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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  All Recessions Are Local

*** Rate cuts are like martinis...

*** Consumer debt staggering households...banks not card delinquencies at 25-year high...

*** Antibiotics selling briskly in New 
Bayer?...2nd largest bear market in 60 years..."guerilla 
investing"...cyber-thugs still at it...and more...

"The latest rate cuts are probably not going to 
stimulate a lot of new net borrowing," said Steve Wood, 
economist at FinancialOxygen, speaking to a reporter 
from "It's really not a cost-of-capital 
issue for most corporations at this stage. We still have 
a mass of excess capacity, both domestic and 
internationally. Business spending is not going to go 
anywhere no matter what happens to short rates," he 
said. "On the consumer side it's pretty much the same 

"I heard a good one on CNBC yesterday," adds a 
Daily Reckoning reader, "Rate cuts are like martinis. 
The first one really feels good. The next few are sort 
of ho-hum. By the time one comes to the tenth, everyone 
is numb."

After 9 cuts, short rates have gotten so low that 
banks can borrow below the rate of inflation. But people 
are numb to lower rates. "Banks are not increasing the 
size of their loan portfolios, as nobody is lining up to 
borrow," says the Mogambo Guru. "This is the old 
'pushing on a string,' where nobody wants to borrow 
money at any interest rate."

"Rising consumer debt may stagger households, 
economy," warns a headline from the Chicago Tribune. 
Then, a piercing insight: "More debt and fewer paychecks 
spell trouble because the combination pushes Americans 
to rethink their free-spending ways."


Rate cuts do nothing for credit cardholders. They 
are still paying 14%. Small wonder credit card 
delinquencies just hit a 25-year high...FHA loan 
delinquencies reached a new high, too, in the 2nd quarter 
- a little over 10%.

But a Fox poll says 71% of Americans are still 
optimistic about the economy. The dumb schmucks. 

Eric...what happened on Wall Street yesterday?


Eric Fry with his eyes on Wall Street:

- After the first two days of bombing in Afghanistan, 
investors couldn't reach any clear consensus about 
whether war is bearish or bullish. But bearish is the 
early favorite.

- Stocks fell for the second day in a row as the Dow 
dropped 15 points to 9,052 and the Nasdaq fell more than 
2% to 1,570.

- Clearly, war is a "not bullish" development for those 
being bombed. Then there's that whole bio-terrorism 
aspect to the current conflict...we'd have to put in the 
"not bullish" category, as well.

- The weather is gorgeous in New York this week and the 
locals are going about their day-to-day activities - 
frequenting restaurants, refinancing houses and stocking 
up on antibiotics. 

- "Retail purchases of the powerful antibiotic Cipro, 
the only medicine specifically approved for treatment of 
inhaled anthrax, are surging in New York City," the Wall 
Street Journal reports. As demand for Cipro soars, so 
does demand for the shares of Bayer AG, the German 
pharmaceutical company that makes the potent drug. Bayer 
shares gained 4% yesterday. 

- "Bayer is one of those rare win-win opportunities," 
says the Fleet Street Letter's Lynn Carpenter. "The 
shares are priced well below their intrinsic value, even 
if the company does nothing but maintain pace." Lynn 
recommended the stock (which trades in Germany) on 
September 27th - before the recent anthrax cases in 
Florida. They've jumped about 10% since. What's more, 
Bayer pays a 6% dividend. "This stock is only beginning 
to rally," says Lynn. (See: Take Two - This One Will Make You Feel Better)

- But even if the bio-terrorism threat helps to propel 
Bayer's share price, could any war ever be bullish for a 
stock market selling at 35 times earnings? 

- Remember that in 1982 the S&P 500 Index sold for eight 
times earnings. If tomorrow, the stock market were to 
return to eight times earnings, it would fall 77%.

- But a crash isn't the only way to restore value to a 
richly priced market. Instead, stocks might take the 
Japanese approach: Tread water for a decade or so, while 
waiting for earnings to catch up. Japanese stocks are 
still waiting.

- What about Fed rate cuts? Won't Greenspan jump-start 
the stock market? For a while perhaps, but interest rate 
cuts make a poor substitute for earnings nor can they 
neutralize the gravitational pull of rich valuations. If 
Mr. Market decides he wants to reestablish the balance 
between value and price, there's not much Mr. Greenspan 
can do. These rebalancing operations are known as "bear 
markets." And they've been known to occur from time to 
time. In fact, here's is happening right now.

- "This is now the second-largest bear market in the 
past 60 years," observes James Stack, editor of the 
Investech. "If it lasts through mid-December, it will 
then become the longest bear market in 60 years. The 
carnage is real and so are the losses, with the broad 
Wilshire 5,000 Index down 39.7% and the Nasdaq index off 
a whopping 71.8%. The overwhelming majority of investors 
never imagined such losses were possible."

- No doubt, this same overwhelming majority of investors 
is trying to imagine that their losses will turn into 
gains. They're trying to imagine that war is bullish, 
that earnings will rebound next year and that paying 35 
times earnings for stocks is a winning investment idea. 

- Maybe, if we all close our eyes and wish really 

- In short, folks, war is not bullish...until it is won. 
Down in the trenches on Wall Street, we investors must 
gird ourselves for a new kind of war. Call it "guerrilla 
investing." We'll need to figure out how to grow our 
total portfolio, even if the Dow is headed to 5,000. In 
other words, "buy and hold" may be a strategy best-
suited for producing capital losses. We'll need to be 
selective, patient, and intelligently diversified. When 
all else fails, we should not refuse a little luck.

- And what about the bond market? Is war bullish for 
bonds? "Looks like a good time to own debt rather than 
service it," says Bill. "Unlikely," I say. Stay tuned...


Back in Paris...

*** Yes, stay tuned. It should be an exciting show...

*** What's this? The most recent figures suggest that 
personal savings rates are shooting up - to 4%...from 1% 
a month or so ago. (As a point of reference, people 
saved 9% of their incomes in the early '80s.) Uh oh... 
despite the ravings of public officials and people who 
should know better, the disaster of financial prudence 
is already upon us. People are growing cautious. 

*** Each percentage point of savings takes about $75 
billion out of the economy. And each 1% decline in 
stocks knocks off another $100 billion or so of wealth.

*** That's why I'm bullish on deflation, Eric. Mr. 
Greenspan and the new homeland defense initiatives may 
put a few billion dollars into the economy...but Mr. 
Market destroys far more than that. As Japan shows us, 
you can pour all the concrete you want...and practically 
give money away...and it still won't get you out of a 
liquidity trap. Deflation has to run its course before 
inflation can take over.

*** A modest prediction: when Greenspan-san began 
cutting rates the fed funds rate was 6.5% and the 
savings rate was near zero. Before the present trend is 
exhausted, the savings rate will be 6.5% and the fed 
funds rate will be near zero. 

*** The cyber-thugs are still at it..."The night before 
last," says Christoph Amberger, who heads up one of our 
publishing groups, "it looks like these self-appointed 
Blockwarts - that's not a dermatological condition, but 
the unpleasant Nazi functionary who was in charge of 
snooping into other people's business - managed to 
incite every socially dysfunctional high school hacker 
from Jersey to Atlanta to attack our sites." 

Not all readers are affected, but if you're getting the 
Daily Reckoning a day late (or not getting it at 
all!)... that's why. Again, I'll keep you posted.

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The Daily Reckoning Presents:

By Rick Ackerman

Like politics, all recessions are local.

They take root in auto showrooms and appliance stores, 
then slowly steal into the malls, choking off jewelry 
stores, stereo dealers, restaurants, clothiers and ski 
shops before creeping right up to your neighbor's door.

So far, that's the way recession seems to be playing out 
in my Colorado neighborhood. Perhaps you'll recognize 
your own in the retail landscape I've described below.

The heart of it is a $250 million mall that opened 
nearby about 18 months ago. The complex was starting to 
feel the pinch even before September 11, but since then, 
pedestrian traffic has fallen precipitously. When I took 
my kids there for ice cream a few nights ago, the main 
thoroughfare was nearly deserted, and there were no 
customers at all in many of the luxury-goods shops.

Near the south end of the mall is the shell of a 16-
screen AMC theater that is scheduled to open in late 
autumn. It is no more than three or four miles from an 
AMC 24-plex and a 12-screen Mann Theater that has been 
operating in bankruptcy for more than a year.

There are three new brewpubs within this radius, each 
displaying those huge stainless steel tanks in the front 
windows. Close by are five or six very large, non-chain 
restaurants either under construction or recently 

One of them sits across a terra cotta plaza from the big 
AMC - a fancy Japanese steak house with enough room to 
easily contain a hockey rink. The space had sat empty 
for more than a year, just like several other 
cavernous storefronts that went into hibernation when 
the giant mall opened just across the road.

Considering the landlord's predicament, the steak house 
undoubtedly was able to negotiate a very favorable 
lease. But can it survive? I doubt it. For, every time 
I've walked by the restaurant on my way to the movies, 
waiters and cooks have outnumbered diners by more than 

A few doors down, on weeknights at least, there are 
rarely more than faint signs of activity at Dave & 
Buster's, an expo hall-size adult arcade with sumptuous 
bars, a restaurant, dinner theater and a billiard 
parlor. Only the steady hum of electrical current 
feeding into the video machines, the somewhat 
disconcerting watchfulness of a very attentive staff, 
and an occasional ka-ching hint that the place is open 
for business.

Even that seemingly irrepressible haberdasher, George 
Zimmer, seems to be dying in this locale. I went into 
The Men's Wearhouse to buy some slacks not long ago and 
there were five sales clerks waiting to pounce.

When I returned the next day to pick up the pants after 
having them altered, the same hungry-eyed bunch were 
loitering near the tie racks. They briefly snapped to 
attention before realizing it was just that guy 
coming in to pick up his slacks.

To round out the picture, I should mention that Qwest 
Communications, Level 3, Sun Microsystems and IBM are 
among the biggest employers in this area. All have 
announced big layoffs lately, and while that may only 
get a paragraph or two in your local paper, it is big 
news around here.

Which brings us to my neighbor's doorstep, in front of 
which a "For Sale" sign has hung for nearly two months. 
Until recently, the guy was a top regional producer for 
one of the largest retail brokerage firms. He left 
the company to do financial consulting, but could not 
have timed the move more poorly. To make matters worse, 
a big client stiffed him for four months of work.

With savings nearly depleted and a dwindling number of 
clients to bill, he decided it would be a good time to 
cash out and rent a home. An appraiser had estimated the 
value of his house at $450,000 - nearly twice what he 
paid for it just a few years ago.

Hard-pressed and sitting on a large capital gain, one 
could hardly fault him for wanting to take the money and 

Now, this story by itself would not be that interesting, 
except there are at least four other homeowners within a 
stone's throw who have refinanced within the last few 
months. Moreover, each told me of being helped by an 
"aggressive" appraisal that was significantly higher 
than what his or her home would actually sell for these 
days. And each took out cash as part of the transaction.

Would it shock you to learn as well that two of the 
homeowners are currently unemployed?

So there you have it. Clearly, the banks have so much 
cash to heap on mortgage borrowers these days that they 
seem neither to care whether you have an income, nor to 
anguish over whether your house is worth anything 
near its appraisal value.

An ironic twist is that the erstwhile financial 
consultant has found a lucrative sideline: setting up 
so-called negative amortization loans for other 
homeowners. This arrangement allows the mortgagee to pay 
only the interest on a loan, with the unpaid principal 
getting tacked onto the balance at the end of the year.

He created five such loans just last week, and I shudder 
to think of how many other entrepreneurs are doing the 
same kind of charitable work elsewhere.

In a booming economy, it's not hard to see how such a 
strategy might tempt imprudence: Buy a house for 
$300,000, carry it for all of $500 a month, then sell it 
to the next guy for $450,000.

Unfortunately, it is not boom times but rather the 
dreadnought of recession that is making this gambit so 
appealing, if not to say irresistible. Devastated by 
losses in the stock market and perhaps even jobless, the 
beleaguered homeowner is capitalizing on the one thing 
of significant value that he's got left: his house.

But there is no getting around the fact that in effect, 
both he and the lender are betting that housing prices 
will continue to rise. For if both are wrong, the 
consequences would be almost too scary to contemplate.

Imagine tacking $50,000 onto your mortgage, even as the 
value of your home is falling more than 20 percent, from 
$450,000 to $350,000.

This example may sound extreme, but I believe it has 
already happened here, if not yet all across America. In 
fact, $100,000 of vanished equity is a reasonable 
estimate. For the supposed $450,000 home, it is simply 
the spread between an "aggressive" appraisal made just a 
few months ago and the current asking price of a 
"motivated" seller.

Meanwhile, statistics compiled in Washington deign to 
suggest that this - we'll call it a recession - is 
different because it has so far miraculously bypassed 
the housing sector. But if profligate collusion 
between homeowners and mortgage lenders is the reason, 
then the economy is going to be in an inescapable bog 
sooner than any of us could have imagined.

In fact, the mortgage shell game now occurring in 
thousands of neighborhoods just like mine is all that is 
keeping the economy from sinking into coma. Ultimately, 
however, the frenetic hollowing out of homeowner equity 
can only help to precipitate economic disaster, 
including the eventual collapse of housing values in the 

I have long predicted that homes would shed as much as 
70% of their peak values during the deflation that has 
recently begun and which should take at least 8-10 years 
to run its course. Now, however, because of the epic 
refinancing mania that is taking place, home values are 
being set up for a much swifter collapse, perhaps over a 
period of no more than four or five years.

A housing bust would add overwhelming power to a 
deflation that evidently has already destroyed the 
economy's ability to respond to either fiscal or 
monetary stimulus.

Anyone who wishes to understand what is about to happen 
to the economy should purge the word "inflation" from 
his mind, since it is no more likely than a heat wave in 
February. No matter how desperately the Fed may try to 
stimulate, deflation is now the only possible outcome. 

As such, we have only just entered a decade of intense 
and relentless economic pain.

Rick Ackerman,
for The Daily Reckoning

Rick Ackerman is a financial writer whose essays have 
appeared in Barron's, The Sunday San Francisco Examiner 
and numerous other publications. Ricks's detailed 
strategies and forecasts for stocks, options, and 
indexes appear daily at Market Wise Black Box. 

For a one-week free trial subscription to Market Wise 
Black Box, and to Wise Guide, which offers intraday 
analysis and real-time guidance from seasoned day 
traders and market professionals, click here:

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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 11, 2001

Published By Tulips and Bears LLC