A FREER PLACE?

THE DAILY RECKONING

PARIS, FRANCE

THURSDAY, 31 MAY 2001

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*** Consumers still spending...but less than it appears.
Dow down...tech stocks getting hammered.

*** Wild guess for the year 2020: Dow 10,000!

*** "Keep your financial advice to yourself," the stars
advised. If only I had listened! Gold down $7.70. Should I
change my buy recommendation to "market perform?"

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Market Watch

This section of the Daily Reckoning is usually written by
Eric Fry, editor of Grantsinvestor.com. Look for Eric on TV
this week; he's the guest host on CNN-FN, 9:30 - 11 E.S.T.
My notes and letter follow, as usual.

*** The rally seems to have stalled. The Dow fell 166
points yesterday. The Nasdaq was down 91.

*** Consumers are still spending...but a closer look at the
numbers reveals the weakness. Half of April's 0.04%
increase in consumer spending is attributable to higher
prices. And earnings, too, reduced for inflation, rose at
only 0.01% during the month.

*** Looking more carefully at how consumers were spending
their money, we find that they were still buying bread and
beer - but not big ticket items, such as cars and homes.

*** Bankruptcy filings rose 17.5% to a new record for a
first quarter. Scylla and Charybdis must be closing in.

*** Will lower stock prices further reduce consumer
spending? "The ups and downs of the stock market," reports
the Wall Street Journal, summarizing a Fed study, "don't
foreshadow where the economy is headed. They drive it
directly." Lower stock prices, less consumer spending. Less
consumer spending, less business investment and lower
profits. Lower profits, low stock prices.

*** We're a long way from a major buying opportunity,
opines Daniel Turov in Barron's. "The Dow first reached the
100 level in January 1906," he writes. "It traded above and
below that level for more than 36 years; it wasn't until
May 1942 that the market left 100 behind for the last
time."

"The Industrial Average first reached 1,000 in February
1966," he continues. "It traded above and below that level
for the next 17 years, leaving it for the last time in
February 1983.

"The Dow first reached the 10,000 level in March 1999.
Considering the unprecedented gains of the past several
years, would it be that unusual for this benchmark to take
a decade or even two before leaving 10,000 in the dust for
the last time?"

*** Investing in Latin America is risky. Argentina is on
the verge of a financial crisis. But Argentina is always on
the verge of some sort of crisis. Meanwhile, there are some
good companies at bargain prices, Barron's reports. I don't
know what Repsol does. But whatever it is, the Argentinian
company gets little respect from investors for doing it.
The $10 billion company is trading at 8 times earnings.
Petrobras, the huge Brazilian energy business, can be
bought for just 6 times earnings. And Mexico's telecom,
Telmex, can be yours for just 10 times this year's
earnings.

*** But a warning. There is no law that says things that
are cheap can't get cheaper. Gold closed yesterday at just
$267 an ounce. Gold mining stocks fell 5%.

*** "I have seen 23 investment manias," writes Ray Devoe,
"ranging from uranium producers, to bowling companies,
airlines and color TV. Four of them were high-technology
(including space exploration and scientific instruments).
With the possible exception of 1968's 'Great Garbage
Market' all of them were localized-so that when the bubbles
burst, the impact on the economy was negligible.

"However, this time it is different in that the bubble in
stocks was (and is) so widespread. This time bursting
bubbles are much more likely to negatively impact the
economy." (see: Good Intentions and Their Unintended
Consequences
http://www.dailyreckoning.com/body_headline.cfm?id=1192)

*** "Accelerated Entropy," is what Dan Denning of the Daily
Reckoning Blue Team calls it. "Businesses suffer from
entropy in the same way organic life forms do. Trouble is,
in the 21st century entropy - naturally built into the
business cycle - is picking up speed... destroying some
businesses faster than ever."

And a few notes from Bill:

*** A friend sent me a copy of my horoscope for last week:
"Keep your financial advice to yourself," advised the
stars. If only I had listened. I would not now be in the
embarrassing position of trying to explain the depressing
fall in gold prices - down $7.70 yesterday alone.

*** And the euro! At 85 cents - it only has a few mills to
go before it hits a new all time low. But what can you
expect from the euro? I dubbed it the "Esperanto currency"
when it came out. Backed by neither a single government nor
by gold, the euro is a monetary curiosity, a money based on
good intentions.wishful thinking.and who knows what else..
And, as James Grant points out, it is a paper currency that
isn't even available on paper. They don't release the
actual bills until next year. So far, it is just electronic
ether.

*** Perhaps, as Grant suggests, I should do what Wall
Street analysts do...and change my 'buy' recommendation for
the euro to a 'hold' ..or a 'market perform.' And maybe
gold should become an 'accumulate,' rather than an un-
hedged long position.

*** Maybe I should just give up - and admit that the gold
and the euro may someday be decent places for your
money...but their time has not yet come. But what's the
point? You don't cancel a life insurance program just
because you aren't dead yet.

*** "The median corporate bond rating stands at BBB, or
weak investment grade," reports Grant in Forbes, "the
lowest since 1981, the first year for which statistics are
available. Also, just 28% of the junk-bond universe holds
the top junk rating, according to Moody's Investors
Service. That's the lowest proportion in at least 80 years,
a span that includes the Depression."

*** Last night, my friend Mark Skousen came to town. He is
on a world tour, promoting his most recent book (about
which more.after I've read it). Mark gave a lecture at the
Democratic Liberal party headquarters in Paris - luring the
biggest turnout of free-market supporters in many years.
Yes, there were probably 15 of us there.at least. More
below.

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A FREER PLACE?

"What's the difference," Benoit asked me, "between America
and France?"

We were painting shutters on Sunday afternoon. Painting is
not my favorite past-time, dear reader. It is tedious and
repetitive. But it has one virtue - it lends itself to
conversation.

If I have any advice to give to the families of America, it
is this: throw out the television and pick up painting
brushes. The family that paints together, sticks together.
Well, at least their hair sticks together.

Jules, Maria, and Sophia each had an answer for Benoit. But
none could offer a convincing explanation of why or how the
two countries differ. All agreed, however, that America is
a 'freer' place.

Even the Frenchman, Alexis de Tocqueville, noticed it -
early in the 19th century. Americans were unrestrained...
bound neither by law, custom, taste or dignity. The
frontier was especially wild, he noted, as uncivilized as
the people who inhabited it.

Since Tocqueville took his famous tour of America, much has
changed. The frontier has been tamed. So have its
inhabitants. As noted here many times, since America gained
its freedom from Britain, America's citizens have become
the serfs of their own government. Americans worked from
January 1st until January 8th each year, roughly, to pay
their obligations to George 3rd. Today, successful Americans
work from January 1st to June 1st to pay their tribute to
George W's government.

Still, my children - as well as most of the world's people
- are convinced that America remains a 'freer' place than
France.

An article in Forbes reports that it takes just 7 days to
start a business in the U.S., but 66 days in France. In its
ranking of the "best places in the world to start a
business" Forbes places the U.S. as #1. France is #25.

I've begun businesses in both countries. The numbers may be
technically correct, but they focus on the wrong part of
the story. The big difference between France and America is
not the difficulty of starting a business, but the trouble
of getting out of an unsuccessful one. Marks and Spencers,
the British retailer with a store around the corner from my
office, decided to close its doors in France after losing
money for years.

Uh...not so fast. The employees kicked up a fuss and a
French court ordered M&S to stay in business until a
settlement was reached. Operating stores reduced hours and
empty shelves has added millions to the firm's losses.

Several investment strategists - including our own Steve
Sjuggerud and Steve Hanke - conclude that you should always
invest in countries that are moving towards more commercial
liberty. But if you followed that advice literally, you
would have taken your money out of the U.S. 150 years ago.
And you would miss the benefits of investing in socialism.

France is a more demanding and unforgiving place than
America. The schools are harder. Teachers do not worry
about a child's self-esteem. If wrong answers are given, or
untidy work is handed in, the poor children are scolded
and, often, insulted.

Children are expected to stand up straight, look guests in
the eye and offer their cheeks for a kiss. People are
expected to dress properly when they go out and always move
to the right hand lane when driving...leaving the left
lanes open for speeders. Husbands may have mistresses, but
they are expected to be discreet about it.

Rigidity is not without its benefits. Women are prettier
and the food is generally better. In the business world, it
is hard to get started - eliminating the casual
entrepreneurs - but once you are established, government
regulations raise up behind you like a drawbridge, to block
potential competitors. Conduct your affairs in the proper
way - and all of French society will conspire to keep you
in business.

France is a socialist country, with a very expensive
national health care system subsidized transportation, and
regulations governing almost every aspect of life (just
like America!)

Workers enjoy a 35-hour work week...with 4 weeks of
vacation. But this puts pressure on enterprises to make
sure their employees are productive. And while French
workers tend to work fewer hours (no one works as many
hours as Americans) it is rare to find workers as
incompetent as those you routinely encounter in the U.S.

"But the real difference between the U.S. and France,"
observed one of the attendees at Mark Skousen's lecture
last night, "is that the intellectual tradition of economic
liberty never really caught on in France."

In Anglo-Saxon countries, Adam Smith popularized the notion
of an "invisible hand" guiding individual market
transactions for the benefit of all. How come those ideas
never took root in France?

Neither Mark nor any of the attendees had a good answer. In
fact, the discussion merely deepened the mystery.

Because it was in France that the idea of "laissez-faire"
economics was first developed. Montesquieu, Say,
Tocqueville, Bastiat - they elaborated the ideas of
financial liberty long before Ayn Rand or Milton Friedman.
"In fact," added Henri Lepage, host of last night's
meeting, "Bastiat anticipated what is now known as 'public
choice theory' long before James Buchanan was born.

But what happened? "They died," said one attendee.

"A similar phenomenon occurred in America," Mark pointed
out, "the New England colonies, especially Massachusetts,
were the most radical, liberty-obsessed part of the nation
in 1776. But, today they are the most socialist states."

Why?

An explanation...tomorrow.

Bill Bonner


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