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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
THURSDAY, 25 OCTOBER 2001 

 

Today:  Sometimes A Great Nation

*** Amazon...Cisco...and a company with NEGATIVE 
revenue!

*** Congress stimulates...but, patience, urges Barton 
Biggs...

*** Security costs mount...the cost of inventory 
rebuilding...as "just in time" becomes "just in 
case"...and more!

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Conveniently, the WTC attacks are being blamed for a 
surprise "slowdown" that has rocked the U.S. economy. 
Suddenly, it seems, corporate profits are dropping; 
investors are less sure...consumer confidence has been 
shattered. 

But...the writing WAS ALREADY ON THE WALL!

And according to one of the world's leading economists, 
we "ain't seen nothing yet." Experience proves that if 
you've been listening to the Fed's high-octane "new 
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Amazon.com - the river of no returns - just keeps 
rolling along. It announced losses of $169.9 million for 
the 3rd quarter, down from $240.5 million lost in the 
same quarter last year. Sales were flat. But the company 
said it would still produce a breakeven 4th quarter, on a 
pro-forma basis. That means if it ignores enough 
expenses, it can show a positive bottom-line number. 

But even "pro-forma" couldn't save a company 
called 360Networks. Its revenue for the 2nd quarter was 
neither up, down, flat, nor zero. The company - now 
enjoying the protection of the bankruptcy courts - had 
previously reported revenue before it got the cash. 

Then, when the contracts were cancelled, it had to 
subtract huge amounts, leaving it with negative revenue 
of $63 million. In addition, it lost $5 billion during 
the quarter. Shareholders are said to be holding "for 
the long term."

"Fed Sees U.S. Economy Struggling," says the BBC. 
The Fed's Beige Book of regional reports showed almost 
no area spared from the slump. But the Fed found no 
evidence of inflation either. There was "little upward 
pressure on either wages or prices." 

Prices refuse to rise - despite the best efforts 
of the Fed and Congress. The House passed a $100 billion 
stimulus bill yesterday. And the Fed prepares for its 
10th rate cut - expected next month, if not sooner. 
Still, long bonds rose yesterday and gold has been 
sinking to near 25 lows. 

"This is what is so astounding," writes Gary 
North. "...there has been no visible increase in long-
term rates...The bond market has actually risen, and the 
stock market has fallen in response to 9 consecutive 
reductions in the federal funds rate. This runs counter 
to previous experience, except during the Great 
Depression.

"Investors have become afflicted with what I call 
Japan Syndrome," Gary continues. "The Japanese central 
bank has lowered short-term interest rates to almost 
zero, but the Japanese economy remains in recession and 
the Japanese stock market is in the pits. This is now 
happening to America."

But, let's turn to Eric to find out what happened 
to Wall Street yesterday:

*****

Mr. Fry in New York:

- Remember when Amazon shares seemed to go up every day? 
No price was too high to pay for this icon of the new 
economy...or so it seemed. As it turns out, of course, 
almost any price was too high to pay, and the stock is 
falling still. Amazon shares dropped another 20% 
yesterday, after reporting disappointing earnings.

- Meanwhile, for no apparent reason, the shares of 
fellow new economy refugee, Cisco Systems, gained 5%. 
Perhaps Cisco shares rallied on the misguided notion 
that "things can't get any worse." Whatever the reason, 
the networking company's shares led the Nasdaq Composite 
27 higher to 1731. The Dow gained 5 points to 9,346.

- "Patience," counsels Barton Biggs, the veteran equity 
strategist at Morgan Stanley Dean Witter. "There should 
be a better opportunity to buy." 

- Biggs offers several reasons for caution. "First, the 
second stage of the war against terrorism almost has to 
involve Saddam Hussein...Second, the U.S. and world 
economies are weak and weakening...Third, [my personal 
favorite] stocks are still not cheap. Fourth, investors' 
equity ratios are still too high and cash levels too 
low. Fifth, the American consumer bubble has still not 
been burst..."

- The average U.S. corporation is earning less money 
this year than last. These same average U.S. 
corporations face slackening demand for their products. 
And now, they face the considerable direct and indirect 
costs of operating in an increasingly security-obsessed 
nation. (Wasn't it so much easier two years ago when we 
were simply a securities-obsessed nation - far less 
worried about Osama bin Laden than we were about where 
Cisco bin tradin').

- Some companies will bear direct costs. For example 
TrizecHahn, manager of the Sears Tower in Chicago, is 
spending millions to beef up the skyscraper's security. 
"[TrizecHahn] has installed concrete barriers around the 
perimeter of the tower," Bloomberg reports, "and hired 
security firm Kroll Inc. to evaluate security at the 
tower...Additional security staff alone could represent 
as much as $1 a square foot in rent."

- The indirect, or "hidden," costs that many companies 
will incur could be even more expensive. For example, 
some companies are deciding to increase inventories on 
hand because of the risk that future terrorist acts 
might disrupt their supply-chains.

- "Holding higher inventories is a cost," reminds 
economist Paul Kasriel, of Northern Trust. "You have to 
finance them or forgo some other use for your funds."

- "Inventories have fallen from 17 percent of GDP to 
11.6 percent of GDP over the last two decades," 
according to James Bianco of Bianco Research. By his 
estimates, it would cost about $600 billion to take 
inventories back up to 17%. Any move in that direction 
will cost tens of billions of dollars, at least. 
Therefore, to the extent companies restock their 
depleted cupboards, reported earnings will suffer. 

- "In 1988, 'The Just-In-Time Breakthrough,' by Edward 
J. Hay, was published, a paean to the management methods 
pioneered by Toyota and credited with making Japanese 
manufacturing invincible," Jim Grant writes. "Strive for 
'absolute minimum resources,' Hay advises, 'the smallest 
possible quantity at the latest possible time in the 
elimination of inventory.'"

- The pendulum may now be swinging in the opposite 
direction. Already, Toyota - the company that started it 
all - has begun "increasing its inventories," according 
to Bloomberg, "[because] winter snows in previous years 
had made it difficult to keep its supply chain going." 

- As Grant notes, "We wonder if, during a wartime 
recession, business practices won't veer from just-in-
time to just-in-case. Seeking safety in the things they 
can control, managers may begin to stockpile more 
inventory..."

- First consumers become savers. Now, just-in-time 
managers are becoming pack-rats. Woe to us all. The 
"recovery" that a growing chorus of Wall Street 
strategists say is now underway looks increasingly like 
a zero-sum game. Yes, some items are selling better, but 
only because some items are selling worse.

- Numerous auto industry observers report, for example, 
that new cars are selling briskly this month, thanks 
mostly to zero-interest rate financing deals. But used 
cars aren't selling at all. Maybe the auto manufacturers 
are just shifting deck chairs around on a sinking ship - 
the S.S. American Economy.

- "Automakers' no-interest financing offers have 
stimulated new car sales but also have created a glut of 
used cars," says USA Today. "Jerry Reynolds, owner of 
Prestige Ford in Garland, Texas, says his used car 
inventory has swollen to 600 vehicles instead of the 
usual 250 on the lot this time last year."

- Fasten your seat belts, the U.S. economy is in for a 
bumpy ride.

*****

Back in Paris:

*** This from the Mogambo Guru: "At the beginning of a 
recession/depression investors are bidding the S&P 55 to 
record-setting P/Es. Company after company is decimating 
the ranks of its employees as sales disappear. Company 
after company is admitting to failed earnings and with 
no expectations to reverse that sorry state anytime 
soon. And yet, here are supposedly intelligent people 
blithely throwing their money at a probably overvalued 
stock market! My God! What are they thinking about? 
Can't they even read a newspaper?"

*** Economist Diane Swonk expects consumers will stay 
"home for the holidays" this Thanksgiving and Christmas. 
She believes the terrorist attacks, combined with 
declining earnings, will produce a "cocooning effect." 
Sales will be flat, except for companies selling home 
improvement products, she predicts.

*** "I had a regular client once - a real sweetheart," 
says one of the loveable prostitutes in Irma La Douce. 
"He was such a good customer. He came to me for 
consolation. But then, his wife died and he stopped 
coming," she continued. "He didn't need me any more."

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SOMETIMES A GREAT NATION

"For which of you, intending to build a tower, sitteth 
not down first, and counteth the cost?"

Jesus of Nazareth, 
Luke 14:28-32


When terrorists struck on Sept. 11, we had the feeling 
that the world had crossed an important bridge...and 
that there was no going back. We sensed the boom world 
of the late 20th century was finally finished. We 
wondered what would replace it...

We still don't know, of course, but as dawn lights up 
the world of the early 21st century, little by little the 
hills, trees, houses and factories comes into view...

It is not a pretty picture. 

The main feature of the landscape we see is that the 
comic mania for wealth of the '90s has been replaced by 
a tragic passion for revenge and war. The word "tragic" 
is part description and part anticipation. For we see 
little good coming from the present enterprise.

The guardians of the nation's security are bombing one 
of the poorest, most God-forsaken countries on the 
planet. Afghanistan was chosen because its government 
harbors a man who is wanted for questioning - Osama bin 
Laden. What his role in the terrorists' attack on the 
Twin Towers and the Pentagon was, no one seems to know. 

But once evidence was shown linking Bin Laden to the 
attacks, Afghanistan's ruling Taliban offered to 
negotiate. It was too late. America's military was 
already moving towards war as if it wanted one.

But against whom? For what? Why not negotiate? 

"Should the attack be considered an act of war?" asked 
Doug Casey in this space yesterday. As far as we know, 
no government was involved in the attacks on the WTC and 
Pentagon. But instead of merely attempting to bring the 
guilty parties to justice, the Bush administration has 
decided to strike back at a foreign country and announce 
a "war" on terrorism. 

It is a war out of "1984" - a war that may never end 
against an enemy we can never quite identify. But as 
long as the flags are waving, people seem willing to 
support any fool project or expense.

"What the American public has not been told," writes 
Gary North, "is that our attack on Afghanistan has been 
in the works throughout 2001. The war in Afghanistan was 
in the planning stages no later than June." That is 
probably why negotiations weren't undertaken...and why 
U.S. troops were so quickly allowed into former Soviet 
republics. There was advance planning - probably 
contingency planning - already underway. Perhaps Russia 
and the U.S. were looking for a way to take out the 
Taliban anyway.

Will the "war" end well? Will it ever end? We have no 
way of knowing. But we fear that this war against 
terrorism might actually make Americans less safe. For 
while the U.S. tries to topple one corrupt, incompetent 
regime in Afghanistan, it tries to prop up another in 
Saudi Arabia. The risk is that it will succeed in the 
first effort...and fail in the second - just as Osama 
bin Laden seems to want. That is the trap he has set for 
America. Luring the U.S. into a war in the Middle East, 
he hopes that the shaky, irresolute aristocracy of 
Saudia Arabia may - like the Romanoffs in Russia in WWI 
- come crashing down. He may be right. The mistakes of 
nearly 100 years ago may be repeated.

"It's time to start facing the truth," said a "prominent 
Middle Eastern oil man who did not wish to cited by 
name" in the current issue of the New Yorker. "This war 
was declared by bin Laden, but there are thousands of 
bin Ladens. They are setting the game - the agenda. It's 
a new form of war. This fabulous military machine you 
have is completely useless." 

The Saudi regime "will explode in time," he added. If 
and when it does, oil will probably go to more than $100 
a barrel...and the essential ingredient of modern 
economies could be under the control of a Saudi-style 
Taliban. 

"I think we're edging closer and closer to a time where 
global military, political, and economic events spin out 
of the control of those who think they are in charge," 
writes Dan Denning in our "Blue" service. "The 
assassination of a cabinet minister in Israel could 
easily be the type of unanticipated event that tips the 
scales of diplomacy and plunges the entire Middle East 
into greater chaos. Or it could be the gathering storm 
of unrest in Saudi Arabia. Each day I read more and more 
stories about how vulnerable the house of Saud is, and 
how they have essentially been paying 'protection' money 
to Islamic fundamentalists to prevent a revolution."

Meanwhile, what actually is going on in Afghanistan is 
anyone's guess. There is precious little "news" coming 
from the news media. The guardians of truth and 
information have come down with war fever along with 
everyone else. When bin Laden offered to explain himself 
on video, for instance, both George Bush and Tony Blair 
tried to prevent the news media from broadcasting his 
statement...on the preposterous grounds that the message 
"might contain coded messages" - an absurdity so 
transparent that even a TV newsman could see through it. 
Yet, the western press generally went along 

Who knows what the war itself will cost. But "estimates 
of the cost of the new Homeland Security Department 
alone," writes Gary North, "indicate $1.5 trillion over 
the next five years."

That is just the beginning. But in the addled mind of 
the public and newspaper columnists the more the better. 
Every dollar spent - no matter how it is spent - is 
expected to contribute to the "stimulus" that will lift 
the economy out of its slump, return stocks to their 
bull market highs, and save America's spendthrift 
debtors - private and corporate - from getting what they 
deserve.

Anything might happen. Osama bin Laden might convert to 
Catholicism. But it is a bad bet. 

"If [investors] are serious," explains Gary North, "they 
won't pay any attention to stock market hypesters who 
spout some nutty version of "war is good for business." 
War is rotten for business. It leads to higher taxes, 
more government controls, less privacy, more deception 
by leaders, more inflation and a reallocation of 
resources from the private sector into battlefields. 
When steel is used for guns, it is not used for 
refrigerators and cars." 

And the cost of the war will not just be a lot of 
money...

"It is possible, if not likely, that we will rely more 
on international rules of war than on our cherished 
constitutional standards for criminal prosecutions in 
responding to threats to our national security," said 
Supreme Court Justice Sandra Day O'Connor, speaking of 
the very thing she has sworn to protect. "As a result, 
we are likely to experience more restriction on our 
personal freedom than has ever been the case in our 
country."

The guardians of the nation's liberties have apparently 
decided to act like the guardians of its money. There is 
a time, they reason, to protect liberty in America...and 
a time to destroy it. 

"I read the most amazing thing in the Figaro," said my 
friend Michel at lunch yesterday. "Apparently, the 
courts in America wouldn't allow torture within the 
U.S., so the FBI is going to send suspected terrorists - 
or maybe tax evaders - to foreign countries where they 
will be tortured before returning them to the U.S."

Meanwhile, the House of Representatives, yesterday, 
approved a $100 billion stimulus package. What good will 
it do? Probably none. 

But in war, as in love, you do not stop to count the 
costs. Caught in the collective hysteria of military 
campaigns...or the private madness of romance...who can 
take the time to add up the figures? The accounts are 
pushed off, debts left to pile up. Sooner or later they 
will be have to settled. But in the heat of passion, any 
price seems trivial compared to what is at stake.

Your editor, trying to keep his head about him...

Bill Bonner


P.S. Here at the Daily Reckoning, we don't mind taking 
unpopular positions. When stocks were at record highs in 
the late '90s, we warned that they would soon come down. 
Some readers, who had staked their financial futures on 
the bubble market, were offended.

Some will, no doubt, be offended by our views on the 
present war. 

But we do not merely honor free speech or celebrate 
it...we practice it...gulping it down like a man's first 
beer after being released from jail. We like the feel of 
the foam on our upper lip...and let it dribble from our 
chins. "If the U.S. does not stand for freedom of 
thought and speech...for diversity and dissent," writes 
George Monbiot in the Guardian Unlimited, "than we have 
been deceived as to the nature of the national project."

 
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 28, 2001

Published By Tulips and Bears LLC