-->Bet Your Bootie

The Daily Reckoning

Bar Harbor, Maine

Monday, July 05, 2004

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*** Homeland Bound...The much-anticipated cross-country vacation
starts today...

*** Let freedom ring! McMansions, SUVs and more on the Great
Debate...

*** Mr. Gilder, Mr. Cook, Mr. de Toqueville - “So what?”

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Homeland Bound.

We came to Europe nearly 10 years ago - a family of Maryland naifs,
innocents abroad.

We return to the New World this summer for a 6-week Grand Tour. But
we are no longer the same people who left. We've become insufferable
euro-snobs, Parisian sophisticates who speak French at home and
compare the $6.95 Sea Food Platter at Nick and Tony's with the
'Risotto aux fruits de mer' from Chez Leon at the Porte Maillot. More
below...following the news:

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

Eric Fry, from the Westchester suburbia...

- As fireworks lit up the night skies from Bangor to Berkeley
yesterday, Americans celebrated 228 years of independence from the
tyranny of British rule. We Americans would not be bullied into
paying low, single-digit taxes to some distant authority, no sirree!
We would rather fight to the death to protect our freedom - the
freedom to impose taxes upon ourselves 10 times greater than those
ever imagined by King George III...and we would fight for the right
to shackle ourselves to massive credit card debts, or to bind
ourselves to a lifetime of indentured servitude to mortgage
debt...let freedom ring!

- The Federal Reserve tightened the shackles of adjustable-rate
financing last week by hiking the fed funds rate to 1.25% from 1.00%.
Immediately the nation’s major banks hiked their “prime” lending
rates to 4.25% from 4.00%, which caused interest rates across the
Land of the Free to ratchet higher.

- Initially, investors - like a 5-year old staring down a serving of
broccoli - tried to like what everyone says is good for them. They
tried to like the higher interest expenses imposed by the Fed. But
the effort to exert mind-over-matter failed, as stocks slumped toward
the end of the week. The Dow Jones Industrial Average slipped 89
points to 10,282, while the Nasdaq Composite dropped nearly 1% to
2,006.

- “America’s future - a nation of bed and breakfasts?” muses Northern
Trust economist Paul Kasriel. “Since 1999, U.S. households have
become a net demander of funds. That is, our expenditures on consumer
goods and services and our expenditures on the net value-added in the
residential real estate sector have exceeded our disposable
(after-tax) personal income.

- “So, why is the U.S. household sector running persistent net
deficits?” asks Kasriel. “To paraphrase President Clinton, ‘Because
we can.’ And how is it that we can? Because Alan Greenspan and his
Asian central bank brethren have been holding U.S. interest rates at
artificially low levels...

- “Having gone deeper into debt to purchase McMansions and SUVs in
recent years, how do baby boomers intend to spend their golden years?
I predict that we baby boomers will turn our McMansions into bed and
breakfasts for the increasing number of Chinese and Indian tourists
who will be visiting our shores in the next fifty years. And we will
provide complimentary shuttle services to our guests with our SUVs.”

- At the moment, however, the cavalier American consumer seems to be
retreating from the front lines of reckless consumption, as evidenced
by recent news of slack sales at Wal-Mart, GM, Target and
others...Could the housing market be next in line to feel the
ill-effects of a consumer retrenchment?

- The shares of Washington Mutual tumbled last week on news that the
giant mortgage lender will post a smaller per-share profit than
expected - something like $3 to $3.60 for the year instead of the
$4.24 a share predicted by Wall Street analysts.

- Meanwhile, new applications for U.S. mortgages fell more than 4
percent last week, as purchase applications and refinance
applications both slumped.

-"It now appears to us that the shift in the interest-rate
environment in recent months, with a sharp increase in long-term
rates and a related reduction in mortgage volumes, will continue
through the rest of the year," said Chairman and CEO Kerry Killinger,
in a company statement."The effects of these changes are likely to
outpace the timing of ongoing cost reduction plans in our
mortgage-banking business."

- The steep drop in the price of “WaMu” shares suggests that
investors were surprised by the news. How could they have been
surprised, we wonder? Is there anyone left in America who does not
expect interest rates to rise? And yet, despite the most telegraphed
rising rate trend in modern American financial history, investors
have continued to snap up shares of mortgage lenders as if they were
buying some sort of safe-haven asset on par with gold.

- The shares of one prominent mortgage lender touched a new all-time
high last Monday. If WaMu says times are tough, how long until other
mortgage lenders feel a similar sort of pain? And how long until the
housing market itself begins to feel the adverse effects of waning
mortgage demand?

- Not long, according to HSBC..."A bubble-psychology has manifested
itself in very rich valuations," writes HSBC chief U.S. economist Ian
Morris in a report entitled, “The U.S. Housing Bubble — The case for
a home-brewed hangover.”

- Not to worry, dear reader. A new 12-page study by the Federal
Reserve says the rapid increase in home prices is itself not evidence
of a bubble. Of course, neither are rapidly rising rates NOT evidence
of a bubble.

- House prices relative to income, rent, replacement-cost and
home-equity have all set new highs, HSBC’s Morris observes.
"Expectations of future house price appreciation are spectacularly,
and unrealistically, high." He writes."We think the party stops by
mid-2005. A series of rate hikes will cause a reassessment of likely
future house price risks and its associated debt, thereby triggering
housing's fall."

- For the moment, dear reader, your New York editor abstains from the
Great Housing Bubble Debate. Although he sympathizes with the
arguments advanced by the bubble contingent, he owns a home he does
not intend to sell and would prefer, therefore that the non-bubble
contingent proves to be correct. In short, your editor opts for the
path of denial.

- He imagines the prospective housing bubble being outgunned by a
prospective inflation. In other words, home prices may fall in “real”
terms, even while continuing to appreciate in “nominal” terms. Such
an outcome would be quite convenient for those Americans who, like
your editor, hold a long-term fixed-rate mortgage.

- One thing is certain - or almost certain - housing bubble or no,
rising short-term interest rates will put the squeeze on those
American families who have built their homes - and their financial
foundations - on the shifting sand of adjustable-rate financing.

- Fannie Mae projects rising rates through the end of the year and
estimates that the monthly payment on a typical one-year ARM will
jump 17% by year-end. In other words, a homeowner who pays $926 a
month on a $200,000 adjustable-rate mortgage would be paying $1,086
by New Year’s Eve...Happy New Year!

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

Bill Bonner, back on the road...

***"So what?" asks old friend Jim Cook.

He was echoing the sentiments of technology stock guru George Gilder,
commenting on the huge amount of U.S. debt held by foreigners. Cook
continues:

"That pretty much sums up the sentiments of most Americans. In fact,
plenty of Americans don't even know about the country's debt burden,
and don't care in the least to learn.

Contemporary economics bores people. If you really want to put people
to sleep, lecture your friends with the negative aspects of the
ballooning trade deficit. Or talk a lot about money creation, credit
excess and artificially low interest rates next time you're at the
country club and see how your golf partners begin to shun you. Nobody
knows or cares much about these complex economic subjects. People
don't believe that anything can cause a crisis, and they write off
those who warn about the future as kooks.
Most Americans want stocks and real estate prices to keep going up,
and that about covers their economic thought process.

All of these boring economic problems that nobody cares about are
tied to inflation."So what?" Mr. Gilder might ask once again. We've
come to believe that a little inflation is good. In fact, purposeful
inflating has become a national policy promoted by government,
business and the public in general.

Money and credit heat up the economy, but an inflationary boom must
eventually lead to a bust. A credit-induced expansion is inevitably
doomed. That's an economic certainty. The greater the credit excess,
the greater the economic pain. The answer to Mr. Gilder's question
will come with the worsening of everyone's economic conditions. No
one will ask"so what?" in the midst of panic and crisis, bad
business and depression.

Exactly when this necessary and certain outcome will unfold depends
on the success of the monetary authorities in containing and
augmenting the greatest money and credit expansion in history. The
more we inflate, the longer the collapse will be postponed. However,
this policy is not without risks. Eventually, the flood of money
makes people believe this policy will go on endlessly, and the amount
of money in circulation will increase beyond all bounds. That causes
everyone to get out of money and into assets. We have the good
fortune of being able to flood the world with dollars, induce price
inflation in other countries, and mitigate inflation at home.
However, inflation is a policy that terminates itself. The whole
world can, at some point, rush to exchange dollars for goods. Such a
flight from the currency means we no longer have the option of taking
the cure (recession). Instead, the dollar's value shrinks to the
point that nobody wants it.

The violent contraction that follows such a currency collapse, or the
evolution of a boom into depression, will deprive consumers of goods,
enforce widespread bankruptcies, cause business failures and spread
impoverishment. Everyone suffers. People are quick to blame the
monetary and political leaders. They vent their anger on those in
charge and replace them at the polling booth. Radical agendas become
mainstream as any kind of cure is sought. People become melancholy
and depressed. They have found the answer to the question,"so
what?"

*** Homeland Bound

"I confess that in America I saw more than America; I sought there
the image of democracy itself, with its inclinations, its character,
its prejudices, and its passions, in order to learn what we have to
fear or hope about its progress."

- Alexis de Toqueville, beginning his visit to America in 1831


"Hurry up!"

The taxi arrived at 7:30 AM. Its mission was to collect your author
and what remained of his family in Paris. He had already dispatched
the older children to America - an advance party to warn the
relatives that we were coming.

It is time we returned to America - at least for the summer. The
older children only recall it dimly, sentimentally. The younger
children barely remember it at all. Even for the adults in the family
there are vast stretches of North America that have never been
explored. We lived in the U.S. for decades. The country was all
around us. But we never had time to look at it.

Now, we open our eyes - ready to be delighted, or appalled.

We passed through two airports on our way to Maine - Newark and
Boston. Immediately upon hitting terra firma, we began to be ordered
around by people who, themselves, seemed to have only arrived
yesterday.

"Put shoes in," said a security guard, whose mother tongue was
apparently not English."No carts allowed," said another. Actually,
we weren't quite sure what she said.

"We've been away too long," we said to the kids."We can't understand
what people are saying.

One of the things that must be surprising to arriving Europeans is to
see so many flags. The French bring out the Tricolore for Bastille
Day - at least they fly it from town halls and police stations.
Individual Frenchmen rarely put out the flag. We've never seen a ball
cap in France with the flag on it. Nor have we ever seen a Frenchman
wear a shirt in which the drapeau was a design element. But here in
America, the stars and stripes are everywhere. You find it on cash
registers, lawns, bumper stickers and in-car windows. A pair of
motorcycles going up I-95 each had large flags flying. A man wore a
Hawaiian-style shirt, with Old Glory all over it.

"Why do they put the flag everywhere," Henry wanted to know.

"It's the 4th of July," his mother replied. But most of the flags
seemed permanent. They meant something. But what?

America is famously advertised as the 'land of the free and the home
of the brave'...but after only a few hours after your feet hit the
ground, you begin to wonder. In Europe, at least in France, security
is more relaxed. You land at Charles de Gaulle airport and you can
breeze through customs in a matter of minutes - the cops often don't
seem very interested in you.

But getting into America is another matter. Even before you hit the
ground, people begin warning you:"Fill out the forms correctly, or
you'll be in a lot of trouble,' says a announcement. Once on the
ground, the airport security guards are everywhere. Soon, the
warnings turn into threats - stay behind the yellow line, remove all
laptops - you can't even tell a joke or they'll put you in the
hoosegow.

"How come it's so much easier to travel in Europe," asked Henry.

"It's the war on terrorism," his mother replied."They don't want
another 9/11."

"Why aren't they worried about that in Europe? There are millions of
Muslims already in France. And it's so easy to get in and out. If
they wanted to you'd think it would be easier to blow up something in
France than in America...and didn't they just blow up a train in
Madrid?"

"Well, for some reason, the Europeans are just much more relaxed
about terrorism," his mother continued, venturing a guess."Maybe its
because they've had terrorism for so many years...I mean the Basques
and the IRA...and so forth. Besides, maybe Americans feel more like
they are the targets."

Homeland security is new to the U.S. In fact, the 'homeland' itself
wasn't even invented when we moved to Europe. When we left, there was
only America. Now, there is the homeland...and the rest of the
empire.

"Why would terrorists want to target Americans more than Europeans?"
Henry wasn't giving up."Maybe it's because Americans are the ones
who are fighting terrorist!"

Whatever the reason, the gendarmes are everywhere in America. Even
after leaving the airport, you can barely drive 20 miles in any
direction without running into a speed trap.

"They're there for the same reason as the security guards," Elizabeth
explained to the children,"to protect you."

No one notices anything unseemly about it: America is now the only
military super-power in the world. No other nation even comes close.
But never have the denizens of the homeland of the brave been so
concerned with their own safety.

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


The Daily Reckoning PRESENTS: The man is talented, we already knew
that...but today we discover that the MoGu is a rock star. For his
latest hit song, read on...


BET YOUR BOOTIE
by the Mogambo Guru

I can't seem to pick up a newspaper off of a neighbor's lawn, or take
a magazine out of his mailbox, or turn on a TV that I borrowed off
his porch last week without being bombarded with morons from the Left
who are agitating for a rise in the minimum wage.

Take John Kerry for instance. The man is a typical odious and
clueless Leftist chump who has spent decades as a Senator, and so is
actually personally responsible for getting us in this pickle. And
now, as he tries to take us even farther down this same tired path,
it’s not surprising that he's all gung-ho about raising the minimum
wage.

With a weary resignation, I get into the Mogambo Mobile, rev it up,
and I drive down there to politely explain to these cretins that
raising the minimum wage is increasing the pain, as it makes prices
rise. Minimum wage workers get no benefit, while the other guys,
namely guys who get NO wages, raised or otherwise, and are on a
relatively fixed income, get robbed. And in fact, raising the minimum
wage actually ends up hurting the working poor as well, because
prices tend to rise faster than their incomes.

And then they counter with"Oh, yeah? Well, what would YOU suggest,
Mister Uptown Hotshot who thinks he can come down here, stinking up
the place, and help himself to a free cup of coffee and who snags at
least six donuts out of the break room when our backs are turned and
who thinks he knows everything?" I am the epitome of grace when I
answer that, first off, I would wear some clothes that fit me so I
didn't look like some retarded street bum, and second, I would keep
prices from rising.

And here's my reasoning: if prices never rose, see, then nobody would
have to raise the minimum wage, and everybody would be happy. And if
prices gently floated down in a nice little deflation, which is the
whole the damn promise of the"productivity miracle" that Greenspan
keeps running his stupid mouth about, then you would be able to buy
more and more stuff every week with the same income! And that is what
I see as the goal of economics: raising the standard of living for
everyone.

Lew Rockwell backs me up on this, even though if you ask him he will
deny it. He wrote an essay entitled ‘Your Right to Deflation.’ Mr.
Rockwell, who is the guiding light behind the Mises.com site where
you can learn about real economics as it really works in the real
world, writes"Our intuition tells us that falling prices are great
for our pocketbooks because they leave more left over for savings or
other forms of consumption. It is just as good for society at large.
Our money becomes worth more and more, and hence our remunerative
labors grow in value too. If inflation works as a stealth tax,
deflation works as a tax refund."

And now they all crowd around my feet, some of them even clamoring to
know how I can keep prices from rising and how everything will be
wonderful as a result, and others wanting me to switch my
long-distance carrier. I snatch the microphone from the stand, bring
it close to my lips, and with a magnificent rumbling basso profundo
voice from deep down inside my Manly Mogambo Chest, I say"Simple."
My arm slowly rises until it stands directly out from my shoulder,
and the only sound in the hushed stadium is the whir of videotape
machines. Suddenly, with a flick of my wrist I motion to the band,
and we launch into my rousing hit song,"Bring Me the Head of Alan
Greenspan!" The first verse is kinda catchy, and it goes;

"To keep prices from rising,
Don't print up money,
And don't print up credit,
Because if you do, I'm telling you,
You can bet your bootie you're gonna regret it."

The boffo chorus was supposed to have these loud clashing, slashing
chords with the drums going crazy, boom-a boom-a boom-a, and the lead
guitar wailing some tasty blues-inspired licks high up in the
background, and the lyrics were supposed to go:

"Because all that new money makes prices rise,
Like those of houses and burgers and fries,
Because the money has to go somewhere, that ain't no surprise,
But don't tell Alan Greenspan, who is one of those guys
Who thinks those are lies.
And if you question him he replies
That interest rates have got to be low,
And then the economy will always go,
And inflation will always be low,
Because we say so
And if you say"no"
Then up we say"Up yours, Mogambo!"

But we were not talking about my becoming a rock star and cranking
out hit songs like this, and what a talented guy I am. No, we were
talking about raising the minimum wage. And, by extension, let's talk
about the people who have worked and raised themselves up to the
point where they already make $7 an hour. What about them? Aren't
they going to be grumpy as hell that all their hard work, and butt
kissing gets them exactly squat? “I've worked like a dog,” they’ll
say, “and now some new-hire off the street earns an identical wage
from the get-go?”

And what about the guys above THEM? Thus the pressure reverberates up
the income ladder, one pay scale after another, until it reaches guys
at Dick Grasso’s level, the disgraced former head of the NYSE, whose
buddies let him make over a hundred million dollars a year, plus
benefits, as an employee of a non-profit organization in an oligopoly
marketplace. And after all, this higher labor cost has to be factored
into prices, which forces prices up.

In conclusion, the actions of these greedy CEOs, the stupid
politically-driven minimum wage ideas from the likes of John Kerry
and all the Fed tinkering, when combined, blaze like a Fourth of July
fireworks display, with those rockets that explode into huge displays
of streaming bright lights, and those screaming things that go
"eeeeeeee!" and the kind that go"bang!" with a loud report, and the
kind that whooshes up"shhhhhhhhhuuuuuuuuuu!" all drawing your
undivided attention to the fact that inflation in prices is like a
gigantic asteroid getting ready to smash into the Earth, and it is
going to come and whack us in the head big time, or more accurately
Big Time, or even better yet, Big Freaking Time (BFT)

...and let me tell you, it will hurt.


Regards,

The Mogambo Guru
for The Daily Reckoning


---Mogambo Sez: Interest rates are rising, but people are actually
bidding up stock and bond prices. It's too, too weird.