-->Premeditated Fraud

The Daily Reckoning

Paris, France

Thursday, 17 July 2003

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

***"Deflation is still remote" and other lies...

*** Long-term investing in stocks... what to expect in
2014... End of the bond boom...? What are bond buyers
thinking... are they thinking at all?

*** The 'progressive socialization' of America... a
botanical clarification... your tax dollars at work in
CA... the French vacation ethic... and more!

Never Fall Victim to Wall Street's Crooks Again

Wall Street's hype machine has been stealing your money for
years. Now it's time to fight back! Rediscover the simple,
time-honored investment tools that never lie, that empower
You and that have generated profits of 73%... 147%... even
300% over the life of the brutal bear market. These
techniques have given investors the chance to see average
profits of 51% over the last three years, despite the
brutal bear market. Now you can revolutionize the way you
make money - Here's how!

http://www.agora-inc.com/reports/FST/Beware/

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

Alan Greenspan's lips moved Tuesday. Speaking to Congress,
he told the lawmakers that the danger of deflation was
"remote."

Was the Fed chairman lying? Or has he become so accustomed
to telling people what they want to hear that he could no
more spot a lie than a bubble?

Consumer price deflation may or may not come to the U.S.,
but it is hardly remote. The core rate of inflation -
taking out food and energy - was zero last month, as it has
been for 3 of the last four months. If there is a number
closer to negative than zero, we have never heard of it.
Far from being remote, deflation couldn't be more
proximate. Even adding back in energy and food, the
inflation rate rose only by 0.2% - a rate so low it hasn't
been seen since the Beatles performed on the Ed Sullivan
show. And if you step out to buy a manufactured item, you
are likely to find the price actually lower than it was a
year ago. Automobiles, for example, sell for about 1.4%
less than they did last summer.

Nor are prices likely to rise soon. Factories are operating
at only 75% of capacity, the lowest number in 20 years -
giving them plenty of room to keep up with demand, if there
were any demand. Consumer buying power, meanwhile, has been
crimped by the highest unemployment levels in 9 years... and
the highest debt levels ever. And"small companies [are]
still cutting jobs," says the Arizona Republic.

But Americans are still convinced that their brand of
democratic, consumer capitalism is neither in an uptrend,
nor a downtrend. To them, the boom is eternal. For they've
become True Believers... and can imagine no improvement in
the Dollar Standard system. America will always issue
dollars, they think... and the world will always take them
at par. And if the system seems to slow down or settle
towards deflation, the Fed will issue more of them to perk
things up.

How do you make money?

It's a no-brainer, they think. You just invest in dynamic
companies and hold for the long run. Little do they know
that the whole idea of long-term stock-market profits is as
big a humbug as Alan Greenspan.

"The simple truth is that stock-market prices do not rise
all that much over the very long term," explains David
Schwartz in the English paper, the Guardian."Periodic
catastrophic declines that destroy years of accumulated
profits are the norm, not the exception.

"When viewed from this perspective, it becomes clear that
the 10 percent annual average gain of the 1990s (not
counting dividends) was a temporary aberration. History
teaches that virtually every major multi-year advance
during the last two centuries ended with a lengthy period
of under-performance.

"There were 25 occasions when shares rose steeply in a 15-
year cycle. They did not rise in every one of those years,
but their cumulative gain over the full 15-year period was
well above average. In 24 of those 25 cycles, prices fell
in the next 15 years.

"We had a very sharp gain in the 15-year run-up to the new
century. The Footsie [the UK equivalent of the Dow] ended
1999 at 6930. If history repeats itself, the stock market
will be lower at the end of 2014, after factoring out the
effects of inflation."

Something to look forward to... right, Eric?

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

Eric Fry, far from the nation's capitol (thankfully)...

- Down on Capitol Hill yesterday, Alan Greenspan appeared
before the Senate Banking Committee to drone on about
monetary policy and the economy. The stock market yawned as
the Dow dropped 34 points to 9,095 and the Nasdaq Composite
nodded 5 points lower to 1,748. Meanwhile, the bond market
celebrated the chairman's remarks by staging a splendid
little rally. Recovering from its shellacking on Tuesday,
the 30-year Treasury bond surged 1 1/32 points, dropping
its yield from 4.97% to 4.90%.

- Encouraging the bond buyers were assurances from
Greenspan that he had not ditched his wacky idea about
buying long-term Treasurys, if need be, to fight deflation.
We would assume, therefore, that the investment logic
inspiring yesterday's bond rally must have been something
like:"Gosh, if Alan Greenspan would buy 30-year bonds
yielding less than 5%, shouldn't we?"

- What are bond buyers thinking these days? Or maybe a
better question would be,"What are they smoking?" Most
bond buyers seem to think a little bit about maximizing
yield, while never giving a thought to minimizing risk.

- How else could General Motors manage to sell more than
$17 billion worth of bonds, the sole purpose of which was
to pay down its pension liability? And how else could
Calpine, a junk-rated Enron-wanna-be, sell a monstrous $3.3
billion bond deal to the public?

-"The $1.15 billion seven-year portion of the offering was
priced at a yield of 8.50%," Barron's notes,"In late
October, Calpine's 8.5% notes due in 2011 hit a low of only
33.5 cents on the dollar. At that level, the market was
assigning a relatively low probability that interest and
principal would be paid fully and on time. Last week, the
notes fetched over 80 cents on the dollar."

- Have Calpine's prospects improved as dramatically as the
price of its bonds? Hardly. Moody's Investors Service still
rates Calpine's senior unsecured debt at single-B1 - four
notches below investment-grade. That's the identical credit
rating Calpine had before the Enron debacle. Like a hooker
that marries a neurosurgeon, Calpine's bonds have acquired
a newfound semblance of respectability. But a hooker is
still a hooker and a junk bond is still a junk bond, even
if the junk bond acts for a while like an investment-grade
issue.

- The bond bull market is shining a flattering light on all
types of credits. But investors don't seem to care. Bonds
are hot, and investors want to own them, plain and
simple... Hmmm... feels like a bubble to this market
observer.

- In February of 2000, your New York editor convened in
Miami with 25 of his friends and colleagues who practice
the dark art of short-selling. At that time, everyone in
our group adamantly asserted (through their tears) that the
stock market was in a bubble of epic proportions.
Meanwhile, Henry Blodget, Mary Meeker, Abby Joseph Cohen
and all the other pied pipers of Wall Street, confidently
heralded the rising stock market as a terrific bull
market... and one with room to grow.

- The lumpeninvestoriat placed their trust in the misguided
forecasts of these Wall Street seers... and then watched
helplessly as $7 trillion of its hard-earned savings went
up in flames. The short-sellers were right and Wall
Street's illustrious strategists, alas, were wrong.

- Fast-forward three years and the Wall Street crowd is
back to its same old game, goading investors to throw their
money into a bubble market. But this time, they are urging
the lumpeninvestoriat to buy risky bonds rather than risky
stocks."Greenspan will keep rates low," say the Wall
Street experts,"and besides, everyone knows that stocks
are risky. So buying bonds is the safe thing to do,
especially high-yield corporate bonds."

- The lumps are lapping up this drivel, and pouring
billions into bond funds. In the 12 months ended April, a
staggering $160 billion of new cash flowed into bond funds.
Unfortunately, the bond market has become a treacherous
place for capital over the last few weeks, as bond prices
have dropped sharply. Is the bull market over, or just
taking a breather?

-"The high tide for bond (and stock) investors has already
taken place," insists Bill Gross, the supremely successful
bond fund manager."Mid-year of 2000 is an obvious high-
water mark for stocks and June of 2003 is a likely one for
bonds. Both bond and equity strategies should begin with
the assumption of low, single digit returns for the next
decade..."

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

Bill Bonner, back in Paris...

***"The party for bonds may be over," says a Wall Street
Journal headline. While the final fireworks were
spectacular, few people realize what a huge, worldwide
party it has been.

In 1970, the entire global bond market had a value of only
$776 billion. Today, there are $40 trillion worth of bonds
in vaults and mattresses around the globe. Readers will
note that not only is there a debit for every
credit... there is also a market price, which could change
without notice. A man holding Japanese bonds over the last
few weeks would be keenly aware of this phenomenon: much of
his wealth has disappeared since the middle of June. Ten-
year Japanese bond yields more than doubled in the last 30
days.

Bond prices - regardless of the face amount - collapsed.
U.S. bond prices will collapse, too, but whether soon or
late... we don't know. (More on bonds and moribund pension
obligations, from The Supper Club's investment director
Karim Rahemtullah, below... )

*** Daily Reckoning readers with a number of thoughts:

From Lake Forest, California, comes this note:

"Mr. Bonner, LOVE YOUR COMMENTARY, it is one of the few
sanctuaries of reality I have to look forward to. Living in
California, I am all too familiar with what you say, as
being the truth, and yet you are not going far enough.

"In California, at the border check point in San Offre, as
the border patrol is stopping 'legal residents' to verify
your residency, you can actually see the illegal immigrants
running along the sewer culverts... this you can witness
from your car; without notice from the border patrol
officers. On my last trip, as I was driving a new caddy, I
was stopped and searched. When I enquired as to why I was
detained, the officer stated it was merely a random
inspection. In other words, they had no other reason, other
than to show they are on the job, wasting my tax dollars."

*** And from Colorado, on how the U.S. got to be like
France:

"Your comments about the progressive socialization of
America remind me of the story about the lobster. If you
dunk him in boiling water, he objects strenuously. But if
you put him in cold water and turn up the heat, he
gradually becomes accustomed to the heat and doesn't notice
that he is being boiled alive.

"That is precisely what is happening to the U.S. economy.
Gradually we are being weaned from our freedom and self-
reliance and made more dependent on the central government
for everything from cradle to grave. You name the acronym
and we have become dependant on it!"

*** And from Puerto Rico, botanical clarification:

"On 11 JUL 2003, Bill Bonner wrote: 'Down by the river,
crews of workers are turning the banks of the Seine into a
beach. They put up palm trees....'

"THERE AIN'T NO SUCH THING AS A PALM TREE, MR. B.

"A tree is, by definition, a critter that's got bark and an
extended root system and leaves. Palms possess none of the
preceding. They are plants, but they ain't trees. As a
resident of palm-invested San Juan, Puerto Rico, USA, I
know whereof I speak.

"You guys are, however, dead RIGHT about GOLD."

[See: The Case for Gold
http://www.agora-inc.com/reports/905STCFG/W905D503/ ]

*** And, finally, a reader sends this article from the
Christian Science Monitor, describing the difference
between French and American attitudes towards vacations:

"In their daily life, the French constantly ask one another
about their plans for holidays - with good reason. With the
introduction of the 35-hour workweek in 2000, five weeks of
mandatory holiday turned into seven. Holidays aren't just a
relaxation in France, they're a way of life.

"When North Americans see how much time the French spend on
holidays, they can't help wondering how the French get any
work done. And how does their economy survive?

"We lived in Paris from 1999 to 2001 to study the French
for an American institute. Many of our assumptions were
turned upside down - including our prejudices about the
French taking too many holidays. The main reason they
'manage' to afford their holidays is that they work hard
the rest of the year. They've also found ways of making
holidays economically productive.

"Contrary to many North American assumptions, France -
according to wealth produced per hour worked - is one of
the most productive countries in Europe. Labor is expensive
in France, so industries are extremely mechanized. The
French would be even richer if they limited their paid
holidays to two weeks, but they look at the problem
differently. If fewer people are necessary to produce the
same wealth, they reason, then why not translate that
wealth into more holidays? As many of our French friends
remarked, whether holidays are good or bad for the economy
is beside the point: 'The economy is supposed to work for
us, not the other way around!'

"Although the French project a hedonistic image, they work
long, hard days - when they work. French workdays don't
start later than in North America, but they do end later.
We lived in a popular Paris neighborhood, and the Metro
rush hour there lasted until 8 p.m.

"'The French also have a very distinct work ethic. They
pretend they're not busy even when they're working like
crazy. To us, looking relaxed shows you're in control,' a
friend explained. Hence, long leisurely lunches at cafes.
Make no mistake: They're working hard, they just don't have
stigmas about taking their time and looking relaxed in
public.

"As to the social costs of holidays, the French argue that
their economy has faced far greater challenges than
generous holidays for workers. The way they look at it, if
their economy absorbed women entering the workforce and the
introduction of weekends and statutory holidays -
impossible dreams a century ago - it can certainly survive
the 35-hour week. And, for that matter, a lot of the wealth
produced in France during the last six centuries was spent
on war. Europe has been at peace since 1945, and the
fantastic wealth that was once devoted to destruction and
reconstruction is now spent on leisure. And who but the
French understand best how productive holidays can be? A
leisure society is good business. France welcomes 75
million foreigners a year, making it the most visited
country in the world. (A mere 51 million visit the United
States.)

"If you pay attention at the cafe, the restaurant, or the
hotel, you'll notice that most of them show a blue crest
that reads: chèques-vacances (holiday vouchers). Many
French companies give a holiday bonus to their employees in
the form of $1,000 in holiday vouchers valid in 130,000
French travel agencies, hotels, restaurants, resorts, and
more. Employees have two years to spend the money. Other
companies simply build resorts for employees: Some 2,000
companies make 240,000 beds available for their employees
in 8,000 resorts. The result? The money stays in France."

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

The Daily Reckoning PRESENTS: What will happen when
millions of Americans who bought into the pension schemes
set up by today's corporations... can't retire?


PREMEDITATED FRAUD
by Karim Rahemtulla

What other kind of fraud is there?

Picture this - millions of American retirees and those
getting ready to retire in the next two decades marching on
Washington, demanding a government handout.

It will happen.

American corporations have hundreds of billions of dollars
in pension liability. This is money that has been put aside
to pay for Joe six-pack's retirement from General Motors,
Ford, etc. It's also for current retirees, who are enjoying
the fruits of their labor and the fruits of union contracts
negotiated when the U.S. Industrial machine was at its peak
in the 50s, 60s and 70s. Back then, the American post-war
generation had no competition for global trade. We made it,
people bought it. End of story.

In the 70's, the Japanese industrial giants were just
entering the picture. China was still in industrial
backwater, churning out five-year plans with the frequency
of Mao's affairs. The Soviets still could not make a car
that could outrun the Pinto - even after producing the atom
and hydrogen bombs. Western Europe offered some
competition, but nothing compared to the mobilized,
motivated, and money-hungry Americans.

As the money came rolling in, U.S. pension plans became
fatter. As long as locals were willing to pay the price for
marginal goods and services, there was no end in sight.
With no competition, there was nothing to stop profit
margins from getting fatter ad-infinitum.

Of course, this type of short-sighted thinking always comes
back to haunt you. As time wore on, the U.S. began to lose
its industrial primacy. In the eighties, the U.S. teetered
on the verge of exporting the majority of its manufacturing
to third-world countries. Other countries quickly caught
up: in the nineties, the Japanese could crank out a car in
half the time of American companies, and the Chinese were
finally getting the hang of capitalism.

Back home, things changed, too - for the worse. The giant
corporate handouts in the form of lucrative retirement
pensions persisted for many of the largest industrial
companies. But the money stopped flowing in at the same
rate and with the same margins.

The result? Deficits in the pension plans. Most people did
not care, and still don't... as long as the check arrives
every month.

They cannot argue that they don't 'understand'; pension
plans are really quite simple. In principle, money is set
aside from the employer in a special fund. This fund is
then invested in the markets to generate a return. This
return, along with the principal, is paid out as an annuity
after the employee retires. So, as long as the market is
not crashing and there are enough investable funds to begin
with, everybody is happy.

During the nineties, many large corporations were running
pension surpluses because the stock market was doing
gangbusters. Companies were obliged to put in money into
these funds at a prescribed rate - which was directly
related to the expected rate of return on the funds. Much
as investors must do when determining how much to pay into
private retirement funds, companies would try to estimate
the return on the cash they put in and adjust their
contributions accordingly.

The obvious chance for chicanery here is for companies to
play with the expected rate of return. They can't play with
it too much, because there are limitations as to the rate
they can use. For the most part, they are supposed to use
the rate of return from the 30-year U.S. Treasury Bond.

Well, what if you could somehow tweak the rate higher?
Either you could understate your liability, or you could
effectively run a deficit. More on this in a moment.

Enter the Bear and lower interest rates. It is now 2003.
The markets have fallen, and fallen hard for three years.
Interest rates have plummeted. The effects are devastating.

Take GM, for example. At the turn of the century, GM's
pension fund was at a surplus. Today, it is running an $18
billion deficit. At this point, the question of insolvency
sets in - unless, of course, GM is bailed out by either the
government, investors or its own product line. Guess which
two stepped up to the plate?

First, investors stepped in by buying over $15 billion in
low-interest, convertible debt. This money is not intended
to better GM's models or to improve efficiency or to make
GM more competitive; no, every penny will go toward funding
the underfunded pension plan. For their hard-earned money,
the poor schmucks will get a paltry return from a company
that is having quite a hard time making a profit after
pension liabilities are considered. For GM, this is a sweet
deal. They can stay in business and move the liability from
one row of the balance sheet to another row.

Not to be left out of the fanfare, the government also
stepped in. As I mentioned earlier, companies that still
pay a pension are obligated to use a conservative rate of
return - usually based on the 30-year U.S. Treasury bond -
to calculate the future benefits from a plan. Well, as we
all know, the 30-year Treasury Bond has seen its lowest
rates ever in the past few months. This means that U.S.
corporations have had to put even more money into these
plans to make them compliant.

Well, what if you could raise the rate of return with the
stroke of a pen? The answer: the amount of your liability
would actually decrease... which means Corporate America
would be perpetrating a massive fraud on retirees. After
all, doesn't the money have to be paid at some point?

The government has now decided to allow companies to use
the rate of return from corporate bonds to calculate the
needs and returns from pension plans. What's a few hundred
basis points' difference? After all, shouldn't the
corporate bond be a standard of safety? Some may think so,
but I am sure retirees from Enron, Worldcom, and Global
Crossing would argue.

Companies love this idea, since contributions to pension
plans can decimate earnings reported to investors. The
government loves it, since this means delaying the
inevitable pension crisis in America, and it also means
more contributions for their re-election efforts. Still, at
the end of the day, only the retiree really cares... but as
long as the checks come in every month, he's willing to
coast along.

And you and I - why should we care?

Here's why. All of these pension plans are guaranteed to
some degree by the PBGC, The Pension Benefit Guarantee
Corporation. This is not some private insurance company,
but one funded by you and me. It operates much like the
FDIC - insuring the pensions based on the assumption that
it can handle a crisis here or there if only one or two
plans go belly-up - but heaven forbid that we have a
massive failure.

So... what will happen if the Fed's current effort at
reflating does not result in higher rates? Once again, the
American taxpayer will be called to step up to the plate,
simply to guarantee higher paper profits for companies that
need the numbers to send the market higher, so the taxpayer
can feel better about the future.

The wheel of life continues.


Best,

Karim Rahemtulla,
for The Daily Reckoning

-->