*** Mr. Deshais...soon a free man. A date with Al Gore.and
*** Confusing signals, contradictory indicators -- this
is a very wily bear stalking the markets.
*** Bonds rose yesterday. For the second day in a row
they went up a full point. Some analysts think they may
return to their highs.
*** Bonds seem to believe that the economy is slowing.and
that there probably won't be any further rate hikes by
the Fed.or any serious inflation.
*** That was what the report from Purchasing Agents
seemed to show too -- lower prices ahead. And new home
sales are falling -- new home starts fell 12% in
California in April.
*** The dollar even rose against the euro, slightly,
yesterday. And day after day, gold goes nowhere.
*** These things may indicate a slowing economy and low
*** But meanwhile, oil rose more than a dollar. It is
over $30. And natural gas ($4.40) is near an all time
record. It has never sold higher than $3.48 in the
*** Consumer confidence, too, is near an all-time high.
*** So, there are signs of both inflation...and a business
slowdown. This sounds alarmingly like stagflation, which
economists once thought impossible -- the worst of all
possible worlds, rising prices in a declining economy.
*** I guess it shouldn't be surprising, however. The Fed
is raising interest rates to try to slow down
the economy, while keeping the money supply expanding at
nearly twice the rate of the GDP. Oxymoronic policies
produce oxymoronic results.
*** One of the popular predictions making the rounds on
Wall Street is the idea of the Summer Rally, which is
expected to take stocks back near their March highs.
This hypothesis gathered strength yesterday as the Dow
rose 129 points on the 1st of June. The Nasdaq rose 181
points. And the Nasdaq 100 -- the focus of so many New
Economy dreams -- went up 194 points.
*** Unlike the peaks of December and March, however,
this rally seems to have a wide base. 2068 stocks
advanced yesterday, on the NYSE, while 901 declined.
There were 76 that hit new highs, while only 35 hit new
*** And if today's report on May employment numbers is
favorable,, "we could have a real big day," said one
analyst quoted in a Reuters article.
*** The world of Internet start-ups has definitely
changed. E-entrepreneurs have been shocked to discover
the introduction of a hurdle or two -- investors want
them to make money. "You didn't need a plan where you
could be profitable in 24 months not long ago," said
Lonn Jonston, VP of TurboLinux, a company that just
announced layoffs. According to Johnston, the market
used to say "that's cool; you can worry about profits
later on." No more.
*** Earlier this week, ex-Vice Chairman of the Fed, Alan
Blinder, told the Nihon Keizai Shimbun (Japan's WSJ) the
Fed is likely to hike Fed Funds to 7-7.5% within this
year. Blinder said May's 50bp hike is not sufficient
to stem inflation and that stocks' current P/E of 30 is
too high compared to the historic norm of 15. Can Fed
rate hikes prick this bubble? Marc Faber doesn't think
so. See the article "When Do Investment Bubbles Burst?"
*** "I saw the top and didn't even know it" says Dan
Ferris. "Celera, a biotech firm, out of Rockville, MD, has
decoded the entire human genome. They were hawking its
fountain of youth technology on the cover of "Forbes" a few
months ago. Then its stock split and doubled in two
weeks. That was the top." This was The Moment of Maximum
Optimism. And the absolute top
of the Nasdaq.
*** Could China be the next home of the mutating bubble
virus? "Forbes" reports: "China has 40 million cell phone
users in a population of 1.2 billion, only a 3% market
penetration. Telecom use, land-based and wireless
combined, will grow 50% or more during the next three
years." "Forbes" also reports 1.4 million PCs were sold in
China last year. By 2003, they expect 42.9 million PCs to
be in use.
*** Doug Casey, writing from Shanghai reports the Chinese
"are already living in the world of Blade Runner
"And the rate of change is
*** And Bob Bauman of Sovereign Society
(www.soverignsociety.com) sent me this cheerful note
about democracy in action: "The voters in Zurich, fed up
with the costly boondoggling of the city fathers, voted
on May 21 to REDUCE the salaries of the Mayor and other
top officials. The Mayor's salary was cut from Sfr
220,000 to Sfr 200,000."
*** It's another gorgeous day out here in the Poitou
region of France, where we are celebrating the long
Ascension Day holiday. Our gardener, Mr. Deshais,
confided in Elizabeth yesterday, but not me, that his
wife has asked for a divorce. Mr. Deshais seems to be
telling Elizabeth that he will soon be a free man.
Should I be worried? Should I read "Lady Chatterley's
*** Results of a focus group research project are in.
Women would prefer a date with Al Gore to George W. Bush.
Of course, I would like a date with the woman who modeled
for those Aubade underwear ads in Paris. That woman, to
borrow a phrase from our president, deserves some sort of
recognition. Politicians are always protecting their
derrieres; at least she has something worth protecting.
But I don't know if I'd want her as President...unless,
perhaps, the only other choices were Al Gore or George W.
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
beginning." 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
dot-economy by clicking." http://www.dailyreckoning.com/getwealthy8/
If only Alan Greenspan could work some of his reputed
magic on the other side of the world. You will recall
from yesterday's message that the Japanese are throwing
themselves onto the train tracks in such numbers that the
railways have put up mirrors in the stations so that the
jumpers may 'reflect' before killing themselves.
Meanwhile, in America financial failure is rarely a cause
of suicide. Ours is a fail-safe, no fault culture. We
can smoke all our lives -- with a warning label on the
package staring at us each time we take out a cigarette -
- and still sue the manufacturer when we get sick. Even
bringing down a huge, multi-national corporation is
generally cause for a rich severance package, not a one-
way trip to the train station. What corporate executive
or money manager in America would even dream of doing
himself in -- no matter how great his losses?
And fortunately, it so rarely happens that people lose
money in America anyway. 'Easy Al' Greenspan prevents
any serious clog in America's financial plumbing...and
rushes in to fix the minor ones immediately, with a gush of roto
rooter cash whenever it is necessary.
While the Fed worries investors with modest rate hikes,
it simultaneously keeps money growth and credit loose.
So the cash keeps flowing. And the train tracks remain
Japan is so different from America. While Americans
spend, Japanese save. While the Fed splashes cash around
like beer at a frat party, the Japanese Central Bank,
treats it as carefully as a geisha treats a businessman.
While the Fed hikes interest rates, Japan's rates are
near zero. While the U.S. economy booms, Japan's Main
Streets are as silent as a dead battery. While the U.S.
runs a frightening current account deficit, the largest
ever recorded, the Japanese run a persistent financial
surplus of stunning size, equivalent of to almost 10% of
GDP. While Americans chow down on steaks...the Japanese
eat raw fish.
It is as if the two countries were on the opposite sides
of the world. And in a curious way, contrary to what
everyone knows to be indisputable fact...as we shall
see...the Japanese are actually getting richer, while
Americans get poorer.
While everything goes right for America, everything seems
to go wrong for Japan. Investors keep expecting a
turnaround. The "restructuring" story, wherein Japanese
corporations undertake to adopt the American program for
providing shareholder value -- mergers, acquisitions,
cost-cutting -- drew investors into Japanese stocks on
several occasions over the last few years.
Wall Street firms love restructuring. They had made
money in the 1980s helping U.S. companies adopt the
practices of Japan, Inc. Now they make money helping
Japanese companies adopt the US model.
But what did it produce?
"During the three months to last December," explains Dr.
Kurt Richebacher, "Japan's economy actually contracted
1.4%. Annualized, this was 5.5%, following a 3.8%
decline in the third quarter. For the calendar year, the
economy grew 0.3%, considerably less than expected."
"Gross domestic output has now fallen," Dr. Richebacher
goes on, "for seven of the last nine quarters."
Nevertheless, those who believe the Japanese
restructuring story take this negative data as a
favorable indicator. It shows, they say, that the strong
medicine is working. Well, it is at least distasteful.
And Japanese stocks, which have shown an occasional
tendency to rise over the past decade, are once again
below 50% of their value in 1989 -- and seem destined to
stay there forever.
Year after year, Japanese companies have announced new
restructuring plans. And the Japanese government has
announced a new fiscally stimulating budget. So
stimulating have these budgets been that $1,130 billion
of new government debt has been added, bringing the ratio
of government debt to GDP up from 60% in 1992 to more
than 100% in 1999.
Perversely, more and more stimulus produces less and less
real growth. From '96 to 2000, deficits have risen from
4.3% of GDP to 7.2%.while real growth has fallen from
5.1% to 1.2%.
And Japanese consumers seem unwilling to spend their
money. Instead, they save it and invest it. They pay
off debts. They accumulate financial assets, rather than
beach houses. Despite a sluggish economy, and a mood of
desperation in the financial markets rather than US-style
euphoria, the Japanese are actually getting wealthier.
Slowly. And quietly.
The Japanese financial story is fascinating. It is
fascinating because it is ignored, misunderstood and
paradoxical. The Japanese market is in the doldrums for
10 years...with declining, weak, and often negative
economic growth to boot -- and still the Japanese grow
wealthy. Even the yen goes up -- though the Japanese
government runs the biggest public deficits in the post-
industrialized world...and the JCB keeps interest rates
near zero. And even though the Japanese regularly eat
raw fish, they have longest life expectancies in the
Japan has the world's second largest economy. But, it is
as if it did not exist. American economists, and
Americans generally, believe the Japanese must have done
something wrong and disappeared from the Earth.
And whatever they did wrong, (no one is quite sure what),
Americans are convinced that we will not make the same
mistake. After all, Americans are not fanatical savers.
We have no large financial surplus. We cook our sushi.
And we have 'Easy Al' at the head of the Fed, rather than
some up-tight banker who would jump in front of a train
if things go badly.
Enjoy the weekend. I hope it is as pretty where you are
as it is here.
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Last modified: April 02, 2001
Published By Tulips and Bears