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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  In It Together

*** The Greenspan Cometh! 

*** Euro deficit may have peaked...

*** Telecom debt...Bernie Ebbers - from hero to zero...

*** Alan spoke! The markets choked. And everybody's going 

*** "Take a look at this," said Beth calling me over to see 
the Nasdaq chart yesterday afternoon. "There goes my 

*** The chart looked awful. After rising in anticipation of 
Greenspan's speech...then hesitating as investors tried to 
figure out what it meant...the line just seemed to fall 

*** The damage was no worse than on a lot of other days, but 
the disappointment was greater. Investors still believe they 
are protected by the Greenspan Put...but the Fed chairman 
refused to use it yesterday. Instead, he merely announced a 
change of bias - from fighting inflation to fighting 

*** The Nasdaq ended the day down 113 points. The Dow 
slipped 61 points. Advances and declines were about 
even...and there were twice as many stocks hitting new highs 
on the NYSE as new lows.

*** Microsoft and Cisco both fell - and both to $44 and 
change. Cisco is the only big tech that has not yet admitted 
any weakness. It has never issued a profit warning and never 
failed to meet or beat its earnings and sales targets. Cisco 
remains the world's second most valuable corporation - with 
a market cap of $300 billion. But the stock price is falling 
anyway - and will probably go down much more before it comes 
to rest.

*** Amazon fell too - along with almost all the dot.coms. 
AMZN closed at $18. Will the company survive? The 
index fell 8% yesterday.

*** "I let myself down," humbly confessed WorldCom CEO, 
Bernie Ebbers, recently. WorldCom's market cap was $150 
billion a year ago. Now it's about $50 billion.

*** "Even in the twilight world of zombies," opined 
the Economist, "it is hard to find many who have gone from 
hero to zero quite as spectacularly as Mr. Ebbers."

*** And here's something interesting - the XAU, the index of 
gold mining stocks, rose 3%. Investors are getting worried. 
Not so much about inflation...but about solvency...the 
quality of debt...and the integrity of the financial system, 
generally. Gold may become more popular as those fears 

*** "'Today my 16-year-old niece explained the wondrous 
concept of compounding and the time-valued money to me'," 
William Fleckenstein wrote on January 19th, 2000, quoting a 
reader who'd written in illustrating life at the height of 
the bubble. "According to my niece," his correspondent 
continued, "her teacher assumed, that by investing in 
`technology stocks,' that a `reasonable rate of
return' for the foreseeable future should be on the order of 
50 percent annually." Those were the days, huh? (program 
note: In an attempt to send 2000 off in style, The Daily 
Reckoning will be featuring "Air Ball: Revisiting The Bubble 
Blow-off" - Bill Fleckenstein's 9-part series plumbing the 
depths of this year's stock market mania... check it out:

*** Margin accounts peaked out in March at $278 billion. 
They're down to $219 billion now.

*** And even the trade deficit may have peaked out in 
September at $33.7 billion. October's number was $33.2 
billion. If the dollar collapses, as expected, the trade 
deficit will fall too.

*** The dollar gave up a little more ground to the euro 
yesterday. The euro, thought to be hopeless a month ago, has 
risen nicely since then.

*** Oil fell 63 cents yesterday. 

*** Asia is a mess. The Tokyo stock market is only a few 
points above its record low of 1998 - more than 60% below 
its high of 1989! Korea's biggest companies are on the verge 
of bankruptcy - or already `in chapter'. And Taiwan no 
longer publishes consumer confidence numbers - they're 
thought to be too depressing.

*** The whole region suffers from the effects of monumental 
debt, overcapacity, and bad investments. Could America be 
hit with similar problems? Nah...don't worry about it. 

*** The Industry Standard reports on what it calls "gadget 
fatigue." Sales of consumer electronics are slumping. A 
trade association notes that more new products will enter 
the market between '98 and 2003 than in the entire history 
of the industry. Who can keep up with all this stuff?

*** Sales of Winnebagos have fallen 23% during the most 
recent quarter, compared to a year ago. Profits are off 18%. 

*** Bianco Research says investors expect a quarter point 
drop by the Fed in the first quarter of next year. But so 
far, investors - and the Fed - have underestimated the 
intensity and speed of the current slowdown. More than 
likely, the Fed will act sooner...and more vigorously than 
expected. That will be surprise number one. Surprise number 
two? It won't work.

*** "The very quality that makes the stock market such a 
good place to invest, most of the time," repeating my 
quotation from Smithers and Wright's "Valuing Wall Street," 
"means that it has to be a lousy place occasionally. One of 
those occasions is now." A quarter point won't make much 
difference. Japan took its rates down to zero - and even 
that didn't make much difference. 

*** Mt. Vernon Square is coated in white this morning. The 
snow has covered the patches of hard-beaten earth, and 
cigarette butts... The Winter of Woe begins tomorrow. 

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As most of the market has gone down - two very curious 
stocks have gone up. Fannie Mae shares rose more than $3 on 
Monday to close at $87.81. Both Fannie and her brother 
Freddie Mac are at near record highs. Indeed, Fannie Mae 
shareholders have realized a 41% gain for the year. Freddie 
Macs owners have done even better - with a 45% boost.

The burden of today's letter - to come right to the point - 
is that these two companies give us a glimpse into the 
future, and it isn't very pretty. 

The two companies are GSE's - Government Sponsored 
Enterprises. They are neither fish nor fowl - neither 
creatures of the free-market, nor purely bureaucratic 
agencies...but monsters, half market, half politics (half 
man, half beast you might say) whose effect on the nation's 
economic future may be, well, monstrous.

"Fears of a U.S. credit squeeze have been growing," observes 
the Financial Times, "amid mounting evidence that 
corporations borrowed too much during the recent boom and 
will have trouble paying back their debts."

Credit used to be controlled by bankers. The banks would 
suffer through the credit cycle - alternately lending too 
freely and then too miserly - and take their losses 
according to their merits. Occasionally, following a period 
of especially reckless lending, banks would go bust along 
with their customers.

But something has changed. Now, "loans are mutating into 
another form of tradeable paper," says the FT, "as fit for a 
mutual fund or an insurer..."

Or a GSE! 

Bloomberg reports that "Banks are selling mortgages, 
possibly their safest assets, because their corporate loans 
are going bad and aren't marketable." Banks need the money - 
and they can sell their mortgages - to Fannie and Freddie.

Freddie Mac buys these bank-generated mortgages in bulk - 
and is increasing its purchases at a 50% annualized rate. 
Altogether, Freddie and Fannie - chartered by the federal 
government to make mortgage money available to people who 
couldn't otherwise quality - now own 40% of the entire $5.5 
trillion U.S. mortgage market.

Those are the facts. They are readily available and, I 
suppose, true. But the valuable truth is the one that is 
harder to see: what do these facts mean?

"When Standard & Poor's measured exposure to the troubled 
telecoms sector at leading global banks," continues the FT 
article, "it found that none of them had anything near a 
dangerous level of risk. A decade ago, a big bank might have 
made commercial real estate loans equal to 80-100 per cent 
of its tangible equity. Using information not available to 
the public, S&P calculated that most leading lenders have 
limited their telecoms exposure to about 8 per cent of 
tangible equity."

Telecom debt, S&P concluded, had been `atomised' - spread 
across the global financial system. The same might be said 
of mortgage debt. A local banker would succeed or fail, get 
rich or go broke, on the strength of his personal judgment. 
If he misjudged a credit risk, the loan would go bad and he 
would suffer the consequences.

But now the loans are `atomised' - sold off to the largest 
holders of mortgages in the world...carrying, between them, 
debt paper equal to 20% of the nation's entire GDP. 

If a mortgage goes bad, the banker who made the loan will 
not be the one who suffers. Instead, the suffering will be 
widespread. The risk, in other words, has been 
collectivized. It has been removed from the shoulders of the 
person responsible for it...and placed on those of 
thousands, or millions, of equity holders. 

It may eventually fall on taxpayers too - when the GSEs' 
reckless lending finally catches up to them..

The risk is no longer that a bank or two will go belly 
up...but that the whole financial system will go belly up. 
More to come...

Bill Bonner

P.S. One of the more interesting debates among intellectuals 
concerns the effects of the new information technology on 
ideas. Most people expect the Internet, for example, to 
allow thousands of flowers to bloom. Mass communications and 
mass ideas are supposed to give way to millions of 
independent ones.

This is consistent with the notion of Darwinian 
specialization. Ideas, like life forms and businesses, are 
supposed to evolve and become ever more differentiated, 
specialized and sophisticated.

And yet, what we have seen is that increases in the division 
of labor and knowledge seem to lead to collectivized 
stupidity. Unable to form an opinion on the quality of the 
meat they eat...nor on the quality of mortgage debt bought 
by Fannie Mae... they turn to the mass-marketed and most 
widely distributed ideas available.

Ideas, it turns out, are not immune to Metcalfe's Law. They 
more widely they are taken up, the more value they give to 
each holder. The more people who believed that the stock 
market was going up, for example, the more it went up. And 
the more people who agree with what you believe - the more 
you are inclined to believe you must be right!

Uniformity, however, comes at a price. Vulnerability. When 
everyone is in the same boat, a single leak can sink them 

More on this I get it figured out.
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