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Published Daily


Contributed by Bill Bonner
Publisher of: The Fleet Street Letter




*** Another big drop in Nasdaq prices...
*** Analysts, investors -- still bullish, but worried...
*** No "first mover advantage"...and other cliches


*** We are at a rare and exciting point in history. We 
have been promised a New Era and a New Economy -- 
complete with new "valuation metrics" to justify high 
stock prices and a New Man smart enough to buy them. 

*** But now it appears that investors are wondering - "is 
this new era for real?" (Only we seem to know the 

*** The Nasdaq, home of so many new era illusions and 
expectations, fell 200 points yesterday. It is now down 
33% from its high of March 10, at 5,048.

*** At least the doubt on that score has been removed. 
The Nasdaq -- the last of the major indexes/sectors to do 
so -- topped out in March. We are now in a broad, full 
bear market.

*** The Dow fell yesterday, too. It was down 168 points. 
Between the Dow and Nasdaq, I estimate that about $460 
billion in paper wealth was removed from the U.S. economy 
yesterday -- an amount equal to the entire capitalization 
of Cisco.

*** Asian stocks are falling this morning. The Nikkei 225 
average was down 3% at noon.

*** The Cisco Kids suffered yesterday, too, as investors 
raised the hurdle -- meaning they are getting more 
careful with their money and more selective about where 
they put it. The New Economy story is no longer quite as 
attractive as it was a couple of months ago. Investors 
are beginning to do the math -- and the numbers for CSCO, 
as well as many other companies, don't look good.

*** At the point where faith in this New Era peaked, no 
price seemed too high to pay in order to own a piece of 
it. Even if any individual company failed, there was 
still little doubt that the New Economy would soon 
replace the Old one...and that investors who didn't get 
on board would be left behind. Because this was not 
supposed to be a "bubble"; it was the real thing, built 
on a new innovation with a revolutionary potential -- 
information technology. 

*** Investors are still bullish. As Laslo Birinyi puts it 
in "Forbes," "those who buy as stocks go down are 
demonstrating their faith in the future." This is another 
aspect of the New Era. You gotta believe. And you have to 
sacrifice yourself -- like Russian troops in the defense 
of Stalingrad -- so that the New Era might live. Faith, 
not logic or stock analysis, moves the market.

*** Every analyst quoted in today's Reuters' story had 
Cisco as a "buy." Still, as the volume of trading rose on 
Wall Street yesterday, CSCO went down. At its peak, CSCO 
stock sold for $82. Now it's at a nearly 40% discount. 

*** But even at that, CSCO still sells for nearly 30 
times revenue. It, and the entire market, has a long way 
to go before it hits bottom. Sell the rallies.

*** AWE, the biggest IPO of all time, is now below its 
issue price. 

*** So many of the sustaining cliches of the New Era have 
proven to be completely wrongheaded. Peter Drucker takes 
up my point about the "first mover advantage" in the 
current "Forbes," for example. It is "no advantage at 
all," says his partner, Alexander Brigham. He reminds us 
of Prodigy, a pioneer in business-to-consumer marketing 
on the Internet. "AOL waited...and then blew Prodigy away 
with a better product," he says. "Be a smart and slow 
mover," he adds, "rather than a dumb, first mover."

*** Another of the cliches we have heard often is that 
the Internet marks a triumph of capitalism. Maybe, but 
not the capitalism that is good for investors...more on 
that below...

*** While stocks fell, bonds, the dollar and gold all 
rose slightly. Gold rose so slightly that it is not worth 
talking about. But the yield on 10-year T-notes fell 
(which is what happens when bond prices rise) to 6.44%. 
Six-and-a-half percent is not a lot of money -- but it 
sure compares favorably to losing 33% of your money. 
Shrewd investors, if there are any, may not be sure if 
the New Era is real or not...but they might very well 
decide to sit in T-bonds at 6.44% while waiting to find 

*** "The euro was launched with huge hype at $1.17 on 
Jan. 1, 1999," writes Steve Hanke, columnist for 
"Forbes," and contributing editor to our "Fleet Street 
Letter." "Since then (and contrary to the expectations of 
most pundits and analysts), it has taken a beating. The 
only surprise is that anyone was surprised." Hanke notes 
that the euro may be regarded as a composite of the 11 
currencies of which it is comprised. Against that 
composite index, he says, the dollar has been going up 
since the mid-`70s. "It doesn't take a rocket scientist 
to conclude that Euroland's economy is no match for the 
United States and that the euro's long-term sinking trend 
will continue."

*** OK, but with the exception of the late `70s, the 
dollar has always benefited from very high real interest 
rates compared to Europe. Plus, the real rate of return 
on U.S. financial assets to European investors has been 
phenomenal -- until recently. If, as I expect, the bear 
market on Wall Street grows more serious, the Europeans 
will begin to favor their own currencies -- and the 
dollar will fall, perhaps even crash, against the euro. 

*** Last week I reported unemployment had dropped to 3% 
in 30 of the top 50 metropolitan areas in the United 
States. "Well, duh, it's census time," says Lynn 
Carpenter. "Unemployment always drops when the year ends 
in 0... 1980, 1990, 2000." Call it the "duffer effect." 
Every 10 years the Census Bureau sends the unemployed 
around to hustle people for the "long form." See her full 
article under "Too Many Workers, Too Few Loafers" at the 
DR site

*** Bull market in commodities? The Nasdaq is down 33% 
since its March 10 high, but the CRB index is soaring! 
This little-known index measures prices of 21 major 
commodities from orange juice to crude. Dan Ferris 
reports the CRB is at its highest level in two years -- 
and it's rising. (See "Bull Market In Commodities" at

***** Kathleen Peddicord, writing from Honduras, says 
she's discovered 31 acres of secluded, boat-access-only 
beachfront property with about 3,000 feet of white sand 
on "one of the best beaches at the east end of Roatan 
Island." It's 99% buildable...and you may be able to get 
it for as little as $5,000 an acre. 

*** I had lunch with my friend, Michel, with whom I'm in 
the book business in Paris. He explained that the big 
bookstores were reducing inventory. They could make money 
on the bestsellers, but books that sold only a few copies 
were not worth stocking.

"If you want something on a special topic, you have to go 
to a store that specializes in it," he said. Michel 
explained that the same phenomenon must be hitting the 
Internet booksellers -- but only worse. Because the 
Internet makes it possible to cut up the market into more 
and more specialized niches. 

This is why the Internet is such an important innovation 
-- it moves the division of labor into a higher 
gear...allowing one bookstore in Bombay to specialize in 
books on the Cathar Heresy...while another in New York 
concentrates on Gothic Rock. 

It is also bad news for a company such as, 
that hopes to become all things to all people. 

*** Lynn Carpenter has been having great success trading 
value stocks. Seems almost oxymoronic, but it seems to 
work. Using a "100-year-old point and figure system," she 
says, "we made 122% average returns on retail last 
month...and yesterday we added two calls--yes, bullish--- 
[and]...our closest call is already up 60% in one day..."

*** Today is the birthday of Salvador Dali, born in 1904, 
who helped to culture various strains of mutant artistry 
-- dada and surrealism, mainly. But Dali was smart enough 
to know that it was all humbug...he packaged himself and 
his art and sold them like Elvis paintings on velvet -- 
but at much higher prices.

*** It is also the anniversary of Bob Marley's early 
death. Marley's music is lively and engaging -- as long 
as you don't pay attention to the lyrics.

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


In the current issue of "Forbes," we learn how much some 
of the leading Internet stocks have collapsed. Value 
America -- down 96%; E-Loan -- also down 96%; DrKoop -- 
down 95%; Etoys -- minus 94%; -- down 93%. 
The list goes on and on. 

But right now, something very interesting is happening. 
The stock options given to employees are way below the 
strike prices. So the companies are under a lot of 
pressure to re-price the options.

Investors may wish to have their shares re-priced, too. 
Alas, that is not the way it is likely to work. 

Capitalism as we have known it is dying. These new 
businesses are perfectly happy to let investors suffer 
huge losses. But employees? They have to be protected. 
Even if their options go bad, they'll still get their 

I've mentioned several times how, if companies such as 
Microsoft were forced to treat their employee stock 
options as what they really are -- labor costs -- there 
would be no profit left over for investors. That is, the 
companies would be operating at a loss, not a profit. 

It's not the capitalists who will profit from the 
Internet companies; it's the employees. Peter Drucker 
explains why:

"Until well into the 20th century," he writes, "most 
workers were manual workers. Today, in the U.S., only 
about 20% do manual work. Of the remainder, nearly half, 
40% of our total work force, are knowledge workers."

Knowledge workers are different from manual workers. 
Manual workers learn a skill. But once learned, their 
capital value scarcely increases. That is why manual 
workers reach the peak of their earning power very early 
in life. Typically, they are most valuable when they have 
learned their trade and are still young enough to 
practice it with vigor.

Drucker points out that the trade of stonemasonry, for 
example, has barely changed since the time that Socrates 
practiced it 2,400 years ago. The old philosopher could 
walk onto a job site today, pick up the trowel, level and 
hammer and go right to work. 

But imagine the knowledge worker of 400 B.C.? No matter 
what work he did, he would have to take at least a few 
refresher courses to catch up. Knowledge increases at a 
faster and faster rate. And those people who have real 
knowledge -- that is, those people who understand how to 
make things work -- are critical to modern economies.

Capitalists could own a factory or a mine. They could own 
the ships that transported goods. But they cannot own 
knowledge. Yes, they can hold patents and trade secrets. 
But those represent a very small -- and diminishing -- 
part of the knowledge stored in their employees' heads.

"We live in an economy where knowledge," says Drucker, 
"not buildings and machinery, is the chief resource and 
where knowledge workers make up the biggest part of the 

These knowledge workers are more important to, say, a 
company such as Manugistics, an e-commerce software 
business, than investors. "We decided that retaining our 
people was critical to our future," said the company's 
CFO, explaining why the company reset its options from 
$17 to $9. The capitalists have been exploited. They will 
take the loss. But, as the CFO realized, the employees 
are critical.

Even in the Machine Age, capitalists were exploited. This 
is a point made by James Davidson and Lord Rees-Mogg in 
their most recent book. A factory or railroad could not 
be easily moved. Labor unions, working hand in glove with 
political authorities, were in a position to demand 
payment. New and higher taxes were imposed. And salaries 
were increased -- often far above the existing market 
rates. The history books refer to this shakedown as the 
taming of rapacious capitalists by democratic 
institutions. Some economists actually seem to believe 
that labor unions and government regulation "saved" 
capitalism -- which was threatened by communism and in 
danger of disappearing altogether.

And now that communism has sunk into its own midden, it 
is widely reported that this new, more humane capitalism 
has triumphed. Yet now even people like George Soros are 
worried that capitalism is breaking free of its Machine 
Age chains. The labor unions are declining in power. The 
proles have all become mutual fund stockholders! And 
globablism has allowed large corporations to escape the 
control of any single government. The "Open Society" is 
endangered by unfettered capitalism, says Soros. "The 
situation is untenable," he writes in "The Crisis of 
Global Capitalism." 

Soros completely misses the real crisis of capitalism. It 
is not the lack of government control. It is the fact 
that capitalists are once again being exploited by the 
workers. Management is free to re-price its options to 
retain and reward valuable employees. If you are an 
investor, however, you should not expect to have your 
shares repriced -- except by the market itself...and 

The real crisis of capitalism is that capitalism, as 
defined by Karl Marx, no longer makes sense. 
Marx said that capitalism was a system where the 
capitalists owned the means of production. He was 
thinking of factories -- the most visible means of 
production in the Machine Age. But the means of 
production now go far beyond the factory and the hourly 
factory laborer. The means of production are more and 
more a function of knowledge -- which is owned, used and 
controlled by workers, not capitalists.

The emblem of profitable business is no longer the steam 
engine or the assembly line. The production of tangible 
goods has been commoditized. There are many competitors 
in many different parts of the world -- ready and able to 
make whatever widget you need. And factory labor, too, 
has been commoditized and globalized to such an extent 
that hourly wages in the United States have gone 
virtually nowhere in 30 years.

But knowledge is hard to commoditize. It changes too 
rapidly. And those with the critical, up-to-date 
knowledge are extremely valuable. This is where the value 
is added...and where the profits will inevitably end up.

Your very un-commoditized correspondent,

Bill Bonner

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

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Last modified: April 02, 2001

Published By Tulips and Bears LLC