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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

FRIDAY, 2 JUNE 2000 


Today:  The Sushi Economy

*** Confusion...paradox...sushi.
*** Stagflation?
*** 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 
( 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."

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

The Sushi Economy

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 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.

Bill Bonner

Enjoy the weekend. I hope it is as pretty where you are 
as it is here. 

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

The Daily Reckoning is a FREE e-mail service of The Fleet 
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Last modified: April 02, 2001

Published By Tulips and Bears LLC