DEBT EXPRESS

THE DAILY RECKONING

PARIS, FRANCE

TUESDAY, 5 JUNE 2001

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*** Inflation is no problem?

*** Sunset in Europe? False dawn in America?

*** Pigs, chickens and deformed ducks...

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*** Last week Dallas Fed chief McTeer proclaimed that the
stock market correction was "overdone." Yesterday, Chairman
Greenspan assured the nation, "Inflation is not a
significant problem at this moment [and] there is also very
little in the way of short-term inflationary expectations."

*** It is certainly comforting to know that our economic
woes are now behind us. Now that everything is settled, we
can get back to buying stocks.

*** Maybe inflation is not a "significant problem," but he
can be a nuisance. And like an ill-mannered guest who
leaves beer cans in the planter boxes, he can make a mess
of things:
o   Most commodity indices have been heating up since late
    March.
o   "Resource currencies" like the Australian dollar and
    the Canadian dollar have been rallying of late.
o   Long-term bond yields have been rising ever since the
    Fed began cutting rates in January.
o   Until very recently, inflation-indexed Treasury bonds
    have been outpacing conventional bonds for months,
    suggesting that Mr. Market worries somewhat about resurgent
    inflation.
o   Even Old Man Gold rose from his rocking chair to
    stretch his legs for a spell before returning to the chair
    for another long nap.

*** And what of the Consumer Price Index itself? If it were
a common stock, momentum investors would take one look at
the CPI's upwardly trending price graph and start buying.

*** The revelation from on high that the inflation problem
is behind us boosted the Dow 71 points to 11,061 - once
again clearing the 11,000 mark. The Nasdaq managed only a
six-point gain.

*** "It is the responsibility of economists to point out
false dawns," writes CLSA economist Eric Fishwick, who does
not see the sun rising on this economy just yet. Consumer
spending will be a critical component of any sustainable
upturn, he says. However, "in real terms, retail sales have
stopped growing [and] they are not yet contracting, which
has happened in previous cycles."

*** Meanwhile, the sun appears to be setting in the Old
World. Business confidence is weakening across Europe -
from Sweden to Germany to Spain.
"French manufacturers were more pessimistic in May then at
any time in almost two years as domestic and foreign orders
dropped," the International Herald Tribune reported late
last week. The index of business confidence, as compiled by
French statistics office INSEE, has dropped six months in a
row. As Deutsche Bank economist David Naude told the IHT,
"This is clearly a cold shower after they slightly crazy
idea that France could escape the international slowdown."

*** Inflation has risen in Europe, unemployment is up too.
Economic growth, on the other hand, is down. Europe.like
America.faces the prospect of a recession. And Europe, like
America, turns its weary eyes to Alan Greenspan, the one
man who might rescue the situation. Bill has more, below...

*** The euro declined 8% in May - because of the weakening
economic picture in Europe, it is believed. It now stands
just a bit over 84 cents.

*** Part of the problem - or advantage, depending on the
way you look at it - in Europe may be that Europeans just
don't work enough. Richard Russell sites an OECD study
showing that Americans work far more hours than than Old
World counterparts. In 1970, for example, Germans and
Americans each worked an average of about 1900 hours per
year. But last year, Americans worked nearly 2,000 hours,
while Germans put in only 1700.

*** But who's better off ? People who work less and save
more ? Or those who work harder and harder to get
themselves further into debt ? You decide.

*** Have you read the "Technology and Health" page in the
"B- section" of the Wall Street Journal lately? It has
become a kind of obituary page for technology companies.
Last Friday, page B2 reported that Tellabs struggles from
"worsening industry conditions," Hewlett-Packard's suffers
falling revenue from falling "worldwide sales of computer
servers" and Ibis Technology "cut its staff 14%."

*** Investors looking for a rapid turnaround in the
technology industry might want to take note of the latest
GDP report from Taiwan. The tech-heavy Asian economies
first-quarter report was its lowest in 26 years. Dante's
Inferno seems to anticipate tech stock investing in 2001:
"This way for eternal suffering. This way to join the lost
people...Abandon all hope, you who enter!"

*** According to a new study by two professors at the
University of Chicago, only 5% of analysts ever issue a
sell signal. J.P. Morgan analyst Michael Freudenstein must
be one of the few. He warned investors last Thursday to
think twice before buying the stock of either Merrill Lynch
or Goldman Sachs. The problem, as he sees it, is a
"continuing decline in investment banking activity."

*** He didn't mention his employer. But, investment banking
produces 60% of J.P. Morgan's operating earnings.
Furthermore, as grantsinvestor.com's Andy Kashdan and
Robert Tracy point out, Morgan's investment banking
revenues fell 22% year-over-year in the first-quarter.

*** "If one were to build a banking behemoth from scratch
with the idea of maximizing exposure to a weakening economy
and struggling capital markets," they write, "the finished
product would bear a striking resemblance to J.P. Morgan
Chase."

Eric Fry

And more notes of a less serious nature...

*** It was so beautiful in the country this weekend, it was
hard to leave. Pierre had cut the hay in the field behind
the house and rolled it into giant bales. Squint, and it
looks just like a painting by van Gogh.

*** Young animals of all species are adorable. We have baby
ducks, turkeys and chickens. One of the little ducklings
hatched with a bad foot. The poor thing hops and scuttles
around. "I should probably put him out of his misery," Mr.
Deshais had remarked last week. Somehow, the duckling
survived - at least while it was enclosed in a protected
space. But now it is out in the fowl yard with about 30
other ducks, none of whom have ever heard the parable of
the Good Samaritan nor ever seen a handicap parking space.
The deformed duckling was still alive when we left last
night. But nature will take her course.

There are also four little pigs in the sty. We bought them
at a neighbor's farm just after they were old enough to be
separated from their mother. They were cute, too, rooting
around in the yard. Of course, adult animals can be
attractive too, with the right sauce.

*** Pierre spent Sunday afternoon fixing his hay rake.
"Every year it is the same thing," he told me. "I drive
along; then I hear a clacking noise. It is not too bad at
first, so I wait. But it gets worse and worse. Then, by the
time I decide to stop the tractor and check, the noise
ceases. So, I don't worry about it... Of course, then I
notice that the rake isn't working. The noise stopped
because the piece finally broke off....so I then have to
search for it in the hay."

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DEBT EXPRESS


"We may make Atlanta, but we'll all be dead."
 One of Jimmy Rogers' railroading songs

Clickety clack. Clickety clack.

There is always a lot of 'noise' in an economy. The latest
figures, for example, show such a mixture of facts and
figures that it is hard to make sense of them.

Corporations are issuing bonds at a record pace. $88
billion of them were taken up by investors in the month of
May alone. And, in early May the junk bond market had its
best week in 12 months, with $500 million flowing into the
risky investments.

Consumers seem to be heeding McTeer's appeal to patriotism.
Countrywide Credit reports that it funded $102 billion of
new mortgage loans in the month of April - and increase of
130% over a year ago. And Mercedes Benz reported its best
results ever in the month of May.

And there is the gold price. Down $9 last week, gold seems
to be telling us that inflation is, as our Fed chief tells
us, no problem. Gold stocks were less sure - declining only
5% over the week.

Meanwhile, the number of bankruptcies rose 17% in the first
quarter. So far this year, 581,105 people have declared
bankruptcy...up 23% from this period last year. What should
you make of that?

With all this racket, how will we know when the economy is
really breaking down?

It is hard enough to see what is in front of our very eyes,
let alone what is coming around the bend. Is the economy
expanding or contracting? No one really knows. We have to
wait to find out, looking backward to see where we have
been.

We don't know where we are, but most people believe they
know where they are going - towards the clear skies of
economic growth, full employment and 15% per year stock
market growth. No need to consult a map, nor even to look
out the window; Alan Greenspan is at the throttle. He's
wearing his Casey Jones cap and has his hands on the
controls.

As we found out yesterday, the throttle may not be
connected to the fuel line...and the brake may be more
operational in theory than in fact...but there is no need
to alarm the passengers. This train is bound for glory,
after all. Get on board now...or you'll be left behind!

"With effortless adjustments to short-term interest rates,
so the thinking goes," as Doug Noland put it in a recent
bulletin, "central bankers have both the skill and capacity
to orchestrate positive and enduring effects to financial
markets, while stimulating just the right amount of
additional demand to perpetuate a non-inflationary U.S.
economic boom. With the Fed able and more than willing to
ward off any financial difficulty or economic slowdown, the
only thing to fear is fear itself."

It is too late for business. Already fearful, business is
cutting back. Employees are being laid off. New projects
are being shelved - at least until excess inventories are
sold off.

Thank God for the consumer. "With industry already in a
slump," explains an article at S.F. Gate, "the only thing
that that has kept the nation out of recession has been the
willingness of consumers to dig into their pockets and buy.
That spending has been fueled by an ever-increasing use of
credit."

Borrow, borrow, borrow, urges the Fed's McTeer. Spend,
spend, spend.
It's our only hope.

But there is a limit to how much debt consumers can handle.
Amid the clatter of news and facts, is a whisper of what is
being called "consumer stress." Credit counselors report a
30% increase in business this year over last. Bankruptcies
are increasing, as noted above. Consumers seem to be
'maxing out' their ability to borrow and spend. In April,
for example, people spent $49.7 billion more than they
earned. How long can this go on?

What the Fed can't do; it won't do. It can't erase
inventories, or turn a bad business into a good one. Nor
can it wave a wand and make consumers' debt balances
disappear.

What the Fed can do - lower the Fed funds rate...and
increase 'liquidity' - it can be counted on to do. The
funds rate can go to zero, and in real terms, below zero.
Will a funds rate of zero prevent stocks from regressing to
the mean? Will it light a fire under productivity and GDP
growth? Who knows. But in Japan, it had no such effects.

And liquidity? It 'has to go somewhere' is the popular
expression. But it might well go to rebuilding consumer
savings accounts...or offsetting deflationary consequences
of a stock market meltdown...or, yes dear reader, even to
increasing the price of bread, houses and movie tickets.

There were those - many and famous - who urged investors to
buy tech stocks and dotcoms a year ago. But only half the
population - the upper half by income - got to take
advantage of this advice. Consumers with more modest
incomes, or perhaps better sense, did not get a chance to
lose money on the tech mania. But now, they have an
opportunity to do something equally stupid: They can climb
aboard the Fed's 'Debt Express,' Destination: Unknown.

Your editor,

Bill Bonner

P.S. What the Fed cannot do might nevertheless happen. Alan
Greenspan, if nothing else, is famously lucky. It was his
great luck to step onto the #1 Engine at the Fed reserve
switchyard after Paul Volcker had sharply raised interest
rates thereby shut off the supply of oxygen to inflation.
It was Volcker who took the heat and did the dirty work.

Greenspan has had a downhill run ever since.. coasting on
the slope of declining interest rates, with no inflation
threat on the horizon.
Maybe he'll get lucky again.


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