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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

FRIDAY, 16 JUNE 2000 


Today:  See A Pattern?

In Today's Daily Reckoning:
*** Not much movement in Dow, Nasdaq, the dollar or bonds.
*** But the meter is running...and the cash is running out
*** Cooking the books...a 'nuts and bolts' company with 
real promise...and more

*** The Dow is still see-sawing around the 50% retracement 
mark. It was up 26 points yesterday - amid little 

*** The Nasdaq rose 48 points for no apparent reason.

*** The dollar was mixed. Bonds mixed. Gold fell $2. 

*** So, there is not much to say today. 

*** I've always wondered how is it possible for huge 
companies with billions in sales to be able to forecast 
earnings within a penny or so of the actual number. In our 
very small business, there are always surprises. Nothing 
ever seems to happen as forecast in the budget. But quarter 
after quarter, GE, CISCO and many other biggies bring in 
earnings of 1 penny per share more than they expected. 

*** Now, I know. CUC officials admitted that they simply 
"cooked the books." It was "a culture that had been 
developed over many years," one testified.

*** Despite some recovery, the Dow is still down 6.8% for 
the year. Margin accounts, which hit a record of $278.53 
billion in March, have fallen to $240.66 billion. No one is 
making money in this market. The insiders are dropping out. 
And speculators are getting knocked out.

*** "Why can't the market just level off and stay 
relatively high?" This question was posed to Richard 
Russell in this week's Barron's interview. "When the bull 
dies," replied Russell, "the bear takes over, and the 
correction process begins. In this process, things go 
wrong, sentiment changes and dirty water begins to seep out 
from under the closet door. Secrets are exposed, corruption 
shows itself, fantasies turn to nightmares, and bull-market 
dreams become bear-market horrors."

"Don't ask how or why," advises the guardian of the Dow 
Theory flame, "It's simply the way bear markets work. The 
sad part of it is that bear markets work just the opposite 
of bull markets. Just as bull markets climb a wall of 
worry, bear markets descend on a ladder of misplaced 

*** As I have been pointing out, a bubble is created on 
credit. The bigger the bubble gets, the more the credit 
costs. It's like buying horses. You may want the additional 
horse...but each one needs to be fed and cared for. After a 
while, you can't keep up. 

*** Among the big eaters in the stable is the US current 
account deficit - which results from buying more globally 
than we sell. That deficit - nearing 5% of GDP - takes 70% 
of the entire world's savings to finance.

*** Richard Russell mentions an estimate of total debt of 
$35 Trillion. At 7% interest, this credit costs $2.45 
trillion annually. I'm not sure what this figure means - 
but it's big enough to be very scary, representing more 
than a quarter of US GDP.

*** In the same Barron's issue Alan Abelson shows a chart 
illustrating how the Fed is now tightening up on the money 
supply. You will recall that the Fed (in fact, all the 
world's central banks) rushed to fatten up the world's 
financial system - supplying plenty of money in 
anticipation of Y2K problems. In this sense, the Y2K scare 
was real - and it had an enormous effect on markets. Given 
a big bucket of Y2K oats and molasses, the Nasdaq nag 
spurted ahead by 50% in the last quarter of '99. 

*** Now, rations are being reduced. MZM, measuring cash, is 
growing at only 3.4% according to the latest figures. 

*** As I explained yesterday, nobody harbors a burning 
desire to own a Cisco product. People do not save their 
money so they can buy one. Owning one will not make you, as 
Isaac Hayes sings of "Shaft", "a sex machine to all the 
chicks." Nor is a Cisco product indispensable, like toilet 
paper. Women do get say to their husbands, "Honey, would 
you be sure to pick up some Cisco products on the way home 
from work."

*** No, on both desire and need...Cisco gets weak marks. Of 
course, the same might be said of GPC, a 'nuts and bolts' 
supplier for the automotive age. Founded in 1928, GPC must 
be one of the greatest business success stories in America. 
Genuine Parts has been increasing revenues for 50 
consecutive years. Dividends have risen for 44 consecutive 
years. And during the early 70s, GPC was one of the 'nifty 
fifty' with a P/E above 40. But who cares? No one, 
apparently. Its P/E ratio now is less than 1/10th that of 
Cisco's. You can buy a share at about 11 times profits, 
yielding almost 5% cash dividend. Both GPC and Cisco may be 
good companies. But only one is likely to make investors 
money. Guess which.

*** "Currency strength or weakness," says Dr. Kurt 
Richebacher, contradicting me, "is determined not by 
perception, but by hard economic facts." And in this 
respect, he ranks the "euro-zone" economy well above the 
American economy. Euroland has a 44 billion euro surplus in 
the current [trade] account...a gross investment ratio of 
19% of GDP and a personal savings ratio of 9% of GDP, as 
opposed to almost zero in the United States." What's ahead 
for the dollar? 

***** "The first problem with vacations is lowering your 
pace of thinking and living from the hectic securities 
business," says Ray Devoe, securities analyst and FSL 
contributor. "The second... is getting back up to speed and 
determining what has been going on in your absence." After 
returning recently from Ireland, Ray was puzzled to find 
"the old 'momentum game' and super-optimism has returned, 
as if the wild convulsions and gyrations of the March 10-
May 24, 2000 period never happened..." 

*** And something else...France has some of the toughest 
gun control laws in the world. Private firearms were 
confiscated and outlawed in 1940 when Hitler took control 
of France. But that did stop someone from taking shots at 
people yesterday - at the Porte de la Chappelle. No reports 
on casualties.

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"There is always a disposition in people's minds to think 
that existing conditions will be permanent," wrote Charles 
Dow in 1902. "When the market is down and dull, it is hard 
to make people believe that this is the prelude to a period 
of activity and advance. When prices are up and the country 
is prosperous, it is always said that while preceding booms 
have not lasted, there are circumstances connected with 
this one which is unlike is predecessors and give assurance 
of permanency. The one fact pertaining to all conditions is 
that they will change."

I regret, almost daily, that I have not been granted the 
gift of prophesy. Wouldn't that make the whole thing so 
much easier - to be able to merely sit down with a copy of 
the Wall Street Journal from some time in the future...and 
see what actually happened!

We romantic contrarians are often confused with moss-backed 
traditionalists. It is assumed that we are just "negative" 
or anti-progress, or backwards party poopers.

"The 'bah humbug' modern-Luddite, hard-asset, deep-value 
crowd tends to cringe at the thought that a spurt of 
innovation and investment like we are currently 
experiencing will actually change anything..." wrote George 
Schott, of Tellus Capital. 

Schott has written an interesting article, to which I will 
return in a moment. But, first, let me clarify:

Change is a feature of life - a permanent feature. But how 
will things change? Perhaps the Internet will revolutionize 
life on the planet. Maybe the Nation State will disappear. 
"Shaft" could win an Academy Award. You and I can speculate 
about these things. We can try to figure out what is going 
on and try to look into the future to guess about what may 
happen next.

But there is no way of knowing. We have no future editions 
of the WSJ to read. And usually, the most important events 
of the future are those you do not expect. Unforeseen, you 
take no action to avoid or accommodate them. 

More predictable are the moods with which people greet 
events and react to them. They range from euphoria and despair and panic. These moods are what 
make the difference between a P/E of 150 for Cisco and one 
of 11 for Genuine Parts. These moods change episodically, 
but never fundamentally. 

Sixty years ago this week, one of the most dramatic changes 
in public mood in history occurred - centered right here in 
Paris. At 3:40 AM on June 14, 1940, a lone motorcyclist 
crossed the Place Voltaire. There was no shortage of 
motorcyclists in those days, but this one had never before 
been seen in Paris - he wore a German uniform.

This was astonishing in several respects. The largest army 
in Europe was not that of the Germans. It was the French 
army. On paper, at least, the French were bigger and better 
equipped. What's more, they had constructed a marvelous 
defensive breastwork - the Maginot Line, fully stocked with 
guns and ammunition to drive back any assault. Paris, well 
behind the Maginot Line, enjoyed the 30s - it was the 
gayest, most exciting city in the world. Parisians, in the 
spring of 1940 sat in their cafes talking about Hitler 
(socialism was the Next Big Thing back then)... Who among 
them could have imagined what would happen next?

The Germans did not come by the expected route. They did 
not attack Maginot's impressive line; they by-passed it. 

Events took an unforeseen turn. Not only did Hitler 
outflank French defenses, he cut off and rolled back French 
troops with surprising speed. From the day he announced his 
attack on France, to the day German troops arrived in Paris 
only a little more than four weeks had elapsed. 

Churchill wanted the French to fight for Paris. "Can't you 
imagine," he urged them, "how a big city like Paris can tie 
down enemy troops? We can fight in the big squares, in the 
little streets, at the corner of every building, every 
street corner. We can defend ourselves neighborhood by 
neighborhood, block by block, street by street, house by 
house. Whole armies can be buried there!"

The idea struck the French as absurd. The idea was to save 
Paris, not destroy it. "It makes no sense," replied General 
Weygand, "reducing Paris to cinders won't have any effect 
on the final outcome."

Instead, Paris was declared "an open city." French soldiers 
escaped to the south, many making their way to Spain and 
then to North Africa, where they joined the Free French 

Half the population of the city fled. Those who could not 
leave - or chose not to leave - met the Germans with a 
combination of dignity, horror and opportunism. The great 
surgeon, Thierry de Martel, hung himself. A few others took 
their own lives. But by the evening of the 14th, the 
brothels were back in business - with a new source of 

Things change dramatically in the financial world too. But 
they are changes you can anticipate. After a boom; a bust 
is inevitable. After a bust...expect a boom.

"Gold prices peaked in the first month of the new decade on 
January 21, 1980," wrote George Schott, the analyst 
mentioned above, "when gold hit $850 per ounce (today's 
spot price is $282). In the next two-and-a-half months, 
gold shed 43.5% of its value, as the price slid to $480 per 

"The very end of the 1980s coincided with the peak of the 
bubble in Japan. The Nikkei 225 hit an all-time high on 
December 29, 1989, the last trading day of the decade for 
the Japanese market, when the index hit 38,915 (the index 
stands at 18,480 at this writing). After kicking off the 
decade of the 1990s with a nasty downslide, the Nikkei did 
rebound in the latter part of January 1990, edging back 
towards 38,000. Then, the avalanche started. By October 1, 
1990, the Nikkei had lost 48% of its value..."

"Anyone see a pattern developing?" asks Schott.

I do not know what will happen next in world events - 
though I spend a lot of time thinking about them. I don't 
know what new innovations will succeed, and which will 
fail. But I do know that despair will eventually replace 
today's complacency. 

If the pattern repeats itself, the Nasdaq high of March 10, 
2000 will not be seen again for at least another 10 years. 
Maybe 20. 

Your correspondent in Paris, 

Bill Bonner

P.S. A couple of interesting events next week: I've been 
invited to the Procession of Garter Day in Windsor Castle 
on Monday...and to the Ascot Races on Tuesday. Stay tuned 
for a full report.
About The Daily Reckoning:
The Daily Reckoning... "more sense in one e-mail than a month of CNBC."  That's what readers are saying about The Daily Reckoning.

Bill Bonner, recognized internationally as a brilliant writer, entrepreneur
and publisher of The Fleet Street Letter, offers you his daily market
commentary absolutely FREE. For the first time, outsiders are getting a peek into his powerful and profitable investment insights. Bill's practical contrarian advice empowers even average investors to protect their hard-earned wealth and achieve amazing gains.

Bonner writes his email letter from Paris, France, each morning --
describing the wacky, wonderful world of investment, politics and everything remotely related. Irreverent. Sharp. Honest. Thoroughly, unabashedly contrarian. It's also among the fastest growing e-letter on the Internet.  It's a brand new service... but it has a distinguished history..

For nearly 62 year, The Fleet Street Letter, the oldest investment
advisory letter in the English language has consistently delivered
invaluable economic and political foresights to savvy investors. Current readers regularly enjoy impressive investment gains even as the market falters. Here's more from his online readers...

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Last modified: April 02, 2001

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