-->Hurt

The Daily Reckoning

Paris, France

Friday, 26 September 2003

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*** Dow down... gold up... houses up... autos down... Bush
approval rating down... Levi Strauss and Indians out...

*** Dead capital + hegemonic decay = 'starving, rioting and
looting'... Mortgage rates fall below 6%... new unemployment
claims below 400,000...

*** How to make a billion dollars in a single day... and
more!

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Mortgage rates fell below 6%.

Home sales hit another near-record in August. Last week's
unemployment claims fell below 400,000, but cynics pointed
out that many government offices were closed because of
rising water brought by Hurricane Isabel.

How can so many people afford new houses? They are already
so deeply in debt. Their incomes are barely rising. They
are losing their jobs. What gives?

Behind each new house is a line of credit that stretches
out from the California coast all the way to Japan and
China. Those wonderful people in Asia lend the money... and
ask only a pittance in return - at interest rates so low
you'd think these were the Eisenhower years.

Once again, we thank the kindness of strangers. Why do they
do such a thing? Because they are nice? Because they are
shrewd? Or because they are dumb? They have faith in the
U.S. dollar... the U.S. economy... and the American dream.
They also want to keep the dollar low so they can sell more
products and provide jobs for their people.

But the recent downward move of the dollar may lead many
Asians to think that they are being less shrewd and more
dumb than they thought:

"Asian countries' apparent willingness to trade-off jobs
for a bad investment begs a better question," writes Bill
Gross, manager of the biggest pile of bonds in the world.

"If Asia is subsidizing its growth by purchasing dollars
and Treasuries at a premium price, what about all the rest
of us? What ancillary benefits do we get by purchasing a
rich dollar-denominated bond? Surely PIMCO and others get
the same interest rate and (absent money management
alchemy) we get the same return as do Asian investors. We
therefore are getting the short straw, the hind teat, in
short, a bad deal.

"We have nothing to show for our investment prowess other
than an under-yielding Treasury note denominated in an
overvalued currency..." Gross continues,"But what oh what
if it turns out to be true, or what if the PIMCOs of the
world wise up to their subsidizing Chinese employment by
holding an overvalued Treasury portfolio? And, lest I sound
too apoplectic, the name of the next game doesn't have to
be Armageddon. A more likely course would posit reduced
Asian and U.S. purchases of Treasuries, a diversification
into Eurobonds, a stronger yen and yuan over the next few
years, more expensive U.S. imports after a lag, a sapping
of consumer spending power, gradually rising intermediate
and long-term rates, a declining housing market and yes, a
near body blow to America's financed-based economy.

"I reiterate," reiterates Gross,"the stocks, bonds, and
currency of a debtor nation in the process of reflating are
not attractive investments."

They may not be attractive... but people seem to want them
anyway - at least, for now. But like Chinese, Japanese, and
bondholders everywhere... they could change their minds.

Right, Addison?

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

Addison Wiggin, writing from Paris...

-"The hour of capitalism's greatest triumph," wrote the
prescient economist Hernando de Soto in 2000,"is its hour
of crisis."

- We had the honor of running de Soto's overhead projector
at a small symposium he gave here in Paris last week. Not
by design. In fact, we ended up sitting next to him at the
table, because we were late. There were no seats left and
the only place available to put up a folding chair was next
to his projector."Désolé," the shorter and (slightly)
stouter of your Paris editors said; for the Peruvian was
giving his lecture in French. He grunted... shook his head,
then continued. The only way to redeem the intrusion was to
offer to adjust his transparencies when they were askew and
turn the machine on and off as he needed it.

- De Soto is doing with his brain and voice the work the
neo-cons think they're doing with their guns."Over the
past five years," he explains in his book,"The Mystery of
Capital," which he was hawking at the symposium,"I and a
hundred colleagues from six different nations have closed
our books and opened our eyes - and gone out into the
streets and countrysides of four continents to see how much
the poorest sectors of society have saved. The quantity is
enormous." Rather than invading and coercing with an $87
trillion army, de Soto and crew went out with backpacks and
notebooks to talk to people.

- What he found is astounding. Trying to answer the
questions:"why does capitalism only thrive in the West?",
he and his researchers discovered that:"even in the
poorest countries, the poor save. In Haiti, the poorest
nation in Latin America, the total assets of the poor are
more than one hundred and fifty times greater than all the
foreign investment received since Haiti's independence from
France in 1804. If the United States were to hike its
foreign aid budget to the level recommended by the United
Nations - 0.7 percent of national income - it would take
the richest country on earth more than 150 years to
transfer to the world's poor resources equal to those they
already possess."

- But, if the poor are so rich... what's the problem? Most
of the capital they possess is what de Soto calls:"Dead
Capital." Government regulations and unclear property
rights keep most of the world's 'savings' locked up in
illiquid positions. Just one example:"In the Philippines,
should a [bloke] want to build a shack to house his family,
and do it legally, the process would take 168 steps,
involving 53 public and private agencies and take 13-25
years to complete." De Soto discovered equally messy
bureaucracy in Haiti, Egypt, Peru, Venezuela... and so on.
The poor are kept poor because they're unable to unlock the
capital they already posses...

-"The fall of the Berlin Wall," observes de Soto,"ended
more than a century of political competition between
capitalism and communism. Capitalism stands alone as the
only feasible way to rationally organize a modern economy."
Yet, efforts by Russia, Venezuela and Malaysia, among
others, to implement 'capitalism' as imagined by their
leaders, have been met this past decade with"economic
suffering, tumbling incomes, anxiety and resentment; of
'starving, rioting and looting' in the stinging words of
Malaysian prime minister Mahathir Mohamad."

- The U.S. and European response to this"starving, rioting
and looting" - prior to the invasion of Iraq - was to
suggest that Third World countries should"stabilize their
economies, hang tough, ignore the food riots and wait
patiently for foreign investors to return." Now, they've
added 'regime change' and 'nation building' to the
vocabulary. And deficit spending of historical proportions.

-"Will debt buildup sabotage the recovery?" asks the IHT,
here in Paris. Oh là là... if even these guys are cottoning
on to the trend, we may be in for some serious trouble. Dan
Denning calculates that a 1% increase in interest rates
would roughly double the amount of interest the U.S.
government would have to pay bondholders. (You'll find an
additional historical nugget from Mr. Denning below... ).

-"The triumph of capitalism only in the West," de Soto
suggested three years ago,"could be a recipe for economic
and political disaster." Last month, bond sleuth Bill Gross
indicated what that disaster might look like; he called it
"Hegemonic Decay.""Dollar crash could wreck U.S. economy,"
is how a headline in the Detroit Free Press put it this
morning."A slide in the U.S. dollar," says the article,
"spooked stock and bond markets this week, a reminder of
the calamitous risk that a dollar crash poses to the U.S.
and global economies."

- The Dow cracked a little more, dropping 81 points to
9,343. The Nasdaq shed 26 to 1817. The S&P lost 6 and
closed the day at 1003. Gold, meanwhile sped ahead to fresh
7-year highs...

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

Bill Bonner, back in Paris...

*** Oh no! Gold shot up above $390 yesterday. It looked
like it was closing in on $400 before reversing and falling
later in the day. The price remains in the upper $380s.
Will it ever hit our $350 buy target again? Should we raise
the target to $400? Maybe, dear reader... maybe...

*** Levi Strauss closed its remaining plants in the U.S..
And Indian Motorcycle closed down, too, after a valiant
campaign to resuscitate the mark. There was a time when
Indian motorcycles were the biggest-selling brand and
people rode them in Levis that were made in America. Sic
transit gloria mundus.

*** Our colleague, Dan Denning, sends the following note
from his office in Paris:

"Who said: 'There can be no other criterion, no other
standard than gold. Yes gold, which never changes, which
can be shaped into ingots, bars, coins, which has no
nationality and which is eternally and universally accepted
as the unalterable fiduciary value par excellence'?

"Alan Greenspan? No. It was Charles De Gaulle.

"In 1968, De Gaulle knew the dollar standard was a racket
that favored American consumers. He said the dollar's
status as the world's reserve currency was an 'exorbitant
privilege' for the American economy.

"He took the American government at its word and began
redeeming his paper dollars for the gold in Fort Knox. When
De Gaulle did this in 1968, it caused a mini run on U.S.
gold that forced Nixon to close the gold window three years
later. De Gaulle didn't restore the gold standard. In fact,
by speeding up the end of the Bretton Woods agreement, he
actually helped usher in the era of fiat money backed by
nothing: the dollar standard we live under today.

"But he showed that it only takes a change at the margin to
precipitate the demise of a currency regime. All it takes
is one prominent seller to call the bluff behind the
perceived economic strength that backs a paper currency. De
Gaulle called the Americans' bluff by forcing them to cough
up gold. Nixon knew that real gold was worth a lot more
than U.S. paper, so he shut the whole charade down.

"Fast forward to today and the dollar standard. What's the
backbone of the dollar standard...? It's the unshakeable
faith the world's investors [particularly the Chinese and
Japanese] have in U.S. bonds. The Administration apparently
thinks it can engineer an 'orderly' devaluation of the
dollar without causing foreign bondholders to sell their
U.S. bonds.

"Currency markets rarely do anything in an orderly fashion,
though, especially at the extremes, when one currency
regime ends and another begins. Just ask John Major and the
Bank of England about insulating a currency from market
forces.

"Nearly 11 years ago to the day (September 22nd, 1992), the
Bank of England tried to manage an orderly entry of the
pound sterling into the European Exchange Rate Mechanism.
But George Soros knew the pound was already overvalued. The
market always knows. Soros figured, 'Why wait?'

"He sold sterling in the futures markets, creating supply.
Creating new supply has the effect of bringing prices down.
The Bank of England countered by raising interest rates to
support the currency. A higher yield, it figured, would
create demand, offsetting the extra supply Soros was
brining on line.

"Remember, the Bank knew the pound was too strong. But they
intended to engineer an orderly decline. Radical
adjustments are disruptive. Investors lose confidence if a
currency loses too much value too fast. They start selling
other assets denominated in that currency. Currency
selloffs lead to stock-market selloffs. Stock-market
selloffs lead to lost elections.

"Soros kept selling pounds, though, and by the end of the
day, the Bank of England was forced to renege on the rate
increase. The Bank was caught in the awkward position of
admitting through its public actions that the currency it
managed was not worth as much as it had said. And it
couldn't afford to support it any longer. But it was forced
to abandon its position because Soros put money behind the
opposite position, that the pound was overvalued and MUST
correct.

"Soros made a billion dollars in one day."

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The Daily Reckoning PRESENTS: A eulogy for Johnny
Cash... may he rest in peace.


HURT
By Bill Bonner


There's a man goin' 'round takin' names
An' he decides who to free and who to blame.
Everybody won't be treated all the same.
There'll be a golden ladder reaching down
When the man comes around.

- John R. Cash


"I was just sitting here, wondering what they would say in
my obituary," said my friend Michel at lunch the other day.
We arrived at the restaurant and found him with a book
explaining the grammar of an ancient Tuscan language, long
forgotten."I've read almost all the classics... I read all
the time. I know an extraordinary amount about an amazing
number of things. I read a book of Norse sagas yesterday.
And then a book about Greek inscriptions. And then an
analysis of the art of Michelangelo and Titian. But who
cares? My obituary will probably say I was an eccentric
publisher with a keen interest in Bombay films."

Long-time readers of this space know that we are pulled to
the obituaries like mountain apes to a shiny new
motorcycle. We can't seem to pass a dead man without
studying him a bit, trying to figure out what this strange
human thing is... and how it works. We stare, without a
clue... and wonder.

Some will say that we have a morbid fascination with death.
Instead, it is a lively one. We read an obituary and look
down at our own two legs. How happy we are to still be upon
them... and reading someone else's death notice! What a
cheerful thought: the gravediggers are tossing clods on
someone else's face! How delightful. We still see... we
still breathe; we still have wit enough to laugh at life's
absurdities... heart enough to cry. What more would a man
ask for than to be able to go down to the Paradis, hobnob
with jolly old whores, and drink enough cheap wine to float
a barge? Or, in a sentimental moment, we can pick up our
guitars, howl out a blistering lament... and drive off the
neighbors.

We like the appeal of heaven and fear the threat of Hell as
much as anyone, but are not sure we can trust them. So we
take Pascal's wager and play it in reverse. Maybe we will
get our reward in Heaven, but that is what worries us; so
we are determined to enjoy life - just in case.

Obituaries are like every other spectacle of life: at some,
you laugh; at others you weep. Few sensible men shed tears,
for example, when a tax collector makes his last seizure or
a politician gives his last stump speech. Most people are
wisely indifferent. A few wail... for they have lost their
champion. But most chuckle to themselves... even as they
lower the putrefying flesh into the grave; they are glad to
be rid of him.

When the Grim Reaper comes around for a politician of
consequence... a Roosevelt or a Lincoln, for
instance... apologists make a great effort to turn him into
a kind of plastic archangel. A few opportunists and cranks
take their parting shots, pointing out that he was sleeping
with his secretary... or that he plagiarized a speech or
two. But as the corpse grows cold, eulogists use even the
alleged flaws to make the stiff seem larger than he was.
Over time, the sordid, the silly, and haphazard elements
are pumped out of him - like decaying bodily fluids - and
replaced with solid concrete. The lucky hack becomes a
monument, a milestone in history, seemingly guiding the way
towards a better future for us all.

An honest man, on the other hand, ought to get an honest
send off.

John R. Cash brought dew to our eyes when he died a couple
of weeks ago. We held off saying anything; we wanted to
think about it. Not that we had any special connection with
the Man in Black... but we had come to appreciate his music
over the years. He had provided our informal and
unrehearsed band with inspiration and material. Friends
even said that your editor sounded a little like Johnny
Cash, when his jaw was broken.

Now that the man is dead, we feel poorer. We have lost
something. Not a fulminating vote-getter, but a real man
with decent instincts and genuine feelings. Here was a man
who had had his share of trouble. He was a sinner, like the
rest of us. His health was bad. When Johnny sang a
cappella, you could hear the pain. His interpretation of
Hurt, a Nine Inch Nails song, is one of the finest pieces
of vernacular music we've ever heard.

But the obituary writers ran right into a dramatic
roadblock when they reported the remark of Kris
Kristofferson."I like to think of him as Abraham Lincoln,"
said Kris Kristofferson. Obituaries, like the rest of life,
are either comic or tragic. Here was an element that didn't
seem to fit. It would seem more than a stretch to measure a
hick singer against the Great Emancipator; it seems not
only preposterous, but outrageous and almost libelous. The
Cash family should demand an apology.

Among all the frauds and humbugs of American politics,
Lincoln falls near the top in our rankings. Had he not been
on hand in the run-up to the War Between the States, the
costliest war in American history might have been avoided.
The American states might still be sovereign. Of course, we
cannot know what would have happened. But while John R.
Cash enriched the lives of millions, we are not sure
Abraham Lincoln brightened the life of a single one.

Some would say that Lincoln had a simple eloquence, like
Cash. But Lincoln's eloquence was as trumped up as his war.
In his celebrated Gettysburg address, to cite an example,
he claims to be fighting to preserve the ideals of the
founding fathers. But the guiding principle of the early
republic was that people had a right to decide for
themselves who would govern them - the very principle that
Lincoln was determined to crush.

Every serious politician is a poseur, and imposter, and an
ultimately, the worst kind of villain. This is no less true
of Clinton or Bush... as it was for Mussolini, Hitler or
Stalin. When pushed, a real politico must be willing to
shove his fellow men into the grave; it is part of the
métier. Mussolini had his rivals killed... and then went off
to war, killing people in far-off cities on some pretext or
another. Hitler and Stalin started with a few... and ended
up killing millions. And even Bill Clinton was willing to
gas and fry innocent women and children when their leader
resisted service of an arrest warrant for a penny-ante
firearms violation. That is why Dante placed his
politicians in Hell; he knew where they belonged.

And so we sneer, snigger and guffaw at the political class.
Maybe it is a character flaw, but we cannot read Hilary's
book without harrumphing and gurgling... nor can we read
George W. Bush's lips without wanting to giggle. So amused
and appalled are we by their simpleton delusions and
ambitious dissembling... we can hardly wait for the
eulogies.

But, at 71, Johnny Cash's obsequies came too soon.

The hurt was bad enough before his wife died in May; after
that, it was intolerable.

"I don't hardly know what to say tonight about being up
here without her," he said to a crowd at the Carter Family
country music festival in Hilton, VA,"The pain is so
severe there is no way of describing it." We did not hear
him say those words. But we can imagine it; the lines
delivered with sincerity and simplicity. There was no
conceit in them. No spin. Just hurt.


Bill Bonner