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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  In Greenspan We Trust?

*** Dow and Nasdaq both up - until after the close...what 

*** Gold down...oil down...employment down...dollar down...

*** Losses in dot.coms as great as the S&L debacle...

*** Now what? The Dow and the Nasdaq both rose 
substantially on Friday. The Dow was up 82 points by the 
close of business. And the Nasdaq was up 144. Breadth was 
unusually solid, too, with 2076 advancing stocks on the 
NYSE, compared to just 816 declining issues.

*** But then, along came the Florida Supreme court... 
tipping the balance of the election scales in Mr. Gore's 
direction. Investors didn't seem to like it. Either they 
didn't like the idea of a Gore presidency...or they just 
didn't wait any longer to see who was going to be Mr. Big 
in Washington. After hours, futures trading took stocks 
down the equivalent of about 200 points.

*** But the U.S. Supreme Court also spoke up over the 
weekend. Advantage: Bush. 

*** And here we are...only 12 more shopping days until 
Christmas...and still no President-elect...and no sign of 
Santa's big bottom...

*** But the good times can't last. The Supreme Court is 
threatening to end the election uncertainty...and Mr. Bear 
may have quietly decamped for his holiday retreat over the 
weekend. His departure would allow investors to fatten 
themselves up over the holiday...providing even more 
delicious and delectable targets when he returns.

*** "Sell me everything you have," invites James Cramer, 
co-founder of Cramer says he's given up 
managing money - and has no operational role at the on-line 
publisher he helped set up. Cramer does not say if he is 
buying shares in The stock sold for as much 
as $60 a share a year ago. Now you can buy it for $2.50. 

*** Mr. Cramer, along with most analysts and most 
investors, still have faith in the Greenspan Put. They 
believe the Fed chairman will lower rates next year - and 
that this will set the market on an upwards course again. 
Why that is unlikely...below...

*** So much is riding on Mr. Greenspan that the U.S. Senate 
decided it had better keep him happy. By act of Congress, 
Greenspan's salary was raised from $141,300 to $157,000.

*** Unemployment increased 0.4% in November - as expected. 
Hourly wages increased to $13.94, or 4% for the last 12 

*** Ollie Curme, a venture capitalist with Battery 
Ventures, predicts that losses from failed Internet 
startups could total more than $150 billion - or about as 
much as the S&L crisis. Both debacles had the same 
cause...and both will come to the same bad end. Again, more 

*** The on-line stock site, VTO Report, tracked 215 
Internet companies over a year. As of Nov. 30, the average 
company had fallen by 93%. This makes companies such as and the Internet incu...bator, CMGI, about 
average. CMGI has fallen 93% over the last year.

*** Analysts' estimates for profit growth for the 4th 
quarter average 9.2%. This is the first time in 2 years the 
number has been below 10%.

*** The dollar went down about 1% last week. Not a 
spectacular crash - but probably the beginning of something 
big. Meanwhile, foreign ownership of U.S. assets grew by 
$207 billion in the 3rd quarter. 

*** Maytag announced that it was cutting back on its e-
commerce efforts. 

*** Gold fell to $275 on stocks fell too.

*** The Rockefeller Center is up for sale...the Chrysler 
building too. The Rockefeller Center became the focus of 
Japanese attention at the end of their boom in the 80s. 
They bought it...and then sold it back after the bubble 
burst in Tokyo - losing millions in the process.

*** What investment strategy worked over the last 11 
months? Value! The Thornburg Value Fund rose 12.2% and has 
been rated as #1 by Morningstar, for tax-adjusted returns 
over the last 5 years.

*** "It's time to plant," said Mr. Deshais, our gardener 
and keeper of the local traditions. We were watching a 
beautiful full moon rise at about 5:30 in the after noon.
"But you can't plant anything's almost winter," I 

"Oh yes. It was St. Catherine's day last week," he replied, 
adding a little rhyme, which went something like this: 
"After the day of Ste. Catherine, trees begin to take 
root." Well, okay, it doesn't rhyme in English...but trust 
me, it rhymed in French.

And so, we dutifully called the local nursery...and soon 
its owner, a Mr. Robin - a stout man wearing checkered 
pants - came bob, bob, bobbin' along. We toured the grounds 
with him making comments and suggestions, and then Mr. 
Robin took his leave, promising to send over a proposal. 
Like everything else about this property, the gardens are 
now threatening to be a much bigger deal, and much more 
expensive, than I ever imagined.

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or as one fellow investor put it: 

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With Lynn Carpenter's F-O-X system, you'll be alerted to 
early price volatility in stocks like American Express. 
Lynn's readers bought bargain call options when the stock 
was at $54.38... 

...and sold them the next day for 91% gains. 

Follow this link - and get in on her next trade


* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * 


When last week came to a close, the protagonist of our 
story, Mr. Alan Greenspan, was widely credited with not 
merely reversing the bear market on Wall Street, but of 
saving Life As We Have Known It.

Life, as we have come to enjoy it, has been one long 
continuous boom. Stocks have been rising since before the 
Internet was invented - that is, for so long the memory of 
man runneth not to the contrary. And the economy has 
enjoyed its longest continuous period of growth in nearly 
40 years. 

In the few instances - such as the LTCM scare, the Asian 
Currency crisis, and the Y2K worry - in which growth seemed 
threatened...Mr. Greenspan and his fellow central bankers 
provided the necessary grease to keep things rolling along 
smoothly. And thus, only a cynic or a crank (or a sourpuss) 
would gainsay Mr. Greenspan's power of lubrication now. 
Millions of investors are counting on The Greenspan Put - 
as traders refer to the Fed chairman's power to slather 
liquidity onto the economy's moving parts. Investment and 
business strategies...even vacation and retirement plans... 
rely on Mr. Greenspan to such an extent that he has come to 
assume a god-like stature. Not long ago, Fortune Magazine 
ran a cover story called "In Greenspan We Trust."

So, today, we continue our story...keeping in mind my 
dictum that people get from the markets not what they 
expect, but what they deserve. 

Will our hero, Alan Greenspan, succeed in keeping the bull 
market/growth economy alive? Will he manage the `soft-
landing' that he hopes for? Will the Greenspan Put be in-
the-money at the crucial hour?

Or, looked at another way - will this story turn out to be 
a comedy, or a tragedy? In the interest of economizing your 
time, dear reader, I will flip ahead to the end: Mr. 
Greenspan will fail. The story will turn out to be neither 
tragedy nor comedy, but farce.

The mechanism by which the Federal Reserve influences the 
economy and the markets is complicated, but the concept is 
simple. The central bank can either make money easier to 
get or harder to get. An increase in the fed funds rate, 
for example, makes it - all other things being equal - 
relatively harder to borrow money.

In a perfect world, prevailing interest rates operate as a 
kind of speed governor on the economy. At any given time, 
people contemplate all manner of spending. A concrete 
merchant imagines adding new mixer trucks to his fleet. A 
couple dream of a winter cruise in the Caribbean. In both 
cases, the significant calculation can be reduced to 2 
questions: what will it cost...and what will it return? 

The return on consumer spending tends to be unquantifiable, 
so consumers focus mostly on the first question: how much 
will it cost, which begs the corollary, can I afford it? 
The higher the interest rate on the borrowed money - the 
more expensive the vacation becomes.

Businessmen, on the other hand, can look ahead at the 
likely financial return on borrowed money. If the return 
exceeds the cost of funds - with a margin for error - it 
makes sense to borrow and spend. Thus, the lower the rates, 
the more projects make sense and the faster the economy 
moves ahead.

Markets, however, have a kind of perverse complexity. What 
really concerns people is not the nominal rate of return - 
that is, the rates as persuaded by Greenspan & Co. - but 
the real rates.

An economist named Pigou once noticed that "people's 
spending habits are influenced not only by how much they 
are earning, but also by how wealthy they feel." He was 
describing what is known today as the 'wealth effect'. The 
insight may be broadened to the realization that when 
people decide whether to borrow and spend, they look at the 
effects in the widest way they can.

The real cost of borrowed money has been phenomenally low. 
You might have borrowed $100,000 in 1982, put it into Dow 
stocks - and today, you would have about $1,000,000 in 
stocks, and owe less than half that amount, including 
compound interest, on the original loan. For nearly 20 
years, the real cost of borrowed funds - when the money was 
put into stocks - was about minus 8%. It paid to borrow. 
The more the merrier. 

Venture capitalists raised money from investors - and often 
borrowed money too. But in the hey-day of IPO fever, they 
earned as much as 1,000% profit. The cost of the borrowed 
funds was negligible.

Of course, when you give away money - you have to expect 
people to take it. Consumers mortgaged their homes, spent 
some of the money on themselves...and invested the rest in 
stocks. With such low real rates, they could spend up to 
half the borrowed money on new cars, houses, vacations - 
whatever they wanted - and still come out even over time. 

Publicly traded businesses, too, found that they could 
borrow obscene amounts of money - the telecoms, for 
example, took up 40% of all newly issued bonds between '97 
and ` alone borrowed $2.2 billion, even 
though it still has no proven business model. For a while, 
it seemed as though the more they borrowed, the higher 
their share prices went. Investors seemed to care only 
about growth and momentum, not about credit quality or 
balance sheets. 

Even speculative junk - at the peak of the Information Age 
mania - was taken up with coupons as low as 7.5%. Investors 
were blind to risk - even from the shakiest borrowers and 
the most absurd business plans.

Bloomberg reports that U.S. investors, for example, just 
lost $75 million of commercial paper seized from Demirbank 
- a Turkish bank in the Caymans. The Bank of America, which 
can't seem to resist a bad loan, had issued a letter of 

Even in the 3rd quarter of this year, debt was still 
increasing - by $414 billion of 'total market debt' 
compared to an increase of $390 billion in the 2nd quarter. 

But eventually, investors stop worrying about the return on 
their money and begin to fret about the return OF their 
money. Dodgy stocks and bonds fall. Junk bond yields soar. 
The cost of credit, for unproven or questionable projects, 
rises to 20% and more...and then disappears altogether. And 
for good reason; investors need to be compensated for the 
risk they run. Moody's projects that one out of 10 junk 
bonds will default next year.

This is the point where we find ourselves today. Credit, 
which was very cheap and very abundant only a few months 
ago has suddenly become expensive. The average junk bond 
has fallen 10.85%. A bond buyer, using borrowed funds, 
would have a real cost of funds exceeding 18%. An investor 
who mortgaged his home in March of 2000 in order to buy 
tech stocks paid an effective interest rate - over the last 
9 months - of greater than 50%. His stocks probably fell at 
least 50%...and he probably pays an additional 8% or so on 
his mortgage.

Ed Yardeni is still confident, though. He believes our 
hero, Alan Greenspan, has the weapons he needs to defeat a 
credit crunch. "There are 650 basis points between the fed 
funds rate and zero," says he, pointing to Mr. Greenspan's 
ammunition belt.

But real rates have gone from minus 8 percent to 20%...30%...50%?! And there are 900 
basis points between Treasuries and Merrill Lynch's high 
yield index. Mr. Greenspan will be outgunned.

Your correspondent

Bill Bonner

P.S. Several readers have asked, "Why do you live in 
France?" Tomorrow: an introduction and an explanation. 

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...

"My small portfolio has followed true to my wife's description of my
investment philosophy, "buy high and sell low." However, that has changed since I started religiously reading DR... I credit this reversal of fortune directly to The Daily Reckoning"

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serious warnings and the state of the market with gentle humor"

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Last modified: April 01, 2001

Published By Tulips and Bears LLC