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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

LONDON, ENGLAND 
TUESDAY, 5 DECEMBER 2000 

 

Today:  Falling Down

*** Recession, recession, recession - everybody's talking 
about it! It must be the coming thing...

*** Dow up, Nasdaq down...but the big news is in the 
currency markets - "Major Reversal!"...

*** The Seven Year Itch...and more...

*** Henry Kaufman says the economy faces a 40% chance of 
recession next year and a 100% chance within 3 years.


*** Reuters reports a "Rising Recession Risk." And even 
noted economist Dick Cheney says he thinks the U.S. "may 
well be on the front edge of a recession."


*** All this recession talk comes as the economy yields 
more and more signs of a slowdown. Yesterday, the 
Conference Board said its index of leading indicators 
slumped 0.2% in October. Home sales were off less than 
expected, but still dropped 2.6% in October, as the mean 
price of a new home rose to a record $218,400 from $204,300 
in September. 


*** The main cause of recession-thinking, however, is the 
`reverse wealth effect' of falling stock prices. Half of 
all American households own stocks. Some open their 
statements each month and see how rich they are. Others 
find out how much money they can afford to spend. In either 
case, when the statements show a big drop, consumer 
spending is not far behind.


*** Yesterday, stockholders got a bit of a break. The Dow 
rose 186 points. But, typical of a bear market rally, 
relatively few people got much benefit out of it. More 
stocks actually went down than up on the NYSE - 1440 
compared to 1421. And more hit new lows than hit new highs 
- 123 compared to 119. 


*** Meanwhile, over in the land of Big Techs and vanishing 
dot.coms - the Nasdaq fell 29 points. Intel lost more than 
$1 to close at $33. Cisco fell $2 to $45. Early last year, 
I warned that more people would lose more money in these 
Big Tech stocks than anywhere else on Wall Street. I wasn't 
predicting the future - just noticing that there was so 
much money in them to be lost! 


*** Not all the techs and nets went down yesterday. Amazon 
gained almost $2. And Qualcomm rose $7 to $90. 


*** But the big news, again yesterday, was in the currency 
markets. The dollar index dropped to 113.63 and the euro 
rose over 89 cents. Currency traders are expecting the Fed 
to switch to a neutral bias next week - which will be more 
bad news for the dollar. I wish I had bought those euro 
bonds when Marc Faber suggested it. But it's not too late. 
The euro probably has a long way to go against the dollar.


*** Even Citibank has urged investors to get out of the 
dollar, warning of a "major reversal" ahead. "If we go into 
a hard landing [recession], the U.S. dollar is a loser," 
said a Citibank analyst. The greenback has been a `winner' 
for so long, it is shocking to think of it as a `loser'. 
But that is what it is likely to be in the months ahead. 


*** The U.S. ratio of savings to income is the lowest it 
has been since 1933. The trade deficit is the highest it 
has ever been. And European investors are losing their 
appetite for U.S. acquisitions. Recent experiences - such 
as the purchase of Chrysler - have given Europeans cause 
for second thoughts. 


*** Now, with the dollar falling, look for The End of the 
World As We Have Known It - more below.


*** Gold rose $1.90...to $273 yesterday. Oil fell 80 cents.


*** Interest rates in Turkey spiked up to 1,700% over the 
weekend...stocks fell 46% in November. 


*** The rise of the dot.coms was amusing...but their fall 
is even funnier. Apparently, there's even a contest for the 
saddest dot-com disaster story. The winner
gets a $1,500 bottle of Screaming Eagle Cabernet. It's at
(http://www.nytimes.com/2000/12/04/technology/04WINE.html.F
r)


*** The British press reports that TheStreet.com has closed 
its UK shop and told its employees to hit the road. The 
stock rose to $60 after going public in May of '99. Now, 
it's about $3 - giving the entire company a value about $10 
million lower than its cash on-hand. More on this story... 
maybe tomorrow.


*** Sophia and I went to see "The Seven Year Itch" at 
Queen's Theatre in the West End last night. Daryl Hannah 
does a good imitation of Marilyn Monroe, illustrating what 
kind of trouble a married man can get into when left on his 
own in New York in the summertime - if he's lucky.


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FALLING DOWN


It's the end of the world as we know it
and I feel fine...

R.E.M.


"We are about to enter a period of deflation," wrote John 
Mauldin recently, describing The End of the World As We 
Have Known It. "By that I mean a period in which prices in 
general drop and interest rates get very low. If I am 
right, the investment strategies that have worked for the 
last 60 years will need to be changed to reflect the new 
economic realities."


It is not often that the end of the world comes. So, when 
it does, people tend to be unprepared. In fact, of all the 
world's peoples none are quite as unprepared for deflation 
as Americans. 


If you expected a period of inflation, what might you do? 
Mortgage your house...borrow as much as you can...and spend 
your cash as though it were going out of style. This is 
exactly what Americans have done - expecting inflation to 
wipe out their debts and boost up their assets.


U.S. investors still expect asset inflation - rising prices 
for their main holdings, their homes and their stocks. So 
confident are they that they have bet everything on it. 
Take away the value of stocks and residential real estate 
and there is not much left. And yet, if the Law of Perverse 
Outcomes is to be honored, they will get not what they 
expect...but what they deserve: falling asset prices and 
recession. 


These two trends are already underway. The Nasdaq, in very 
round numbers, used to be worth $6 trillion. Now it is 
worth only half that much. What happened to the money?


It didn't go into the Dow, which has also drifted down 
since March. Some leaked into cash and other assets. But 
most of the money simply dematerialized. 


At any given time, most people who own stock are neither 
buyers nor sellers, they are holders. Yet the value of 
their assets is determined by those few who want to either 
get in or get out. When more people want in than out...the 
price rises and the holders all feel richer, even though 
they may own exactly the same percentage of exactly the 
same business as they did before. 


In a bear market, the bids disappear and prices fall. Fewer 
than 1% of all shares may have changed hands - but price 
could be cut in half, or worse. Thus, a company might be 
worth $100 billion one day and only $50 billion the next - 
even though only a handful of shareholders actually sold 
shares. The shareholders would have lost $50 billion in 
purchasing power overnight. What happened to the $50 
billion? It simply vanished. 


That is what happens in deflation. Money just disappears. 
The houses are still there. Factories do not go away. Cars. 
Gold coins. Fast-food restaurants. Movies. Real wealth 
remains. But the illusions of wealth give way to reality. 
Deflation is a learning experience.


"In an ideal world," John Mauldin continues, "deflation 
should be the norm. In theory, over time competitive 
businesses should become more productive and able to 
produce more products for less cost. Prices gradually drop 
and we all get more bang for our buck."


More bang for the buck is what economist Gary Shilling 
expects. His book, Deflation, lists 14 reasons why you 
should expect falling prices: 


1. End of the Cold War led to global cuts in defense 
spending


2. Major country government spending and deficits are 
shrinking


3. Central banks continue to fight the last war - 
inflation

4. The increasing number of people retiring in G-7 
countries will lead to reduced benefits and slower growth 
in incomes and spending


5. Restructuring continues in English-speaking lands and 
will spread 


6. Technology cuts costs and promotes productivity


7. Information via the Internet increases competition 


8. Mass distribution to consumers reduces costs and 
prices


9. Ongoing deregulation cuts prices


10. Global sourcing of goods and services curtails costs


11. The spreading of market economies increases global 
supply


12. The dollar will continue to strengthen 


13. Asian financial and economic problems will intensify 
global glut and reduce worldwide prices


14. US consumers will switch from borrowing and spending 
to saving


On at least one of these points, Shilling is about to be 
proven wrong. The dollar will not continue to strengthen: 
it will fall, and has already begun doing so. But this, it 
turns out, will make asset deflation - if not consumer 
price inflation - even worse.


More tomorrow...


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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Open your mind with the most stimulating e-mail newsletter that you'll ever read, The Daily Reckoning. To receive this free daily email newsletter click here now.

 
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Last modified: April 01, 2001

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