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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
WEDNESDAY, 31 MAY 2000 

 

Today:  Persistence of Memory

*** Biggest Nasdaq increase ever...
*** More IPOs for this week...for those with money to 
lose
*** Is the correction over?

*** It was a rollicking, frolicking day on Wall Street 
yesterday. Investors, brokers, fund managers and analysts 
arrived back at their desks bright-eyed and bushy-tailed 
after a three-day weekend spent in quiet contemplation of 
the poor grunts who died in trenches, foxholes and bombed 
out buildings. 


*** Among those returning to work was Dan Niles, formerly 
with Robertson Stephens and now with Lehman Brothers, who 
announced that the average memory/box of business 
computer systems would increase from 90 megabytes to 128 
megabytes before the end of the year. What's more, he 
predicted a shortage in the DRAM industry.


*** I love this tech talk. It makes me feel so modern, so 
with it...so in-tune with all that is new and exciting.


*** Investors must have loved it, too. For they came into 
the market yesterday with bulging wallets determined to 
buy something...anything. 


*** The Dow rose 227 points...or 2.2%. The Nasdaq posted 
its biggest single-day increase in history -- rising 254 
points or 8%. 


*** More than twice as many stocks rose as fell on the 
NYSE - 2,018 to 920. 


*** The S&P lost 6.2% so far this year; its worst 
performance for this period since 1984. And after four 
straight weeks of falling prices -- on the Nasdaq and S&P 
500 -- investors were ready for a little relief. 


*** "People are over the shock of the Nasdaq's correction 
and are ready to roll up their sleeves and put some money 
to work," said a Warburg analyst. 


*** Is the correction over? Or is it just beginning? Only 
time will tell. But a rising market only increases the 
odds of further rate hikes by the Fed. Bonds went down 
last week -- probably in expectation. But rate hikes 
alone probably won't deflate a bubble. What will? See 
below...or check out "When Do Investment Bubbles Burst?"


*** Most likely, we've just witnessed another rally in a 
major bear market. But there were so many hopes attached 
to the bull market dream -- they won't be given up 
easily...again, see the "Persistence of Dreams," below...


*** Ominously, a headline on a Reuters report tells us 
that the "Dollar on Defensive Despite Wall St. Rally." 
The euro has risen to 93 cents. Foreign money -- and 
perhaps quite a bit of domestic money, too -- is 
suspicious of America's financial future. A crash on Wall 
Street will cause the dollar to collapse. A collapse of 
the dollar will cause Wall Street to crash. Or is it the 
other way around?


*** Volume remained fairly low -- despite the soaring 
prices. This low volume is killing the e-brokers. 
Ameritrade has fallen 82% in the last six weeks.


*** Yesterday's rally couldn't have come at a better time 
for the eight companies scheduled for IPOs this week. Red 
Herring reports: "...the smallest, Urban Cool Networks, 
...still plans to raise $20 million by selling 2 million 
shares at $10. The planned offering...would give Urban 
Cool a cool $62 million market value. Urban Cool's Web 
site calls itself `a leading Internet technology and new 
media company.' So much for the hyperbole; now the 
reality: the nine-person company's filing with the 
Securities and Exchange Commission shows $12.6 million in 
losses and no revenues during Urban Cool's two-year 
operating history. At the end of March, the company was 
down to its last $165,000 in cash and had negative $1.1 
million in working capital, which includes such things as 
accounts receivable, inventory and other current assets. 
The last time a company with the word `cool' in its name 
went public was May 19. Coolsavings.com (Nasdaq :CSAV) 
priced at $7, hit a high of $7.12, and headed south, 
settling at $4.50 on Friday."


*** Meanwhile, "Karl Marx championed the graduated income 
tax," writes Bill King, "U.S. comrades perfected it. 
Friday's "FT" reports the Russian cabinet approved a 13% 
flat tax for Russians!!! The cabinet believes this will 
increase tax collection, as tax evasion is a huge problem 
there."


*** According to the BBC, people who run e-businesses in 
England are being paid 40% more than their peers in the 
"Old Economy." They are also "67% more likely to receive 
general loans at low interest rates, 50% more likely to 
receive car loans, 33% more likely to receive mortgage 
subsidies and 20% more likely to get flexible benefits."


*** Mike Palmer of International Living 
 tells me the 
Schiphol Airport in Amsterdam is going to get a great 
deal friendlier soon. "One of Amsterdam's most popular 
bordellos, the Yab Yum, is suing the Schiphol Airport for 
the right to open up in the airport. Yab Yum wants to 
provide hors d'oeuvres and 'massages' for travelers with 
long layovers."


*** The Real France? Interested in knowing what it's 
really like living, working and raising children in 
France? Elizabeth, my wife, is jumping headlong into the 
Internet age, and hosting a live forum this Saturday, 
June 3rd a 1pm EST. By the way, there are still spots 
available on the IL tour group that is staying at my 
house the last week in June... 
(http://www.internationalliving.com


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

PERSISTENCE OF DREAMS


A few years ago, Hillary Clinton proposed a "politics of 
meaning." She was hoping that politics could give meaning 
to your life and mine, as it has for her.


We, too, might be enlisted in the campaign to build a new 
and better world. And, with such weighty cares and high-
minded visions before our eyes, we might be able to 
ignore a few cattle trades. 


In the `30s and `40s, there were few politicians anywhere 
in the world who could resist the allure of the New Era. 
The only question was which strain of this new hokum -- 
Nazi or communist -- they would choose.


"Next to Hitler, Mussolini and Stalin," wrote the Jesuit 
scientist and philosopher, Teilhard de Chardin, 
ecumenically, "don't you see that Churchill...[is] 
grotesquely antiquated?...Personally, I stick to my idea 
that we are watching the birth, more than the death, of a 
World..."


It was hard to imagine an English victory over the 
Germans in May 1940. What's more, to most intellectuals 
of the time, such a victory was not even desirable -- 
because it would hold back the New Era for which they 
dreamed.


Believing in an English triumph, wrote Teilhard de 
Chardin, "is like someone who in 1900 had prophesied the 
victory of China, with its mandarins in pigtails and jade 
buttons, over the Europeans with their motors and 
cannons..."


"Peace," he went on, "cannot mean anything but a HIGHER 
PROCESS OF CONQUEST...The world is bound to belong to its 
most active elements. Just now, the Germans deserve to 
win because, however bad or mixed is their spirit, they 
have more spirit than the rest of the world."


Those dreams of a dynamic new world were hard to stop. 
They filled hollow lives with ersatz meaning. They 
changed behavior -- thus, actually creating a new world.


But this new world was ghastly. Regimes in both the 
Soviet Union and Germany were abominations. A few 
intellectuals and contrarians resisted or fled. But the 
New Era dreams persisted until they were utterly 
exhausted. Germany had to be pulverized and practically 
flattened -- by the combined efforts of the largest and 
most heavily armed forces in history. And the Soviet 
Union put up with malign communism for a period of seven 
decades until the economy was so hollowed out, and the 
military so weak, that the entire system simply 
collapsed. Last week, by the way, marked the anniversary 
of a small event which helped to bring down the entire 
Soviet regime. Mathias Rust, a West German teenager, flew 
a small plane from Finland all the way to Moscow -- 
landing on Red Square. His plane was never challenged by 
Soviet air defenses. Mathias, who had done the Soviets an 
immense service, spent nearly two years in jail.


Even today, as the book by Revel, "La Grande Parade," 
reveals -- apologists for Bolshevism try to keep the 
dream alive -- arguing that a "pure form" of communism 
could succeed, even though every attempt to apply it, 
anywhere in the world, has been an appalling failure.


It is not logic, reason nor even observation that brings 
a mania to a close -- it is exhaustion. A mania has to 
run its course. It has to be obliterated, annihilated, 
crushed and completely destroyed. People do not give up 
on their dreams easily.


So how will the dream of the New Economy finally end? 
Marc Faber takes up the question in a recent issue of his 
"Gloom, Boom and Doom Report." There are two schools of 
thought, he says, one "believes that it is only a matter 
of time before money shifts back into the "Old Economy" 
stocks, which could lead simultaneously to a decline of 
the Nasdaq and a rise in the Dow."


"Another...holds a less sanguine view. A sharp break in 
the Nasdaq would lead to widespread losses and have very 
negative financial and economic ramifications. This 
school holds that a Nasdaq crash would not only bring 
down all high-tech stocks, but lead to lower stock prices 
altogether."


Faber points out that "rising interest rates alone hardly 
ever deflate bubbles." In fact, he argues that rising 
rates can actually "fuel the bubble," as investors shift 
money from low performing sectors to more promising ones.


"...[S]peculators will jump," he writes, "nervously, from 
one group of stocks to another in the hope of maximizing 
their gains...Furthermore, at the end of the bubble, 
additional buying power is increasingly financed with 
credit. (Margin debt in the United States increased by 
$83 billion, or at an annual rate of over 130%, between 
November 1999 and February 2000.)" 


"What eventually pricks the bubble is not so much the 
price of money as its availability," says Faber.


Until the money disappears -- that is, until the fuel is 
exhausted, the mania continues. "Like a virus," Faber 
suggests, a bubble is "extremely resilient...Frequently 
they also mutate rapidly."


"Bubbles don't occur at the beginning of an economic 
cycle," Faber explains, "but rather, at the end. In other 
words, bubbles mark the climactic end of an expansion or 
a trend that has been in place for a very long time. 
Therefore, it takes much more than just moderately rising 
interest rates to reverse people's expectations. Since 
the boom or the trend has lasted for so long, it is 
perceived as a permanent one. Confidence becomes very 
hard to shake."


After the price of gold fell 50% in January 1980, faith 
in the yellow metal remained so strong that investors 
continued to see every subsequent drop as a buying 
opportunity -- up until the late `90s!


Faith in gold, however, reached almost messianic levels 
in the late `70s. But is faith in technology any less 
strong?


(I noted with amusement that J. Taylor's newsletter - 
"Gold and Technology Stocks" -- mentioned here yesterday, 
used to be named "Gold and Gold Stocks.")


"Similarly," writes Faber, "the first decline in the 
Japanese stock market in 1990 was perceived as a 
correction and a great buying opportunity and accounted 
for a strong rally in the spring of 1990."


Of course, the crash in 1929 was also seen by many as a 
buying opportunity. The most celebrated American 
economist of the time, Irving Fisher, wrote before the 
crash, with more alliteration than accuracy, that the 
U.S. economy had reached a "permanent plateau of 
prosperity." After the crash, he still refused to give up 
on the dream, writing that the "panic was technical in 
its character and largely artificial." 


"For the immediate future," wrote Fisher in the last 
sentence in his book, "The Stock Market Crash -- and 
After," which was written in November '29, "the outlook 
is bright." 


Dreams persist. But not forever. "In my opinion," Faber 
concludes, "there is only one [thing]...that permanently 
reverses investors' excessively optimistic 
expectations...and that is `a meaningful and enduring 
loss of capital for the majority of investors with no 
hope of recovery.'"


Exhaustion. That is what we have to look forward to.


Bill Bonner


P.S. We're leaving for the country tonight. I found out 
that Addison is a finish carpenter...so I invited him for 
the holiday weekend. We'll write.
 
 
 
 
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
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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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