proof through the night

From: Forrest Bishop (
Date: Sat Feb 17 2001 - 04:49:42 MST

Some observations on near-future technological developments-
February 16, 2001 Second-half rebound D.O.A.

 "And the balance sheet's red glare. . .
Bombs went off last night in the form of earnings results,
preannouncements and future guidance. In no particular order, Dell
(DELL) missed its estimate, guided lower and said it had no visibility
to provide guidance for the second half of the year. ...

The bombs bursting in air. . .
 Analog Devices (ADI) lowered guidance for the next couple of quarters
and will be at the mercy of cancellations while trying to make its
revised numbers. Last, but most important, Nortel (NT) dropped a bomb by
saying it was going to lose money instead of make money, it was going to
lay off a bunch of people and allowed that there was not going to be a
recovery this year. Folks need to realize that when Nortel's business
gets this bad, that means the big carriers have cut back their orders
and suppliers to Nortel are going to have their orders cut back.

   When you add up the three big names previously mentioned you get more
than $100 billion in revenues, so ladies and gentlemen, this is
significant stuff. These are not itty-bitty companies that are having
problems. This will definitely back up the food chain in technology. As
I've been trying to state on a regular basis the last couple of weeks,
the most vulnerable equities are the chip stocks because of the
valuations and the fact that we're swimming in inventory at every level.
They're facing the possibility of having their orders literally go to

   [Note: there is a worldwide glut in DRAM, semiconductors (e.g.
microprocessors), telecom, wireless, electronic components, etc. sitting
in warehouses, a classic Austrian School malinvestment.]

To put it mildly, last night's information touched a wide range of
companies. On top of that we had a couple of other important
preannouncements, one from Schering-Plough (SGP) and another from Dow
Chemical (DOW). It's telling that we've reached the point where we're
starting to see estimates go from expected gains, to small losses, to
even bigger losses.

   In the first couple of hours we pretty much went sideways with a
slight upward tilt in the S&P and the Dow and a slight downward tilt in
the Nasdaq. It appears as though "they" (the proverbial they) were
trying to prop certain stocks to maintain psychology...

 [Note: "They" may be traders for the larger mutual funds, the Plunge
Protection Team (PPT: Fed+US gov), or maybe aliens.]

 I might add that, for once, an economic statistic showed up in a
dramatically unfriendly way, which complicated the picture this morning.
The PPI, instead of being up the expected 0.3 percent, was up 1.1
percent, which also helped cast a pall over things, although as I've
said in the past anyone who relies on government statistics to tell them
what's really happening with inflation is being a bit nave.

[Note: the official CPI, PPI, GDP, productivity, etc. figures are 100%
statist propaganda, reminiscent of the Soviet Union. A 1.1% PPI should
probably be doubled for good measure, though it is more accurate than
most BLS numbers. Check out your local supermarket for the Incredible
Shrinking Package.]

>From there a sharp rally ensued, I suppose partially because Dick Arms
sent an e-mail to all his trader types indicating that at 3:20 p.m. EST
he was going on bubblevision [Note: CNBC] to declare that, based on his
35 years of his experience, the Nasdaq was at a bottom. ...

 In the news, Ed Hyman of the ISI Group pointed out that when the price
of oil broke in 1980, the rig count broke one year later. And when the
Nikkei broke in 1990, Japan's economy started to break a year later.
He's pointing out that since the Nasdaq stock bubble broke a year ago,
this is about the time we should start to see some technology company
weakness. When one looks at it in the context of bubbles breaking, the
absurdity of the notion of this getting better by the second half
becomes very clear. ...

 Turn the lights down low. . .
One of the reasons that I've harped on all the shenanigans going on in
corporate America, where they focus on the stock price instead of the
business, is because by doing that a lot of businesses have been hurt to
the point of ruin. There is no better example than Lucent (LU), which is
potentially headed to death's door because of trying to move heaven and
earth to make the number. All the vendor financing that went on, and not
just at Lucent, where companies that couldn't afford it were sold
equipment on credit so that "expected" sales growth and earnings growth
would be there, is now starting to blow up in everybody's face.

   The amount of hanky-panky that has gone on in this cycle dwarfs any
other cycle probably by a factor of 10. The fallout from this will be
very grave. Companies that took on debt in addition to balance sheet
voodoo are going to be the most vulnerable. It was particularly
remarkable to see IBM, for instance, only down $1.50 today. If anyone
thinks that company is going to get through this unscathed they're
crazy. IBM is in the same business as the companies that are getting
hurt right now, it has no protection from a price war and its balance
sheet is a disaster waiting to happen.

   [Note: Inflation/hyperinflation is the debtor's friend as long as
loans don't need to be rolled over. This principle also applies to the
largest debtor in history- the US federal gov. Motive and method are

  Perhaps over the three-day weekend folks should take a step back and
think about what's gone on and the potential for problems. I think we
can be certain that the bad news will continue to escalate and it seems
as though folks are not prepared for it yet are determined to bet
against it. One of these days all hell's going to break loose and you're
not going to get a chance to sell them at anything remotely resembling
today's levels. . . .

   I'd like to make a comment about trying to pick bottoms and tops.
Trying to pick the bottom is like trying to pick the top. By definition,
it's an extremely low-probability event because it can occur only once.
That's why I think it's particularly crazy to state, with any degree of
certainty, that the bottom has been reached. When we were chronicling
the craziness of the last couple of years, from time to time we tried to
describe what a top might look like just so we would be prepared if we
ever saw events surrounding that top.

   We chronicled a number of blowouts and reversals that didn't turn out
to be the top, but at the time I tried to be careful to point out that
by definition it was a low-probability event and staking money on
guessing that was foolhardy. I would remind the bulls of the same thing
-- it's worthwhile knowing what a bottom looks like, but it's not very
likely it's going to be identified on the day it occurs, and it's even
less likely that it's going to occur so recently after the peak of such
a very large mania. "


The largest speculative mania in history, to be precise.

   Mr. Greenspan has presided over the greatest money-supply creation in
human history. More dollars were conjured up (well over 4 trillion) on
his watch than in the entire rest of the history of the Federal Reserve.
This "Credit Bubble" is the underlying reason for the hyperinflation in
stock and real estate prices over the past few years. The rise in the
S&P 500 1994-1999 for example, has a .995 correlation with M3 growth
over the same period.
    The trade deficit is much of the reason for "low" price-inflation,
alleged productivity increases and rising GDP. We have been exporting
many (over $30 billion per month net) of the excess dollars -inflation-
and importing "productivity". This one of those 800 pound gorilla
"imbalances" that Greenspan drones on about. The GDP increase is caused
in large part by re-pricing imports for sale in the US. That $30billion+
per month, when adjusted for a 220%+ purchasing power parity (PPP basis)
-the overvaluation of the dollar- is closer to $100 billion per month,
or something like one trillion dollars (in October, 2000 dollars) per
year worth of goods plundered from the world. This is the core of the
"New Economy" (a phrase coined in the late 1920's). We wire information
about "money that never was" overseas, in exchange for about half of
what you (meaning Americans) consume. That is the "Information Economy",
for your information.

A day unlike any other day-

    An external devaluation of the dollar appears imminent. It can limit
down overnight, while you sleep, as happened with Apple and Intel and
the S. Korean Won. The dollar peaked November 24th and has since fallen
about 7%+- against most currencies. The Fed's panic drop of interest
rates the first week of January may have served notice of capitulation
in the Euro-Dollar currency war. This may have been motivated by
someone's (Bank of America?) derivatives book blowing up LTCM-style.
  The Fed's choices are/were restricted to essentially two:
1) attempt to cushion the "hard landing".
2) attempt to salvage the value of the dollar.

   The daevaluation may prompt foreign holders of US bonds, (44%ish are
held externally, the highest % in history. Here we disregard US bonds
held by the Fed, these are simply monetized government debt.), stocks,
dollar accounts, and perhaps even central bank exchange reserves to
divest themselves, setting off a panic not unlike a stock market crash.
This process appears to be underway now. Alternatively, this may lock up
the interbank system- a global, systemic failure. The resulting import
price-inflation (like with oil) in the US will be a central feature in
the economic "soft landing" (a retreat to low GDP growth) or
"hard-landing" (recession, defined as 2 quarters of negative growth) or
most probably "collapse" (a rapid reduction in GDP concurrent with
rising unemployment, etc. A recession speeded up.)
   Recognize that e.g. stock market capitalization is a "notional
value", the $13ish trillion peak market capitalization (aka the "wealth
effect") never existed. Money flows through the stock market, from a
buyer to a seller, it does not reside in the market. The entire US
economy runs on a bit more than $1 trillion (M1 or MZM). This can be
visualized by thinking of the US annual GDP of ~$10 trillion as being
very roughly a monthly circulation of the M1 "money" supply, plus
occasional parts of M3. External central bank holdings alone greatly
exceed M1, Eurodollars (US dollars held in European accounts) are about
of M1, and untold quantities of 'actual' paper dollars (well north of
a $half trillion) circulate externally. Much of this is currently used
for international trade between non-US countries- but not because they
volunteered to grant such exorbitant privilege...

A glimpse of the future-

ORO (01/30/01; 14:43:09MT - msg#: 46961)
 ... there is discussion of displacement of local manufacture by imports
due to "free trade". This is not true! The actual cause is "Triffin's
dilemma", which was actually discovered at least 3 centuries ago, and
possibly first formulated by Sir Gresham, the Exchequer to Elisabeth
some 450 years ago.

    The idea is simple, industry is destroyed at the source of money

    If you are in a country that has a wide variety of industries in the
days of the gold standard, and there is a huge strike of gold, with more
reserves found every year, then money (gold) will be spent by the local
owners, spent by the happy miners, taxed and spent by the local
government, and would cause an increase in money supply. Local prices
would rise well above those in other countries, as a result, the
country's exporters will find local labor hired from under them and
moving towork the mines or cater to the spending of miners, the mine
owners, and the government. The exporters, facing high costs and an
attractive local market would stop exporting. Next, import prices, being
lower than local prices, would cause imports to flow in, displacing
local production.
   While artists, shop owners, and service providers might be getting
very well paid by the mine owners and their laborers for local services,
lavish shows, andconstruction of megalo-houses, the industrial
production of the country would decline and the mechanically inclined
local labor once employed in industry would have to convert to one of
the booming industries of housing, retailing, broking intermediaries,
entertainment, scientific research, spiritual and psychological advice,
medical service and medications, and government service.
  This will continue until the prices of goods abroad rise to be closer
to the prices of goods in the gold producing country. When this happens,
the expansion of imports will stop, some imports will no longer be
cheaper abroad than when locally produced, and then local entertainers,
salesmen, government workers, home builders, brokers etc. will have to
find new employment in some of the old mainstay industries that now have
to be rebuilt from the ground up.

   Now, instead of a mine being the source of money, let's look at the
source for today's official international money, the dollar. How and
where is a dollar created? Dollars are created by issuing debt - which
is done by borrowing for the purpose of spending, investment in capital
and technology development, or speculation - or it is done by "printing"
of it by the monetary authority, the Fed. Dollars abroad are not
borrowed into existence directly, but leveraged in what is a "free
banking" system - which is prone to liquidity problems when it expands
more quickly than the supply of dollars from exports to the US (the
creator of our "gold" in this case), because there is no monetary
authority to print dollars outside the US.

   Money is thus destined to flow out of the reserve currency issuing
country, America. Aside from giving it away, the only other ways of
supplying money abroad is by lending it and spending it on foreign
investments and imports (produced by the investments abroad).

    Imports are destined to flow the other way and to destroy the
industrial economy by competition from imports, so long as dollars are
used to settle the most necessary trade (oil) by political fiat (an
agreement between our creditors, us dollar producers, and oil producers
that have our troops sitting around their oil), and there is a need for
more dollars abroad. The need for more dollars abroad is a result of
dollar debt incurred in the past by developing economies; both in their
attempts to buy oil in the 70s, and in their borrowing for capital
investment in local and exporting industries in the later 70s and
through 1994.

   When dollar exports overcome debt service costs to dollar debtors
[Note: you are here.],
the dollar will collapse as prices of imports grow to match US prices,
while import volumes drop and will start being replaced by local

  A demonstrative look at recent dollar history:
 This is exactly what happened in the course of the development of the
dollar reserve system coming out of WWII. This lasted till 1971, when
the then exporters to the US, namely Europe, finally reached the point
where their loan repayments in dollars were completely supplied by
income from their accumulation of American income producing financial
assets, and the US suddenly found itself devoid of new oil, which had to
be imported in growing quantities - thus suddenly supplying more dollars
to the global markets. From that point on, there was no further need for
dollars in Europe, and they just dumped into the markets for real goods
those dollars they and oil producers got from exports destined to the
US. Import prices rose to the sky in the US, and "free trade" became the
mantra in order to lower import costs to Americans. Europe and oil lent
the money to emerging markets, and China suddenly started opening its
doors to trade. ...

    They [Asian "tigers"] will only be able to resume high speed growth
when China (and later India) can no longer offer cheaper skilled labor
or the costs of American distribution and retailing and export
transportation (oil to run the ships and energy costs to build new
ships) rises to the point of choking further export growth by eating the
price margin with the US. Alternatively, they can make a coordinated and
concerted effort to lower outstanding debts and raise reserves in
dollars till they no longer have to price their exports off of the need
for dollars for debt and oil. When this point is reached, they will not
need any surplus dollars from the US. The collapse of US energy
infrastructure is displacing production of US basic materials to these
same emerging markets, which will increase their dollar income more than
it will increase their production volumes. The 7% drop in their net debt
position is going to be a 10%-12% drop in the next period (assuming
stable oil prices under $40) just because of the replacement of
production from US basic industries.

   When non-oil US import prices stop dropping, the signal will have
been given that the colossal debt trap of the past 20 years has been
breached and the captured economies are escaping. Oil prices will then
rise in tandem with other import prices going up, till the US is
producing enough of its energy to cap oil prices.

During the 70s and early 80s, the "median American" lost 25% of his
"real income". This round will be worse. With luck, it may fall by
35%-40%, as production of import replacement capital and energy capital
will hopefully grow by the time the process hits bottom.

[Note: here we assume the federal government can be straitjacketed,
"with luck". To illustrate, the recent political "solution" in
California is quite precisely incorrect, and will create an even greater
energy shortage.]

   When making calculations on the advancements of technology,
particularly as they may apply to one's personal situation, it is
required to include the fundamentals of economic science, a subject that
is unfortunately no longer taught in the US.

Do you trust your life
savings to a computer disk somewhere-
money created and annihilated
at the flick of a pen
or the click of a mouse?

Or would you prefer the kind of money that can only be created in a

Forrest Bishop
Institute of Atomic-Scale Engineering

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