-->Bat Meat

The Daily Reckoning

Paris, France

Friday, 17 October 2003


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

*** Templeton says dollar to fall 40%... get out of stocks,
real estate...

*** Why not try currency trading on-line? We can think of a
few reasons...

*** Jobless claims, gold, senior mortgages... a worldwide
boom?... and more!

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

Our lead story today comes from Sarasota, Florida, courtesy
of the International Herald Tribune. There, it is reported
that the Metheusela of investment mavens, John Templeton,
92, says you should get out of U.S. stocks, the U.S. dollar
and 'excess' residential real estate.

Templeton believes the dollar will fall 40% against other
major currencies... and that this will lead the nation's
major creditors - notably Japan and China - to dump their
U.S. bonds, which will cause interest rates to run up, thus
beginning a long period of stagflation.

The Florida reporter felt he should get a second opinion
from the local brokers and fund managers. None wanted to
contradict the great man directly, but neither did they
want their customers to think he might be right."It
probably won't be that bad," was the gist of their remarks.
"Bush wouldn't let the dollar fall too much," said one.
Another thought she saw a way to undermine Templeton's
authority. His age, she noted,"could count against him."

Templeton was still sharp in 1999. While the financial
industry hacks in Florida were urging their customers to
buy more tech stocks, Templeton warned that the bubble
would soon burst. He was right; they were wrong. Of course,
he was only 88 back then.

He is almost certainly right again. The idea was confirmed
when we let our eye wander from the on-line news story to
the ads nearby. Next to a"Win Dinner with P. Diddy," which
we didn't know whether to regard as an invitation or a
threat, is one that asks:"Why not try something new:
Currency Trading On-Line?"

Why not? Sure, give it a whirl... The odds are better at the
racetrack, but this is something you can do from home.
Perfect for the millions of people who have lost their jobs
since the recovery began. Sure... trade currencies until
your heart breaks or your money gives out... why not?

That anyone would believe he could make money trading
currencies is evidence of rampant, hallucinatory optimism.
At least, you might be able to buy a decent stock paying a
decent dividend... and the company might prosper... and the
growth in the company and the economy at large could make
it a decent investment. But currencies are a zero-sum game.
They trade against each other; when one goes up, the other
must go down.

But that doesn't mean the investor has a 50/50 chance of
making money. There's also the 'friction' in the
system... the cost of trading... the money that you must pay
to the financial industry itself to support the quacks who
tell you to ignore Templeton.

"There is one last point I wish to make about the gigantic
financial brothel the Fed has established," Marc Faber
concluded."A visit doesn't come cheap. We, the whores
[Marc is a fund manager as well as a writer], all live very
well, travel, stay and eat in style at our clients'
expense, and charge them legal, advisory, management, and
director's or trustees' fees, and commissions. Moreover,
the bordello's furniture, maintenance, health controls,
advertising, and supervision in the form of Bloomberg and
Reuters machines, compliance officers, legal services, back
offices, and regulatory supervision, and exchange fees add
considerably to its overheads. It is inevitable, therefore,
that as the financial market grows disproportionately
faster than the real economy, an increasing wealth transfer
between the clients and the brothel's owners and its
willing and self-interested, and mostly charming service
providers will take place, which will have an increasingly
significant impact on the clients' purses."

And yet the clients practically line up to have their
pockets picked. They have come to believe something that
isn't true... but it is such a comforting delusion they
can't give it up: that all they have to do is buy a house
or buy stocks and that 'equity' will come to them like a
vamp in the night.

"I don't recall any previous time when fund managers were
as 'bullishly positioned,'" Faber points out. Quoting James
Montier, he continues:

"The U.S. market is still exceedingly expensive. On the
basis of a Graham and Dodd P/E, the S&P 500 is trading on a
30x multiple. Such stratospheric valuation would be fine,
if investors were rationally expecting a very long-run
return. However, both our model of irrational expectations
and the UBS survey of individual optimism suggest that
investors are still suffering a collective delusion of the
likely returns from equity investing."

Marc, by the way, has made some very complementary remarks
about the book we wrote with Addison."My first reaction
was that reading another investment book would be a painful
waste of time," he wrote in an e-mail from Hong Kong."But
on a flight where I had nothing better to do, I started to
read... and what a pleasant surprise. I could not put this
book down... I enjoyed it immensely!"

Our friend the Mogambo Guru gave it Five Mogambo Stars this
week."It is a fab-u-lo-so book that I could have written,
if I had any talent," says the great one. He suggests:"You
should get this book, and read it, and then periodically
get it out and read a few random pages every day. And read
the Mogambo Guru, too. Then, one glorious day, all that
stuff will suddenly click in your brain, and you will
suddenly realize, in your own moment of Transcendent True
Enlightenment..."

Over to you, Addison...

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

Addison Wiggin in the City of Lights...

- Gold is hovering around the mid-$370 range. The dollar is
holding pretty steady at $1.15-$1.18 per euro. The Dow
seems content somewhere around the 9800 range. The Nasdaq
happily rests at 1950, and the S&P can't shake 1050.
Bullish predictions of the fabled 10,000 and 2,000 will
have to hold on for another day...

- Jobless claims are at their lowest in 8 months, says
Bloomberg."Sales Feed Optimism On Growth" reads a headline
in the Washington Post... setting the stage for predictions
that the economy is now growing at a 3.5% rate. The High
Frequency Economists are quoted in the article as pushing
their"estimate for third-quarter economic growth to 7.5%."

- It seems so simple to some:"You give consumers a tax cut
and they'll spend it," says Ken Mayland, an economist in
Cleveland."That's the way America works."

- The Fed's Beige book came out yesterday, appearing on the
surface to confirm the more bullish effects of the Bush tax
incentive plan and low, low, low rates set by Mr. Greenspan
and his hoary harem.

- The"Beige Book" - named after the color of cover on the
report - is a survey of economic activity in the 12 regions
that make up the Federal Reserve System. The New York Fed,
which prepares the book, is careful to point out that the
survey summarizes"comments received from businesses and
other contacts outside the Federal Reserve and is not a
commentary on the views of Federal Reserve officials."
Still, economists, financial analysts and journalist the
globe over get all hot and bothered when the book is
released. Yesterday's records business activity through
October 7th.

- A quick read through the Beige Book, and you would think
predictions of 7.5% growth were not only possible, but
sustainable. Consumer spending"generally
strengthened"... though most districts report a pull back in
auto sales. Ten of twelve districts report economic
activity is improving. Only Boston and Cleveland are
bucking the trend."Virtually all districts" report smoking
housing markets. And financial institutions report
"favorable conditions and brisk growth." Up and away we
go...

- Wait, wait... what's this?"Labor markets generally remain
slack," confirms the Beige Book. And while residential real
estate remains robust, that of the commercial persuasion is
still characterized as"weak" in all districts... what's
more, steep declines in mortgage refinancing have been
reported across the board. Prices for raw commodities -
steel, lumber, plywood, and gas - are all rising sharply.
Wage increases were"modest" at best, yet non-wage benefit
costs, particularly health insurance, were described as
"escalating" rapidly.

- What should we make of all this? Well it's clear what the
financial media and economists of the Keynesian persuasion
would like you to think: The witches brew of government
spending, tax cuts and low rates has gussied up the U.S.
consumer enough to the point where she feels it would be a
crime not to whip out the credit cards for a night on the
town."I'm looking a little to 'hot' to stay in tonight,"
you can practically hear her purring.

- Of course, as you might rightly guess, we here at the
Daily Reckoning Paris hideout have an alternate opinion.
Never ones to miss an opportunity to grouse and snicker,
we'd like to point out a few of the specks, dimples and
warts on the exposed derrière of the reflatable doll known
as the U.S. economy. To begin with we remind you that
consumer spending still makes up 70% of GDP. Spending your
tax-break money on new barbecue implements does not a
sustainable recovery make. Nor does charging your way
through the gee-gaw aisle at Wall-Mart.

- Still, the Fed's most quotable mouthpiece of late, Ben
Bernanke, remains steadfast, undaunted... even a bit
cocksure."Given the rate of increase in spending and
output that we are now witnessing," he blabbed to the
Senate Banking Committee on Tuesday,"a reasonable
expectation is that firms will need to add significant
numbers of workers in the next several quarters."

-"Consumers feel supported by income-tax-relief-belief,
and a strong dose of wealth reflation," writes the
inimitable analyst/trader/basket-ball player Greg Weldon,
"and despite bouts of confidence-shaken-confidence readings
related to JOB anxiety... consumers are strutting right
now." Consumers' incomes, however, are not keeping pace
with their spending habits. In fact, despite August's
widely reported increase in jobs for the first time since
January, incomes dropped in September."There have only
been three instances," Weldon continues,"of no-growth in
Average Hourly Earnings on a month-over-month basis. Once
in 1993, once in 1994 and the other time coming just this
year... meaning... that the income 'deflation' of 2003 is
something NOT SEEN in at least a decade."

- And the 'surprise' 57,000 jobs increase from last week? A
spit in the pan compared to what's needed to reverse the
jobless rate. James Glassman, an economist at JP Morgan,
told CNN yesterday:"It would take jobs growth of 200,000
to 300,000 a month for six months or more to make a dent in
unemployment."

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

Bill Bonner, on the banks of the Seine...

*** The LA Times guesses that"U.S. third-quarter growth
may reach 6%." Bloomberg says growth in Argentina is at 7%.
And in China, growth continues at more than 8%. Is this a
new world-wide boom? Probably not. Every molehill of
growth, particularly in America, comes at the expense of an
Everest of debt. This is not like any other cyclical
recovery - ever. In our humble opinion, it is a phony
recovery that cannot be sustained and that will eventually
end in an even worse mess.

*** Used to be, people over the age of 50 had a hard time
getting mortgages. How would they ever pay them off,
bankers wanted to know. But in this brave new world of
'what's-my-monthly-payment,' more and more people expect to
carry mortgage payments with them into retirement and die
owing the banks money. Things just get better and better,
don't they, dear reader?

*** If the U.S. is going the way of the Third World... we
should expect hyperinflation of the currency (eventually).
We should also expect U.S. debt - state, municipal and U.S.
Treasury bonds - to be marked down to junk status... and
trade like the bonds of Argentina or Zimbabwe. Is it
beginning already? Dan Denning sends this note:

"First Pittsburgh, what next?

"Today's WSJ reports: 'Standard & Poor's dropped its credit
rating of Pittsburgh's municipal debt by five notches to
junk status... The decision by S&P, announced Wednesday,
affects about $879 million of Pittsburgh debt outstanding,
all of which is insured, meaning any losses from a possible
default would be born by insurance firms instead of
investors.'

"The article added that, 'the action nevertheless made
investors nervous as it was one of the sharpest downgrades
of tax-exempt municipal debt since California's Orange
County filed for bankruptcy protection in 1994.' Nervous is
just the beginning. Downright scared comes soon after.

"Of course, there's a big difference between Pittsburgh and
the United States government. But the dynamics of debt
default are simple: if you borrow too much, sooner or later
you're going to pay the price in either higher borrowing
costs... or the downgrading of your outstanding debt."

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

The Daily Reckoning PRESENTS: Bill Bonner, evading the
fringe-lipped bat...


BAT MEAT
by Bill Bonner

"It's a cold, cold world we're livin' in."

- Percy Sledge

Pity the poor tungara frog. According to a New York Times
article, the little amphibian, native to Nicaragua, lives
"between a rock and a hard place." In order to mate, the
male of the species makes noise -"A sliding whine followed
by abrupt chucks, it sounds a bit like a little boy
imitating a dive bomber. Female frogs hop to when they hear
it. But fringe-lipped bats also tune in; the call is their
beacon for finding frogs to gobble."

"There is a crack in everything God made," noticed Emerson.
The more eager the little fellow is to mate, the more
likely he is to be eaten by a bat.

What kind of world has God put together for us, dear
reader? We ask the question not expecting an answer, but
offering one: it is a strange world. But the weirdness of
the world seems to have a pattern to it... a pattern of
perversity, with cracks big enough to bury a split-foyer.
When the tungara frog, for example, undertakes to whine his
way to what he most wants - love and immortality - he gets
what he least wants: almost immediate extinction.

Nationwide, houses have been going up in price at about the
same rate as increases in the money supply... that is, about
8% per year. In certain areas, the increases have been far
more resplendent, lighting up homeowners' hearts with
increases of 20% to 30% in a single year. Taken altogether,
since 1997 total housing values have risen from $8.8
trillion to around $14 trillion.

This 'free money' has been so alluring that homeowners
hopped over to their local banks to get at them, and then
whined their way deeper into debt. The financial industry,
ever ready to separate a fool from his money, rushed to the
scene with the offer of home equity lines of credit that
could be used"for everyday expenses, like groceries and
gas."

Thus does the world's mouth (as the U.S. has been called)
gobble down its own houses one brick at a time. The
homeowner, thinking he's getting something for nothing,
believes he is merely taking some of his gains off the
table - like selling a few shares of appreciated stock.
Little does he seem to realize, he is selling the table
itself... along with the kid's bathroom and the family room.

If, for example, his house went from a $100,000 price to a
price of $200,000, he may feel he can 'take out' $100,000
of equity and still be living in a $100,000 house. But what
he is actually doing is selling half of the house to the
mortgage lender. Even if the higher prices stick, he still
has to live somewhere....and now he has to 'rent' half his
house from the mortgagor.

Another important difference between stocks and real estate
is realized when the bubble finally bursts. The man who has
sold off half his portfolio of stocks is actually a winner.
When the other half crashes... he walks away from it.

But when a real estate bubble bursts, there are at least
two losers - the borrower as well as the lender - and
neither walks away easily. The borrower still has to pay
his mortgage or he loses his house, and often must pay a
mortgage that is higher than the value of the house. Many
cannot or will not pay, which bounces the loss back onto
the lender.

But such is the cold, cold world we live in that the appeal
of rising asset values - whether real or paper - is almost
irresistible. Bats or no bats, the lumpeninvestoriat can
barely wait to begin croaking.

The average house in San Jose now sells for half a million
dollars, a reader tells us (below). How many people in the
San Jose area can afford a $500,000 house? We don't know.
But we suspect that the number is less than the number of
owners. Americans have become convinced that buying as much
house as you can - even more than you can comfortably
afford - is a shrewd financial move.

"Generations upon generations within the United States,"
writes Michael J. Burry,"believe that terrific home value
appreciation is both rational and certain... The current
population simply possesses very little direct experience
with devastating national housing deflation. Treacherous
cyclicality [price deflation] is at once absolutely certain
to occur and yet implicitly, patently denied by nearly all
today. For all time frames, complacency is the rule..."

People believe rising real estate prices are as close to a
sure thing as anything can be. But when an investment is
sure... it is surely a mistake.

"Clearly, a housing deflation would not be a pleasant
experience," continues Mr. Burry."In the more recent real
estate bubbles of Britain, Japan and Hong Kong, the point
was made that there was and is finite land available -
which was true. Such logic formed the basis for the famous
late-1980s argument that the island nation of Japan,
smaller than California, was worth more than all the land
in the entire U.S. But the corollary that prices could not
fall due to land scarcity never proved true."

Another argument frequently made is that housing prices
merely reflect the increase in 'replacement cost' of new
homes. Since people need to live somewhere, it is
reasonable to expect that houses will not fall below
replacement costs.

And yet, every capital asset does sooner or later fall
below replacement costs - including houses. We recently
offered for sale one of our buildings in Baltimore - an
architectural gem designed by Stanford White and built in
the 1880s. Builders estimated that it would cost $5 million
to replace the ornate mansion. But in downtown Baltimore
today, we find no line of buyers willing to pay even
$750,000.

And who, save perhaps John Templeton, is old enough to
recall what happened to housing in the 1930s? Mr. Bury
reminds us:

"In 1933, during the fourth year of the Great Depression,
the U.S. found itself in the midst of a housing crisis that
put housing starts at 10% of the level of 1925. Roughly
half of all mortgage debt was in default. During the 1930s,
housing prices collapsed nationwide by roughly 80%."

Earlier this year, a Harris Poll revealed that 2/3rds of
investors were unaware that rising interest rates would
have a negative impact on bond prices. Homeowners seem
unaware that interest rates can rise at all... or that house
prices can fall. And they are as unprepared for it as the
tungara frog for the fringe-mouthed bat.


Your editor,

Bill Bonner

P.S. Below, a reader approaches the issue from a different
angle. Readers are invited to replace 'land' with the more
modern and comprehensive term, 'capital assets.'

"I just read the commentary by Bill Bonner concerning the
mystery of how equity accumulates, magically, in the normal
home. Around 120 years ago, the 'self taught' economist and
philosopher, Henry George, wondered about the same thing.
In fact, Henry George could have predicted the economic
circumstances that most of the industrialized nations find
themselves in. The answer is simple speculation.

"....With speculators in full control, the price of the
asset speculated in has no option other than to inflate.
The problem is that at some point in the inflation process,
land becomes so expensive that any goods and services made
by the people on that land, can no longer be competitive.
Gee, does that sound like the industrialized west or not?

"Here is a vicious circle for you to contemplate. Land
values, after years of inflation, have the effect of
reducing the competitive nature of the products made by the
people that live on said land. The nation goes into
recession. In order to get the nation out of the recession,
policies are put into place that cause further inflation of
the land, making the goods and services of these people
even less competitive on the world market. Soon, all of the
jobs go to countries that have not yet discovered the
'something for nothing' world of real estate speculation.
And, the surprising thing is, everybody wonders where the
jobs went.

"There are some that look at the issue from an ideological
point of view. The reason that California is losing jobs at
a horrific rate is not because of the workers comp system
or the fact that most employers need to provide health
care. The reason is that the average house price in the San
Jose area is around half a million dollars. Even if, say,
an engineer did not need to eat, buy a car, etc, he would
still need to pay rent or a mortgage. His mortgage is more
than the monthly income of the same engineer in India or
China."