| NO EXPECTATIONS PARIS, FRANCE FRIDAY, 3 DECEMBER 1999 *** We have our answer...Nasdaq hits new highs!
*** Gold drops
*** The euro meets expectations *** "How do you say 'sell short' in Esperanto?" That was
the opening line of my July 12 letter in which I
suggested that the Esperanto currency -- the euro --
would meet the same fate as the ersatz language itself.
Yesterday the euro dropped below the dollar... *** I wouldn't bet too heavily against the euro, though.
The dollar is likely to give it a good race -- to
extinction! The money pumps on the dollar are working
overtime. Could be that the cash is being absorbed by
people concerned about possible Y2K problems. But it is
likely to come flooding back into the market after Jan.
1. This could give another big boost to the tech
bubble...or the whole thing could blow up... *** The Dow rose modestly yesterday. But the Nasdaq
answered our question. We wondered if we had seen the
top. The answer: NO. The Internet average, IIX, rose 18
points. AMZN was up 4...This spike has not yet reached
its zenith. Whatever happens...this will go down in the
history books. *** But what will happen? I don't know...but how DO you
say "sell short" in Esperanto? *** The "NY Times" reports that a tiny Internet company,
Send.com, is spending $20 million on TV ads. Pretty gutsy
for a company "which has no profits and negligible
revenue." The "Times" goes on..."A lot of e-tailers have
sold their souls to the TV networks." And Richard Russell
comments, "What we're seeing here is a form of financial
madness." *** Financial madness comes and goes. The "Times" also
reports on the demise of the hottest IPO of 1993 --
Boston Chicken. I ate there once and thought
the food was pretty good. Investors liked it, too. They
put in $552 million...and watched the market cap rise to
$3.2 billion. This was the Internet stock of the early
`90s. The stock more than doubled on the first
day of trading. But on Wednesday, McDonald's bought the
whole business for less than the value of its real estate
holdings. Stockholders would "retain no value" -- meaning
they are wiped out. *** If a company that sells decent food...had all the
capital it could possibly need...and bought real estate
extensively in a rising market, can be wiped out...what
could happen to the Internet stocks? You can't eat
software. *** The price of gold dropped decisively...the threat of
inflation is not worrying the yellow metal. *** "Agence France Press" indicates that scientists have
finally figured out how to communicate with dumb animals.
AFP records the chants of Seattle demonstrators: "Turtles
say NO to the WTO...Butterflies say NO...Dolphins
say NO, etc." Other chants include such sentiments as
"Capitalism destroys all life...WTO is a bloodsucker...a
terrorist organization...Greedy Parasites Out of
Contol..." *** The "Times" of London reports that the Church of
England has finally set up a helpline for vicars who are
being bullied by their congregations. *** The ice is melting at the North Pole. The WTO must be
behind this, too...The annual loss of ice is estimated to
be as great as the surface area of Wales. *** But I have to move on...yesterday's letter about my
daughters reminded me of Howard Ruff's great line about
his daughter. "I've got her right where she wants me," he
said.
* * * * * * * * * * * * * * * * * * * * * *
NO EXPECTATIONS "I've got no expectation...to pass this way again." --
The Rolling Stones In today's letter I will knit together some of the
threads of conversation we've been following these last
few days. There are three major views of today's stock market,
generally...and the tech/Internet spike in particular.
The most broadly shared view is certainly the New Era
view. This is the bullish perspective which believes the
American economy is on top of the world...and getting
better. If stocks are expensive, don't worry...they'll
only get more expensive as the economy harnesses the
awesome new power of the Internet. Yes, there will be
corrections...but stocks always go up in the long run.
Besides, where else can all these baby boomer retirement
savings go?
My guess is that this is the view of the man-on-the-
street investor. Then there is the opposing view -- that
the whole market is overpriced...and that the techs and
Internet stocks are in a major bubble. There may or may not be a communications revolution going
on...the way the world does business may or may not be at
the beginning of a radical restructuring...but there's no
way investors in these Internet companies are going to
get their money. Even if the companies are
successful...they'll quickly be replaced by the next
generation of companies...coming out of nowhere. No
matter what happens, it is almost impossible for the Net
companies to meet investor expectations. We will
not pass this way again...not in our lifetimes. Then there is Jim Dines' view...which I am caricaturing a
bit...that whether they'll meet business expectations or
not -- you can still make a lot of money from investors'
expectations...however unrealistic they may
be. The mob is fickle...foolish...and irrational. But if
you can understand it...as Dines' believes he can...you
can make a fortune as the mob of investors bids up the
prices of Internet stocks to outrageous levels. "There
will come a day," says Dines, "when I switch you out of
Internet stocks and into precious metals." Thus he
anticipates not only the end of the bubble...but its
successor -- inflation. Yesterday I tried to show how decisions are made by the
heart, not the head. Lee at Gettysburg...the war fever
itself...were two examples. The most important decision
most people make is probably to whom they will get
married. It is a rare person who applies logic and reason
to this decision. "Loving eyes can never see," as Percy
Sledge puts it. Marriage, in fact, may be fundamentally
irrational...since it limits your choices.
Reason is absent not merely on the days you make your
most important decisions, but when you make trivial ones,
too...such as deciding for whom to vote...or where to
invest your money. It is easy to see how the mind
yields to the emotions when there is neither a fulcrum of
facts nor a lever of experience available to help you
make a rational decision. But when mass psychology takes
over -- the whole process of rational thought is
pushed aside like a police barricade. Blockheaded,
unreasoning, exaggerated emotion pushes aside whatever
logic, reason or simple good taste might otherwise
decide. A member of a mob will do things that he would never have
the courage or imbecility to do on his own. This is
sometimes true on a national scale, where civilized
people will go along with the most barbaric
atrocities...if properly stoked by mob psychology. And
during the 1980s, juries locked people away for years in
hysterical child abuse cases, based on testimony
that sober judges have later determined "no reasonable
person could believe." Psychologists have done many tests
to prove how mad crowd behavior can be...well illustrated
in a book entitled "Influence"...whose
author I cannot recall. Mass psychology pushes things beyond all reasonable
limits. People get swept along...and begin to hallucinate
collectively. Gustave Le Bon wrote a book, "The Crowd,"
many years ago. He made the point that the mob "is not
prepared to admit that anything can come between its
desire and the realization of its desire." No matter how outlandish the stock multiples become, the
bravery of the crowd leads people to believe that there
must be some way that their expectations will be met. No
reasonable way, of course. But reason no longer matters.
The Irish potato famine can be understood as the bust
phase of a financial boom. Many readers have reminded me
of the role played by the English. But the English landlords were no more sympathetic to the
Irish before the famine than they were during it. They
were an externality...like a persistent natural parasite
or chronically bad weather in an ecological niche. In the
early 19th century, the Irish population boomed despite
the English. Surely there were some people who resisted. More cautious
people might have wondered if the good times were
permanent. They would have clung to the old
ways...married late...had a traditional, small
family...gone to church. But the spirit of the boom not
only enlarged the population...it washed away many of the
social customs...including the practice of
ultimagenitor...which conveyed the family property to the
youngest, rather than oldest, son. Instead...property
holdings were carved up into smaller
and smaller units.
It was a "new era" in Ireland in the early 19th century.
But all booms that are built on unrealizable expectations
end in busts. There are no counter examples in history.
Austrian economists, such as our own Dr. Kurt
Richebacher, are very clear on this -- a boom built by
credit expansion rather than savings is
unsustainable. Extra credit produces the illusion of
prosperity and causes people to make bad decisions. They
spend too much, save too little and
invest recklessly. This is what we see in America today...negative
savings...abandonment of the traditional measures of
stock value...bizarrely high stock prices
(representing less real business / dollar of investment -
- or the equivalent of smaller landholdings).
Are current expectations realizable? Is there a margin
for error...for misfortune...such as a potato blight or
an oil crisis? I expect it will end badly. Bill Bonner P.S. Best wishes for a nice weekend.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
The Daily Reckoning is a FREE e-mail service of Agora
Financial Publishing -- dailyreckoning@agora-inc.com
If you would like practical advice on how to act on the
ideas in this e-mail, then simply subscribe to my monthly
financial communique, "The Fleet Street Letter." You can
subscribe or get more information easily. Just call 1-
800-433-1528 and ask for code 3472. | 
