-->The Dollar...Er, Again...

The Daily Reckoning

Ouzilly, France

Thursday, 26 December 2002

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*** Dow down 37% from its '99 peak...where to next?

*** Consumers will pay $3 trillion in credit card
interest...will they continue to ruin themselves for the
world economy?

*** Weak sales...Postcards from Nicaragua...Tears in our
eyes...full disclosure...and more!

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Only four more trading days left...the Dow is down 15.5%
for the year...and 37% below its '99 high.

Investors have given up on '02; they're already wondering
about next year. Once again, they turn to the financial
press for the usual plague of predictions. The seers have
been blind, deaf and dumb to the biggest financial trend to
come along in the past 20 years - a major bear market.

But maybe they'll get lucky next year.

Falling stock prices are unthinkable; the experts seem not
only unable to imagine them falling but unable to see them
falling right in front of their own eyes. Almost all those
quoted in the press at the beginning of 2000 thought stocks
would continue to rise. Then, again in January 2001, Abby
Cohen, Rukeyser's 'elves' and the other loudmouths on Wall
Street foresaw rising prices. And a year later...same
thing.

And, now three years later - three years of declining
prices on Wall Street later - and what do they see: rising
prices! Business Week interviews 65 of the 'smartest
players' on the street and, guess what...62 of them say
that stocks will go up in '03.

Why will stocks go up? The analysts give a variety of
reasons. Among them is the continued willingness of the
American consumer to ruin himself in order to keep the
entire world economy spinning around.

The Fed reports that consumers added a record $1.7 trillion
in personal debt through October - almost 4 times Russia's
entire GDP. Eric Gillen, of TheStreet.com calculates that
consumer will pay $3 trillion in interest on credit card
debt over the next 50 years, even if they never charge
another thing.

This record debt leads, of course, to record bankruptcies
and a record level of foreclosures. There were 1.5 million
bankruptcy filings in the last 12 months.

But just as Wall Street could see no break in rising stock
prices coming 3 years ago...few economists can see a change
in the borrow/spend/go bust pattern of the American
consumer. Consumer borrowing and spending"will continue to
be a boon to the economy," says Gillen.

Then again, perhaps Christmas sales figures are giving us a
hint that the poor fellow has had enough? Maybe he's
reached his credit limit. Maybe he's just tired of being
the world's patsy? Or maybe he's noticed that most of what
he's buying is getting cheaper...autos, TVs, even
food...and maybe he'll just wait a little longer before
spending his money...?

Of course, if he does that, it may be the end of America's
consumer economy... the End-Of-The-World-As-We-Have-Known-
It (EOTWAWHKI)...and welcome to Tokyo! (Or is it Buenos
Aires?)

Here's Bob Prechter's prediction:"We've entered a bear
market that's so big, we haven't had anything like it since
the 1700s, and that was a 64-year corrective process...
This is a great opportunity to get out. By the time this
whole thing is over, you'll be able to buy your favorite
neighborhood mansion from the bank at 10 cents on the
dollar."

Stay tuned for our own Daily Reckoning predictions for
2003...next week! (And a look back at what we were saying
this time last year... below.)

Over to you, Eric...

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Eric Fry in New York...

- The New York Stock Exchange was locked up tight for the
Christmas holiday yesterday...but we won't let a little
thing like that stand in our way. As we like to say down on
the factory floor,"the reckoning never sleeps..."

- When we last visited our hero, he was handing out a lot
more lumps of coal than sugarplums. On the day before
Christmas the Dow lost 45 points to 8,448, while the Nasdaq
fell 9 to 1,372. Not only is the so-called"Santa Claus
rally" failing to materialize, but the Santa Claus sell-off
has shown up instead...

- Weighing on share prices Tuesday was a durable goods
report that was far more naughty than nice. Orders fell
1.4% in December instead of rising slightly as most
economists had forecast. Orders for non-durable goods -
like Christmas presents that break on Christmas - haven't
been too great either. Holiday sales have been downright
terrible.

-"Sales for the seven days ended Saturday were down 5.8%
from the week," says USAToday citing a report from Instinet
Research."Sales at major chain stores grew 0.2% in the
three weeks ended Dec. 21 compared with the same period
last month. Sales were consistently"below plan" across
Instinet's entire sample in the third week.

-"Wal-Mart is barely making the sales it projected," USA
Today continues."Federated, operator of Bloomingdale's and
Macy's, continued to see sales weaken...Most retailers
estimate low single-digit sales growth and blame sluggish
economic conditions for consumers shrugging off of ever-
steeper discounts through the season."

-"The pre-Christmas retail figures weren't just bad," says
Dan Denning of the Strategic group,"they were the worst in
the 32 years the figures have been kept. Part of the
problem was the old `expectations game'. Following upbeat
forecasts after Thanksgiving, retail stocks surged. But
since December 2nd, the S&P's retailing index has fallen
13%, over twice the 6% decline in the S&P itself.

-"Maybe this is good news for consumers," Denning
continues."You can expect to see a blizzard of falling
prices and sales in the next two weeks. But even if the
price-cutting strategy works, it's bad news for corporate
profits. The Fed, the financial media, Wall Street
analysts...every one keeps telling us there's no
deflation...but we keep seeing companies like Federated
Department stores forced to cut prices just to maintain
sales figures from last year. Is it deflation? Is it a
tapped-out consumer? Is it really bad weather? There may be
lots of reasons...but the bottom line is that it's an
excellent time to be short retail stocks."

- [Editor's note: Bad news for Federated, for example, is
good news for Strategic Trader Alert subscribers, says
Denning. Two weeks prior to the holiday, STA readers
received a put recommendation on Federated - in
anticipation of just the news we saw yesterday. The puts
are up 26% so far and rising. If you are not a subscriber
and would like to learn more, please click here: Strategic
Trader Alert
See: http://www.agora-inc.com/reports/STA/FindGains/]

- Up here in the Northeast, a huge winter blizzard is
blanketing the landscape with snow. It's absolutely
beautiful. And for a California guy like myself, having an
honest-to-goodness white Christmas still seems a bit
bizarre. Amidst the winter freeze here in the Northeast, I
am reminded once again of the balmy breezes of Central
America.

-"Remember, it's a third-world country," one recent
visitor to Nicaragua told me before I headed down there.
And that's a true statement. North American visitors should
be prepared to observe poverty in all its various forms,
especially in Managua. But having visited both Mexico and
India, I was prepared for a much more horrific form of
poverty than what I observed in Nicaragua.

- It's true that one passes miles and miles of very humble
houses and shacks, surrounded by pigs, chickens, cows and
dogs, not to mention beautiful flowering bougainvilleas.
But the locals seem to eat pretty well and most of the
houses out in the countryside were very well tended. Pick-
up baseball games among boys of the various villages are as
much a staple of Nicaraguan life as rice and beans. And
nearly every boy I saw carried his own glove.

-"Better to travel hopefully than to arrive" is an
expression that often pertains to international travel. But
it did not pertain to my visit to Nicaragua...Something
strange and wonderful happened to me when I visited Rancho
Santana. My anxieties vanished. I didn't give a single
thought to any of the various concerns that I had left
behind in the States. Instead, I gazed out at the majestic,
blue Pacific and"zoned out."

- Is Rancho Santana a great investment? I don't know. I do
know that it is a great place...and that I can't wait to
return. I also know that I'd prefer to buy an $85,000 lot
in Rancho Santana than $85,000 worth of an S&P 500 Index
fund...But that's just me.

-------------

Back in Ouzilly...

*** Here at the Daily Reckoning, we believe in full
disclosure. We open our raincoats readily, like the aging
prostitutes on the Rue des Lombards...and hope we won't be
arrested. Your editor already has a house on a cliff at
Rancho Santana and is an investor in the development. But
he has mixed emotions about the whole thing. On the one
hand, he recognizes that the when others come down and buy
lots and build houses, his investment increases in value.
But on the other hand, he likes the isolation and
loneliness of the place and would like to keep it that way.

Again, if you're interested, you can take a look at the
property by clicking here:

Rancho Santana
http://www.internationalliving.com/ranchosantana/dr

*** Christmas came to Ouzilly yesterday, just as to the
rest of Christendom. Each of the children has come to
expect one special present from Santa. Jules, who was born
on Christmas day 15 years ago, sometimes gets 2.

We were especially proud of Henry this year. The 12-year-
old sang a solo in church on Christmas eve...and again on
Christmas day. His voice is changing and almost
cracked...but the pure, clear tones echoed through the
small stone church as if from an angel.

It reminded us all of the time, at least 7 years ago, when
Jules sang a solo at Christ Church, in Maryland, and
brought tears to almost every eye.

(Since then, he has brought tears to his mother's eye on
more than one occasion - even without singing.)

This year his father decided it was time to get him an
electric guitar. The present was a big hit. Jules opened
the box, reached in to pull out a shiny red instrument,
plugged in the amplifier...and scarcely another word was
heard from him the rest of the day.

But your editor is no fool. He included a pair of earphones
so that the boy could do his Grateful Dead tunes in
silence...while the rest of the family listened to Connie
Francis singing Ave Maria.


The Daily Reckoning PRESENTS: As we prepare ourselves to
forecast the economic events of 2003, we thought a look
back at year-end 2001 would be in order. Thankfully, the
market didn't embarrass us too much...this year.

This essay was originally broadcast on New Year's Eve of
2001.


THE DOLLAR...Er, Again...
By Bill Bonner

Each year for the last two [now three] years, we have
forecast a decline in the value of the dollar relative to
the Euro...and to gold. Predicting a decline in the
dollar's value has become an annual ritual here at the
Daily Reckoning.

This year we keep the tradition alive. In 2002, as the year
before and the year before, we expect the dollar to go
down. And even if it fails to go down...well, it doesn't
really matter. For here at the Daily Reckoning, our
forecasts tell only what should happen...not what will
happen.

In that sense, we've been right two years in a row. The
dollar should have gone down in 2000 and it should have
gone down again in 20001. Will it now, finally, actually go
down? That is not exactly the subject of today's letter...
but we expect to pay it a visit once or twice on our
meander through the thicket of monetary past, present and
future.

Statistically, this year's forecast is more reliable than
those of previous years - if only because we are less
likely to be wrong three years in a row than two. But
readers who took our counsel for more than it was worth
have nothing to complain about. Stocks over the last two
years have lost approximately 25% of their value - measured
by the Wilshire 5000. A reader who shifted from stocks to
either Euro bonds or gold is at least no worse off than he
was in January 2000.

[Editor's note: Such an astute reader would have, in fact,
fared quite well in 2002. Gold is 24% higher for the
year...the XAU and HUI gold indexes are likewise up 38% and
115% respectively. And while at the beginning of the year
it would have cost you US$.88 cents to buy a Euro...today
the price has risen US$.15 cents. Figures in the rest of
this essay were current on the eve of 2002, but as we've
noted above, the economic picture has changed little...
except to have been stretched farther out of whack. Cheers,
Addison.]

Not since Jimmy Carter was president has the nation seen
anything like the increase in the money supply, recently
clocked at 18% per annum...which is infinitely more than
the increase in the supply of goods and services that it is
supposed to purchase. The nation's output of ostensible
purchasing power is phenomenal. But the nation's output of
purchasable things is in decline. You don't have to be a
monetary economist to guess what should happen. More
dollars in circulation chasing fewer goods and services
should lower the value of each dollar doing the chasing.
Like millions of spermatozoa in search of an ovum - the
more there are, the less likely each one is to reach the
prize.

The Carter Administration also marked the last time when
America, relative to the rest of the world, was neither a
net borrower nor a lender. Since then, America has become
the world's leading debtor nation - with $2.59 trillion
owed the rest of the world. This amount is not trivial. It
equals a quarter of the nation's GDP...about $40,000 per
household.

In the '70s and '80s, the U.S. was concerned - as Japan is
today - that its currency was too high in relation to
others. An expensive currency gives a nation a competitive
disadvantage, makings its products difficult to export. But
by the time of the Clinton Administration, this worry
disappeared. Japan, Taiwan, China and other far eastern
nations had already taken away much of America's
manufacturing base. So, the country turned to software,
services and high tech industries where cheap labor posed
less of a threat.

These new industries were so promising that the rest of the
world wanted to own a piece of them. A new and very curious
financial model developed in the U.S. - helped by Robert
Rubin's strong dollar policy. Instead of producing and
exporting things the world wanted to buy, America's
consumers went on a buying spree, and made up the
difference by selling off capital assets and exporting
dollars!

The strong dollar made U.S. investments more attractive to
foreigners. And it made it easier for U.S. consumers to
continue to buy more than they could afford. Every day, the
difference between what consumers bought from foreigners
and what they sold to them equaled about a billion dollars
- financed by foreign investors.

No country could have got away with this except the U.S.
Because it is America that produces the key variable - the
currency in which all these transactions take place.
America bought foreign-made goods and paid for them with
dollars. Then, it borrowed back the dollars - trillions of
them. Aided and abetted by foreign investors, the dollar
was kept high throughout the '90s and early 2000s.

But there was no guarantee: the nation that borrowed
expensive dollars may pay back cheap ones. We don't know,
dear reader, but the thought crossed our mind as we were
watching a video at the hardware store: there are some
temptations so great they are irresistible.

Almost 4 decades ago, Charles DeGaulle noticed the
temptation offered to a nation whose currency has attained
the status of the dollar - it can make the currency worth
whatever they want it to be worth, noted the old general.
Prodded by DeGaulle, France demanded payment in
gold...which later forced America off the quasi-gold
standard.

Once completely free from the restraints of gold, the
dollar became almost as good as gold; it became the
currency of nearly last resort...the currency in which the
world's financial business was conducted.

America is in a unique position in monetary history. Its
consumers (and voters) labor under a greater burden of debt
than any people ever have. Their mortgages are higher than
ever. Credit card debt is higher than ever. Collectively,
Americans owe $2.59 trillion to foreigners. How could the
load be lightened? Simply by lowering the value of the
currency in which it is calibrated. How can this be done?
In theory, it is simple - by producing more of it.

No cobwebs adorn the money-creation wing of the Federal
Reserve bank. The machinery that increases the money supply
must whir and buzz around the clock. While the rest of the
economy experiences flat or negative growth, the money
supply has been growing all year long at double-digit
rates.

According to the formula, the quantity of 'money,' ceteris
paribus, is inversely proportionate to its quality. If the
available goods and services remained constant, and the
supply of money doubled, each unit of money should be worth
half as much. It is, of course, never quite that simple.
But neither is it ever completely contrary to the formula.
Money, like water, has to go somewhere. And sooner or
later, somehow or other, it will get there.

Maybe this will be the year the dollar leaks to lower
levels. [Maybe, indeed.]

Your correspondent,

Bill Bonner