-->The American Syndrome

The Daily Reckoning

Paris, France

Monday, 19 May 2003

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

*** Dow down...Gold up...Prices down...Euro up

*** Money supply explodes...Wall Street's bulls numbered
at 63%...

*** Caught by the gendarmes! And more!

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

Today, we come to the aid of new or forgetful readers with
some leading questions:

"The object of investing is to make money, isn't it?"

Yes, it is.

"And the way you make money is by selling something for
more than you paid for it, right?"

Yes...

"But you at the Daily Reckoning claim to have no idea
whether a particular investment...or stocks in
general...are going up or down; is that right?"

Well, yes...

"Then why should I bother to read your column?"

Next question!

Actually, we also claim that no one else can tell you
whether an investment is going up or down either...and if
they could, they wouldn't.

A good investment call is like a good guess at the race
track: the more people who bet against your horse, the more
it's worth. Because as the odds go against your horse, the
more you make if the poor nag wins. Ergo, the more you hear
any particular investment advice...the less likely it is to
be of any worth.

What we hear now is that the current rally will carry
stocks much higher. And maybe it will...but you're not
likely to make much money believing it. So many people
already believe that stocks will rise that they've tilted
the odds against a big payoff on the long side of the stock
market.

Here we are, 3 years after the beginning of a major bear
market, and stocks still sell for the kind of
price/earnings multiples you typically see at the top of a
major bull market.

"Which prompts another question. You admit that as far as
you know, stocks might just as well go up as go down. But
when you say they are 'expensive,' you imply that you think
they will be less expensive...that is, that they will go
down...in the future. Have I caught you in a contradiction,
or what?"

Oh stop your pettifogging cross-examination. Yes, we think
stocks are going to be less expensive at some point. And
yes, it seems inconsistent, but so what?

A strong intuition, combined with a careful look at the
history of markets, tells us that a big top is sooner or
later followed by a big bottom. We don't know where...and
we don't know when. But we feel that stocks and cheap
prices will meet again on some sunny day.

And since we know that stocks will someday be a lot cheaper
than they are now, we would rather that someone else
experience the pride of ownership during this drooping
period.

In the meantime, we welcome the news of the rally with the
same foreboding that might have greeted readers of a 1939
newspaper found in an attic trunk this weekend.

"French Forces Break Siegfried Line," began the hopeful
headline, noting that it was"too early to proclaim
victory" in the new war. Six years too early, as it turned
out.

Friday's news brought more evidence that Fed officials are
losing the war against deflation. Consumer prices fell
0.3%...housing starts fell 6.8%...and bonds hit new highs,
even while the dollar fell.

Rounding off the news, the Dow fell...gold rose.

We know that the Fed is bringing out its heavy guns; the
money supply - M3 - increased $83 billion in the last two
weeks...or at a spectacular 25% annual rate. Still, we
think it might be a long time before victory is finally
achieved.

Over to our colleague in the Big Apple...Eric Fry:

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

Eric Fry in New York...

- The Dow may have fallen on Friday, but stocks gained
ground for the fifth straight week...as the Dow Jones
Industrial Average added 74 points to 8678 and the Nasdaq
tacked on 18 to 1,538. The higher the market climbs, the
more numerous the bulls become.

-"The most recent sampling of its members by the American
Association of Individual Investors showed nearly 63%
bullish and a meager 16% bearish," Barron's reports."And,
according to the latest available data from Investors
Intelligence, 54.4% of the investment advisors are bulls,
only 21.7% bears."

- And the bulls are especially fond of tech stocks...The
NASDAQ's nearly 40% advance since last October suggests
that investors anticipate a genuine and robust revival of
technology spending. Curiously, most of the tech company
insiders do not exhibit similar optimism. Not only are the
insiders continuing to provide"cautious guidance"
publicly, but they're also continuing to sell their shares
privately. We suspect that a genuine recovery in the tech
sector - if it were underway - would elicit a very
different response from tech company insiders.

-"There's a host of economic data suggesting that a
revival in spending on technology has arrived," CNN/Money
reports."Output at high-tech companies was up 9 percent
over year-ago levels in March...[and] for the first time
since late 2000, new orders for tech goods are outpacing
shipments.

-"But a closer look suggests tech's revival may not last
for long. Although tech is doing better, capital spending
in general is not. In the first quarter, for instance,
spending on new equipment actually dropped, falling to an
annualized $981 billion from $992 billion. The implication
is that companies are spending on tech not because they
want to, but because they have to. And once they no longer
have to, their wallets will snap shut again."

- Nevertheless, the potent tonic of"less-bad" news is
curing many tech stocks of the bear market blahs - helping
them to recover from the lows they hit last fall.

- The shares of Gateway Computer, for example, have"taken
the cure" - the less-bad cure. A few weeks back, Apogee
Research cited Gateway Computer as an especially promising
speculation. The timing of the recommendation was
fortuitous, as the stock has subsequently soared 34%.

- The rally in Gateway shares kicked off in earnest on
April 16th, the day immediately after the company released
its annual 10-K filing. Since this annual report contained
no NEW bad news, but just a bunch of OLD bad news, relieved
investors started piling into the stock.

-"Gateway Inc. (GTW) has fallen on hard times," Apogee
Research observed in its initial report."GTW has seen its
bubble-era prosperity melt away and has struggled in recent
years just to sustain profitability and cash flow. Truth be
told, Gateway has not generated an operating profit for the
past five quarters, having posted nothing but red ink since
the fourth quarter of 2001. That said, there is a bull case
to be made for Gateway. For one thing, at GTW's current
share price, investors can pick up the Company's business
operations for virtually nothing. For another, Gateway has
initiated a new strategy to address its problems, and early
signs point to success...

-"Obviously, we can't say for sure that GTW will be a
successful turnaround story. But with the market value of
its operations at zero, any meaningful signs of success in
this regard will most likely spark a substantial rally in
GTW shares."

- From Apogee's mouth to Mr. Market's ears... the stock has
been rallying ever since. [Ed note: for more from Apogee,
see:

Apogee Research
http://www.agora-inc.com/reports/APG/ToSeeMore/ ]

- However, Gateway is not out of the woods, and neither is
Cisco or Intel or Sun Microsystems or Dell...Last week,
Dell reported a 31% annual profit growth on sales that rose
18% in a year's time. But Dell's in-line report and
forecast spurred profit-taking that dropped its shares 3%.

- Nevertheless, the company remains very cautious about
future demand."While overall industry demand has increased
slightly for the past three quarters, we don't expect
significant near-term improvement in economic or industry
conditions," Dell's CFO admits.

- The news from the technology sector, broadly speaking,
may be less bad. But less-bad is not the same thing as
good, no matter how many Wall Street strategists confuse
the two.

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

Bill Bonner, back in Paris...

*** We were stopped on the highway by a pair of gendarmes
Friday night.

"Just a routine check," began a pretty blond woman in
uniform."Can we see your papers?"

"Hmmm..." she began, after examining them."You have missed
your car's inspection. Did you know that it is obligatory
to have your car inspected once every two years?

"I'm afraid I'm going to have to give you a ticket.

"I don't like to do this, of course...I mean, as a
foreigner you probably didn't know. But you've been in
France long enough...you should know that we can be
strict..."

"You mean, the gendarmes, or the women?" asked your editor.

"Well, both I guess. But especially a woman gendarme needs
to be especially tough..."

"Why so?"

"Because if she weren't, people would take advantage of
her."

"How so?"

"Oh, you know...flirting with us, trying to get out of
getting a ticket...or just thinking they can push us
around..."

"How despicable. Can I buy you a coffee?"

The Daily Reckoning PRESENTS: A specter of the past,
sternly scolding,"I told you so!" This DR Classique was
originally aired on 9 February 2001.


THE AMERICAN SYNDROME
By Bill Bonner


"Economist Anthony Chan met privately with Alan Greenspan
and the Federal Reserve Board. After the meeting he was
asked by a journalist: 'Tell me a little about what that
was like...and what you were able to learn that you didn't
know before.'

"'Well,' said Chan, 'If I told you, or answered that
question, I would have to kill you.'"

- The Washington Post


TIME advises its readers how to get through the"slump"
while waiting for the stock market to make them rich:

"Put off purchases of things like cars and appliances...
try to build a cash cushion equal to 3 months of living
expenses..."

TIME's good counsel has a small potential flaw: if TIME
readers were to take the advice seriously, it would almost
certainly trigger a recession far worse than any expect.
That is why Fed governor Robert McTeer gave his audience
the opposite advice: buy an SUV.

Retail consumption represents 2/3rds of the U.S. economy.
Consumption depends on spending. And, in America, spending
depends upon borrowing. Americans already spend all they
earn, and then some.

"It was in 1998," writes Kurt Richebächer,"that
everything, both the U.S. economy and its financial system,
went completely out of control. Since that year's fourth
quarter, personal saving has plunged from $244 billion to
recently [negative] $56 billion. As to the U.S. current
account deficit, it increased from $77 billion to $140.5
billion between 1990 and 1997. By the 3rd quarter of 2000,
it was running at an annual rate of $450 billion."

If American consumers suddenly begin to act like their
Japanese counterparts, it will set in motion what is
commonly known as a"vicious cycle" of unpleasant effects.
A cut-back in spending would produce a cutback in sales,
which would mean lower profits. Lower profits would cause
businesses to reduce their payrolls, trim inventories, and
curb expansion. This would mean even less money in
consumers' hands. It would also encourage foreign and
domestic investors to dump U.S. stocks...which would send
the"wealth effect" into its own little vicious cycle...and
cause collateral damage to consumer spending as well as
investment spending.

The overall effect is recorded in the literature of the
economics trade under the oxymoronic heading: The Great
Depression.

What was so great about it? Well, you could walk into
almost any restaurant in Manhattan without a reservation
and still get served. You could buy a new car without have
to spend time on a waiting list while it was assembled from
component parts made on various continents. And vanity was
cheaper. It didn't take a lot of money in order to feel
superior. A man with even as little as $1 million in
savings in a solvent bank could still feel like a big shot.

"People worry too much about money," said my friend
François yesterday."It's madness." Perhaps one of the
things that made the Depression great was that people had
less money to worry about.

But there's good and bad to everything. Even the Great
Depression was marred by widespread poverty and the
Roosevelt administration.

Could we have another Depression, great or even not-so-
great? It is almost unimaginable.

Why not?"Because the character of our economy has
changed," economists will answer."During the '30s, we put
into place institutions that act as safety nets to protect
people from catastrophic losses - such as Social Security
and FDIC insurance. And the Fed now understands how to
manage the credit cycle."

What Roosevelt & Co. did was to implement the reigning
illusion of the time: that technology and rational central
planning could eliminate uncertainty. Government social
programs would replace the chaos of tradition and culture.
Keynesian fine-tuning would bring economic cycles under
control. And the Federal Reserve would manage the currency
and prevailing interest rates to ensure stability in the
markets.

The result - much disputed by economists - was probably to
turn a short, swift market break into the biggest economic
disaster of the industrial age...and to burden American
society with expensive programs from which we have yet to
escape.

But here we are, in a new millennium, still counting on a
pre-WWI idea - whose central, hidden tenet is that a man's
pockets should be picked by the government in exchange for
protecting him from his own imprudence and misfortune.

Rather than let Mr. Market decide what interest rates
should be, for example, Mr. Greenspan is forcing the issue:
setting, by declaration, the rate at which banks can
borrow.

Rather than allowing people to finance their homes at the
market rates, Congress - in its wisdom - has reduced
mortgage rates for millions of Americans, by backing the
most reckless lenders in the world - Fannie Mae and Freddie
Mac.

Rather than let people take care of themselves when times
are tough - thus requiring them to save money for a rainy
day - the government, and Federal Reserve, have encouraged
the illusion of a vast umbrella, shielding the public from
any major downpour. Since the Roosevelt era, it is
believed, there will always be plenty of jobs...plenty of
money...plenty of credit...plenty of food and fuel...plenty
of everything - as long as you go along with program.

"We have noted before," writes Sean Corrigan, of the
Capital Letter [now Capital Insight],"the spread of the
American Syndrome around the Anglo-Saxon world. Briefly,
the characteristics are that household savings ratios have
become depleted while personal borrowing has shot up.
Exposure to the stock market has increased as market-valued
net worth has risen, giving rise to an illusory perception
of increased wealth. In essence, the Atlantic and
Australasian Middle Classes have almost unknowingly been
turned from creditors to debtors and have come to rely on -
indeed to cheerlead - the process of monetary inflation to
bail them out, as debtors have from time immemorial."

Americans will not be disappointed by the Fed's actions.
They will not be crucified on a cross of gold...nor have a
crown of hard dollars pressed down upon their brows. The
Fed will make good on its promises. It will cut rates. It
will increase the money supply. Fannie and Freddie are
ready, too. As reported by Kurt Richebächer,"they have
converted private mortgage debt into government debt at
massive scale...When the credit market tightens, they step
in and create liquidity. Just recently, Freddie Mac
announced,"it expects to issue $90 billion of U.S. dollar-
denominated Reference Note and Bond debt in 2001, implying
a 25% annual rate of growth.'"!

All the expensive, lumbering gear of the Rooseveltian
machine now stands at the ready, prepared to do its
part...to protect and defend the world's most profligate
debtors from the fate they most assuredly deserve.

But will it work? Can you build an economy by destroying
your own currency? Can you get rich by living beyond your
means? Can the Federal Reserve really encourage the
production of new wealth...by offering the public phony
apples?

Stay tuned...


Bill Bonner