-->Shed A Tear

The Daily Reckoning

Paris, France

Wednesday, 23 July 2003

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*** A dead-son bounce on Wall Street

*** More on muddling through... won't it be a hoot to see
the end of it?

*** I once was adored, says Mr. Bond... Alan's bubbles... how
poor folk get air conditioning... and more!

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We can't wait to read the history books. Maybe a year from
now. Maybe 2... 5... 10 years. We want to know the precise
date on which the U.S. consumer credit economy stops
muddling through. For it must shake, rattle and roll over
dead some day. Everything does.

The day may come and go without notice. The world created
in the Dollar Standard era may end with scarcely a
whimper... and no bang whatsoever. But it will end. How and
when... and the irony and agony of it all... are grist for
the Daily Reckoning mill. Our wheel turns slowly, grinding
one day's market news and then the next. Consumer sentiment
gets crushed into chain store sales... which gets mashed
into the pulp of M1, M2, M3 and so on. Unless you have a
lively imagination or a perverse sense of humor, you might
find the whole thing as dull and pointless as a joint
session of Congress. What a pity, because you'd miss the
eternal drama of it all... the spectacle of monumental
arrogance humbled before nature.

Isn't that the theme? Powerful moneymen who think they can
buck the laws of nature... and thumb their noses at the
dead?

Men learned centuries ago that paper money unbacked by gold
can't last. No counter examples exist. Long before the
birth of Christ, they discovered that you 'can't get
something for nothin''... that savings, not consumption, are
the way to wealth... and that you cannot create real money
'out of thin air.' But modern economists, central bankers
and politicians pay no attention.

The dead write no letters to the editor... they cast no
votes....they buy no stocks or bonds. They are forgotten
and ignored. Instead, Greenspan, Bernanke, McTeer, Bush,
the whole bunch of them, go about their business as if they
were the smartest men who ever lived... so smart they can
ignore the lessons of two thousand years.

Won't it be a hoot to see them brought low? Maybe we are
the only ones who think so...

The precise day is important, because that is the day you
should sell your bonds and buy gold. It is the day when
bonds begin shuffling off to the graveyard... and never come
back. It is the day the U.S. economy changes
course... instead of sliding towards Japan, it heads
south... towards Argentina... or southeast, in Zimbabwe's
direction. It is the day they knock the 'dis' off of
inflation. It is the day the U.S. stops muddling through
and the dollar gets marked to a suspicious market, and all
we lonely, cranky, crotchety... optimistic gold buyers get
to turn our fellow grumps and say,"see, I told you so...."

Maybe the day has already come and gone. Eric tells us,
below, that bond investors have lost 10% in the last month
or so. And the differential between TIPS, the inflation-
indexed treasury bonds, and bonds from the same issuer and
same duration without the inflation protection is
approaching 2% - higher than it has been in a long, long
time. Bond investors themselves are beginning to fear
inflation.

We're not very good at guessing birthdates or telephone
numbers... so we have to stick to the essentials. By any
reasonable measure we can think of, U.S. bonds are
overpriced. We will stay away. The U.S. economy could
continue to ape the Japanese for months to come... even
years. But whatever profit remains in dollar bonds (as the
U.S. economy slouches toward deflation, bonds should rise
in value) is dwarfed by risk.

Our advice: if you want to own bonds, buy euro bonds.

Over to you, Eric...

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

Eric Fry in New York...

- The Dow Jones Industrial Average struggled early on
yesterday, before heading higher in the afternoon to end
the session 61 points higher at 9,158. The Nasdaq jumped
1.5% to 1,706. Bonds bounced a bit and gold dipped a bit.
The stock market had been drifting lower all morning
yesterday until the news crossed the wires that Saddam
Hussein's sons - Odai and Qusai - perished during a six-
hour shootout. (Obe Wan remains at large).

-"Share prices surged immediately on the news Odai and
Qusai had been killed," remarked your New York editor's
friend, Michael Martin, an institutional stockbroker with
R. F. Lafferty."But this mini-rally is nothing more than a
'dead-son' bounce."

- Meanwhile, the beleaguered bond market could muster
nothing better than a feeble dead-cat bounce yesterday,
despite the harrowing drop it suffered on Monday. The 10-
year Treasury yield dipped slightly to 4.15%.

-"I was adored once..." Sir Toby Belch sighs in
Shakespeare's Twelfth Night. Mr. Bond Market must be
entertaining similar thoughts as he faces the disdain of
the very same investors who once adored every little basis
point on his nerdy frame.

- Treasury prices have rallied sharply over the past three
years, pushing the yield on the 10-year note from nearly
6.8% in early 2000 to a 45-year low of around 3.1%
recently. Ever since early 2000, investors have been
flocking to the bond market, seeking sanctuary from the
violent stock market. As of June 30th, long-term government
bond funds had gained an average of 13% per year for the
past three years. By contrast, many of the once-popular
equity funds (Did someone say,"Janus?") had lost more than
20% per year over the last three years.

- Is it any wonder that the bond market's siren song lured
investors away from the abusive stock market? Of course,
the bond market did not provide as much comfort as many
investors imagined... especially lately. Buyers of long-term
bond funds have suffered a 10% loss in less than two
months. So Mr. Bond Market is adored no more. Most
investors want nothing to do with this guy.

- Last week, Chairman Alan Greenspan crowed to the Senate
Committee on Banking, Housing, and Urban Affairs that his
policies were succeeding in"warding off unwelcome
disinflation." In fact, so successfully did Greenspan ward
off unwelcome disinflation, that he triggered an unwelcome
crash in the bond market. Bravo Alan!

- But let's be fair; there could have been no crash in the
bond market if the very same Alan Greenspan had not first
nurtured an epic bond bubble that elevated bond prices to
absurd levels. So let's give him credit, both for the boom
and the bust. Twice bravo, Alan!

- And your New York editor would like to extend a special,
heartfelt thanks to the Chairman. Were it not for
Greenspan's easy monetary policies, your editor could not
have refinanced his house in early June at generational-low
mortgage rates. Thanks, Alan!

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Bill Bonner, back in Paris...

***"First off let me say, I'm impressed," says a Daily
Reckoning reader, starting off on the right foot."Never in
my life have I taken such an interest in economics before.
Quite honestly no one had ever made it remotely interesting
to me before I began reading and subscribing to the Daily
Reckoning. Now I look forward to each new edition, often
quoting to my friends and family from you! ;)

"But what I am curious about is your insight and
recommendations to the thousands of us 'poor folk' in the
USA. In other words how would you suggest to those of us
(even with college degrees) making less than 20K/yr, living
literally paycheck to paycheck to cover basic life
essentials who are lucky to have $500 if even in
savings/assets, to get on the upwardly mobile track???

"I've heard the old adage of 'It takes money to make money'
or 'Only the rich get richer' all my life. Can you think of
any ways to break the economic chains on the anchor that
suffocates us?"

***"Have you re-financed your house yet," is our snappy
retort.

But the question is near and dear to us. We lived through
nearly 40 Maryland summers before we could afford air-
conditioning. We do not recall being any less happy in
those days, but at least we sweat less now.

Fortunately, we were protected from big mortgages and big
debts by the combined wisdom of the local banking
community... which judged a start-up publishing business a
poor risk. And we were protected from investment losses by
the fact that we had no money.

Now we know; it is very unlikely that you can make much
financial progress by buying stocks or bonds, anyway. The
idea of getting rich by investing on Wall Street is largely
a fraud. It can be done, but so might you win the lottery.

Wall Street sells products, just like a used car dealer. If
it can induce you to buy something, it will make money. But
will you? Not likely. If there were money to be made, the
product would have been held by the Wall Streeters
themselves... or offered to rich insiders. Ask yourself, if
a product really could produce an above-market rate of
return, why would the sharp people on Wall Street make it
available to perfect strangers?

Nor are there any other financial tricks we know of that
will turn a $500 nest egg into big money quickly. In fact,
the only formula we know for making money - one we have
some experience with - is this: you start a business, you
work 18 hours a day for 20 years, and then you get to live
in a house with air-conditioning. Then, of course, you get
bored... and buy a decrepit château in France and spend all
your time and money fixing it up. You see, the literal
translation of the word 'château' into English is 'money
pit.'

If you are interested in following our example, we will
refer you to a similar free service offered by a friend...

"Early to Rise"
http://www.earlytorise.com/sub/dailyreckoning.htm

.. and send you a loaded revolver by UPS, in case you want
to blow your brains out now and save yourself a lot of time
and trouble.

*** Oh là là... and update on the poor working stiffs from
our friend, Dan Ferris:

"Page 14, July 28 issue of BusinessWeek...

"23% of Americans say they won't take a vacation because
it's not in the family budget.

"17% won't take a vacation due to 'the general economic
climate.'

"14% are concerned about job security.

"That's from a phone survey of 1,014 adults."

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The Daily Reckoning PRESENTS: An ode to the bond bubble.


SHED A TEAR
By Eric J. Fry

Maybe we shouldn't be rushing to begin etching the bond
bull market's epitaph, but that doesn't mean that we should
refrain from preparing a fitting eulogy:

"What a bull market it was... so gentle, so kind, so
faithful, so enduring - a dear, sweet friend to every other
financial market and asset class. (Mr. Housing Market
wished to say a few words, but is simply too broken up
about the loss of his close friend to speak). He was a good
man, spreading good cheer in every life he touched... By his
mere presence, he enriched the lives of millions - or at
least made them FEEL richer. We will miss him."

Of course, sad to say, our dear friend never had a fighting
chance; the forces arrayed against him were simply too
formidable. It is a testament to his fortitude that he
survived as long as he did. But, in the end, he was no
match for surging Federal deficits, resurgent inflation and
accelerating economic growth.

Weep not for the bond market, however; it lived a long and
wonderful life. For many years, it enjoyed the balmy breeze
of budget surpluses. (Remember when investors worried about
a SHORTAGE of bonds?) Unfortunately, budget surpluses and
politicians cohabitate like hens and foxes; the hen lives
until the fox becomes hungry.

No budget surplus can survive in the proximity of
politicians - especially those conducting a distant and
expensive war.

According to the most recent tally by the Congressional
Budget Office, the Federal budget this year will exceed
$450 billion, and will bump up against half a trillion
dollars next year. That's real money, which means there
will be no shortage of T-bonds, T-notes and T-bills on
offer from the U.S. Treasury."The federal budget deficit
has flipped from a small surplus to a very large deficit,"
Jim Grant observes,"and the estimated monthly cost of the
U.S. occupation of Iraq is now put at $3.9 billion... up
from $2 billion in April."

Therefore, we suspect that the Treasury's plans to issue
about $60 billion worth of new debt securities over the
next three months is merely an appetizer - a taste of
things to come.

"Although it was only a few months ago," David Tice notes,
"that Congress signed into law an increase of nearly $1
trillion in the federal government's debt ceiling - to
$7.384 trillion - there are already signs that the new
limit could be reached inside of a year. Washington's
appetite for Americans' - and the world's - spare change is
growing exponentially."

The swelling Federal deficit is merely one of the many
trends waiting in line to rough up the bond market.
Inflation is another. Alan Greenspan has promised to
overcome deflation with inflation... and we believe him. The
Chairman seems to have never encountered an economic
difficulty that could not be papered over with dollar
bills.

"The FOMC stand prepared to maintain a highly accommodative
stance of policy for as long as needed to promote
satisfactory economic performance," Greenspan told the
House Banking Committee last week. Is this audacious remark
anything more than Greenspan-speak for"If I've got a
problem, any problem, I'll print dollars?" The Chairman of
the Federal Reserve promises to create inflation. Why
should any bond investor doubt him?

Not surprisingly, the U.S. economy's embryonic inflation
trend has matured into a juvenile, or at least an
adolescent. The dollar's weakness, combined with the
stubborn strength of most major commodities, suggests that
inflation is returning, perhaps soon. The Leuthold Group's
proprietary commodity diffusion index, designed to
anticipate inflation, recently touched a"high inflation
danger zone" with 84 percent of Leuthold's 74 spot
commodity prices rising above their year-ago levels.

Then there's the possibility that the U.S. economy might
finally shake off its lethargy. Resurgent economic growth
is far from a certainty, but we wouldn't rule it out. And
traditionally, accelerating economic growth coincides with
rising bond yields, as corporations compete with the
government to borrow the funds required to invest in their
businesses.

"The American economy is coiled like a spring and ready to
go," Treasury Secretary Snow recently asserted. Greenspan
seconded the notion last week when he told Congress that he
expected U.S. GDP to grow between 3.75% and 4.75% next
year. If the Chairman's record as an economic forecaster
improves dramatically, and GDP does in fact exceed 3.75%
next year, bond yields will almost certainly rise.

"A period of sustained growth may already be under way,"
the Times of London observes."Retail sales in June rose at
the second-fastest rate so far this year; news from the
Institute of Supply Management of pick-ups in new orders,
backlogs and employment in non-manufacturing industries;
reports that capital spending on IT equipment and housing
construction are increasing; and a government announcement
that output in the beleaguered manufacturing sector
increased in June for the second straight month."

"Add those positions up," the Times of London concludes,
"and you get a bondholder's nightmare - loose fiscal policy
in a period of accelerating economic growth, and a Fed
chairman willing to risk some inflation in order to
stimulate growth at a rapid-enough rate to sop up excess
capacity. Investors are now hoping that the pin Greenspan
has stuck in the bond bubble will result in a slow leak
rather than a big bang."

But just in case, we would advise standing a safe distance
away and covering your ears. If, in fact, the bond bull
market has perished, what is an investor to do?

For starters, don't buy bonds.


Regards,

Eric Fry,
The Daily Reckoning