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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Terminale

*** The rally didn't hold amateur's market
*** E-tailers getting ready for "Going Out of Business" 
*** Suicide by passenger train

*** "The rally didn't hold up," said a director of Wit 
Soundview in a Reuters report, "because there wasn't a 
lot of volume." Typical of bear market rallies, there 
weren't enough people with enough money to sustain 
Tuesday's surge in prices. So it petered out yesterday.

*** The Dow fell very slightly -- 4.8 points. The Nasdaq 
registered a 58-point decline.

*** But this is amateur's market. And the amateurs are on 
full "data watch" this week. Today the numbers from the 
purchasing managers come out -- showing the increase in 
prices at the wholesale level. And tomorrow the jobs data 
arrives. Anything could happen.

*** Home sales fell 6.2% in April. Consumer spending 
slowed, too...though it is still rising at 7.5%, 

*** "The one truly distinctive feature of the New 
Economy," wrote Robert J. Samuelson recently, "is that 
consumers, as a group, have virtually stopped saving. In 
1991, the personal savings rate (savings as a share of 
after-tax income) was 8.3%; in 1999 it was 2.3%." 

*** Samuelson notes that even with computers, 
productivity gains were larger in the 1950s than in the 
1990s -- a point I've made to you often. Unemployment, 
too, was lower in the late-`60s than it is now. So what's 
new about the New Economy? 

*** Well, Samuelson, goes on: "Every percentage point 
drop in the savings rate is worth about $66 billion in 
extra consumer spending. Americans may still make 
deposits in savings accounts or 401(k) plans. But 
consumers offset these savings by borrowing or by 
spending stock profits. It is this spending spree -- 
based heavily on people's stock wealth -- that has 
expanded the economy, profits and hiring..."

*** But spending money does not create wealth -- it 
destroys it. It creates the illusion of wealth, in the 
form of economic activity...and consumption. But real 
wealth is created by saving and investing -- not by 

*** But, bulls will reply, billions of dollars ARE being 
invested in the New Economy. More than ever before, 
venture capital funds...and ordinary stock buyers...are 
contributing to the world's wealth of capital. More 
entrepreneurs are starting up enterprises. More tech and 
business innovations are being tested. 

*** Alas, when a dead-end dot-com rents office space, 
buys equipment, hires people with body piercings and 
orders out for pizzas, capital is not created -- it is 
consumed, just as it is used up by people who take a 
holiday in Paris. For the world's wealth to increase, 
there must be a return on the capital invested. The new 
companies must produce a benefit that society is willing 
to pay for...and willing to pay enough for so that the 
company can clear the "hurdle rate" -- returning enough 
profit to make the whole thing worthwhile. When the 
hurdle rate goes to zero -- as it did for the Nets and 
techs -- the whole thing becomes an exercise in self-
deception. Investors pretend to invest. Entrepreneurs 
pretend to create wealth. And stock market indexes 
pretend that everyone is getting richer. 

*** According to Forrester Research, which keeps track of 
trends in the Internet business community, most of the e-
tailers operating entirely on the Internet will be out of 
business within 12 months. 

*** The whole thing -- the boom, the New Era, the New 
Economy, the explosion of new wealth supposedly created 
by new technology -- is an imposter. 

*** When will the counterfeit be exposed? "If the market 
doesn't upset consumers," says Samuelson, "the boom 
continues. If the market terrifies consumers, the boom 
stops. Between those two extremes, there are endless 

*** The popular press is catching on to many of the 
themes we've been discussing here for months. David 
Dreman wrote an article in April's "Forbes," entitled, 
"What New Economy?" E-tailers, whose sales are growing 
strongly, "accounted for only 0.6% of all retail sales in 
1999's fourth quarter," he says. And, "in the four years 
that online booksellers have been in operation, and the other Internet sites have captured 
only 8% of the retail book market. They have accumulated 
losses in the billions. Hardly...a category-killer...

"At the end of 1999, 400 large Internet-related companies 
had a market value of $1 trillion (27% of the Dow). This 
group reported combined revenues of $29 billion; that's 
only 2% of the Dow's revenues. More tellingly, the 
Internetters will collectively lose $9 billion this year, 
while the Dow stocks will probably earn close to $150 

*** Oil went down by $1.34 a barrel after the Saudis let 
it be known that they, too, would respond to the 
"automatic" trigger (an oil price over $28) by pumping 
more crude.

*** And bonds rose. The yield on a 30-year T-bond dropped 
to almost 6%. Bonds won't make you rich overnight, but 
they're not a bad place to sit out a bear market. A 
portfolio of bonds could turn the tragedy of high losses 
into the entertainment of low comedy.

*** While the rally stalled, it also inexplicably 
broadened out. There were 1,719 advancing stocks 
yesterday, as opposed to only 1,267 declining ones. And 
in a remarkable departure from recent custom, 89 stocks 
hit new highs; 54 hit new lows.

*** The Japanese are throwing themselves in front of 
trains. Suicide by train is such a problem that they're 
putting up mirrors so that, as a railway official put it, 
"people will reflect before acting." 

*** There is no shortage of distractions in Paris. But 
even out here in the middle of nowhere -- Addison and I 
have to use iron discipline to keep focused on our work. 
Our office was invaded by a chicken. There being no 
representatives of the Animal Rights League present, I 
booted it out of the window... Then Mr. Deshais insisted 
upon showing me his latest oeuvre -- a row of tomato 
stakes that looked as though they had been lined up with 
a laser transit. They were so absolutely straight and 
true, I marveled at how precise a drunk can be.

+ + + + + + 

In a recent article appearing in the "Wall Street 
Journal," Fleet Street Letter's Marc Faber notes that "no 
investment mania has ever ended without peak prices 
collapsing by at least 70%. In other words, the recent 
volatility of the Nasdaq and other markets is only the 

To find out how it ends, and which investments will hold 
up over the course of a volatile summer, please read our 
special report on the collapse of the dot-economy by 
+ + + + + + 

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


The final academic stage of the teenaged years in France 
is called "Terminale." It is the last year of the French 
equivalent of American high school, but typically at a 
level more closely parallel to the second year of a U.S. 
community college.

After Terminale, there is a big hurdle for the students 
to jump -- the baccalaureat, a national test so dreaded 
and so important that people spend years trying to 
achieve a passing level. Without the "bac," girls fear 
they are doomed to be charwomen and boys expect they will 
spend their lives on the dole. 

Still, the Terminale students were in high spirits 
yesterday -- which was, the last day of school for them. 
Maria reports that a group of girls dressed up in the 
most abbreviated costumes she had ever seen on the 
streets of the 16th arrondissement -- our conservative, 
bourgeois neighborhood. To the accompaniment of an 
impromptu band, they sang Tom Jones' big hit, "Sex Bomb," 
in their Franglais accents, swinging their hips and their 
arms as though they were about to become unhinged.

Jules, meanwhile, reports that a group of Terminale boys 
marched through the streets with a live chicken, whose 
significance Jules failed to detect, throwing eggs. 
Passers-by ducked into shops and around corners to avoid 
the missiles.

Ah...the high spirits of youth at the end of its most 
high-spirited stage. 

"A common feature in the terminal phase," writes Marc 
Faber, speaking of bubble stocks, rather than bubble-
headed teenagers, "is a sharp rise in credit demand 
(margin debt), huge volume in the most speculative 
sectors of the market and extreme volatility."

Volatility, excess, boisterousness -- how better to 
describe the terminal phase -- whether of bubbles or 
teenagers? And don't forget uncertainty...

"During the terminal phase," Marc continues, "the advance 
becomes very narrow and dangerously concentrated...with 
just a handful of stocks reaching all-time highs, while 
most stocks are already in well-established downtrends."

"Investment manias involve a great deal of uncertainty. 
The discovery and exploitation of natural resources, the 
opening of new territories, the application of new 
inventions, or the introduction of new products [or the 
raising of a child...] all involve a high degree of 
uncertainty as to their future profitability. Thus, 
bubbles proliferate particularly among assets and 
investment themes whose value is almost impossible to 

Marc reminds us of the auto and airline industries. Of 
the hundreds of U.S. companies that entered the field, 
only three remain. Those three will not disappear easily 
-- there are huge barriers to entry that keep competitors 
out. On the other hand, their growth is not likely to 
surprise the world, either. 

Airlines, meanwhile, attracted a lot of competition over 
the last two decades. But 129 airlines filed for 
bankruptcy in the period. And according to Warren 
Buffett, during the entire history of the airline 
industry, investors -- overall -- never made a profit.

What will the Internet and other new technologies 
produce? "Even if one could reliably forecast the growth 
rate, final market penetration and profitability of the 
Internet," Faber writes, "who can know which companies 
will survive and thrive, and which ones will fail? 
Possibly the most successful future Internet players have 
not yet been formed."

"The uncertainty..." he says, "increases the volatility 
in the terminal phase." The stocks could be worth a lot. 
Or nothing. 

And guess what. They will be.

The terminal phase of a bubble marks the transition from 
infinity to nothingness. Expectations that were nearly 
limitless are reduced to hopes that are almost 
negligible. Values that formerly were thought to have no 
ceilings are discovered to have no floor. Investors who 
had expected to make a fortune are delighted to get back 
a fraction of their original capital. 

Of course, there is no guarantee that we have reached the 
terminal phase. This teenaged market could have a year or 
two left at home -- struggling to pass the bac. 

But the mania seems to be winding down. The e-tailers 
certainly seem to have reached the end of their growing 
years. Drkoop looks terminal. Many other companies still 
have a pulse but have sustained such brain damage that 
they will expire as soon as they are taken off life 

Even overseas, where the bubble has been generally less 
inflated, collapsed in the United Kingdom. 
WorldOnline, the big Dutch Internet play, has flopped. 
Softbank and Hikari Tsushin, in Japan, are down so much 
their executives are considering a one-way visit to the 
train station...perhaps to reflect on what happened...

But, writes Faber, "it is conceivable that the present 
bubble will mutate once again..."

"I can only add," he concludes, "that no bear market 
beginning was ever perceived as such, but always as a 
correction that would be followed by new highs."

So stay the greatest, gaudiest, most 
extravagant and absurd story of our time...continues to 
be told.

And if you are a teenager at "Terminale..." or have a 
teenaged heart...go for it. Throw the eggs. Swing the 
hips. Soon you'll have to study for the "bac"...or in 
America, pay your college loans. Soon the infinity of 
your future will be the reality of your life. And your 
infinitely rich Internet stocks will be no further cause 
for celebration.

Your still-adolescent scribbler,

Bill Bonner

* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
The Daily Reckoning is a FREE e-mail service of The Fleet 
Street Letter -- If you'd like practical advice about 
profiting based on the ideas in this e-mail, then simply 
subscribe to my monthly financial communique, "The Fleet 
Street Letter." Right now you can save up to 50% off the 
regular price. Visit 
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
About The Daily Reckoning:
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Bill Bonner, recognized internationally as a brilliant writer, entrepreneur
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Last modified: April 02, 2001

Published By Tulips and Bears LLC