*** 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
*** 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
*** And more stocks fell than rose -- 1,589 to 1,332.
There were about the same number of new highs and new
*** 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
*** 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
*** 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
*** Speaking of Africa, Doug Casey has found some unique
investment opportunities there. See "Into the Heart of
*** 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.
+ + + + + +
Massacres...Beatings...and a Shocking Development Across
This rock-solid company has taken a brutal beating with
the rest of the market. It's a high-tech blue chip with a
P/E of 7...a dividend yield of 4%...and the largest and
fastest growing ISP in the world's fourth most populous
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 firstname.lastname@example.org)
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
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
"The risk that we regard as paramount," writes Dr. Kurt
"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.
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Last modified: April 02, 2001
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