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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Virtual Wealth

In Today's Daily Reckoning:
*** Nothing very exciting in the financial markets
*** The Last Summer of Euphoria...
*** Meeting the Prime Minister... 

*** The summer rally continued yesterday -- on the first 
day of summer. The Dow managed to climb a few points 
yesterday -- up 62. The Nasdaq did, too -- up 50 points.

*** Will the rally continue? Well, it doesn't look good 
for the bulls. For even while the averages rose, the 
broad market seemed to be going in another direction. 
Only 1,255 stocks on the NYSE advanced while 1,598 

*** Reversing the trend of the last couple of weeks, 55 
stocks hit new highs while 75 hit new lows.

*** What's more, oil rose to about $33. Even if you order 
something on the Internet, it still has to be delivered. 
And it is typically brought to your house or office in a 
truck -- which runs not on electrons, but on good old 
fossil fuel. 

*** This is, as I opined yesterday, probably the last 
summer of such consumer and investor euphoria for many 
years. People will want to take advantage of it -- 
getting in their huge land barges and driving somewhere. 
Demand for gasoline will be high. 

*** This thought must be worrying transportation stocks -
- they are breaking down. In fact, many of the big names 
in American business are down 30% to 50% -- companies 
such as GM and, airlines, retailers. 

*** Meanwhile, a few big tech stocks in the Nasdaq 
continue to give the impression that this is a healthy 
market. "The correlation between the Nasdaq and the Dow 
Jones Average, which is more representative of the "Old 
Economy,'" wrote Marc Faber in April, "has never been as 
low as at present."

*** Marc pointed out that the divergence between the hot 
sector and the rest of the market tends to peak out just 
before the entire market goes down. "Thus over the last 
18 months [remember, this was written in April], the 
Nasdaq 100 has outperformed the S&P 500 by more than 
150%. In the early 1970s, however, the `nifty fifty' 
outperformed the S&P 500 by only 40% in the 18 months 
preceding their peak. For oil stocks in 1980, the 
outperformance was 70%."

*** "If you don't at least own AngloGold (AU: NYSE), 
you're making a big mistake," says Real Asset Investor 
Dan Ferris. "Last time the current account deficit was 
like this was in the mid-`80s, when gold went from $284 
to $500, and the dollar lost more than 50% against the
yen and the D-mark. (

*** Warren Buffett is sticking with his methods. He 
bought Justin Industries, maker of building materials and 
boots, for $600 million in cash. I own a pair of Chippewa 
boots, bought from L.L.Bean, but made by Justin. They are 
so well made, it looks as though they will last a lot 
longer than I will. 

*** Professor Gordon, mentioned here yesterday, studied 
U.S. productivity figures from a slightly different 
angle. He found that if there has been any increase in 
productivity at all -- it is only in the Information 
Technology sector. (I have pointed out several times that 
the figures for productivity in this sector have been 
corrupted.) In the rest of the economy, that is...the 
other 88% of it, productivity growth has been 

*** Parisians got up late and went to work with tired 
eyes today. Few people slept well. Paris must have been 
the noisiest, liveliest city in the world last night as 
the Fete de la Musique, the only successful innovation of 
Mitterand's socialist government, got under way. There 
must have been hundreds of bands performing. There were 
rock bands on nearly every corner of the Latin Quarter. 
People filled the streets. Bongo drummers bongoed until 
morning. Dancers strutted their stuff and swayed in the 

*** Jules, 12, is a film fan. His idea of "quality time" 
with his dad is going to see an action movie together. So 
we went to see "Gladiator" last night after work. I 
enjoyed the film -- especially the battle scenes; it did 
not seem nearly as dumb as most of the movies Jules 

*** After the movie, we found the streets jammed and 
people jamming. One band sounded as though they had never 
met each other before last night -- and a few still 
needed an introduction to their instruments. 

*** We walked down the middle of the boulevard St. 
Germain, enjoying the energy, the crowds and the 
enthusiasm of the music lovers, if not the music itself. 
Then we turned up the Rue Babylone. Here we found the 
street blocked by police. But a helpful woman explained 
that there was a special invitation-only party in the 
Matignon Palace garden -- roughly equivalent to the White 
House in Washington. She passed along her invitation and 
Jules and I went in.

The garden was beautiful. Paris has a lot of these 
private "hotel particulier" gardens, hidden behind stone 
walls. But this one was stunning. Twin alleys of boxed-
shaped linden trees formed a broad walkway up to an 
improvised stage. There a crowd listened to a very 
professional pop group, whose music and costumes were 

Just as we were getting ready to leave, Jules grabbed my 

"There's Jospin," he said, pointing off to the right. 

Jules recognized the Prime Minister of France not just 
from photos. His friend Xavier's father plays some role 
in the government and got both boys close enough to shake 
hands with Jospin and France's President Chirac, during 
the Armistice Day celebrations in November.

Most countries are far more relaxed and civilized than 
America in the manner in which they protect their 
leaders. In the United States a president is treated as 
if he were a Roman Emperor. Large phalanxes of praetorian 
guards with wires coming out of their ears, each one of 
them prepared to jump in front of a bullet, try to keep 
the chief executive from harm. 

Few people want to see a man killed, but of all the men 
who might be killed, a president seems like one of the 
most dispensable. There are plenty of others who will 
take the job. And at least as many people would probably 
be delighted as aggrieved.

I walked over to Jospin and extended my hand. 

"Bonsoir," I said.

"Bonsoir," he replied.

I thought about offering him some advice...

"Let's get going," said Jules.

*** One of the most interesting bands was on display down 
near La Motte-Picquet. It was a rock band with a hard 
edge. It caught my eye because there were several men 
dancing in front of it -- each one shirtless and in 

They were big men...many had beer bellies and most had 
tattoos. And they danced in a strange way. Instead of 
swaying and hopping like the dancers down on the 
boulevard St. German, they roamed around bumping into 
each other and engaging in mock combat. They seemed to 
know the songs too -- and raised their fists to yell out 
the key lines. These men, I believe, were France's answer 
to the yobs, skinheads and soccer hooligans for which 
England has become famous.

*** Agence France Presse reports, smugly, that France has 
the best health rating in the world -- according to a 
study done by the World Health Organization. Living in 
France, rather than America, I am likely to live 4.5 
years longer.

*** But the big story today is that researchers will hold 
a press conference and announce that they have found 
water on Mars. I have no further details. I'll get 
interested when they discover a good vintage wine.

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After a few days of light fare -- telling you about my 
trip to England -- I suppose you are ready for something 
a bit heavier. Something with "bottom," as the English 

Reading the latest installment of Dr. Richebacher's 
newsletter (, 
I think I have found the perfect thing. 

"At long last," says the keeper of the flame for the 
"Classic" school of economists, "the great global bear 
market in stocks has arrived...and just [as in 1929] the 
consensus wants to believe that it is a mere correction, 
even a healthy correction."

The two key questions, according to Dr. Richebacher, are 
"the potential magnitude of the decline in stocks 
prices... [and] the potential repercussions on currencies 
and economies around the world, primarily...on the dollar 
and the U.S. economy."

Those questions may turn out to be premature. The dollar 
rose yesterday. If, as many think, the euro's rally of 
the last couple of weeks is already over, the correction 
may be finished. (Though I doubt it.)

But Dr. Richebacher is not trying to predict the future. 
He is merely trying to understand the present -- which, 
as you will see, implies certain things about what will 
happen next.

The word "virtual" used to mean "actual" or "real." But 
it has come to mean just the opposite. 

Dr. Richebacher believes, as I do, that wishful thinking 
investors, opportunistic entrepreneurs, dreamy 
philosophers and tech-worshipping futurists have created 
a "virtual reality" -- in which almost every detail of 
current economic life is misrepresented or misinterpreted 
to produce a picture that is basically unreal.

Not only that, economists themselves have contributed to 
the fraud. Failing to understand what causes real 
economic progress, they cannot detect an imposter. The 
current "boom" has not created real wealth. It has 
created virtual wealth. Few people can tell the 

Webster's defines virtual as "existing in effect or 
essence though not formally recognized or admitted."

That is the problem; the wealth isn't really there. And 
since it isn't really there, sooner or later the 
emptiness will be exposed.

"Classical economics" was the third revolution in the 
field -- after the Mercantilists of the 17th century and 
the Physiocrats a bit later. "For the Classics," writes 
Dr. Richebacher, "healthy economic growth inherently 
implied investment-led growth..."

At first glance, the New Era economy seems to have had a 
lot of investment-led growth. Huge amounts of money have 
poured into the investment markets. At the venture 
capital level, money flowed like champagne at Ascot. 
Someone would fill your glass as soon as it was emptied. 
But, like everything else about the New Era, it turns out 
that the investment has been virtual, rather than real. 

"What critically matters for long-term economic growth," 
continues Dr. Richebacher, "is the net increase in the 
capital stock after depreciation...and that is growing 
rather moderately." Also, "it has to be taken into 
account that net investment spending in the 1980s 
had...collapsed. The gains in the 1990s therefore reflect 
a rise out of a deep hole."

According to the Classics and Dr. Richebacher, real 
investment must come from real savings. "Any credit 
expansion, uncompensated by savings," writes Dr. 
Richebacher, "is in essence of inflationary nature..."

Capital is the result of savings. You cannot create 
capital out of thin air. Otherwise, a country such as 
Tibet would be the richest country in the world -- they 
have plenty of thin air. Virtual capital is like a 
virtual coat; it may look good on paper, but it won't 
keep you warm.

Credit looks like real money. At the micro level, you 
can't tell it from the real thing. It provides the 
illusion of capital and the illusion of wealth. If you 
can borrow enough money -- you can be virtually rich.

As I've pointed out here several times, the illusion of 
wealth causes people to change their behavior, at the 
margin. They believe they have more wealth than they 
really do. They cannot distinguish between what is real 
and what is virtual. But believing they have more than 
they need, they spend some of it. And when they buy a new 
coat, though, they buy a real one, not a virtual one. 
Real wealth is consumed. 

Savings have been neither virtual nor real. They barely 
exist -- even in our imaginations. So, the virtual wealth 
produced in the last five years has been almost all built 
upon credit. That is to say, they have been of an 
inflationary nature. But since the inflation has been in 
the price of shares -- who was going to complain?

The Internet itself, as suggested by Professor Gordon, is 
a virtual revolution, not a real one. It represents an 
advanced evolution of the telecommunications revolution 
that began in the 1800s, not a "first order" innovation. 

Likewise, corporate profits tend to be virtual rather 
than real. While brokers and naive investors share the 
"whisper numbers" in advance of an announcement -- and 
get excited when earnings come in at a penny more than 
the forecast -- corporate profits, generally, have been 
disappointing. Profits have been going down since 1997.

A chart of profit margins shows that profits rose from 
'91 until late in '97. Why did they decline since then? 
Even there, the failure can be traced to the difference 
between the virtual and the real...

But perhaps I should leave that for tomorrow...and tell 
you why the U.S. corporate model failed...and what it 
means for the future of stock prices.

Bill Bonner
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

Published By Tulips and Bears LLC