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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

FRIDAY, 23 JUNE 2000 


Today:  Virtual Profits

In Today's Daily Reckoning:
*** Al is dead...Al is dead...
will the bubble turn to lead?
*** Clouds over the 'summer rally'
*** Conspiracies...manipulating the price of gold, stocks 
and the next presidential election

*** Al is dead...Al is the hidden lyrics in a 
Beatles song...a rumor spread yesterday morning that the 
chief of the world's most powerful banking cartel and price 
fixing organization - Alan Greenspan of the Federal Reserve 
- had died.

*** At first, prices fell. Then, they went up. Then, they 
fell again. Investors and floor traders didn't seem to know 
whether to take it as good news or bad news. 

*** But by the end of the day, the rumor had been dispelled 
- it was revealed that 'Easy Al' still had his bony hand on 
the levers of interest rate policy, and a cold eye on the 
inflation figures. The Dow lost 1.2%, or 121 points. GM 
fell to $60 - down from a high of $94 in April. 

*** A cloud seemed to pass over the 'summer rally' picnic. 
The Nasdaq fell 3.1% - down 127, closing well below the 
4,000 mark.

*** Down, down, down, down...Amazon drifted further into 
the heart of darkness and closed at $42. This river of no 
returns stock was at 113 on Dec. 9.

*** Only 49 stocks hit new highs on the NYSE yesterday.

*** Gold lost 90 cents - the day before the World Gold 
Conference begins here in Paris. I'm going over to the 
Intercontinental Hotel later to day to peek in at the 
events. Sure to be discussed: the global conspiracy to 
drive down the price of gold. I am surprised at the outrage 
this notion provokes. Large holders of gold will certainly 
do all they can to manipulate its price. If they can keep 
the price down - so much the better. As George Soros 
advises, you should try to "profit from the folly of 
government." Buy gold, sell dollars.

*** We are still waiting to see if the dollar has reached 
'the end of greatness.' Yesterday, it fell sharply against 
yen - after Bank of Japan officials threatened to stop 
giving money way. Japan has had a zero interest rate policy 
for years. It may be ending.

*** Lumber futures fell $6.10 - further evidence of a 
slowing economy. Lumber is selling for 27.63 cents/bd. 

*** Labor, though, remains tight. The International Herald 
Tribune reports that employers are turning, in desperation, 
to the last pool of labor available to them - people over 
the age of 50. Census Bureau figures show the number of 
people 20-34 years old fell by 6 million in the past 
decade. The number of people over 50 rose by 12 million. 
Making these fossils work harder has become a big concern 
of personnel departments throughout the nation.

*** "Fear Grips Zimbabwe" says the headline in today's 
Financial Times. The election is scheduled for this 
weekend. So far 30 voters have been killed - thought to be 
opponents of Mugabe's ruling party. 

*** Fear might be gripping the White House too, according 
to Bill King. The Justice Department is proposing to 
investigate Al Gore's fundraising abuses. Conspiracy-minded 
readers might wonder why, just before a close election, a 
Clinton-controlled Justice Department would take up such an 
explosive issue.

[If you're interested in Bill King's service, just call 1-
800-433-1528 and ask for code 3457 to receive a FREE one-
month trial.]

*** Well...reasons Bill King...if Clinton were afraid Gore 
was going to lose...and also afraid that Hillary was going 
down...he might want to clear Gore out of the way in the 
hopes of a better chance with a different candidate. Maybe 
even Madame Clinton.

*** Hillary has been making a point of privacy lately. But 
her opponent, Lazio, charges that she hired a PI to 
investigate him as soon as he announced his candidacy.

*** Remember, I spoke about Nicuraguan beachfront property 
a few weeks back? Well, Kathie Peddicord writes to tell me 
prices are already on the rise. Still, "For just $12,000 
you can own a lot in a wooded enclave set back from a 
private, fine-sand beach and with wonderful sunset views 
out over the ocean..." 

*** "Now you can get the best up-to-the-minute financial 
news and commentary ABSOLUTELY FREE," says the Internet 
message I just received from Apparently, 
with so much free information on the web, people were not 
willing to pay for what TheStreet had to offer. The trouble 
with free information is that it is worth what you pay for 

*** The Daily Reckoning is an exception because it only 
appears to be free. In using it as a source of information 
and ideas, you are also forced to read various 
advertisements and my gratuitous 
reflections on subjects that have nothing to do with 

* * * * * * * * * Advertisement * * * * * * * * * * * * *

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Your state and local governments aren't telling you 
Fact is, where you live could actually determine how much 
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state's favorite tax poison: Income tax...sales tax...gas 
tax...the 15 disguised taxes on your phone bill...or some 
other insidious charge? Find out how to cut your tax burden 
and protect your wealth - in the 2000-2001 edition of the 
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* * * * * * * * * * * * * * * * * * * * * * * * * * * * *


"At long last," to repeat yesterday's quotation from Dr. 
Kurt Richebacher's recent letter, "the great global bear 
market in stocks has arrived"

But what happens next?

I ended yesterday's letter with an interrogative that must 
have left you on the edge of your seat. Why did corporate 
profits decline after 1997? Surely, with the spread of 
Information Technology...and the beneficent light of the 
New Era sun ...profits should have risen.

But they did not. Why?

You may be worried that this subject will be too narrow and 
dull to be worth your time. Let me assure you - you are 
probably right. Yes, I do explain why life as we know it on 
planet earth will soon end...and how. But if you have other 
things to do...I will understand.

America has, since WWII, enthusiastically taken up its role 
as the consumer of last resort. Like the teenager with an 
infinite appetite at the family table, America has been 
willing to consume just about anything and everything that 
the world wanted to send its way.

In economists' terms, we provided the Keynesian demand 
required for global growth. "But the long-term effect of 
Keynesian economics," writes Dr. Richebacher, "was 
dwindling capital formation and 'stagflation,' unusual 
coexistence of economic stagnation and inflation."

The answer to this problem of the late 70s was supposed to 
be a shift to the supply side - Reaganomics. Lowering taxes 
and reducing regulations produced new growth. But the 
growth was not the investment-led growth that was expected. 
"The reality," as Dr. Richebacher puts it, "was the precise 
opposite: an unprecedented consumer borrowing and spending 
binge, with exploding budget and trade deficits." 

Instead of increasing the amount of investment, Reaganomics 
actually reduced capital formation and increased 
consumption. Once again, America played its role well - 
absorbing products from all over the world (especially from 
Japan, which was the economic miracle of the time)...and 
going deeply into debt.

"Over the decade," again, quoting Dr. Richebacher, "total 
outstanding debts skyrocketed from $4.1 trillion to $12.8 
trillion. During the three decades since World War II, each 
dollar in incremental GDP growth required approximately 
$1.40 of additional debt. At the end of the 1980s, the 
debt-to-GDP ratio had soared to $2 with a rising trend."

The 1990s merely continued the trend. We were getting good 
at it. Debt-to-equity, total debt, and debt-to-just-about-
every-other-measure-under-the-sun has gone up. "The 
American reality of the last four years is the wildest and 
most reckless credit and debt binge that the world has 
every seen," as Dr. Richebacher puts it. (See:

That is the trouble with Keynsian demand-side growth. It 
gives the illusion of growth - the effect and essence of 
growth, as it were, but much of the growth is virtual, not 

Nothing comes from nothing. Real growth still and always 
requires real investment of real money. It requires 
sacrifice - giving up current consumption in favor of 
capital formation. In the most primitive economy, progress 
requires that a man give up his leisure in order to do some 
work. In a more advanced economy, a person must forego 
additional consumption in order to devote the money to 
investment purposes.

But instead of saving their money and investing 
it...Americans spent it. And instead of making capital 
investments that would have boosted earnings and profits, 
US companies preferred to give the consumer/investors what 
they wanted - a fast return on their money. They preferred 
to substitute virtual profits (in the form of stock market 
increases) for actual increases in productivity and 

A real return requires time. And sacrifice. But a fast 
return could be had by embracing the latest jingoes of 
American corporate management. In the 1960s, American go-go 
management was the envy of the world. But after in the bear 
market of '73-'74, the American model was discarded. For a 
few years, it was the German model that the world wanted. 
Then, in the 80s, books on Japanese corporate management 
were the rage. By the 1990s, a new American model was back 
in style - one that was consistent with the underlying 
trends in the U.S. economy.

The single imperative of U.S. executives has been to 
"maximize shareholder value." And do so quickly. You do 
this by cost cutting, restructuring, merging, acquiring and 
buying back your own shares - not by investing in new plant 
and equipment. Each announcement of a merger, for example, 
produces a pop in the share price. So does a large purchase 
of your own shares. But these gains are virtual - they 
produce no additional profit.

In his 1997 book, The Synergy Trap, Mark Sirower showed 
that two thirds of all the 168 mergers and acquisitions he 
studied failed to produce additional shareholder 
value...instead, they destroyed shareholder value.

And even the gains from cost-cutting are largely an 
illusion. That is, companies are always trying to remove 
unnecessary costs. And while one company can, 
theoretically, boost its net earnings by eliminating costs, 
what really happens is that the culture of cost-cutting 
produces cuts across the entire economy. One company's 
cost, it turns out, is another's revenue. The aggregate 
effect is merely a reduction in economic activity, not an 
increase in profits.

In short, corporate profits leveled off after 1997 because 
there was so little real investment in the preceding years. 
There was not enough money going into new plant and 
equipment to produce new profits.

While American corporations were trying to squeeze out 
additional earnings by cutting costs, and goose up their 
share prices by buying back their own shares...their 
workers were on a spending spree. This too contributed to 
the lack of profits. The money paid to employees did not 
come back in sales revenue. Instead, much of it ended up in 
the hands of foreign businesses. Then, when it did come 
back to America, it came back as capital investments in 
stocks and bonds. The dollar was boosted were U.S. 
equities. Interest rates, on the other hand were held down. 
And U.S. corporate profits suffered.

Dr. Richebacher: "The U.S. current-account deficit 
increased to $338.9 billion in 1999, from $220.6 billion in 
1998, and $143.5 billion in 1997. That is, the deficit has 
doubled within the two years. It is already well above 
$400." In fact, the first quarter of 2000 the deficit - 
which measures the difference between goods and services 
sold abroad and those imported from overseas - hit $100 
billion for the first time ever.

"Follow the trail of debt excesses," urges Dr. Richebacher, 
"The decisive causes of every single, serious economic and 
currency crisis are credit and debt excesses. Apparently, 
one cannot repeat it often enough: the U.S. credit and debt 
excesses of the past few years are beyond past 
experience...essentially leaving behind a horribly 
vulnerable economy and financial system. This tells us to 
expect a very hard landing of the economy with a steep, 
steep fall of the dollar."

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...

"My small portfolio has followed true to my wife's description of my
investment philosophy, "buy high and sell low." However, that has changed since I started religiously reading DR... I credit this reversal of fortune directly to The Daily Reckoning"

" Your Daily Reckoning is the best in business commentary... mixing
serious warnings and the state of the market with gentle humor"

"It is actually better than some of the newsletters that I pay to

"Your statements and philosophy have kept me from storming into the market and in fact [I'm] making some money in put options" (Frank)

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Last modified: April 02, 2001

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