if a 
drunk with a rifle can halt 1/5th of U.S. oil production 
with a single bullet, what do you think a couple of 
sober terrorists could do with a rocket launcher?" Hard 
to say, but it probably wouldn't be bullish...except for 
defense stocks.

- Continuing recent trends, defense stocks like General 
Dynamics, Lockheed Martin, and Raytheon - maker of the 
Tomahawk cruise missile - all jumped to new 52-week 
highs yesterday. Meanwhile, hotel and lodging stocks 
slipped ever lower into the slough of despair.

- "I'm sure we are in a recession, probably a relatively 
deep and extended one," Warren Buffett proclaimed last 
week, "but [recessions] are part of business life and we 
are prepared." That's all well and good for Berkshire 
Hathaway and Warren Buffett, but what about the rest of 
us? If I had a few billions of dollars stashed away for 
a rainy day, I'd feel "prepared" too.

- But as The Daily Reckoning highlighted yesterday, 
"savings are meager, debt is abundant." Most of us are a 
little light in the rainy day funds department.

- "The first half of 'stagflation' is upon us - a 
stagnating economy," writes Outstanding Investment's 
John Myers. "What remains to be seen is whether 
inflation comes to bear. Certainly some of the 
precursors are present: the Fed playing fast and easy 
with the money supply and the threat of rising oil 
prices (which cannot be dismissed given the geography of 
the current conflict)...rising oil, rising energy... 

- "Stagflation," in Myers' opinion, "would deliver mega-
money making opportunities to resource investors. Raw 
resources are every bit as underpriced today as they 
were in the 1970s. If just a fraction of the money from 
the bond market were shifted to hard assets, prices 
would skyrocket!"  (see: The Wolf At The Back Door)

- Mortgage refinancings to the rescue?! Now that 30-year 
mortgage rates have fallen to within 1/4 point of a 
three-decade low, homeowners are flooding into mortgage 
banks to refinance their home loans. The Mortgage 
Bankers Association of America reports that in the week 
ending Sept. 28th, refinancing activity soared to the 
second largest volume week in the twelve years that the 
Association has tracked it.

- "The latest burst of activity is effectively a boom on 
top of a bloom," USA Today reports. "On the strength of 
the first nine months, the mortgage industry has already 
anticipated a record year: $1.65 trillion in 

- It is tempting to shake our heads at all these heavily 
indebted consumers who are sucking the equity out of 
their houses. But maybe they are little smarter than we 
are giving them "credit" for. If you borrow money 
against your home at 7% and use part of the proceeds to 
pay off credit card debt costing 19%, the pretax return 
is 12%, guaranteed. Where else can you get a certain 

- nice. America's new saving ethic. Time was, 
millions of Americans would borrow funds from their 
credit cards at 19% to invest in a stock market that 
seemed all but certain to produce 35% returns each and 
every year. Those were the days. 

- How about you, Bill? You going to refinance the 
chateau to pay off your Visa cards?


Bonner back in Paris:

*** Hmmmm...thanks for the suggestion. Maybe I should 
refinance it twice...just to be safe. I can borrow at 
the lowest rates in 40 years. Shouldn't I load up on 
debt while I have the chance?

*** But wouldn't it be just like that crafty Mr. 
Bear...and that unforgiving Mademoiselle 
drop interest rates even further, after I had 
refinanced...and maybe send the economy into an even 
deeper decline?

*** S'pose our own Alan Greenspan-san follows the trends 
set by his Japanese counterparts...and cuts rates to 
zero? And s'pose consumer prices fall just as they have 
in Japan - making debt even more of a burden? And s'pose 
business goes bad so I can't afford to keep up with the 

*** No, Eric, this looks like a good time to own debt 
rather than service it. With a little luck, the U.S. 
economy will follow the Japanese model...interest rates 
will go to zero. Debtors will go bankrupt and bonds will 
soar. Buy bonds. Sell GE.

*** Besides, a man doesn't want the banks to foreclose 
on his chateau in the middle of a depression...

*** Meanwhile, a housekeeping detail - Addison tells me 
cyber punks from Russia(!) seem to be causing mischief 
with our e-mail. Daily Reckoning transmissions have been 
disrupted. We thought about sending in missiles, but 
decided to negotiate...stay tuned. 

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by Bill Bonner

Mr. Greenspan must look at himself in the mirror each 
day. Does the world's most powerful central banker look 
tired, he must ask himself? Saving the earth can be hard 
work, he must observe...with a sparkle in his eye... 

But perhaps the Fed chief notices a change. Does he see 
himself "turning Japanese" a little more each 
rate cut after rate cut fails to boost the economy...and 
consumers, investors, and businessmen turn cautious? 

In December of 1996, stocks in America reached an 
unheard of level...nearly 6500 on the Dow. It was a case 
of "irrational exuberance", said Mr. Greenspan on 
December 5th. The next day, stocks recoiled. 

Stock market valuations had reached such a high level, 
that they had out ran imaginations. But soon after, 
imaginations caught up...inventing a whole cluster of 
explanations and justifications. A galaxy of "New Era" 
rationales launched into space. Within days, the 
astronomers of Wall Street began to discover the distant 
stars..."the productivity miracle"..."the Peace 
Dividend"..."the information technology revolution"...
"the new economy"..."long-term buy & hold"...and so on. 
And within days, the stock market rocketed skyward...and 
didn't stop until January of 2000, when the Dow hit 
11,722 - more than 5,000 points higher 

Was Mr. Greenspan alarmed by this even-more-irrational 
exuberance? Quite the contrary. Thanks to the twinkle of 
so many New Era stars, the Fed chief was able to see 
stocks in a new light. In the 4 years from 1996 to the 
market's peak in January 2000, he had turned his face to 
the heavens and become a believer.

Since January 2000, the Dow has fallen as low as 8,235. 
The Wilshire 5000, as noted above, has lost 40% of its 
value - a sum estimated at $5 trillion. And the Nasdaq 
has suffered even worse damage. 

But the "New Era" stars still shine in the autumn sky -
brightly enough to lead perhaps an entire nation to 

"According to the latest survey of fund managers by 
Merrill Lynch," writes Marc Faber in his latest letter, 
"84% of managers expected higher equity prices within 
the next year, compared to just 10% who saw lower 
prices." Abby Cohen, the permanent bull, has become even 
more bullish. And Wall Street strategists now advise 
holding 70% of your assets in common stock.

Star struck investors, such as Mr. Watkins, mentioned 
above, have stood their ground...even in the midst of 
war, recession, and a bear market. Stocks have gone 
down, but there has not been a single day of panic. Mr. 
Watkins, and millions of others, still believe that a 
steady hand on the tiller and a close eye on the star of 
"long-term buy & hold" investing - even through a bear 
market - will lead to investment success. (He seems 
unaware that a good navigator needs to recognize the 
point of departure as well as the destination. Buying 
stocks at the top is almost guaranteed to be a losing 
proposition...unless you are as a long-lived as 
Methuselah. Adjusted for inflation, investors who bought 
at the '29 peak waited more than a quarter of a century 
to get back to where they began.)

And yet, there, half a world away, the world's second 
largest economy has enacted "a morality play designed 
for our edification." Does anyone bother to watch? 
Apparently not. While the U.S. was getting better and 
better - far better than anyone expected - Japan was 
going in the opposite direction...with an economy that 
has proved more intractable than anyone could imagine.

"In one way...," explains Paul Krugman in his NY Times 
article, "our situation is actually worse than Japan's. 
For the past decade, Japan has been an island of 
depression in a sea of prosperity, its economy 
stagnating even as other major economies, ours in 
particular, boomed. That was, you might say, quite an 
achievement. Our current problems, on the other hand, 
are shared by much of the world - not the least by Japan 

As long as Americans were willing to buy more than they 
could afford, the Japanese economy managed to keep 
growing...though barely. Now, things look worse than 
ever for the Japanese. The economy shrank at an annual 
rate of more than 3% in the 2nd quarter of this year. 
Prices are falling. Banks and huge corporations - kept 
afloat for years by easy money and the "convoy system" - 
are in danger of sinking. Unemployment is already 5%... 
and rising. "If Japan slips into the abyss," writes Paul 
Krugman in his NY Times piece, "that will have a direct 
adverse effect on our economy dwarfing anything the 
terrorists did."

But, now, the entire world seems to be slipping into a 
deflationary abyss. Who will buy Japanese products? Who 
will buy anyone's products?

And who will suffer most? Low-cost producers such as 
China and India...or high-cost producers such as the 
U.S. and Japan? 

Globalization is a great thing during a business 
expansion. It extends the division of labor...allowing 
for more specialization and lower cost goods and 
services. A company in Cleveland, for example, opens a 
manufacturing plant in Bangladesh to supplement its U.S. 
production facilities. Everyone benefits - consumers get 
lower prices, Bangladesh gets capital investment and 
employment, and the U.S. company gets higher profits.

But when profits are squeezed, the Cleveland company may 
have to close one of its plants. Which one will it shut 
down...the one in Bangladesh that exploits workers at $2 
an hour? Or the one in Cleveland that is exploited by 
workers at $20 an hour? 

Another difference between Japan and the U.S. is that 
Japanese householders never abandoned their saving 
habits. Even at the very height of the Japanese mania, 
when the Nikkei Dow was near 40,000 and confidence had 
reached epic levels, savings rates never fell below 12%. 
In America, savings rates at the peak of confidence 
dropped below zero...and presently hover around the 1% 

So at least the Japanese could face their downturn with 
more grace and equanimity than Americans. They had 
savings upon which to fall. 

Still, who knows what will happen? Nature, with her 
sense of poetic symmetry, could insist that we Americans 
follow the Japanese script. Mr. Market, more mischievous 
and destructive, may even add a more desperate scene or 

And Mr. Greenspan, if he still has his wits about him, 
is sure to observe a moment of confused silence as the 
Dow reaches his point of "irrational exuberance" - and 
regret that he did not retire when his popularity was at 
its peak. He is an old saxophone man, after all. He must 
know that you should stop while the crowd still wants 

Perhaps he will pick up his old speech from years 
ago...shake it to get the dust off...and recycle it. 
"The market is reacting," he will say, "to irrational 

Then, the skies will cloud over...and the market will 
fall another 50%...

Your correspondent...watching the stars...

Bill Bonner

P.S. When the Dow crosses the 6,500 mark on the way 
down...peoples' imaginations will go back to work. Soon, 
they will discover a new cluster of stars...reasons why 
stocks are doomed to fall even further...and why the 
world economy will never climb out of the abyss. It will 
be a "new economy," they will which the dollar 
is doomed, economies are ruined...and stocks will never 

Then, a new boom can begin...

P.P.S. "Let me put this bluntly. If you look at it from 
the inside - or if you look at the official data - you 
will conclude that the brokerage community is not 
designed to help you profit," writes 11-year veteran VP 
of T. Rowe Price, James Cooke. "It's designed to 
encourage you to buy. Even as the bear market ravages 
through the average investor's portfolio, when you need 
to know which stocks are headed for trouble - Wall 
Street is mute."

(See: The Silent Conspiracy)
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 09, 2001

Published By Tulips and Bears LLC