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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  The Way We Were

*** Funds down...earnings down...but investors still 
looking "across the valley"...

*** Treasury bonds up...junk bonds down...

*** Is it time to buy gold? Yes, we say, realizing the 
price might go down as well as up...Factories not 
putting out...commodities down...and more...

For the last quarter, the average diversified 
mutual fund fell 16.22 percent, according to Morningstar 
Inc. It was the biggest three-month decline since the 
fall of 1987. The two biggest funds, Vanguard & Fidelity 
Magellan, are down more than 20%. (Conversely, a fund 
managed by the DR Blue Team's David Tice - The Prudent 
Bear Fund - is up 41.9%...)

Earnings are falling at least as fast. S&P 500 
earnings are expected to decline 22.4% in the 3rd 
quarter, the worst in a decade. And the earnings over 
the last 12 months are the worst in history. 

But Peter Lynch, who used to run the Magellan 
Fund, is in advertising now...urging investors to stick 
with stocks for the "long haul." 

"Wall Street pundits," observes the Dallas Morning 
News, "believe investors are already beginning to look 
across the current valley in earnings to better times in 
the first quarter of 2002."

How do they know times will be better in 2002? 

Factory output fell 1% last a level 
where only 75% of capacity is being used. Commodity 
prices are falling. Debtors are going broke. And 
consumers don't want to buy. 

Harry Schultz puts it this way: "The psychological 
effect of the 'Nasdaq Shock' was to make a lot of people 
say to themselves: Maybe I don't need the new model car 
I want to buy. Maybe I should delay buying that boat, or 
bigger/better located house. Maybe take a less expensive 
vacation, one closer to home." (See: Economic Whiplash)

Why would earnings rise? A French couple we met 
over the weekend described their trip to Utah: 

"We took a hiking and river rafting trip. It was superb, 
the best trip we've ever taken. We went for days without 
crossing a road or seeing another person...along with a 
group of Americans. The food was terrible but they were 
all so nice...But it is strange out there. We would see 
a mountain in the distance and we'd say to ourselves...I 
guess we'll be there this evening. But three days later, 
it would still be just as far away...Things can be a lot 
farther away than you think."

Eric, what do you think - how far away is the 
other side of the valley?


Monsieur Eric Fry de Manhattan:

- If folks keep behaving as if stocks are actually in a 
bull market...who knows...we might just get a bull 
market. Somehow, stocks keep plugging away to the 
upside, no matter how dire the news headlines may be.

- The Dow rose 36 points yesterday to 9,384, while the 
Nasdaq Index tacked on 1.5%, to 1,722.

- Investors, like teenagers on a first date, find Mr. 
Market so attractive that he can do no wrong. Rising 
earnings would be a nice attribute, but declining 
earnings are "kool" too. Where will this infatuation 
lead? I'm afraid to look.

- "The bond market has a message for stock investors: 
Curb your enthusiasm," writes the Wall Street Journal's 
Gregory Zuckerman. Although stocks have recouped their 
losses since Sept. 11, Zuckerman points out that "Prices 
of corporate bonds, including junk bonds, are still down 
sharply from their pre-attack levels."

- Typically, whenever recessions approach, corporate 
bond prices fall more than Treasurys. That's because 
investors start to care more about the return OF their 
money than the return ON their money. Currently, 
Zuckerman notes, "The spread, or difference in yield 
between junk bonds and Treasurys, is nine percentage 
points, its widest level since 1990."

- So who's right? The upbeat stock investors or the 
pessimistic bond investors?

- Fred Hickey, editor of the High Tech Strategist, would 
give the nod to the bond crowd. "Ultimately, the economy 
won't recover until the excesses of the '90s are worked 
off," Hickey predicts. "Consumers have to reduce their 
consumption in order to whittle down their huge debt 
balances. Savings rates must rise. The nation's mammoth 
trade deficit, which absorbs most of the world's free 
cash flow, can't be sustained much longer and must be 
reduced. The manufacturing overcapacities resulting from 
years of capital spending binging have to be absorbed. 
Stock market valuations have to come down to more 
reasonable levels. There are no easy solutions to these 

- Bulls and bears alike agree that current economic and 
geopolitical conditions in the United States are as 
unsettled as they have been at any time in the last 20 
years - and maybe at any time since the Vietnam War. 
But the investment response to these troubling 
conditions varies greatly from person to person. Some 
buy "depressed" tech stocks, while others prefer to wait 
out the crisis in short-term Treasuries.

- Curiously, very few investors seem to be seeking 
refuge in the gold market. Yet, "the succinct bull 
argument for gold today," Jim Grant, editor of Grant's 
Interest Rate Observer observes, "is that, for the first 
time in a quarter-century, all the world's major 
economies are in recession together. Trying to lift them 
out of it, governments and central banks will err on the 
side of doing too much."

- Al Friedberg of Friedburg's Commodity and Currency 
Comments agrees: "Monetary expansion around the world 
has accelerated in direct proportion to the severity of 
the economic bust. Growth rates of the broad-based 
monetary aggregates in the U.S. have ratcheted upwards 
for over five years, remaining well above 10-year moving 
averages. The inflationary implications...are as obvious 
as they are ominous. Can we capitalize on this 
'inevitability?'" His response: Absolutely. Buy gold.

- Friedburg also points out that the special 
circumstances that brought gold to its current low 
estate are disappearing. For one thing, the lion's share 
of dis-hoarding by central banks has occurred already. 
"Henceforth, official supplies are predictable and 
digestible." For another, net forward selling by the 
mining companies will not be increasing, as their hedge 
books are already very large. In fact, "Goldfields 
reported that mines added to demand by lifting hedges on 
41 tonnes during this year's first half."

- "The Fed today [may] face the Japanese predicament of 
striking a match but lighting no fire," Grant allows. 
But he anticipates that Greenspan's aggressive monetary 
response to this state of affairs will spark an 
inflationary reaction. "Value investors must swallow 
hard to buy [gold]." Grant concludes. "Following the 
roll-up of the European currencies, only four basic 
monetary alternatives present themselves: euros, yen, 
Swiss francs, gold. Of these, only gold is beautiful to 
look at and not replicable on a high-speed printing 

-Shares of Freeport McMoRan, a gold play recommended by 
the DR Blue Team, are still trading at a 19% discount to 
their redeemable value. (DR Blue Readers Only see:)


Back in Paris...

*** Elizabeth and I went to see Moliere's "School for 
Wives" last night, in which a man in his 50s buys a 
young girl from a destitute mother and keeps her away 
from the world so that she'll grow up to be a perfect 
wife - loyal, obedient, and faithful. 

*** I felt sorry for the poor man. His project was 
doomed from the start, as any half-wit could see. Walls 
were never built so high as could keep a woman from 
acting like a woman. But he persisted in his efforts to 
completely control and dominate his young Agnes until 
she finally had him groveling at her feet, beating upon 
himself like a madman and begging for mercy. Not much 
has changed, since the 17th century at least, neither in 
love nor in markets. 

*** After the play, we went for dinner at Le Grand Caf� 
on the Boulevard des Capucines. "I felt sorry for the 
poor man," said Elizabeth. "But as Moliere put it, if he 
didn't want the trouble of having a real wife, he 
shouldn't get married."

* * * * * * * * * * Advertisement * * * * * * * * * * *

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* While investors thought they were going to get rich - 
they lost $5 trillion in wealth in an 18-month period. 

* While consumers heeded the Fed's call to "buy..." - financial security was going bye-bye under 
a collapsing tower of DEBT.

Now the "live for today" generation faces war and 
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The Daily Reckoning Presents: THE MOGAMBO GURU explains 
why based on an overwhelming accumulation of historical 
precedent, one can reasonably expect that we will have 
several decades, or more, of increasing misery from a 

by Richard Daughty

The American economy will probably not recover for at 
least a decade. There is no reason to expect that it 
will. The immutable laws of economics have not gone 
away, nor have they changed overmuch in the history of 
the world. 

Since before the time of the Pharaohs, all nations have 
contended with the same financial forces in existence 
today. They had (in one form or another) money, debt, 
and taxes.

They all had government spending. And every single one 
of these nations, in all of history, was eventually 
ruined by its government. Their money was debased to the 
point of worthlessness by the government spending too 
much to do too much, and then the country collapsed.

Why should we expect to be any different?

To combat the evil of the debasement of the money, the 
Founding Fathers wrote into the Constitution that money 
will only be of silver and gold. 

As thinkers of the Enlightenment era, Jefferson & Co. 
surely studied history and saw, with alarm, what 
happened to every nation that resorted to fiat money: 
the value of the money went to zero and the people were 

They believed that there had to be constraints on 
government spending, and the only constraint available 
was to limit the currency to something relatively rare 
and valuable. Ergo, the gold standard, which limited 
spending to the amount of gold and silver you had. 

But the Supreme Court, in its infinite wisdom, rather in 
a series of idiotic decisions that is part of its 
lasting shame, acquiesced to the fraud of allowing 
absolute disregard for this important, crucial piece of 
the Constitution. No longer would the dollar be, "as 
good as gold." Et voil�, fiat money.

Since the sixties the government has been on a deficit-
spending spree. That is, they "borrow" money and spend 
it. This is, of course, the Keynesian approach to 
battling a recession. It works. How could it not?

There is, unfortunately, a price to be paid. And the 
price is the accumulation of debt. Piles of it. Whole 
mountains of debt. Keynes himself said that the debt 
accumulated during a stimulus program has to be paid 
back out of the subsequent recovery. Congress, to its 
sorry shame, forgot this part of the equation. 

We now have $6 trillion of "official" government debt. 
The interest on the debt already eats up a third of 
government revenues. And it never goes away - except by 
paying it or repudiating it. Normally, debt can only 
accumulate to some limit. One limit, obviously, is when 
total debt service eats up 100% of revenues. In reality, 
it is a much lower amount. And when that point is 
reached, the game is over. Normally. 

Enter the central banks. After three decades of fiscal 
stimulus by Congress, the geniuses at the Fed decided 
the economy also needed direct, constant monetary 
stimulus - to help the government pay the interest on 
the ravenous debt. 

The Fed, you'll recall, is a government-mandated, semi-
secret club of the banks, all meeting together behind 
closed doors. Their "job" is to safeguard the banking 
system. They set monetary policy for the government in 
the name of "the common good." Meaning: "making sure the 
banks are profitable."

Since the Fed does not actually have any money to pay 
for anything, they invent magical money. It literally 
appears on a whim, out of thin air, onto account 
balances at the bank. The Fed says, "I have - presto! - 
money! Take this money and sell me some of that 
government debt you are holding. Look, now you have 
money to lend!" 

This is such an obvious fraud that it is also obviously 
only an emergency power of the Fed. It was not supposed 
to be used as "party favors" during the boom. But under 
the woeful stewardship of Alan Greenspan through the 
90s, that is exactly what it became. 

Week after week, month after month, year after year, the 
Fed poured pure adrenaline into the banking system. It 
wasn't just for investors that Alan Greenspan pronounced 
the mania as "irrational exuberance." He was also 
describing the actions of the Fed. The operative word 
is, of course, "irrational." 

It is not rational to expect that fiat money will 
forever hold it's value. It never has. It is
not rational to expect that a stock market will forever 
go up. None ever has. It is not rational that a country 
can forever spend more than it makes. None ever has. It 
is not rational that debt can grow forever larger. It 
never has. It is not rational to believe that a 
government can keep getting bigger forever. None ever 

The enormous amounts of money magically brought into 
existence during the decade of the 90s also made 
superstars of every hotshot with a penchant for numbers 
and access to Other People's Money. In each case, it was 
a matter of cleverly coming up with another idea to 
"free up" untapped sources of money, and putting it "to 

Receivables were constantly sold forward, ordinary debt 
was broken into weird little pieces and sold at 
premiums, unrealized profits were borrowed against, 
equity in anything was borrowed against, futures bought, 
options sold, etc. The velocity of money zoomed, as the 
vortex twirled round and round, twisting tighter and 
tighter, sucking in more and more money with each 

The Japanese, for their part, lent mountains of money at 
zero percent interest, which was immediately snapped up 
around the globe and plowed into something, anything, 
making that "something" go up in value. You could almost 
hear them exclaim, Frankenstein-like, "It lives! We are 
geniuses!" You can still hear the echoes of the masses 
replying, "You ARE geniuses! You are gods! Here's my 

Add the newly formed IRA's, 401(k)'s, and a plethora of 
retirement plans, and trillions of dollars got sucked 
into the stock and bond markets. Interest rates dropped 
when the money went into the bond market. Investments 
boomed liked nobody's business when it went into the 
stock market. IPO's! Mergers! Acquisitions! 
Construction! Houses! Malls! Real estate! Antiques!

Congress, always eager to butt into everything, passed 
NAFTA, GATT and God-knows what all free trade stuff. 
Companies moved production of goods offshore, taking 
advantage of the wide differential in wages and 
regulatory burdens to fatten bottom lines. The goods 
were then imported into the USA for manic Americans to 
buy, via credit. 

And credit was everywhere in abundance, because money 
was everywhere in abundance. And the Americans bought 
everything that was offered! By the ton! Consumer credit 
soared to $1.6 trillion! Commodity prices tumbled, as 
hard-scrabble foreign nationals now had cheap entry to 
the US for their low-tech commodities production, and 
thus kept primary inflation at bay.

No wonder services boomed! What else is there to buy, 
now that we are chock-a-block full of TV's and cars and 
houses and vacation property and investments and 
snowmobiles and vacations and swimming pools and videos 
and clothes? We actually thought we could have an 
economy based on services. Laid off from the plant? Who 
cares? Get a job in services! The factory production of 
actual tangible products is absent in the U.S.A.? No 
problem! Get a job in services! 

So, here we are. Debt up to our eyeballs for toys that 
are mostly broken and old. Debt up to the government's 
eyeballs. Debt up to the state's eyeballs. A fiat 
currency. A gargantuan government. A huge trade deficit
and a huge current account deficit (meaning goods 
shipped in and dollars shipped out of the country) to 
provide the consumer goods, while we merely peddle these 
imports and services to one another. A nation of retail 
clerks and hairdressers today, a nation of pyramid-
builders and quarry workers yesteryear.

So what is so different now? Nothing. Another page in 
history, telling the same old story over and over again. 
Mogambo sez: if the story is always the same, why should 
we expect the ending to be any different? 


Richard Daughty,
for The Daily Reckoning

Richard Daughty, general partner and C.O.O. of Smith 
Consultant Group, serving the financial and medical 
communities, is the writer/publisher of the Mogambo Guru 
economic newsletter, an avocational exercise the better 
to heap disrespect on those who desperately deserve it.

* * * * * * * * * * Advertisement * * * * * * * * * * *


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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 17, 2001

Published By Tulips and Bears LLC