-->Accidental Immigrants

The Daily Reckoning

London, England

Thursday, 18 September 2003

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*** Stocks down... euro up... gold up...

*** Will the Fed win the war against deflation? We hope
not.

*** Old boys... War... bankruptcy... health
care... Argentina... buglers... and more!

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Trivial and monumental.

Such were the subjects we discussed when we met two of our
Old Boy friends in London last night.

We caught up with Lord Rees-Mogg, former editor of the
Times of London and now a contributing editor to the Daily
Reckoning, at the Garrick Club.

"Unsustainable," was his conclusion. Speaking of the twin
deficits - the U.S. current account and federal, each about
$500 billion - his lordship had this to say:

"They just can't continue running deficits of that
magnitude. The whole thing has to blow up someday. We don't
know exactly how or exactly when. But we do know how to
protect ourselves - with gold."

The U.S. government and its number-one ally, Britain, are
fighting a war against terrorism that could add a trillion
dollars to the national debt. Most economists and nearly
everyone in a position to know better considers it money
well spent. Because the Bush administration is also
fighting a major war against deflation.

Reuters reports that"Underlying U.S. Inflation Slows to a
37-year Low." Core consumer prices rose only 0.1% in
August. The"data suggested," says the Reuters piece,"the
economy is not yet safe for the dangers of deflation."

Deflation... with its accompanying joblessness, bear markets
and recession... would unseat the Bush team. Naturally, the
Bush boys are doing all they can to prevent it - even if it
means loading future generations with debt they can never
hope to pay off.

"We hope they lose," was our reply to the war against
deflation. Sooner or later, deflation is going to have its
way. Better sooner than later, for every year that goes by
adds another 5% of GDP to the nation's debt burden. The
longer it goes on, the worse the eventual debt correction
will be.

In a recent interview, Paul Krugman described how a blow-up
might develop:

"So what happens is a plunge in the dollar when
[foreigners] decide to stop buying and start cashing in,
and a spike in U.S. interest rates. But you might also get
in a situation where the interest rates the government has
to pay to roll over its debt become so high that you get an
accelerating problem, which is what happened in Argentina.
What happened was that suddenly no one would buy Argentine
debt unless they paid a twenty-something percent interest
rate... and everybody says, but if they have to roll over
their debt at a twenty percent interest rate, there's no
way they can pay that back. So the whole thing grinds to a
halt and the cash flow just dries up....

"Yeah, just take the numbers as they now look, and that's
where it heads....So you say, but this can't happen, this
is America, and I guess my answer is, is it? Is this the
same country that we had in 1970? I think we have a much
more polarized political system, a much more polarized
social climate. We certainly aren't the country of Franklin
Roosevelt, and we're probably not the country of Richard
Nixon either, so I think we have to take seriously the
possibility that things won't work out this time."

Later, we left the Garrick Club and walked down the street
to Rules restaurant, where we dined with Alexander
Chancellor, former editor of The Spectactor and, for a
time, editor of the Talk of the Town section of the New
Yorker. Your editor had a Stilton and watercress soup,
followed by a roast rack of highland beef, lavaged down
with a few bottles of Pommard. What will he not do on your
behalf, dear reader?

"Buglers," was Alexander's concern.

Buglers?

"Yes, there are not enough of them. Did you know that WWII
veterans are entering their peak dying years? More than
600,000 of them are expected to shuffle off this mortal
coil next year alone. Not to mention casualties from Iraq.
And they're all entitled to a bugler when they get buried.
But there are only 400-odd buglers.

"Well, I was deeply concerned about this, but it turns out
that the yanks have invented an electronic bugle. It looks
like a real bugle, but you put in a diskette or something
and push a button.

"People who've heard it say the sound is so pure and so
sweet it brings tears to their eyes."

"Is there nothing left that isn't artificial," wondered his
lordship.

Meanwhile, we turn to Eric Fry for the latest news:

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Eric Fry in New York City...

- Yesterday, New Yorkers basked in the warmth of a glorious
late-summer day, while a slight chill settled over the
stock market. The Dow slipped 22 points to 9,546, while the
Nasdaq fell 4 points to 1,883.

- Your New York editor soaked up some of the late-season
sun by strolling a few blocks to"City Bakery" for his
morning croissant and espresso. (That's right, the New York
editor of the Daily Reckoning often enjoys a French-style
breakfast... without the Gitanes. To even things out, some
of the ex-pats in the Paris office wake up each morning to
a bowl of Cheerios or cornflakes. Rumor has it that Dan
Denning combines the two: Cheerios and Gitanes.)

- While en route to his croissant, your editor observed
many of his fellow New Yorkers strolling down the sidewalk
alongside exotic canines or behind designer baby strollers,
and many of these folks were chatting excitedly about the
hurricane that is bearing down on the East coast.

- On such a gorgeous day, it seemed a bit surreal to hear
so much chatter about an imminent hurricane. But we at the
Daily Reckoning are accustomed to such curious
juxtapositions. Indeed, they attract us like Iowa
cornfields attract UFO-seekers. The stock market has been
rallying briskly for months. The Nasdaq Composite basks in
a flawless summer day - sunny and warm with a slight
breeze. And yet, we fully expect an imminent gale-force
selloff. The storm clouds are gathering...

- For starters, the nimbus clouds of overvaluation are
billowing ominously overhead. The S&P 500 is selling for
more than 25 times estimated earnings for 2003. Once upon a
time, stocks markets would crash whenever they reached such
rarified heights. But in the modern age, investors
recognize 25 times earnings as a bargain... and Wall
Street's finest minds agree.

- Adding fury to the nimbus clouds of overvaluation are the
swirling winds of joblessness. Statistically speaking, the
economy is showing a few signs of revival. But employment
growth is failing to revive (and even the NYSE chairman,
Dick Grasso, will be heading down to the unemployment
office soon. Mr. Grasso resigned his post yesterday, under
a firestorm of disgusted criticism about his $140 million
compensation package. It's true that Mr. Grasso is only one
more addition to the growing ranks of unemployed, but he
made as much money as hundreds of workers. By one
calculation, five average American workers, toiling for
1,000 years each at the average American wage, would still
not earn as much money as Grasso's package generously
provided).

- But Dick Grasso is simply one of America's unemployed
unfortunates. Hundreds of thousands of others are filing
claims for unemploymewnt insurance each week."Lots of
other data in the U.S. are improving," observes Donald
Straszheim of Straszheim Global Advisors,"but not the all-
important jobs data. Why all-important? Because for most of
us, if we have a job, we are OK. If we don't have a job,
we're not OK... The U.S. cannot have a solid, sustained
economic recovery with continuing job losses.

-"30 months have passed since the pre-recession payroll
peak in February 2001," Straszheim notes."Total jobs are
down 2.1%, by far the worst post-recession performance in
postwar period."

- The dismal employment trend seems to be supporting
Treasury prices. Unlike their stock-buying counterparts who
breathlessly await an economic recovery, bond investors
wring their hands over the nation's sluggish employment
trend and see an economic glass that is half-empty... and so
yields continue to fall. The 10-year Treasury note rallied
again yesterday, pushing its yield down to 4.18%. That's a
big improvement from the 4.55% level that prevailed a
couple weeks ago.

- Meanwhile, the U.S. dollar tumbled 1% against the euro
yesterday to reach $1.128. Is the dollar's renewed selloff
a taste of things to come?... More tomorrow!

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Bill Bonner, back in London:

*** Speaking of Lords... on page 12 of the Times, the
pathetic story of the House of Lords is described.

"The hereditary peerages are dead and gone," said Lord
Strathclyde."We have all acknowledged that."

In the late '90s, the House of Lords began a reform program
designed to exterminate itself. Lords, everyone admitted,
were"an affront to democracy."

We cannot speak for democracy. But she might be just as
affronted by the spectacle of modern elections as by the
peculiarities of the peerages. Would she really sooner have
a representative chosen by the fraud of the election
process than by the luck of blood? Those slimy creatures
who crawl out of the gene pool and run for public office
are what make government such a sordid métier. They can't
bear having their ranks thinned and backs stiffened by
hereditary peers with no campaign debts to pay, no promises
to forget and no strings attached. The lords stand for no
elections; they raise no campaign funds. As a result, they
are free to speak their minds and vote any fool way they
want. Quirky, often half-mad, and generally decent, the
lords are more representative of the average Englishman
than the on-the-make hacks who end up in public office. We
will miss them.

*** Here, a Daily Reckoning reader corrects our Chinese...

"First, you should know that I enjoy your daily letter more
than anything else I read financial. It helps that I agree
with your fundamental outlook, but you guys are wonderfully
contrarian, brave and usually correct.

"Second, a Chinese friend from Beijing just emailed me with
a comment on your letter from the 16th. He said:

"The author learned a wrong Chinese word. The correct
version should be: Pao Mo - the bubble in the air or on
water surface which will break easily. Shui Pao - well,
refers to the bubble that grows on human body, which is
actually a kind of skin disease.

"It is nothing strange that companies related to McDonald's
have higher P/E ratio. Just take a look at how many people
eating there everyday - esp. children and young students!

"Perhaps you meant skin disease?"

*** Another reader writes:"Back in the early 1990's, Paul
O'Neill left his job in the Bush I Administration and came
to Pittsburgh to run the Aluminum Company of America, ALCOA
Corp. One of his first acts was to approve price increases
of aluminum strip coils, this in the face of a depressed
world market due to massive dumping of ex-USSR aluminum
stockpiles.

"Everybody thought that the new ALCOA Chairman was, not to
put too fine a point on it, crazy. A business writer asked
him, 'Do you really think you can make those price
increases stick?' Paul O'Neill replied, 'Have you ever
tried to put beer into an aluminum ingot?' Somebody's
instincts were right, because the price increases stuck.
Strip coils were the 'sweet' spot in the market, and ALCOA
made money.

"The world wonders how America will pay its bills. Bill,
you wonder every day in your Daily Reckoning. Me, I wonder
every day in my own daily reckonings. The world wants to
know. The Chinese and Japanese buy U.S. bonds so that the
U.S. can continue to purchase Chinese and Japanese goods
and keep their factories humming. There is a precarious
balance of national financial accounts, as capital flows
and each side bets that the other will not flinch. But
tomorrow's newspapers tell a tale of financial disaster if
the U.S. keeps to its present monetary course. And now Paul
O'Neill, the aluminum-ingot man, thinks there are hundreds
of billions (with a"B") of dollars of identifiable savings
in the U.S. health care system. Hmmm...

"The U.S. spends more on health care than any other nation
in the world. More in absolute numbers. More per capita.
More in every category and by any measurement. More gauze-
wraps, pills, botox-injections, colonoscopies, physical
therapy and stomach reductions than any other nation in the
history of mankind. (Well, the ancient Egyptians are said
to have performed many similar medical procedures on
people, but only after they were dead.) So the U.S. ought
to be the healthiest nation ever, yes, what with all that
medical care? Or maybe the U.S. is the sickest nation ever,
what with all that medical care? Or maybe the U.S. is the
most wasteful nation ever, what with all that medical care?

"I mean, when you have it to waste because the Dollar is
the world's reserve currency, you just print the currency
and you waste it, right? If you really had to earn it,
would you spend so much of it in one place? Is it possible
that when the financial hurricane hits, maybe the
U.S. will buckle down and fix its problems? Perhaps there
is nothing like going broke to scare some sense into a
person, if not a nation. Is Paul O'Neill starting to write
the headlines for the newspapers that will be published the
day after tomorrow? The world wonders..."

*** By the way, dear reader, the New Orleans Investment
Conference draws near. Our favorite analysts, contributors,
friends and colleagues will soon be meeting to discuss what
an investor is to make of today's economy... in New Orleans
over All Hallow's Eve, no less.

Quite a few of you have signed up to come and cheer us on,
along with Mr. Fry and Mr. Wiggin... and of course, keynote
speaker Bill O'Reilly, Jim Rodgers, and Richard Russell, to
name a few. There are still a few spaces available, if you
would like to join us... but we cannot say how long they
will remain open...

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The Daily Reckoning PRESENTS: How Bill Bonner came to take
up residence in France... par hasard. This DR Classique was
originally broadcast on 19 March 2001.


ACCIDENTAL IMMIGRANTS
By Bill Bonner

The winds of March that made my heart a dancer
A telephone that rings but who's to answer?
Oh how the ghost of you clings
These foolish things, remind me of you

- (I can't remember the title, or the author of
this song... but it was sung by Frank Sinatra)


The winds of March blew up on Saturday. It is a period
marked by 'les giboulées' - where the weather changes from
one moment to the next, like Maria's moods. Teenage girls
are reliable, like stock markets - you can count on them to
be adorable one moment and insufferable the next.

Mr. Deshais was moody, too.

"Farming is finished in France," he said, exaggerating for
emphasis. The chart of beef prices resembles the Nasdaq.
The wholesale price of beef in France has dropped from 1.6
euros per kilogram a year ago to less than 1.2 euros in
January.

Now, with a single recorded case of hoof and mouth disease
in France, exports of meat products from the European Union
have collapsed. The U.S. banned European meat last week.
More countries have followed suit since then.

But later in the day, our gardener was beaming again. It is
springtime, after all. I fixed the cold frames - replacing
the glass in the lids - for him. He was happily planting
lettuce and contemplating the collapse of western
civilization when I left him.

I should stop here and warn you, dear reader, today's
letter has little helpful financial advice or insight. I
didn't think about financial matters over the weekend. So I
have nothing to say on the subject. Having nothing to write
about... I will write about nothing.

"The weather was just like this," Elizabeth reminded me,
"when we first got here. We just drove up, in rented
car... and thought we would move right in, as though we were
staying at a Holiday Inn."

"We were so naive," she went on, describing our arrival at
the Château d'Ouzilly,"we had no idea of what we were
getting into."

"The weather was beautiful when we arrived. The sun was
shining. The sky was blue. The grass was green. The birds
were singing and the jonquils and Japanese redbud were
already in bloom... it was gorgeous. And then, of course,
the weather changed. Then we discovered that the furnace
did not work. Of course, neither did the plumbing."

My wife might have continued: there was no heat, no useable
kitchen stove, no bathroom that you wouldn't be embarrassed
to have a heart attack in, the fireplaces smoked so badly
that you had a choice: you could have warmth... or you could
breathe, but not both. And the roof leaked so badly in the
first rainstorm, we thought it might have blown off in the
night.

"The roof is okay," the previous owner had told us. This
was the same person who told us that the furnace"worked
fine." It was not so much that he was lying as that his
frame of reference was different from ours. The furnace did
work fine, as long as you didn't mind living in a house
with no detectable warmth. That sentiment might carry over
to the bathrooms too - they were fine, unless you wanted
real plumbing. And the roof was perfectly adequate, unless
you wanted one that didn't leak.

That is, of course, what makes living in France - or
anywhere overseas, I suppose - so interesting. Things look
familiar. But they are never quite what you think. Even the
words often mislead you - French has many words that look
for all the world like those of English, yet with very
different meanings.

For example,"Are there are lot of 'préservatifs' in the
food in France?" asked our new intern, Vanessa. The word
sounds like something you might find in food. But what it
means is 'condoms.'

What triggered these remembrances of things past was the
sight of the moving van at our front door. We were not
moving out. Instead, we had rented a van to move some
things from the country to our new apartment in Paris. This
apartment is much larger than the last one - so it needs
more 'things' to fill it up.

Not only do things have to be designed, built and sold -
they also have to be moved around from time to time. In our
case, they had to be carried from various rooms of the
château, loaded into the van, driven the 350 kilometers to
Paris and then carried up 6 long flights of stairs to our
apartment. The elevator is so tiny that most of the
furniture could not be shoehorned in. It had to be
schlepped up the stairs, in the old fashioned way, just as
it would have been 100, 200, or even 500 years ago.

Was there no help that could be had from the"Information
Economy?" I sought in vain for an IT solution - for some
way that the 'information' that is supposed to transform
our lives could make this task easier.

The only improvement information technology offered was in
the Avis rental office in Poitiers.

"Where would you like to return the van?" asked the clerk.

I gave her our address in Paris, which was followed by a
few clicks and clacks on her computer terminal. Thus, we
agreed upon an Avis office not too far away - at the Ecole
Militaire - and were on our way.

And so, amid the 'giboulées,' the van was loaded with rugs,
tables, lamps, chairs and other 'things.' And taking a
couple of the children with me in the cab - Sophia, because
she's the oldest and strongest and could help me
unload... and Edward, because he's the youngest and wanted
to ride in the 'big truck' - I set off for Paris.

It is a long, slow drive from Poitou to Paris at 110 kmh.
Edward fell asleep within minutes. Sophia plugged in her
earphones and opened her schoolbooks. I was left alone.

So, my thoughts drifted to experiences of the last 6 years
- since we moved to France... and how, little by little,
without ever really thinking about it, we became something
we never intended. You've heard of the accidental tourist.
Somehow, we became accidental immigrants.

But that is how things actually happen in life, dear
reader. Things happen that we intend to happen... and try to
make happen... and other things just happen.

"When you set something in motion," Elizabeth warned me,
"you never know exactly where it is going to end up."

Big, stone houses in France are relatively cheap. We had
planned to use our French house as a summer residence - a
place we could turn into a seminar center and visit with
the family in the summer.

But we never imagined the amount of time, money, energy and
emotional commitment that was required. Once the investment
was made, we didn't want to leave. While my back was
turned, Elizabeth put down roots. I don't dare try to pull
them out.

Ignorance is a fact of life - in France as in America. You
never know exactly what people mean. Nor can you know where
things will end up once they are set in motion - even in
the Information Age.


Your very ignorant correspondent,

Bill Bonner

P.S. Once we got back to Paris, Sophia and I unloaded the
van. Edward helped too, by holding doors open. And we found
that we could fill the elevator with small items and still
have room for Edward, who would then push the proper
buttons to set the elevator in motion, while Sophia and I
climbed the stairs with chairs or tables in our hands.

This morning, I took the van back to the nearest Avis
office, as organized by the Avis computer.

"Uh oh," said the clerk,"they must have made a mistake in
Poitiers. We don't take trucks back at this office. You
have to go to the Bois de Boulogne."

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