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
*** 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 Ford...builders, 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. (http://www.realasset.com)
*** 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
*** 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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* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
"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
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.
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Last modified: April 02, 2001
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