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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  War and Inflation

*** Gold down. Euro down. Commodities down. Deflation 

*** Consumers give credit cards a rest...

*** Ad budgets slashed...employees slashed... 
entertainment budgets slashed...slash, slash, slash...

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Gold dropped $4.50 yesterday - to $263. The euro 
fell to 89 cents. Commodities fell to a new low. "For 
the first time in years, Americans start to give their 
credit cards a rest...," declares a Houston Chronicle 

And..."Virtually all of the world's major 
economies have broken decisively to the downside in the 
past few months," reports Stephen Roach from Tokyo.

Prices are falling in Taiwan, with the CPI down 
.5% year to year...and wholesale prices down even more. 
Japan, meanwhile, is in its 4th recession in a decade. 

Worldwide deflation...get used to it. 

"The glass-half-empty folks might see our country 
today as a land of frightening terrorist plots, falling 
corporate earnings and bad TV sitcoms," writes Eric Fry 
from New York, "but clearly, Mr. Market sees something 
else altogether - something hopeful, something upbeat, 
something so positively marvelous that it is worth 
almost 40 times annual earnings." Though they suffer the 
torments of Job...investors still believe...

Here's the rest of Eric's report:


Mr. Eric Fry in New York:

- The stock market is going up because it is going up. 
Who are we to quarrel with it? Like pierced tongues and 
facial tattoos, some things just seem to happen...for no 
good reason. 

- The Dow gained nearly 2% yesterday, rising 173 points 
to 9,377, while the Nasdaq advanced more than 2%, to 

- It would be nice if Mr. Market would let us in on what 
he sees because, to the naked eye, the economy and the 
stock market don't look so good. 

- Case-in-point: SBC Communications announced yesterday 
it would cut several thousand jobs, trim next year's 
capital budget by 20% in and delay the build-out of its 
broadband network. The telecom giant is hardly alone in 
declaring that it plans to save money next year, not 
spend it. (To refresh: spending is good and saving is 

- Company after company has been reporting terrible 
earnings lately...the market is rallying anyway, which 
prompts's Igor Greenwald to suggest doing 
away with "reporting season" this quarter. "The hundreds 
of public companies reporting earnings over the coming 
week should save their breath, red ink and crocodile 
tears," he writes. "A single press release will do: 'The 
170-odd S&P 500 companies reporting this week announced 
a 20%+ drop in third-quarter profits, after subtracting 
very special charges in a procedure no one should try at 
home. Those results beat, by a penny a share here and 
there, forecasts those companies supplied three weeks 
ago...Business, meanwhile, is still slow.' No fuss, no 
muss, no annoying conference calls." Igor's got a point. 
Business, indeed, is still slow.

- Many companies are slashing their advertising budgets, 
along with every other budget they can find. The media 
executives from across the country who convened at the 
annual American Magazine Conference in Manhattan 
yesterday all griped about the grim outlook for ad 
spending. Frederick Hill, executive vice president of 
marketing and communication for J.P. Morgan Chase told 
Crain's magazine, "Our advertising dollars will be 
curtailed until the second quarter of 2002."

- As ad budgets fall, so do entertainment budgets, and 
that's bad news for the restaurant trade. Many Manhattan 
restaurants continue to do a steady business in the 
aftermath of skyscraper bombings and anthrax attacks, 
although most are not serving "organic mixed greens," 
"seared tuna steaks" and "tiramisus" the way they used 
to. According to Crain's, "some 15,000 jobs have been 
lost and hundreds of eateries in the highly fragmented 
industry face the possibility of going out of business 
by the beginning of next year..." 

- But the Big Apple's loss is the burbs' gain. I dined 
Saturday night at a restaurant in Westchester County, 
about an hour north of Manhattan. The place was packed 
to its rustic 300-year-old rafters. "Ever since Sept. 
11th," the manager explained, "we've been very busy. 
Customers say they don't want to go into Manhattan. So - 
I hate to say it - but terrorism has been good for us."

- Terrorism might also be good for the oil market. John 
Myers, editor of the Resource Trader Alert, is not 
afraid to say it: "Osama bin Laden and the Taliban are 
getting the lion's share of attention, but the most 
important player in the Middle East is Saudi Arabia. 
Beneath the Saudi desert sands lie one-third of the 
world's oil reserves, much of which can be developed for 
less than $2 a barrel. The pro-American sheikdom is 
OPEC's swing producer, able to dictate prices and make 
up disruptions to the world's oil supply.

- "But Saudi Arabia may also be an oil empire on the 
brink," Myers warns. "The events since September 11 have 
increased the tension between the U.S.-friendly Saudi 
government and the radicalized Saudi populace to the 
point where the stability of the Saudi government is 
more threatened today than it has been since the last 
revolution in the 1930s...If Saudi Arabia were to fall 
into chaos, crude prices would probably spike to more 
than $80 a barrel - perhaps even higher." (see: The Wolf At The Back Door)

- At the very least, keep a full gas tank at all times.


And back in Paris...

*** It's a rainy autumn day. The leaves on the linden 
trees outside my office have turned yellow. But it is 
still as warm and delightful as a fresh croissant and a 
cup of long as you don't read the paper.

*** The news is dreadful. Germany just registered its 2nd 
sharpest collapse in business sentiment since WWII. 
Italy just uncovered a vast network of terrorist cells 
all over Europe. Argentina is about to default on $132 
billion in foreign debt. And the editorial pages are 
full of the worst drivel I can remember...about which 

*** I'm going to see "Irma La Douce" at the theatre 
tonight. I'll give you a report.

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by Bill Bonner

"I don't care about money really; it just settles my 

George Foreman

"Inasmuch as this is the first full-blown recession in 
the modern day era of globalization," writes Stephen 
Roach, "the contractions around the world now seem to be 
feeding on one another." What could put an end to this 
vicious circle, he asks.

"Even with a mild recession in America," adds the 
Economist, "...this could still turn out to be the most 
severe world recession since the 1930s." 

What might head off a '30s-style recession? You know the 
answer, dear reader: war. 

Why is war supposed to be good for an economy? 

We ask the question, not because we don't know the 
answer, but because we think it is too seldom posed. 

The common answer is simple. 'War is good for a sluggish 
economy, because it is inflationary.'

In wartime, governments drop their feeble inhibitions 
and take up the task of destroying their currencies as 
though their lives depended on it. 

War "is always wasteful, no matter how just the cause," 
noted James Grant recently. "It is cost without income, 
destruction financed (more often than not) by credit 
creation. It is the essence of inflation."

It is what economists call a "deadweight loss," 
destruction without creativity, a lose-lose situation... 
a cloud with no silver lining. A tank may be a useful 
thing to have - at the appropriate moment - in the way a 
fire extinguisher is useful. But neither adds much to 
our quality of life - except by preventing an even 
bigger catastrophe. 

Inflation can be described as an abundance of money 
chasing a scarcity of goods and services. Wars destroy 
the goods and services we really want - houses, cars, 
crops, restaurants - thus, they are biased towards 
inflation. What's more, in wartime, governments spend as 
if there were no tomorrow...deficits explode...and 
central banks do their best to expand the money supply.

But wars also destroy confidence, credit, and trade. 
Fighting unsettles the nerves of millions of people. It 
causes consumers to clutch their money just a little bit 
tighter and hold onto it just a little bit longer. And 
it causes businessmen to close down unprofitable 
operations sooner, rather than later...and to forestall 
new capital investments. It cuts sales, squeezes 
profits, and quiets the shipyards and truck terminals, 
as the volume of trade falls. 

In the present conflict, the U.S. finds itself fighting 
on two fronts - against terrorism...and against 
deflation. On the first front we have the word of the 
president that the battle is going well. But on the 
second, the battle against deflation, the news is not 

The Economist notes a disturbing feature of the world 
economy. "Margins are at their lowest level at any time 
in the past half-century." Companies cannot raise 
prices. "Estimates of the global output gap (the extent 
to which output is below its potential) suggest that it 
has increased to its widest since the 1930s. High excess 
capacity around the world looks likely to push inflation 
down faster than in past world recessions."

In America, for example, factory output in America fell 
for the 12th month in a row in September. Capacity 
utilization is down to its lowest level in 18 years and 

When people were flush with confidence, cash and credit, 
they built new factories. Now they are flush with 
factories and what factories produce. Not only is there 
too much of just about everything except Cipro, the 
world's factories can turn out a lot more. Credit is 
still available but lenders are getting worried. People 
are getting low on cash...and confidence is still strong 
among na�ve investors...but shaken among people who know 
what they are doing. 

"Let's put a final nail in the inflationary coffin," 
suggests my old friend John Mauldin. "Prices are in 
retreat. The Philadephia Fed reports, "For the fourth 
consecutive month more firms reported paying lower 
prices for their purchased inputs (24 percent) than 
higher prices (2 percent). The current prices paid index 
fell from -13.2 in September to -22.1, its lowest 
reading in the history of the survey. With regard to 
prices of their final manufactured goods, more firms 
reported decreases (22 percent) than increases (7 
percent). The prices received index fell slightly from -
12.2 last month to -14.9." 

"This is price deflation," John continues. "There is no 
other way to interpret it. 'The lowest reading in the 
history of the survey.' Only a few industries have any 
ability to maintain or raise prices.

"The US has not experienced numbers like the above for 
over 60 years. That is because we have not been in a 
deflationary environment for over 60 years.

"There is a global glut of capacity. I predicted this 
two years ago, and now it is sadly coming to pass. In an 
optimistic wind the world built more factories to build 
more things than we can actually buy, much less afford. 
Now we reap the whirlwind of companies and nations 
competing on price to keep those factories busy."

By a margin of almost 4 to 1, Americans say they intend 
to reduce debt levels and increase savings. They are 
still refinancing their homes - but new home financings 
have dropped sharply since Osama bin Laden became the 
most hated man in Christendom since Saladin. People do 
not trade up in wartime. 

"This is major league deflationary," concludes John, who 
has his office in the Texas Rangers' stadium. John 
raises another ominous feature of the slump: "the 
velocity of money...has dropped to the lowest point for 
18 years. (I can find no data from before that time.)"

In a boom, people enjoy the confidence of CNBC and 
rising portfolio statements. But in a slump, they find 
themselves on their own...and take a little comfort from 
the crisp bills in their wallets and the jingle of coins 
in their pockets. Money circulates less quickly...and 
prices fall.

Your writer in residence...

Bill Bonner

For more from John Mauldin visit the Millenium Wave 
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 23, 2001

Published By Tulips and Bears LLC