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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
FRIDAY, 9 JUNE 2000 

 

Today:  Getting What You Need

*** Dow back below 50% retracement...seesaw continues...
*** More evidence of stubborn optimism (or numbskull 
Pollyannaism) among investors
*** The freest country in the world -- Russia?!

*** I continue to watch as the Dow balances itself at the 
50% retracement level -- that is, halfway back from its 
losses after hitting an all-time high of 11,722 on Jan. 
14 of this year. 


*** Yesterday, the Dow once again fell below the halfway 
point -- 10,759. In fact, it closed a big 89 points 
below. The seesaw game may or may not be over. But right 
now the Dow is pointing to more losses ahead.


*** As reported yesterday, there have been four rallies 
since the Dow fell below 10,000. Each one has been weaker 
than the previous one. 


*** The rallies signal the obstinate optimism built into 
the market after nearly 20 years of rising prices. But 
the fact that the rallies fail to carry the Dow to higher 
levels signals that the bull market -- at least for now -
- is over.


*** This residual optimism lasts a long time. For many 
years after the Tokyo market crashed in 1989, investors 
remained bullish. Each rally was a signal, to them, of a 
new bull phase. Of course, things just got worse and 
worse. A similar pattern took place in the gold market. 
After the highs of 1978, bullishness among the "goldbugs" 
lingered in the air, like the smell of a bum in a subway 
car, for many years after. The goldbugs are a nearly 
extinct species now. But there are still a few bulls on 
Japan left.


*** A Bloomberg survey plumbed the depths of today's 
optimism. It found that more than 75% of respondents 
thought the economy would remain at least as good in the 
months ahead as it is now -- or get better; 61% expected 
continued Fed rate hikes. And 56% said they lived from 
paycheck to paycheck with no savings.


*** The Nasdaq fell, too, but only by a trifling 13 
points. 


*** And more stocks fell than rose -- 1,589 to 1,332. 
There were about the same number of new highs and new 
lows.


*** Oil fell. And gold, too. Gold dropped $3.20.


*** The big news today will be the release of the latest 
PPI data. If the number is good -- meaning the producers 
are paying lower-than-expected prices -- the amateurs 
will buy, and it could be another "big day" on Wall 
Street. If the number is bad -- indicating more inflation 
than thought -- it could be a very big day in the other 
direction.


*** I don't know if it will be a good number or a bad 
one. Goldman's commodity index is up 10.5%. Oil is up 
13.8%. The ingredients are there for a bad number. But 
throw in a little hedonic hocus-pocus, and who knows?


*** But I do know that the risk is on the downside. After 
four stalled rallies...each weaker than the last...the 
stage is set for a Big Bad Bear day. We'll see.


*** Another thing that is very worrisome is the dollar. 
Japan's economy is growing -- the news came out last 
night. But it isn't growing as fast as expected. "I had 
expected the dollar to climb more on the news," said 
Tetsuya Takahashi, a raw fish eater at the Bank of 
America. But the dollar was a disappointment. Look for 
bigger disappointments ahead...an issue I take up 
below...


*** Either as a measure of the foolish optimism in the 
market...or the short interest...MicroStrategy has 
doubled in the last four days. This is the company whose 
chairman, Michael Saylor, has lofty ambitions for the 
Internet. He aims to make information flow like 
water...and to flood the arid fields of our brains. Sell.


*** Meanwhile, Microsoft fell $1.50. It's now down 50% 
from its high. Investors are being told "not to worry." 
Stocks always come back. There is short-term volatility, 
chant the bubblemeisters, but no long-term risk.


*** Markets are cyclical. Eventually, this level of 
bullishness may recur. But there is no guarantee that any 
individual stock will come back. Maybe Microsoft will 
come back. But how about MicroStrategy with its 
delusional chairman or the flaky dot-coms that are 
currently running out of money?


*** You will recall that President Putin of Russia has 
proposed a 13% flat tax. The measure has been passed by 
the Duma, but not yet by the upper chamber. If enacted, 
Russia will have one of the lowest tax rates in the 
world...and by that measure at least be a far freer 
country than the United States. How things change.


*** Having been a tobacco farmer in my youth, I 
sympathize with anyone who has to earn his living growing 
the plant. So I have followed events in Zimbabwe with 
some interest, where "Comrade Bob" Mugabe's openly racist 
government is stealing the land of the white tobacco 
farmers in order to hand it over to his political 
supporters. Mugabe said on Wednesday that if he didn't 
take all the land, it would be because of "our own 
charity." 


*** Speaking of Africa, Doug Casey has found some unique 
investment opportunities there. See "Into the Heart of 
Darkness" (http://www.dailyreckoning.com


*** I am getting ready for another long weekend. Let the 
heathen roar -- we're celebrating Pentecost. Few of those 
taking the day off on Monday have any idea what Pentecost 
is -- but it is a legal holiday here in France. 


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


MUST HAVE DONE SOMETHING GOOD


Nothing comes from nothing
Nothing ever could
So somewhere in my youth or childhood
I must have done something good
From the Sound of Music


Today, I wonder what it is that Americans have done so 
that they might be showered with such blessings as we now 
enjoy. Employment so full that there is scarcely room for 
a layabout. Even the most shiftless and dysfunctional 
personality is being lured into the job market. Promises 
of sign-up bonuses, options, free pizza and Coke, 
gymnasia -- hardly an illiterate or felon could resist. 
Street corners in bad neighborhoods, so recently guarded 
and befriended by winos and the unemployable, will have 
to fend for themselves.


Kathie Peddicord, who visited this week, told me of her 
travails trying to locate someone for the best job in the 
world -- traveling around the world and writing about it. 
She also seeks correspondents willing to live and write 
in the places she's identified as the most desirable in 
the world. But even the appeal of paradise is not enough. 
(Readers interested in applying should contact Kathie 
directly at publisher@internationalliving.com) 


But it is not only the employment picture that is rosy. 
The whole gallery of everyday economic life is tinted 
rose. Inflation is low. Productivity is high. GDP is 
growing. Crime is shrinking. Life expectancy is 
increasing. And the streets of Paris are jammed with 
American tourists spending dollars that are near the peak 
of their purchasing power. Just about everything, if you 
ignore politics, is swell.


Just how did this come about? Is it real? Not wishing to 
make it too easy for you, I pose an additional question: 
when will it end? And how?


May 19, 2000 -- that may turn out to be the answer to one 
of those questions. That date may mark the beginning of 
the "end of greatness" -- as I will explain. 


I was intrigued by an editorial in the "International 
Herald Tribune," written by a director of Tudor 
Investment, Robert Dugger. "From the 1950s onward," 
Dugger writes, "Americans encouraged European and Asian 
economic progress by making themselves the consumers of 
last resort. Shopping, to put it bluntly, was an 
important aspect of the American strategy to counter 
communist advances beyond the Iron and Bamboo Curtains."


For the last 50 years, Americans have been doing 
something good. We have been buying what the world 
produced. The post-war economies of Europe, and even more 
so, Japan, were helped not by U.S. interference, nor by 
U.S. beneficence -- foreign aid is mostly harmful -- but 
by Americans' willingness to consume rather than save.


And since we have had the benefit of the world's leading 
currency -- the world's reserve currency -- we enjoyed 
the ability to consume more than we produced for long 
periods of time. That was the story of the 1960s -- which 
I recounted here yesterday. It is also the story of the 
1990s. 


The `60s story ended badly. After de Gaulle caught on to 
the fact that the United States could print as many 
dollars as it wanted...the rest of the world soon caught 
on, too. Foreign nations took advantage of their ability 
to redeem dollars for gold -- until so much gold was 
leaving the country that Richard Nixon felt it necessary 
to "close the gold window." 


The dollar fell and the price of imports rose. Dollars 
were dumped. Inflation rose sharply. And by the Carter 
Administration, the rose-colored tint on U.S. economic 
and financial affairs had been replaced by a somber gray. 


Could that pattern repeat itself? 


You may recall my quote from yesterday: "The strong 
dollar is the only thing left underpinning a wildly over-
priced stock market." 


The strong dollar is the only thing left because all the 
other underpinnings have been knocked down. Richard 
Russell (http://www.dowtheoryletters.com) describes this 
process as the "Top Out Parade":


Daily new highs topped out on Oct. 3, 1997
Advance/Decline ratio topped out on April 3, 1998
Transportation stocks topped out on May 12, 1999
NYSE Financial Average hit its peak the next day
Utilities registered their high on the 16th of June 1999
NYSE composite topped out a month later
The Dow itself hit a high of 11,722 on Jan. 14, 2000
The Nasdaq peaked on March 10 at 5,048
The S&P topped out on the 24th of March at 1,527


What's left? The dollar. 


The value of the dollar is, it turns out, tightly linked 
to U.S. financial assets.


Traditional models of economic progress required some 
form of sacrifice to get ahead. People had to work extra 
hard or save their money and invest it. But, in recent 
years, Americans have benefited from a virtual paradise -
- in which consumption appears to make us rich.


Here's how it works: On world markets, Americans continue 
to buy much more than they sell. As the bull market 
morphed into a bubble market, the current account deficit 
(which measures the difference between how much we sell 
overseas and how much we buy) rose from a big number to a 
grotesque one. It is currently more than $2,000 per 
family per year. 


This money does not disappear. It ends up in foreign 
hands -- in Euroland, for example, where $200 billion now 
rests. But the Eurolanders and Japanese have a habit of 
saving rather than spending. So instead of buying U.S. 
goods and services -- they invest the money in U.S. 
stocks and bonds.


The money comes back. But not as earnings or profits. It 
comes back as capital investment -- which pushes up U.S. 
asset prices. Our stocks and bonds go up. We are richer. 
We have suffered no pain; but we seem to have realized a 
gain. We must have done something good.


And here is the important point: as long as U.S. asset 
prices were rising, the foreigners were happy to send 
their money to Wall Street. But all the major indexes are 
now falling. A bet on U.S. investment assets is no longer 
a sure thing.


But there is still the dollar. As long as the dollar was 
rising, even if the markets themselves were no longer 
going up, U.S. asset investments still looked pretty 
good. Even a bond paying 6% was attractive if you also 
got another 10% gain in the currency markets. 


If the markets fall -- the dollar will fall, too. If the 
dollar falls -- the market will fall, too. If both fall -
- ooh la la.

The dollar hit a cyclical high on May 19. Since then, the 
dollar index is down 7%. The euro -- considered a 
hopeless currency just two weeks ago -- has risen in 15 
of the last 16 trading sessions. Yesterday, after the 
European Central bank raised key short-term rates, the 
euro rose to 97 cents, before falling back to 95. 


Euroland, by the way, is running a $50 billion current 
account surplus, compared to America's $400 billion 
deficit. Inflation is 2% in Europe, compared to 3.7% in 
America, the highest inflation rate among industrialized 
nations. 


"The risk that we regard as paramount," writes Dr. Kurt 
Richebacher (http://www.dailyreckoning.com/corprofits3), 
"is the one that is most neglected...a plunging dollar... 
Confidence in a strong dollar has played a crucial role 
in fostering the conditions for the stock market bubble 
and the bubble economy. A savage bear market in stocks 
implies a savage bear market in the dollar."


It is too early to say that the dollar has definitely 
joined the "Top Out Parade." But it is getting its 
sneakers on. The end is near.


Best wishes for a nice Pentecost weekend.


Bill Bonner



* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
The Daily Reckoning is a FREE e-mail service of The Fleet 
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