MORE THEORY THAN IN FACT

THE DAILY RECKONING

PARIS, FRANCE

FRIDAY, 1 JUNE 2001

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*** Surprise, surprise - techs do just what they said they
would do...

*** Could McTeer be serious? Or is he just a comedian?
Should you go chapter 11 for the health of the economy?

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Market Watch

To remind you, this section of the Daily Reckoning is
written by Eric Fry, editor of Grantsinvestor.com. Eric has
been the guest host on CNN-FN this week, 9:30 - 11 E.S.T.
But Eric is becoming a celebrity.

He'll be appearing on the FOX network's "Cavuto on
Business" show. It is a 1/2 hour roundtable show that
appears three times over the weekend. Saturday at 10:30 AM,
6:30 PM and Sunday at 9:30 AM. I am told it appears in the
same time slots in each time zone across the country.

*** The stock market correction has been "overdone,"
Federal Reserve Bank of Dallas President, Robert McTeer,
pronounced yesterday. And we are darn glad to know it.
Unfortunately, McTeer provided no specific stock picks or
model portfolio by which to profit from the anticipated
rally.

*** As if in reaction to McTeer's "call," the stock market
rallied a bit yesterday. The NASDAQ Composite gained 26
points, or 1.3%. Even after Thursday's token bounce, the
NASDAQ sits about 9% below the level it achieved last week.
And lest we forget, the struggling index is still 58% below
last year's all-time high.

*** Lately, the news issuing from the technology sector has
been so grim, that not even diehard bulls can ignore it.
"Surprising" is the word appearing very often in the latest
batch of earnings warnings and cautionary comments from
Wall Street analysts.

*** In particular, Sun Microsystems "surprised" Wall Street
earlier this week by warning that its earnings for the
current quarter would be less than half what most folks had
been expecting. But the most surprising thing about Sun
Microsystems announcement was that it surprised anybody.
Sun's very own CEO, Scott McNealy, has been complaining for
several weeks about the poor "earnings visibility" at his
company. Investors simply ignored him.

*** As High Tech Strategist editor, Fred Hickey wrote two
months ago, "While most market strategists, chart
technicians and analysts are proclaiming in unison that
they see a "bottom," the CEOs' most-used phrase today is
"no visibility." The only bottom they see is the bottomless
pit into which they are staring."

*** The Dow Jones Industrials gained 39 points yesterday to
10,912 - within hailing distance of the emotionally
significant, but fundamentally irrelevant, 11,000-level.

*** McTeer's comment about the stock market selloff being
overdone typifies the new and improved Federal Reserve that
has emerged during Chairman Greenspan's reign. The
Greenspan Fed is not as focused on the stability of the
banking system or the strength of the currency as its
predecessors have been. Rather, Greenspan's gang devote
themselves to micro-managing and cheerleading the economy.

*** And why not? The Fed did such a good job of protecting
the value of the dollar - only down 95% since the Fed took
up its mission - who is better qualified to manage the
economy?

*** Would a national Chapter 11 filing be patriotic?
McTeer's hope for economic growth via debt-driven
consumption sounds more idiotic than patriotic.

*** Mitchell Securities bank analyst, Charlie Peabody
points out that even though the Fed is "cutting rates," not
all interest rates headed lower. Yields are rising for debt
maturities that are longer than two years. This state of
affairs affects different types of borrowers differently,
and the news is not all good.

*** For example, people wishing to take out a new 30-year
mortgage on their home will find that rates are higher now
- not lower - than when Alan Greenspan begun cutting rates
in January.

*** Furthermore, even when applying for mortgages that are
tied to one-year rates (which are lower than they were 5
months ago), consumers usually must qualify for these kinds
of mortgages based on what their monthly payments would be
on a 30-year fixed rate mortgage.

*** Therefore, Peabody concludes, "For every notch that
rates rise, some tier of consumer won't qualify for access
to credit, some tier of consumer will buckle under the
weight of their rising debt service burdens, and the
affordability of housing (as well as the ability to
leverage against the value of this asset) will deteriorate.
The bottom line is that the consumer's ability to sustain
this economic expansion is in the process being cut out
from underneath him."

*** The hapless euro fell against the dollar again
yesterday. So unrelenting is the euro's decline that it is
becoming monotonous. Financial commentators are running out
of reasons to explain its weakness. By the end of the New
York trading session the euro had reached a new low for the
year of 84.5 cents.

*** BCA Research believes that the euro's weakness stems
directly from the fact that the investment capital flowing
out of the euro-zone is much greater than that flowing in.
I get it, people are buying the dollar and selling the
euro. I guess that explains it..

*** We mentioned a couple days ago in the DR that, thanks
to our unofficial recession, travel bargains abound. The
reason for the deals is that folks aren't traveling. To
judge from recent stats compiled by Dennis Gartman's
eponymous, Gartman Letter, most families' will spend their
summer vacation in their own backyard, running through the
sprinklers and grilling hot dogs.

*** Gartman states that this spring 17 of the top 25 travel
markets in the US report "marked declines" in hotel
occupancy rates compared to last year. In New York,
occupancy fell to 73.3%, from 84.2% one year ago. San
Francisco Bay at even worse, last year's 85.2% occupancy
rates fell sharply to 70.8% this year.

*** Not even the "Happiest Place on Earth" could buck the
trend. DisneyWorld occupancy rate fell to 77.8% from 84.5%
last year.

*** Greg Weldon, editor of Weldon's Money Monitor, who
brought the Gartman data to our attention, also provided a
firsthand report from DisneyWorld. "I can say in no
uncertain terms, that while I was there last week, hotels
in Orlando were very aggressively advertising discounted
rates for the Memorial Day weekend space-with neon signs,
billboard ads and repeated radio ads."

*** Tellingly, Dennis Gartman notes one bright spot:
"budget" hotel occupancy rates rose 1.3 percent compared to
a 3.5% decline in "luxury" hotel occupancy. Consumer, where
art thou?

*** How about this for a darned cheap stock? Tenneco
Automotive - maker of name-brand auto parts - has $3.5
billion in revenues.but 73 million in losses...for the 12
months ending March 31st. At the current share price, you
could buy the whole company for $110 million. The problem
is that the company owes $1.6 billion and is in danger of
going bankrupt. It is a "turnaround situation." says the
CEO. Of course, if he succeeds, buyers at today's prices
will do quite well. If he fails, well, forget I mentioned
it.

Eric Fry

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MORE THEORY THAN IN FACT

Dear reader,

I return to painting - if only to introduce my method.
You've heard of 'taking a broad brush' to a subject? Well,
today, I have gotten out a spray rig - with a wide nozzle.
Using this heavy equipment I intend to put a thin gloss
over 2000 years of western history in less time that it
would take a Republic congressman to sound out the word so-
li-da-ri-ty.

The question on the floor - still lying on the carpet like
a smear of cheese dip after last night's party - is this:
why has the idea of laissez-faire economics taken hold in
Anglo-saxon countries, but not in the country of its birth?

Yesterday, I reported that French workers were entitled to
4 weeks vacation. I was wrong.

In 1981, in the name of 'solidarite,' the Mitterand
government decreed that, henceforth, every French worker
would have the right to 5 weeks of paid vacation.

There is no word in English that conveys the sense of the
French word 'solidarite." Socialists and agit-prop
demonstrators occasionally try to use an anglicized version
of it - solidarity - but the word has neither meaning nor
emotional power in English.

"Solidarite means nothing in French either," explained a
very bourgeois dinner companion a few months ago. "But it
is like the word 'racism' in English. It is used to shut
people up. No politician in France wants to risk being
'contre' solidarite."

What a wonderful world we live in, dear reader. So full of
intricate, subtle meaning. So marvelously complex...and so
entertaining.

There is no better place for an American to enjoy this
fascinating world than in France. You don't have to listen
to people charging one another with being 'racist' - a pre-
occupation of American politics. Instead, you listen to
arguments about 'solidarite' - and you are amused.

The French still imagine that they are one people, with one
language, inhabiting one distinct place. They may have
competing ideas...but their interests are in harmony.
What's good for the truck drivers is good for all
Frenchmen. When the drivers went on strike, blocking major
highways and causing a 100-mile traffic jam, people were
overwhelmingly sympathetic. They felt the need to stay in
'solidarite' with the drivers.

America is different. It is a collection of different
peoples. We recognize that different groups not only have
different ideas, but different interests that compete with
one another. Many people might be sympathetic to truckers,
but few would feel they had a right to snarl up the entire
nation's highway system. If they have a beef it is with
their employers, not with the rest of us. Let them sort it
out themselves. Laissez faire.

"Why has the 'laissez faire' concept been lost in France,"
Mark Skousen asked his audience. "Perhaps it is a question
of faith," he wondered aloud. "Adam Smith's idea was that
things would work themselves out for the public good,
guided by 'an invisible hand.' Smith was a moral
philosopher. He saw the 'invisible hand' as the hand of
God."

America has more churchgoers than any other developed
nation. It always has had higher levels of religious
participation. Looking around the U.S., region by region,
the higher the level of church attendance - the more likely
the voters are to favor the 'invisible hand' of the free
market over the iron fist of government. It is rural areas,
and especially, the evangelical, super-church regions of
the south and southwest that vote for the free-market. With
little faith in the 'invisible hand,' the Chardonnay
drinkers of Manhattan and latte swillers north the
Housatonic look for the hands of Hillary and Jeffords to
set their vacation policies.

Before Ceasar, the Roman Republic was a bit like the
American Republic before Roosevelt. People took their
vacations according to tradition, consensus, the give-and-
take of the market, family obligations and so forth. But
when the Republic gave way to an empire, the operating
principle changed too. Emperors began to determine the
character of life by decree. Power shifted from the clans
and families of Republican Rome to the tyrants of Imperial
Rome.

Neither the Frankish kings, Richelieu nor Napoleon could
resist the lure of Roman power. Once a Roman territory,
France became a kingdom, a republic, an empire (Napoleon
actually crowned himself Emperor in a moment of
unparalleled absurdity), and then a republic again.
Whatever, it called itself, France has always continued in
the tradition of Imperial Rome. Paris is the center of
power, as was ancient Rome, from which laws and roads
radiate outward.

All over France, mothers rock their infants to sleep hoping
that their children will do well in school and make it into
the few 'grand ecoles' in Paris and thence into a
government ministry. Perhaps they will help set interest
rates...or rig bids for Air France contracts...or determine
vacation policies. However much they might retard progress,
they will earn a good living and enjoy the feeling of
superiority that you get from being 'inside the beltway' -
at the center of power.

In America, things are not so different. But at least we
all know the regulators are morons. And women do not wish a
bureaucratic job upon their infants. Instead, they imagine
them as respectable professionals - lawyers, doctors, or
university professors - or, if they can't make it into the
professions, as successful businessmen.

Yet, in America, the idea of an 'invisible hand' is widely  
known and widely accepted. This is not because more people
have read Adam Smith; it is because the intellectual
traditions of the U.S. are different.

While Nero and Caligula were proclaiming holidays,
persecuting enemies, murdering relatives and destroying the
economy...providing bread and circuses to the Roman
mobs...and otherwise acting like modern American democrats,
the Saxon tribes on the north cost of Germany were already
developing a system of evolved rules which would become
know as "common law."

Rather than relying upon a written legal code (such as the
Roman law...which was the basis for the Napoleonic Code),
common law was an attempt by judges and juries to find the
essential principles that allowed people to go about their
business without doing too much harm to one another. Once a
principle was discovered, subsequent judges would continue
to refine it and apply it until it was replaced by a better
one. No decrees or edicts...no centers of power...no
bureaucrats were necessary.

 This common law tradition - in which people decide for
themselves when to work and when to take a holiday, or how
much to charge for a pound of potatoes, or how high short
term interest rates should be - was exported to America, as
well as to the other Anglo-Saxon colonies.

'Tis a pity it exists in today's America more in theory
than in fact.

Your editor,

Bill Bonner


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