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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Kiwi Bonds

*** Value is back! Investors are still very bullish...

*** Money rushing into equity funds...but not tech funds... 

*** Three quality slipping...euro 
holding...Edward turns 7 on this, the anniversary of the 
most devastating single event in 20th century history...

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*** There was a "return to the tried and true," yesterday. 
In with the Old - out with the New. "Value investing" is 
back in style, said the International Herald Tribune.

*** The Dow rose 159 points. It is now only down 4.5% for 
the year. 

*** The Nasdaq fell 35 point. It is off 16% for the year. 

*** But investors have short memories. They seem unable to 
recall the world in which George W. Bush got arrested for 
drunk driving, when the Dow was below 1,000 - and sinking. 
The 'old' - in investors' collective memory - goes back no 
farther than 1982, when the Dow began the longest and most 
impressive bull market in history. 

*** Despite disappointments in dot.coms and now Big Techs, 
people are still very bullish. Richard Russell reports that 
last week $11.4 billion of new money went into equity 
mutual funds. Through August, the year-to-date total was 
$255 billion - twice the level of a year ago.

*** The public now owns $4.4 trillion of mutual funds - a 
figure that was only $1.3 trillion in 1995.

*** But while the public still believes in stocks, it seems 
to have lost faith in Technology. Cisco fell 1 5/8 ahead of 
announcing its results. Then, after the market closed, 
Cisco said it beat estimates by the usual penny. Still, in 
after-market trading, Cisco shares fell.

*** Cisco announced that sales and profits were up 67% 
above last year. But the "actual net income" was only 11 
cents a share - about the same as last year. The stock, 
once $82, now trades at $55 - still about 70 times 

*** "When Cisco Systems tells Solectron Corp. to jump," 
writes Grant's Investor Eric Fry, "the contract 
manufacturer says, 'How high?'" After all, some 12% of 
Solectron's revenues come from making widgets for Cisco. 
But when it comes to creative accounting, Solectron can 
hold its own. "[Selectron] will report what it wants, how 
it wants. And if the company feels like revising its fiscal 
2001 earnings forecast both higher and lower on the same 
day, it will do that, too..." (See: Earnings Went Thataway)

*** Linux fell 42% to $17 and change. It was $320 a year 
ago. What were investors thinking?

*** "The evidence is in," writes Uncle Harry Schultz, who 
economizes on verbs and articles, "Tech funds are 
shrinking; value funds increasing (in number & price). 
Nasdaq in major downtrend; DJIA hanging in here. My longer 
view: Nasdaq bear market will continue til decimated. But DJIA 
will stagger sideways in wide trading range, shorterm, 
benefiting from money flowing out of tech. 'Tech' will be 
the new dirty 4-letter word."

*** Richard Russell: "My own belief is that the public will 
remain bullish unless or until the Dow breaks below its 
bear market low of 9796.03, the low that was recorded last 
March 7."

*** Since I am surveying sooth-sayers, I will say some 
sooth myself: I don't think there are many Dow Theorists 
among the lumpeninvestoriat. The 9796 mark will come and go 
with hardly a soul noticing. Investors will not abandon 
stocks willingly. They will have to be destroyed by them 

*** William Fleckenstein quotes Justin Manis on how the 
bottom will be reached: "Changing valuations from crazy to 
merely excessive is not the way a bottom forms... 'fair-
value' if such a thing exists at all, is never a market 
bottom, because historically important bottoms are made at 
extreme undervaluations. 

"If/whenever that 3,000 [Nasdaq] neckline is decisively 
broken," Mamis continued, "the floodgates of selling will 
open. Any declines that follow such break will terrify the 
public... Excuses that 'It's only a paper loss' will no 
longer ring true - the losses will look very real because 
the much higher prices they paid will no longer look 
achievable! Once someone knows he won't ever get his money 
back, his mind switches to the other extreme: 'Then the 
hell with it.'... the public sells down, not up." 
(see: Bubble Splat: The Week Gets Off To A Sloppy Start)

*** The WSJ includes a warning from Bruce Bent, who helped 
develop the money market mutual fund industry. Bent notes 
that the risk of holding money funds has quietly increased: 
"People are going into money funds," he says, "and they are 
not getting what they think they are getting." Fund 
managers have been increasing yields by buying more 
marginal paper - such as commercial notes, asset-based 
securities and short-term funding agreements. As Ray DeVoe 
put it, "More money has been lost reaching for yield than 
at the point of a gun."

*** The decline of credit quality was a major theme at the 
contrarian bear fest hosted by Jim Grant in New York last 
week. Our man on the scene, Thom Hickling reports: 

"The historic mortgage finance boom continues to drive a 
national real estate boom," according to Charles Peabody of 
Mitchell Securities. During the second quarter, 83% of 
household mortgagers took out loans at least 5% larger than 
the previous loan amount - or stated differently, they 
pulled out at least 5% equity. For comparison, during last 
year's second quarter only 58% pulled out at least 5% 

"Last year, 7 banks failed. Estimates are that 12 - 22 
banks will fail in 2000. And some think that the regulators 
are going easy on the big banks because of the elections. 
It could be setting the stage for many more bank failures 
to come. During the '91 recession 127 banks failed and 
nearly $6.2 billion was lost. 

"Bankruptcies will be heading up in 2001. There's about a 
18 - 24 month lag between big credit card marketing 
campaigns and ensuing rises in bankruptcy filings. After a 
slight downturn, filings are moving up again...well over 
300,000 in the 2nd quarter of this year. 

"Expansion of credit card lines reached $2.8 billion a new 
record. Credit card companies are aggressively marketing to 
higher risk clients."

*** Meanwhile, the euro held above 86 cents yesterday. The 
low point for the euro occurred on Oct. 25th at 82.96 cents. 
It is possible that the euro will collapse to lower lows. 
But is also possible that Great Currency Battle has turned 
against the dollar... Yes, more below... 

*** "An investor will succeed by coupling good business 
judgment with an ability to insulate his thoughts and 
behavior from the super-contagious emotions that swirl 
about the marketplace." - Warren Buffett.

*** My friend John Forde celebrates his birthday today, 
along with Leon Trotsky, and my son Edward, who turns 7.

*** This is also the anniversary of the Bolshevik
coup d'etat in Russia. For the next 70 years, Russians were 
trapped by the logic of communism and the terror of the 
KGB... Americans are now trapped too, albeit much more 
comfortably, by the logic of democracy and the terror of 
the IRS.

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""[W]hat the United States owes to foreign countries it 
pays - at least in part - with dollars that it can simply 
issue if it wants to." 

Charles de Gaulle, 
President of France

"I agree that the dollar is probably over-rated," wrote a 
Daily Reckoning reader, in response to my harping on the 
subject, "but if not the dollar...what? Surely not the 

Longtime Daily Reckoning masochists know that we live in an 
imperfect world. Justice is not meted out with the 
regularity and fluidity of laxative elixirs; nor are fools 
as quickly or dependably separated from their money as, 
say, married men or IRS audit victims. Even the earth 
itself tilts on its axis... and migratory birds, responding 
to the seasonal impulses triggered by the listing globe, 
sometimes get lost. 

And yet, somehow, sometime, somewhere - the books are 
balanced. People get what is coming to them. After 180 
days, the sun is back in the sky as it used to be...and 
life goes on.

With this rather poetic approach to the mishaps and cycles 
of life, we take yet another peek to see if we can spot 
that yeti of the currency markets - the bottom of the euro. 
We will also suggest an alternative. 

The trigger for this reflection, should you wish to blame 
someone, was an article in Grant's Interest Rate Observer 
( In this piece, Grant proposes 
an answer to the question posed by our reader above. If not 
the dollar, what?

Well, the New Zealand dollar...for example.

The fall of the dollar has never been a popular theme with 
Americans. It does not resonate in the collective 
imagination the way "the top 1% of taxpayers" or "saving 
Social Security" does. Americans feel they have little 
direct stake in the international value of the dollar. So 
what if it falls? Doesn't that make U.S. goods more 
competitive on global markets?

Yes, it does. And the fall of the dollar is not a bad 
thing, in any case, just like the fall of the Big Techs is 
not a bad thing. Both are merely the market's way of 
restoring balance - and making sure people get what they 
have coming to them.

That is probably the disturbing point to most Americans. 
After a spending spree that has been going on for 
years...and one that has driven savings rates down to 
negative levels...there must be many people who ask 
themselves, perhaps in a quiet moment, when CNBC is turned 
off, how it could be that they are able to buy a new car or 
a new house, without earning more money or saving any?

There must be a nagging suspicion that there must be a 
catch somewhere.

The catch is the dollar itself - which has made this 
spending spree possible. 

Peter Bernstein, in his book The Power of Gold, observes 
that even the discovery of huge new supplies of gold in 15th 
century did not actually make the Spanish richer. The money 
came in from the New was spent...and it was 
gone. The world's supply of gold increased. But Spaniards 
got no lasting advantage. In fact, they were probably made 
poorer by the whole episode, as the easy money actually 
discouraged investment in productive enterprises.

The rising dollar has given Americans a similar increase in 
purchasing power. Foreigners were happy to accept it in 
payment for goods and services...and to lend dollars to 
American businesses and institutional borrowers. The circle 
seemed virtuous - Europeans saved, Americans borrowed. 
Foreigners produced. Americans bought. U.S. corporations 
(including mortgage lenders such as Fannie Mae & Freddie 
Mac) borrow the excess dollars accumulating in Europe, for 
example, allowing further consumption spending by 

Not only does the willingness of foreigners to lend money 
fund the current account deficit, it actually increases the 
value of the dollar. Grant explains: "To buy these 
securities [bonds issued by Fannie Mae, for example], they 
have obtained dollars by selling their own currencies, 
euros not least. In this way, foreigners underwrite more 
leveraged American balance sheets while contributing to the 
rise of the dollar exchange rate."

But at some point, for no particular reason and at no 
predictable time, the virtue of the circle is called into 
question. Perhaps, a slip of the tongue by Alan Greenspan, 
or Wim Duisenberg, or George Soros... maybe just a rumor... 
or a moment of clarity, such as the one that struck then-
president of France, de Gaulle, in 1965, when he observed 
that the Americans could not only pay for things with 
dollars but also control their value.

"What lends value to a paper currency?" asks Grant. "Is it 
approximately the same set of psycho-speculative factors 
that caused the boom and bust in U.S. Internet stocks? If 
the answer is 'yes,' as we believe it is, the currency 
markets are driven by momentum, not value."

Momentum will carry a collective sensation a long way. 
Whether it is a stock, an army, or (Edward's favorite) 
Pokemania, it can go much further than you might think. But 
fads eventually pass and financial assets are eventually 
marked down to their real values.

So what's the dollar worth? "We see in the dollar," writes 
Grant, "the world's least rare financial claim. Believing 
in neither a New Economy, nor an Old Economy, but only in a 
Cyclical, Evolving Economy, we refuse to accept that the 
world's demand for dollars is infinite."

There must be times when the shelves that hold dollar-based 
assets become temporarily over-stocked. It is impossible to 
tell for certain if this is one of those times or not. But 
since the world's press is so overwhelmingly favorable to 
the greenback, we can't help but think that supplies must 
be bountiful. A value investor with a contrarian streak 
might well decide to lighten up on the greenback, just in 

Which brings us back to the question at the beginning of 
this letter. If not dollars, what?

Grant's suggestion: Kiwi bonds. The New Zealand currency is 
down 40% over the last 4 years - from about 70 cents U.S. 
to around 40 cents. Readers of the world news will 
instantly identify a culprit - New Zealand's government 
took a left turn a year or so ago. And yet, bond yields, 
growth rates, interest rates and balance of payments 
considerations provide no corroborating evidence. On the 
fundamentals, the Kiwi dollar is no worse than other 

And yet, thanks to the momentum recently, and perhaps even 
still, favoring the U.S. currency, prices in New Zealand 
are marked down by 40% since 1996. Houses, stocks, 
businesses - all are available at a deep discount. Telecom 
Corp. of New Zealand is priced to yield 8%. Several of my 
friends report that beautiful farms and ocean-front acreage 
can be bought at giveaway prices. 

There are also Kiwi bonds. The 10-year note yields 6.75% - 
about a full percent more than similar U.S. notes. There is 
a risk, of course, that the Kiwi dollar could decline even 
further. But probably the greater risk for the average 
American is that it will not. We may have already seen the 
top in the dollar on October 25th. If so, Kiwi bonds will 
turn out to be very good places to sit out the bear market 
in U.S. stocks.

Your humble scribe... seeing euro bottoms everywhere he 

Bill Bonner
About The Daily Reckoning:
The Daily Reckoning... "more sense in one e-mail than a month of CNBC."  That's what readers are saying about The Daily Reckoning.

Bill Bonner, recognized internationally as a brilliant writer, entrepreneur
and publisher of The Fleet Street Letter, offers you his daily market
commentary absolutely FREE. For the first time, outsiders are getting a peek into his powerful and profitable investment insights. Bill's practical contrarian advice empowers even average investors to protect their hard-earned wealth and achieve amazing gains.

Bonner writes his email letter from Paris, France, each morning --
describing the wacky, wonderful world of investment, politics and everything remotely related. Irreverent. Sharp. Honest. Thoroughly, unabashedly contrarian. It's also among the fastest growing e-letter on the Internet.  It's a brand new service... but it has a distinguished history..

For nearly 62 year, The Fleet Street Letter, the oldest investment
advisory letter in the English language has consistently delivered
invaluable economic and political foresights to savvy investors. Current readers regularly enjoy impressive investment gains even as the market falters. Here's more from his online readers...

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Last modified: April 01, 2001

Published By Tulips and Bears LLC