-->The Daily Reckoning

Ouzilly, France

Friday, 1 August 2003

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*** Bonds down again... Dollar up. Gold at $354... how long
will the bargain remain?

*** Who stole Wall Street's thunder? More 'skin' than ever
on TV...

*** Thank you Franklin Roosevelt - for nothing!

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It is hard to believe, but it is already the end of the
week... and the end of August. We are gulping down the
calendar as if it were $2 wine.

But though the U.S. has become"the world's mouth," we have
been on short rations here at the Daily Reckoning. People
from Romania, Poland, Germany, South Africa, Britain,
France, Spain, and of course, America have come to hear
your editors talk about writing. We have to put on a good
show. We are left with time to write, but none to think.

The bond market fell again yesterday. In a just a few
weeks, falling bond prices have wiped out 4 years of
earnings. Imagine the poor people who bought in June -
desperate for a measly 2.5% yield, but sure that U.S.
Treasury bonds were the safest financial credits on the
planet. Instead, they have lost 10%.

We are not convinced this means the end of America's
progress towards Tokyo, but we are sure it is the end of
something.

No, dear reader, we have not become obsessed by the Dollar
Standard; we're just trying to understand what happens
next. (More on this below... )

We know how it got started: under pressure, President Nixon
defaulted on America's pledge to redeem its paper money
with gold. Thirty-two years later, there is $9 trillion in
foreign hands... the current account deficit has reached
more than $500 billion per year... and the U.S. federal
deficit has grown to about $400 billion. The temptation to
make the next dollar a little less valuable than the last
is irresistible. Bernanke has not only admitted as much; he
has promised it. If foreign lenders get their money back at
par, it won't be his fault!

We think we know how it ends: on the pampas... that is, in
bankruptcy, recrimination, and desperation. But we are
still not sure it doesn't make a little stop in Japan on
the way.

A friend is down in Buenos Aires. It is a beautiful city,
he reports, which looks like it was once a rich one. It is
like Paris, but Paris down-at-the-heels... and now overrun
by beggars. People pick through trash bins looking for
things they can eat, wear or sell.

Why doesn't the Argentine central bank just lower interest
rates? Maybe they never thought of it....

Here's Eric Fry, on the very lips of the great American
digestive system:

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Eric Fry, our usual suspect in New York...

- The final day of July 2003 was a glorious one for the
bulls... for a while. As the new trading day dawned, stocks
soared majestically toward the heavens. The Dow glided more
than 160 points higher, before suddenly losing altitude.
Although the Dow's nosedive stopped short of crashing into
negative territory, the blue-chip index tumbled to a mere
gain of 34 points to 9,234. The Nasdaq Composite also
relinquished more than half of its earlier gains to advance
only 14 points to 1,735.

- Meanwhile, the bond market resumed its inelegant
collapse, as the 10-year Treasury note tumbled 1 6/32,
causing its yield to spike to 4.47%. The 10-year yield has
jumped a stunning 1.38 percentage points in just six weeks
since hitting a 1958 low of 3.07%. The 30-year government
bond plummeted 2 11/32 points yesterday, driving its yield
from 5.21% to 5.41%.

- The"news du jour" which cheered the stock market -
initially - and spooked the bond market was the Commerce
Department's report that GDP rose at a 2.4% annual rate in
the second quarter, after growing at 1.4% rate in the first
quarter. Highlights of the report included the fact that
consumer spending rose 3.3%, and business spending rose
6.9% in the second quarter - the largest increase in
business investment in three years. Spending on equipment
and software rose 7.5%, also the largest increase in three
years.

- Lowlights included the fact that, excluding the defense
buildup, the U.S. economy grew only 0.7%. Defense spending
rose 44.1%, the highest rate since the third quarter of
1951. Net-net, it looks like America is making a lot of
guns, but not much butter.

- So the stock market bulls are finally getting what they
want... or are they? Maybe they are merely on the road to
getting what they deserve. For months, the stock market's
optimistic contingent has been longing for an economic
recovery - one that is sufficiently robust to help them
justify paying nosebleed prices for stocks.

- Yesterday, the bulls believed they received evidence of
said hoped-for recovery in the form of 2.4% GDP growth.
Unfortunately, the recovery - so far - is strong enough to
boost GDP a little, while boosting interest rates a lot. A
10-year yield of 4.50% will be no help whatsoever to GDP
trends in the third and fourth quarters of this year.

- But the stock market bulls aren't worrying about rising
rates. They can't be bothered with concerns about soaring
long-term interest rates, even though they are clamoring to
pay 40 times earnings for stocks that rely greatly upon a
low interest-rate environment. Heck, maybe this time IS
different. Maybe times have changed. If pornography can
play on TV during prime time, can't stocks selling for 40
times earnings continue rallying?

- A new TV series called"Skin" will debut on the Fox
Network this fall. As the International Herald Tribune
reports:"'Skin' tells the tale of the forbidden romance
between a 17-year-old Mexican-Irish Romeo, whose father is
the Los Angeles district attorney, and a 16-year-old Jewish
Juliet, whose father is a porn king."... Think of it as a
modern-day"Father Knows Best."

-"How much redeeming social value can be shoveled onto two
hot bodies in a single Fox TV series?" quips the
International Herald Tribune. Helpfully, the show's Web
site provides a suitably provocative answer:"'Skin' is
about sex and race. 'Skin' is about politics. And most of
all, 'Skin' is about skin: complexion, beauty, desire,
attraction, obsession and prejudice in contemporary Los
Angeles."

- On Wall Street,"Skin" is about the depth of sell-side
research. Wall Street's skin-deep analysis and automatic
"buy" recommendations may continue to succeed for a while
longer, but we suspect that the market's"ugly internals"
will halt this rally before too much longer.

- Eventually, investors will discover that this market's
inner beauty is sorely lacking. One facet of the market's
"ugly internals" is the fact that financial stocks have
been leading the market's advance. These same financials
are, of course, acutely sensitive to interest rates. When
rates are falling, life is good. But when rates are rising
- Yikes! - watch out!

-"The weight of interest-rate-sensitive stocks in the S&P
500 is at a 25-year high, suggesting that the market is
more sensitive to the bond outlook than ever before," one
analyst observes... Maybe it's a good idea to steer clear of
the financials for a while.

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Back in Ouzilly...

*** The dollar rose yesterday, to 1.12 to the euro. We also
note that you can buy an ounce of gold for only 354
dollars. Eventually, we suspect that the euro will rise to
at least 1.5 to the euro... and that it will take more than
1,000 dollars to buy an ounce of gold. When? We cannot say,
but readers are urged not to linger over this opportunity
for too long.

[For more on where gold is headed, see:

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

*** Another reader comment:

"What is the future of a failed governor of America's
largest state? Looking at this remarkably informative and
encompassing photo of California Governor Gray Davis, I am
reminded of historian John T. Flynn's contention (in"The
Roosevelt Myth," 1948/1956) that the Great Depression
commenced in New York state under the governorship of one
Franklin Delano Roosevelt.

"In 1929, as we all know, there was a classic Wall Street
Panic on FDR's gubernatorial watch, which FDR did nothing
to alleviate. Recall that in those halcyon days it was the
state, and not the federals, who regulated banks and
brokerages. FDR's New York regulators did nothing to
correct the excesses that led to the Panic. Subsequently,
FDR's Wall Street Panic spread across America like a
financial plague, aided and abetted by an incompetent
Federal Reserve (is it redundant to say that?). The FED
kept money tight (it was Gold-standard money, in those
days), and compounded the problem by permitting the U.S.
Dollar to be used as a world"reserve currency" for third-
party nation transactions. That is, for example, Brazil
settled accounts with Germany in U.S. Dollars, and in the
end U.S. Gold currency physically left the country to one
or both nations.

"In 1933, FDR took the helm from the by-then disgraced
Hoover, on a political platform of balanced budgets and
investment-led growth. FDR's first act? Confiscate the
nation's Gold. Then devalue the U.S. Dollar from $20 per
ounce of Gold to $35 per ounce of Gold, a 43% loss of value
to the national currency in a matter of two months. Now
there was even less money in a broke nation.

"After several iterations of FDR's so-called 'New Deal,' by
1939 the U.S. had more unemployed workers and people on
relief than in 1933. Factories were still idle, furnaces
were still cold, fields were fallow and mine pits were
flooding. But quite a few leaves were raked, I hear.

"At root, it seems that the nation's and world's
capitalists heard the socialist-nationalist musings of FDR
et al., and did not invest in the USA. How to solve the
problem? In the words of that self-same FDR, 'Battleships'
and other military preparedness. And that is another story
entirely.

"But I do wonder what the future holds for California and
its poster-boy for tax-and-spend governance. Keep your
powder dry, Gray."

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The Daily Reckoning PRESENTS: More musings on the
dead... and who, at last, will foot their bills.


RIGOR MORTIS
by Bill Bonner

"Oh death, we thank you for the light you spread across our
ignorance."

- Bossuet


Tante Janine lost her right to vote. But that was the least
of it; the old woman was dead.

"We all remember her as 'Tante Janine,'" said the eulogist,
"because she was like a family member to us all. Always
ready to lend a hand... always ready to comfort the
sick... and help with community projects... Tante Janine was
there for us all."

"She will be remembered by us too, as a woman who was
always full of life... even though in her own life she had
to overcome many obstacles and hardships."

Poor Tante Janine had her share of life's miseries. Her
husband died young. And then, her only child was killed in
a motorcycle crash a few years ago, leaving her alone in
the world. And then, she was crippled by severe arthritis
and finally done in by something else.

"We will all remember her fondly," continued the farewell
address,"but she would not want us to do so with tears..."

Yet, there in the front row, in a church full of gray
heads, were two very pretty young women whose eyes ran like
leaky faucets. Janine Armande had taken to them both -
Maria, your editor's daughter... and Elisabeth - as if they
were her own kin.

Tante Janine had taught the girls to knit. Maria, waiting
for a photo-shoot, would pull out her knitting to pass the
time. Then, she would send Janine a copy of the magazine -
usually a fashion spread - which the old lady would show
off as if they were photos of her granddaughter. May she
rest in peace.

"We saw her in the morgue," Maria reported earlier.
"Elisabeth cried, but I didn't really know her as well; I
wasn't as close to her... She looked pretty good."

Veni et vidi. Gaze on the dead, and learn their secrets.

No one seems to care about dead people. No stockbrokers ask
for their business. No politicians pander for their votes.
No one cares what they think or what they may have learned
before they shucked their mortal shell. They get no
respect, just a quick sendoff... and then they are on their
own.

But come with us, dear reader. And let us look into the
open carton and see ourselves, we Americans... the world's
mouth. But not ourselves as we pretend to be - full of
pretense and chutzpah - but as we really are, with our
mouths shut.

Lately, we have taken up a morbid fancy. We think we hear
the dead whispering to us: 'come over... peer into this
carton... and take a good look!' We read the obituaries
first. And show up for funerals a half an hour early so we
will get a good seat. It is as if each corpse had something
to tell us; but the poor stiff cannot speak. So, we have to
stare and wonder.

"In death, all debts are paid," said Shakespeare. The dead
get no breaks; they are held to strict standards. Rigor
mortis - that is what draws our thoughts toward the
defunct. The dead are paid up. Settled. They make no
mortgage payments and take no calls from creditors. Their
Final Reckoning is over and done.

A body decomposes into its constituent elements. If we
watch carefully, maybe we will find out how it works. The
soul goes Heaven-knows-where... while the rest returns to
the dust from whence it came.

And the debts? Where do they go?

We lean over the box. We want to know. Who gets paid... and
who gets stiffed?

Every debt is eventually settled, one way or the other. It
is paid by the borrower. Or - if his luck runs out - the
lender must make up the difference. Either way, like a
night janitor in an empty schoolroom, death cleans the
slate.

How is it then that Americans think they can slide into
paradise... owing the rest of the world $2.5 trillion, net?
Do they think their heirs can add to their borrowings at
the rate of another $2 or $3 billion every day, forever?

Such is the remarkable state of the world that China - a
3rd World Nation - lends the U.S. $300 billion per
year... buying that much, according to the latest estimates,
in U.S. Treasury bonds. Without Chinese support, the dollar
would have already collapsed... bond yields would have
soared... and the U.S. economy would be in a recession, if
not a depression.

Where does the money come from? The Chinese get the dead
presidents from selling products to live Americans - who
seem ready to consume anything that comes their way. First,
the dollars come rolling off America's printing
presses... then they make their way into the hands of
Chinese and other manufacturers... (in the first quarter of
2003 alone, China's exports to America rose 35%)... and
finally, are returned to their birthplace as loans.

China is fast becoming America's 'company store,' to whom
we owe our standard of living... and maybe even our soul.

And thus comes an even more remarkable curiosity:

"In an era of free trade," begins a complaint from Treasury
Secretary John Snow,"we should not have to confront the
issue of countries distorting their currencies to gain
unfair trade advantages."

The specific country to which Snow refers is China. The
trade advantage the latter enjoys is that it sells much
more to America than America sells to it, by a ratio of 5
to 1. And the unfair distortion is that China pegs its own
currency to the dollar.

Daily Reckoning readers will have to rub their eyes. They
will have a hard time seeing what is unfair or distorted
about fixing your currency to the world's reserve money;
that is the whole idea of the Dollar Standard system. It
seems admirable on the part of the Chinese, rather than
conniving. But the Treasury Secretary is a desperate man.
Thirteen rate cuts have failed. Perhaps a dollar
devaluation would help. What stands in the way is China's
resolve to hold its currency steady against that of its
major trading partner.

An entire American generation has grown up being told that
it could spend its way to prosperity. Snow, McTeer,
Greenspan, Bernanke - they all still believe it. Debt is no
problem, they say. Spend, spend, spend.

American spending has created a boom in China, where the
average person works in a sweatshop, lives in a hovel, and
saves 25% of his earnings.

And yet, Americans have come to believe there is something
unfair about China's trade practices... that they must be
'stealing' jobs with a distorted currency, rather than
competing for them fair and square.

Meanwhile, in America, the average man lives in a house he
can't pay for, drives a car he can't afford and waits for
the next container from Hong Kong for distractions he can't
seem to resist. He saves nothing and believes the Chinese
will lend him money... forever, on the same terms!

That this cannot go on forever seems hardly worth pointing
out. Whether it will go on much longer or not, we cannot
say. But that it will all end badly seems a lead pipe
cinch.

If the Treasury Secretary can pull off a devaluation
against the Chinese currency, he will effectively stick
Chinese investors with the bill for America's debts.
Compared to their own currency, they will be holding assets
in a declining one. He will, no doubt, succeed eventually.
Because it seems sure that the dollar will go down. But at
what cost? If the Chinese are too badly stiffed, why would
they continue to lend? And what will become of us when
foreign lenders are no longer willing to pony up?

Which way to Buenos Aires?

Oh, you worthless dead people! If only you could move your
lips and tell us something useful! All of these debts,
conceits and tomfooleries must be settled somehow... if only
you could tell us how!

Instead, you deconstruct in front of our eyes... and take
your secrets to the grave.


Your editor,

Bill Bonner