-->God, Man And George W. Bush

The Daily Reckoning

Paris, France

Friday, 4 April 2003

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

*** Whiffs of sushi...the world economy slumps like dead
meat...

*** Unemployment gets worse...stocks get better...houses
get refinanced...

*** The American dream machine..." We don't want you
here..." And more...like it or not!

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

Yesterday brought more whiffs of sushi...

..more evidence that the world economy is turning into
raw, cold, unappetizing, dead meat. Like Japan.

Initial jobless claims rose to more than 445,000 - the
highest level in a year.

Factory orders fell 1.5% in February.

And February also turned in the lowest measure of core
inflation in 37 years.

Deflation is a rare thing in the annals of economic
history. In major economies, it has struck only twice in
the last 100 years - first during the Great Depression, and
second in Japan in the last half of the 1990s, continuing
to the present.

What central bankers and economists fear most is that it
might spread, like SARS, to Western economies. Already,
there have been reports of an outbreak of deflation in
Germany. And in America, economic officials watch the
nation's container ports for signs of infection. What they
see is that almost all imports arriving from the Far East
carry the disease - their prices sink like a failing
hospital patient. Only the robust service
sector...energy...and housing keep the country from getting
sick.

Neither the bond market nor the gold market see an
immediate change in this trend. Nor can we.

But our New York colleagues are convinced that higher rates
of CPI inflation - and thus, lower bond prices - are as
imminent as the fall of Baghdad.

We don't know. Maybe inflation will rise sharply...interest
rates will shoot up...bonds will crash...the price of gold
will shoot up to $500 an ounce. Then again, maybe the
deflationary trend will continue a little longer before it
comes to an end...with another rate cut by the Fed...and
another round of refis...and even lower prices for imports.

New York-based Daily Reckoneers and those on the other side
of the Atlantic agree only on the essentials - neither
would add to U.S. bond positions. Whatever their merits,
they are far too risky for the little gain (possibly) left
in them. More below...

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

Eric Fry in New York...

- Investors huddled in their foxholes yesterday, awaiting
the latest news from the Baghdad front. In the absence of
fresh, decisive headlines, investors remained non-
committal. A little buying here and a little selling there
and by day's end the Dow had fallen 45 points to 8,240 and
the Nasdaq Composite had slipped less than a point to
1,397.

- So let's turn our attention to the home
front...literally. Will the red-hot housing market ever
cool down? If you didn't know better, it would be easy to
mistake an unlabeled graph of the Mortgage Bankers
Association Refinancing Index for the Nasdaq Composite
Index through March 2000. But the Refi Index's parabolic
trajectory is no mere replica; it is a bubble in its own
right. Indexed to 100 as of March 16, 1990, the series
recently registered 9,387. In other words, as James A.
Bianco, president of Bianco Research, points out, the
volume of refinancing activity is more than 93 times
greater than it was 13 years ago.

- It's no secret that our economy has been subsisting on
the"free money" produced by"cash-out" refinance
mortgages."In 2002, $80 billion was shifted from
homeowners' equity accounts into homeowners' wallets,"
writes James Grant."The funds sustained consumption and
bore up stock prices, postponing the market's rendez-vous
(or even - as we continue to believe - less than fair
value). Interest rates, far from losing their macroeconomic
punch in the post-bubble years, have assumed an honored
place by the American hearth...Refi activity has virtually
displaced conventional bank lending as the mechanism by
which monetary signals are beamed to Main Street."

- The signals are coming through loud and clear. Cash-out
refis are as popular as SUVs. In fact, without cash-out
refis, there would be far fewer SUVs sitting in American
driveways. The cash-out refi, like a whiff of nitrous oxide
at the dentist's office, dulls the anxiety - and a little
bit of the trauma - resulting from massive stock market
losses. In other words, thanks to the refi boom, the
buoyant housing market giveth what the stock market taketh
away.

-"John Lonski, chief of the Moody's economics group, has
come up with the clarifying fact of this interest rate
cycle," says Grant."Since the 2000 stock market top, he
observes, equities are lower by 44%, while the median house
price is up by 20%. Low interest rates have cushioned the
consumer and the stock market both."

- But the dream-like conditions in the housing market may
be approaching an unpleasant denouement. Signs of weakness
are starting to appear. And falling home prices - or even
non-rising prices - could be far more hurtful than most
folks imagine.

-"For the past two years," Bridgewater Associates notes,
"the robust housing market has been a key underpinning of
U.S. economic growth. The influence has been multi-pronged.
First, investment in housing is a direct line-item of GDP.
Second, investment in housing leads to purchases of related
durables. Third, the strength of the housing market
produced rising home price and capital gains. A significant
portion of these capital gains were converted into cash and
spent."

- Bridgewater believes the worm is turning:"Homebuilders'
expectations of future 6-month sales took a big drop in
March on the heels of a drop in February...inventories
represented a 5.0 month sales supply, the highest since
1996. [And in absolute terms], the current inventory of new
homes is approaching the highest levels of the past 20
years." We should also point out that these nascent signs
of weakness are emerging in the midst of the lowest
interest rate environment in 40 years. In other words, low-
interest rates are proving somewhat less stimulative to
home-buying than previously.

- Meanwhile, finance companies have been gorging themselves
at the mortgage-refinance trough. According to Stephanie
Pomboy's Macro Mavens, RE lending represents a record 40%
of total bank lending, up from 17% two decades ago, which
leads Pomboy to surmise that a related bubble-ette is
developing in the shares of finance companies. The"safe
harbor" status of financial stocks has taken on a life of
its own, she says."Since its peak, the stock market is now
down 43%, with Tech declining a spectacular 77%," Pomboy
observes."The Financials, on the other hand, have given up
a scant 9% and many stocks in the sector have registered
meaningful gains, like Fannie Mae, which is up 10% over
this period...This fascination with Financials is starting
to bear an uncanny resemblance to the blow-offs in Energy
in 1980 and Tech in 2000...

-"Bubble or not, one thing that is beyond debate is that
the credit quality of banks' real estate loans is clearly
deteriorating," Pomboy concludes."While the redefinition
of 'delinquency' has kept an artificial lid on those stats,
'foreclosures' have risen dramatically. Indeed, when viewed
in the context of the 40-year lows in interest rates,
foreclosures have never been this high."

- No one can say for certain how high is too high. Nasdaq
4,000 seemed pretty high...until we reached Nasdaq 5,000.
Today's refi activity seems unsustainably high, but of
course, it might soar unsustainably higher. But the risks
seemed skewed to the downside. In short, don't rule out the
possibility that the"American Dream" is about to become a
"Nightmare on Elm Street".

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

Bill Bonner, back in Paris....

*** Australia advised its citizens not to go to Toronto.
The SARS plague is"just another nail in the coffin of the
world economy", says Stephen Roach. When people are
spooked, they don't travel. They don't spend money. They
don't get deals done.

***"Have you noticed any anti-American sentiment," asked
Sylvie yesterday. She had just come from the embassy (where
she gives French lessons) and had been told of an incident
on a Paris street. An American woman with two children was
apparently insulted:

"You have no business here....we don't want you here, go
the f*** away," she was told.

"They must have been Arabs," suggested Sylvie, unable to
believe that any Frenchman would say such a thing."But
people seem to be getting meaner...and more fearful..."

Politics or plague...either one could be fatal to the
global economy.

*** You and I, dear reader, may have thought Fannie Mae and
the other mortgage mongers were in business to make a
profit - by helping American families go deeper into debt.
But no."We're in the American Dream business" says a full-
page announcement in Barron's, paid for by Fannie Mae.
During the 30 years Fannie has been hustling loans, she
tells us, she has managed to hang the albatross of a
mortgage debt around the necks of 49 million families.

Of course, people don't see it that way anymore. When they
take out a mortgage, they think they are managing a
financial asset...as if the house were a long position in
cocoa futures or an I.O.U. from a drug dealer.

*** Dinner last night with French friends produced the
usual questions about America's war aims. Your editor
explained, as best he could, the thinking of the Bush
administration. His listeners were not hostile, just
puzzled. How was the situation different from Vietnam...or
Algeria...or the West Bank...they wanted to know? They
didn't seem to realize that we have entered a New Era. More
below...


The Daily Reckoning PRESENTS: Searching for humility, Bill
Bonner portends the downfall of the world's favorite
money...


GOD, MAN AND GEORGE W. BUSH

"They're a bunch of idiots."

- An unidentified employee of the
U.S. embassy in Paris, speaking
of her employers

What worries Europeans most about the Bush administration
is not that they are idiots - for they expected nothing
less - but that they are religious fanatics.

"Is this religious fundamentalism...are they really
serious? Do they really think they are doing God's work?
Isn't it a bit arrogant? I mean, to think they know the mind
of God?"

The questions came from Sylvie, our French teacher. The
subject is much discussed in the French press lately, where
the chattering classes are beginning to see the War in Iraq
as a conflict between two religious fanatics, both
preaching a holy war.

We want you to know, dear reader, that we take up today's
topic carefully, as we might approach a cold mistress or a
warm bottle of champagne. We have ventured comments on our
President and the war in Iraq before; we know what we can
expect.

Still, what subject is more interesting? What poses a
greater threat to our peace, tranquility and prosperity? We
can think of nothing. Besides, with the fate of the world
and its favorite money at stake...how can we turn our
backs?

Recently, readers of the Daily Reckoning think they have
picked up just the barest soupçon of liberal
politics...closet Europeanism...maybe even democratic
tendencies...in this column. Many are those who have
written in outrage."Socialist nonsense..." some have
ranted."Liberal democratic b.s.," others have raved. Some
have gone further, suggesting loyalty tests...blood
tests...even mental tests. We write today to reassure
readers; whatever foul creed they worry about...we are
almost certain to despise it more than they do.

On the other hand, we admit to being a little disappointed
in our own president. We were impressed by the way the son
of the congressman-turned-CIA director, Vice President and
eventually President of the U.S. - the studious youth who
himself had attended Andover and then Yale...a man, in short,
who could not have been more a member of the East-Coast
establishment if he had had a Lacoste logo tattooed on his
derrière, right next to the silver spoon - nevertheless
managed to re-invent himself as a half-smart Texas cowboy. It
was a great act, and we admired him for it.

Bush came from a decent family...he had kicked the
bottle...he left the office at 5pm - how much damage could
he do? Besides, we figured that even a Texas ground
squirrel would be an improvement over the Clinton-Gore
crowd.

And we rather liked that line from Bush about 'humility' in
foreign affairs in his inaugural address. As long-time
sufferers of the Daily Reckoning know, our ears perk up to
the sound of the word 'humility'; we never met a man who
had too much of it...and find more things in ourselves to
be humble about every day.

Imagine conservatives' chagrin when they discovered that
the humility promised by the Bush boy was a lie, while the
half-smart, yahoo, populist image he so carefully
cultivated was not! Bush supporters may immediately counter
that getting half of what you are promised from a
presidential candidate is a better deal than most...but,
alas, it was the wrong half. It has left the Bush
administration with a bad combination of traits - like a
fat, ugly oaf who also sells Amway products.

So unbecoming is this mélange that the Bush administration
seems on the verge of doing the impossible - making Clinton
look good! During the Clinton years, though probably
through no virtue of Mr. Clinton himself, if there were
any, the nation was at peace...and seemed prosperous. And
the federal government was in surplus. Now, the nation is
at war, seems to be in a slump, and the federal deficit is
projected at about $500 trillion for next year - the
biggest flood of red liquid since Pharoah's Army drowned in
it!

Meanwhile, the Bush administration has undertaken foreign
and fiscal policies that must rank as the least humble in
history. Bush's address to the world of March 17, 2003, was
a remarkable pronunciamento. There was nothing illogical
about what Mr. Bush said...but it was so stained by
buffoonish grandiosity that it must have made an
intelligent European laugh and a smart American cry.
"Instead of drifting along toward tragedy," the commander-
in-chief told the world, he would rush to meet it!

Whatever he may be, George W. Bush is not the humble
conservative people thought he was. In fact, he may be the
most expansionist, forward-looking president since
Roosevelt...the biggest humbug since Lincoln...and the
greatest threat to the nation since Bill Clinton.

Which is not to say that we know whether the effects of his
actions will be good or bad. We have tried to look into the
future, but we have never gotten the knack; all we see is
our own hopes and fears reflected back at us. Finally, we
have given up the effort as both unproductive and
dangerous, concluding that it is not given to man to know
the future; God keeps his secrets to himself.

You see, dear reader, here at the Daily Reckoning, we
believe in God...and gods...and Nature...the madness of
crowds...and the kindness of strangers. We never heard of a
superstition or tradition we thought we could safely scoff
at...we never pass a penny on the street without bending
over to pick it up...and never ignore an old wives' tale,
nor a young ones'.

For in every tradition is the distilled wisdom of
centuries...through bull markets...and bear
markets...famine, drought, war, plague, boom, bust. People
learn from their mistakes, not from their successes. And
not perfectly or consciously...but unrelentingly and
episodically. For every tiny bit of progress - a rule, a
principle, a guiding law - such as"Thou shalt not
kill"..."Buy low, sell high"..."The early bird gets the
worm"..."Always save for a rainy day"..."Never sh** where
you eat"..."Paper money never lasts...while gold never goes
away" - there are hundreds of years of experience and a
million tormented souls roasting in Hell.

But every once in a while, people come to think the golden
rules no longer apply. God begins whispering in their
ears...or so they think."It is a 'New Era'," He says. Now,
things are different; now we CAN see clearly into the
future, and profit from it.

During the late, great bull market, many people believed
that not only could they read tomorrow's newspapers...they
could take advantage of tomorrow's news today. Peeking at
the stock pages, they were sure they saw higher prices. If
they bought the shares, were they not already as good as
rich? So why not spend a little of tomorrow's wealth today,
they asked themselves?

What passes for comedy in the stock market, comes on stage
as a tragedy in politics."The terrorist threat to the
world will be diminished the moment that Saddam Hussein is
disarmed," said George W. Bush, looking into the future.

"We have to establish democracies in these countries," a
friend, calling from Texas, elaborated."If not, those
anti-American groups will continue to grow and they'll
continue to get more and better weapons. And yes, it will
cost hundreds of billions of dollars...that we don't have.
But what choice to we have?"

"We are now acting," Bush continued, reading tomorrow's
headlines,"because the risks of inaction would be far
greater."

Inaction is, of course, what humble people do in foreign
affairs. They admit that they don't know what will happen
in the future. Lacking clairvoyance, they mind their own
business...and put up defenses to protect themselves from a
possible attack.

Action is what humble people do after an attack...or what
arrogant people do before one. Those who think they can
tell when an enemy will attack them - like the police in
Philip Dick's science fiction book, The Minority Report -
may try to arrest criminals before they commit a crime. But
they risk the wrath of the gods. For thousands of years, in
personal relations as well as international ones, being the
one to start a fight was rarely rewarded. Will it be any
different this time?

We do not know."New Eras" do not come along very often. If
George W. Bush has spotted one, he deserves credit as a
hero and a genius...and when we both get to heaven, we
will give him a hearty handshake and apologize for ever
doubting him.

But here, we offer a humble guess on a closely related
subject. The president may go down in history as a great
man, like Lincoln. But Bush's dollar - like Lincoln's
greenback - will go down, too. Even if it is a New Era in
geopolitics...it is almost certainly an old one in central
banking. Bush's wars on terror may knock off a tyrant or
two...but the cost of them is almost sure to blow up the
dollar.


Bill Bonner