-->We The Dead
The Daily Reckoning
Paris, France
Friday, 27 June 2003
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*** Dollar up...Gold down...Bonds down, too...
*** A once-in-a-lifetime opportunity...to sell bonds
*** People still employed. GM borrows big money. Is the
Daily Reckoning witty and intelligent? Or just boring?
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The dollar rose yesterday. Gold lost $5.40. Bonds went
down.
The typical investor poses himself two questions. Are bonds
coming off a top, headed down? And are stocks coming off a
bottom, headed up?
As to the second question, our answer is simple: probably
not. And what does it matter, anyway? You make money by
buying low and selling high. Stocks are high; buying them
now starts you off on the wrong foot.
But to the first question, our reaction is almost
schizophrenic. Yes, well, maybe...perhaps not. We think
U.S. bonds may go up...but we think you'd have to be crazy
to buy them.
"Whereas...the early 1980's provided a once-in-a-lifetime
opportunity to purchase bonds," explains Marc Faber,"the
current period is likely to provide a similar opportunity
to sell bonds."
It may be too early. The Fed may not be able to inflate as
easily as people think. Instead, as in Japan, overnight
rates may eventually drop below zero...as the economy
weakens. A 3% yield may seem like a gift from heaven.
But 10 years from now, Marc Faber elaborates, it will be
totally irrelevant whether you sold bonds at a 3% or a 4%.
In January of 1981, the Fed Funds rate reached over 19%.
Sooner or later, it will head in that direction again.
"If the inflationists, who now have the leadership of the
Fed, and control of the central banks around the world,
have their way," wrote Faber in yesterday's Daily
Reckoning,"a very dangerous economic policy course will be
followed. This will result eventually in sharply rising
inflation rates and a much lower U.S. exchange rate, and
will bring about a disastrous global recession, which could
threaten the capitalistic system as we know it today."
Bonds probably are at an historic top. And no bonds are at
a more historic top than those of Japan - where the yield
has dropped to 0.57% on 10-year JGBs. This is not only a
high for Japanese bonds...it is the lowest return on
government paper ever recorded.
"The Japanese bond market is the short of the century,"
Faber told Barron's. But unlike Japan, he went on,"the
U.S. does not have a trade and current-account surplus. It
has deficits."
Japan, Faber implied, could stomach a little deflation.
Falling prices do little harm to a nation of savers. But
the U.S. has total credit market debt three times the size
of the economy. It cannot bear falling prices; its voters
and industrialists are too close to insolvency already. It
must 'inflate or die'...
"This monetization experiment on a global scale will
temporarily boost economic activity and consumption," Faber
concludes."It will end in disaster."
Meanwhile, we have Eric's cheerful report from the Big, Big
Apple:
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Eric Fry from New York...
- The hopeful masses resumed buying tech stocks yesterday.
That's because buying technology stocks has been a much
more rewarding activity than buying any actual technology
products...(Remember the old days when folks used to buy
PCs and semiconductors and routers, and not just the stocks
of companies who try to sell this stuff?)
- Yesterday, the resurgent Nasdaq Composite climbed 2% to
1,634, while the Dow tacked on 67 points to 9,078.
Government bonds tumbled for a second session, pushing the
yield on the 10-year Treasury note to 3.52%, which means
that the yield on the 10-year note has jumped nearly half a
percent in just 10 days!...Deflation, where is thy sting?
Suddenly - and somewhat disastrously for bond investors -
deflation fears have given way to"recovery fears." In
other words, the expectation of an economic recovery causes
investors to expect higher interest rates in the future,
which causes them to sell today's low-yielding bonds,
thereby driving up interest rates.
- We here in the Daily Reckoning's New York bureau
sympathize with the sellers of bonds, simply because it
seems to us that a 3% return on 10-year government paper is
a miserly compensation for the risk that the bond buyer
must bear - principally, the risk (read: certitude) of
inflation. On the other hand, the bond buyers may not have
completely abandoned their faculties. After all, evidence
of economic recovery is sparse at best.
- Last week's jobless claims, for example, topped 400,000
for something like the 20th straight week. Meanwhile,
factories are still running well below capacity and capital
spending has yet to recover. High-tech widgets are still
gathering dust in many Silicon Valley warehouses.
- But if you think that the"new, new" economy is looking a
little green around the gills, you ought to take a look at
the"old, old" economy - namely General, Motors. This
beleaguered American institution - like a convict on a
chain-gang - continues its fruitless toil. Day by day, it
hammers away at selling cars, but barely makes any money
doing so. Meanwhile, over in the finance division, GMAC
makes a few bucks here and there by lending money to auto-
lessees and to home-buyers (especially to home buyers!),
but then it has to hand most of those profits over to GM
retirees. Is this any way to make a dollar for
shareholders?
- Every day is a struggle. Today, in the largest-ever
corporate bond sale, GM is selling about $17 billion worth
of bonds in order to shore up its foundering pension plan.
"Although GM touted the debt issuance as 'an overall effort
to accelerate improvements in GM's balance sheet and
financial flexibility,' the truth is that GM is merely
substituting one debt, much of it off-balance sheet, for
another debt that remains on the balance sheet," observes a
very skeptical Apogee Research."Can anyone realistically
consider this outcome a positive indicator for GM's future
prospects?...This is nothing more than a red flag signaling
the escalating pension and OPEB obligations are placing a
menacing burden on the interests of common shareholders.
-"Simply put," Apogee continues,"the $17 billion of debt-
raised proceeds is not going toward R&D or product
development or improved manufacturing processes, any of
which might conceivably improve the fortunes of the common
shareholder. Instead, the proceeds will go to support the
growing needs of GM's substantial retiree base."
All together, GM's underfunded pension liabilities total a
staggering $75 billion. Even the largest-ever $17 billion
corporate bond sale, therefore, is literally a drop in the
bucket.
- It's possible, of course, that GM will"pull a Houdini"
and wrestle free of these daunting liabilities. On the
other hand, it's possible that it won't. GM may simply
wriggle and writhe in its financial shackles until drowning
in its own liabilities.
- We wish GM well, and wouldn't dare to predict the mighty
company's demise. But neither would we stand in line to
become a GM equity-holder, as a GM equity-holder, in turn,
must stand at the end of a very long line of pensioners and
bondholders.
- The good news is that GM is only one of the 30 stocks in
the Dow Jones Industrial Average. The other 29 are probably
in much better shape.
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Bill Bonner, back in Paris...
***"Groupies!!!," said Addison yesterday."Let's not let
this opportunity slip by...ask for a photo..."
What had got Addison's attention was a piece of fan mail:
Dear Daily-Reckoning,
I signed up for your daily newsletter b/c I am a young
English major who has somehow ended up in the strange and
getting stranger world of modern finance. I had hoped your
newsletter would help me to learn the ways of finance -
which it has - but Daily-Reckoning, I never thought I would
fall in love.
I find myself spellbound, laughing like a crushed-out 12-
year-old girl as I eagerly read your latest letter.
You guys are dreamy.
Keep up the comical, witty, intelligent work.
Love,
Wendy
Dear Wendy, we respond, keep the letters coming. You are a
very perceptive young woman.
*** But our mailbox brings bad news as well as good...
"Gentlemen,
I agree with your daily/weekly news...but these are NOT at
all NEW. You are repeating always the same in a 100-fold
way. And that is rather extremely b o r i n g...
You are not specific in the themes and everything is said
in a broad"souse" that always has the same taste. Richard
Russell was recommending you but with the time I guess its
everywhere exactly the same item. At least, if you could
relate some special events...but its everytime the same
BLABLA.
Aren't you ashamed to send just a such uninteresting
garbage?
Truly yours, Carlos from Germany (Chilean)"
Well, we reply, what do these silly foreigners know. Our
blabla is at least as interesting as anyone else's. And
besides, it's cheaper!
*** But then comes another critic with the same complaint:
"The problem with the Daily Reckoning," it begins,
ominously...
"The Sky is falling!
"Buy gold!
"Thus spake the DR every day. Now I recognize that the sky
is falling and I probably will buy gold fairly soon. (But I
don't think it has quite bottomed yet) But the problem with
the DR is that this repeated message gets boring.! B-O-R-I-
N-G!
"...How come the DR has developed into perpetual criticism
without some suggestions as to what the governments
could/should do first to prop up this falling sky and then
ultimately to raise it to the heavens? That's both my
question and, if Bonner reads this, a suggestion for future
DRs.
"David"
Oh là là , David, you ask too much. If the government could
hold up the sky...or if we could tell them how...what would
be left for God to do?
*** And one more:"Enough about China already!" writes a
reader on the Daily Reckoning website discussion board.
"China is a LOT weaker than many people suspect," the
writer continues."The country is in the midst of a major
bubble economy right now, but the banking system is an
absolute mess, and corruption is rampant. The real-estate
markets in Beijing and Shanghai are starting to look
ominously like the Tokyo and Osaka markets of 13 years ago,
many new developments have high vacancies already.
"More importantly, the underpinning of the Chinese economy
is the willingness of foreign consumers to keep going
deeper into debt buying goods. Mark my words, when the USA
and Europe descend into a deep recession, China will be
squealing like a stuck pig."
"The longer the [Chinese] government applies the
reflationary policies of 1998 and 1999 to an economy that
is already overheating," agreed the Financial Times back on
June 4th,"the more it jeopardizes the sustainability of
its new-found growth momentum. If Beijing does little to
reduce its balance of payments surplus and money supply is
allowed to surge unchecked, China could find itself
creating an investment bubble akin to Japan's at the end of
the 1980s."
One way to reduce the trade surplus with the U.S. is to
float the renminbi...
"I can't see the Chinese jumping at a float right away,"
said Chuck Butler, our friend from the Everbank World
Currency research team, to Thom Calandra yesterday."It has
no value for them. But, says Butler,"I believe the
governments of the U.S., Europe and Japan will be applying
pressure to float the currency. This, I believe, will
happen. How soon, is the question. Could be a month. Could
be 12 months."
[Ed note: We told you about Porter's China Strategy Report
on Monday. If you're looking for an alternative way to
seek gains from a revaluation of the Chinese currency,
Everbank announced the opening of Chinese Renminbi Deposit
Accounts earlier this week - the first account of its kind
available to U.S. citizens.
You can call Chuck Butler or Frank Trotter at the Everbank
Trading desk: 1-800-926-4922 (If you call this week, you'll
only get Frank...Chuck is out of the office today for his
daughter's wedding.) Or you can visit the Everbank World
Currency website at:
http://www.everbank.com/main.asp?affid=eb&idpage=pro_wc&referID=1555
Tell them Addison sent you. In the interest of full
disclosure, please note that Agora Inc. (our publisher) has
a commercial relationship Everbank and may receive
compensation if you open an account. Still, Everbank offers
some of the best ways we know of to diversify your money
safely out of the dollar.]
More, vintage Bill Bonner below...
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The Daily Reckoning PRESENTS: Bill Bonner, summoned from
the great beyond.
WE THE DEAD
By Bill Bonner
The wind blows where it chooses, and you hear the sound of
it, but you do not know where it comes from or where it
goes.
- Jesus of Nazareth
John [3:1-16]
Here, we pass along an email that came to us yesterday, in
response to our"Dead Men Talking" column of last week. Is
it authentic? We cannot say...we can only hope.
Dear Mr. Bonner,
I write on behalf of all of us here in this little corner
of Hell - Helferrich is here. Ya...and Havenstein too. He
was the guy in charge of printing the money in Germany,
1919-23. And Ben Strong is here, too...forever boring us
with his little tale of how he gave the markets"a little
coup de whiskey" and brought on the Great Depression...and
John Law, always trying to get up a poker game...and, of
course, everybody's favorite schemer, Charles Ponzi.
You hit a raw nerve last week. Well, all of our nerves are
a little raw...but a constant gripe in these parts is this:
We sacrificed our very souls...and now we roast in eternal
torment - and for what? Yes, when we were living, we all
did the wrong thing; we freely admit it. And now every one
us pays the price. (Nothing comes in life without
conditions attached, we discovered.) But what good is it
for God to make a moral example out of us if no one pays
attention?
Believe it or not, we read the papers and watch CNBC down
here. [It is part of our torture!] It seems as though every
central banker in the world has taken the devil's bait. The
bankers create money, 'out of thin air,' as if they knew
what they were doing. As if had been not be tried by every
one of us...as if there were anyway to get away with it.
Here, we know what we are talking about; every sorry one of
us learned the hard way: you can't get something for
nothing.
But let us change the subject. These doom and gloom
opinions are boring, your readers tell you. So we dead men
will speak of other things. You see, we have learned a
thing or two. And if you - whose hearts still beat - would
take a minute to listen to us, you might learn something.
That is what really galls us. That each generation seems to
think it is the first to stand upright. It is as if its
mothers and fathers walked on four legs and howled at the
moon!
Even when you feign admiration for same fallen forebear, it
is usually without paying a lick of attention to what the
poor schmuck actually said...or knew. We leave you our
memoirs, our gospels, our histories and constitution - for
what is a constitution but a pact with the dead? - and you
ignore them, choosing instead to watch the latest brain-
fogging episode of Survivor on TV! You seem to believe that
all that we suffered, all we went through, all the mistakes
we made, had no more interest to you than a comment by a
sun-struck contestant in a bikini:"this
is...like...weird..."
A dead man, Edmund Randolph of Virginia, attended the
Constitutional Convention in Philadelphia in 1789. He
explained why America needed a constitution:
"The general object was to produce a cure for the evils
under which the United States labored; that in tracing
these evils to their origins, every man had found it in the
turbulence and follies of democracy."
Another dead man, James Madison, made it even clearer:
"Democracies," he wrote,"have ever been spectacles of
turbulence and contention; have ever been found
incompatible with personal security or the rights of
property; and have in general been as short in their lives
as they have been violent in their death."
So, we leave you"a Republic, if you can keep it," added
Ben Franklin.
Well, you couldn't keep it. And now, people who call
themselves"neo-conservatives" are pushing democracy on the
entire world. These men are supposedly inspired by another
corpse, Leo Strauss. But why do they not listen to the man?
"Democracy has not yet found a defense against the creeping
conformism and the ever-increasing invasion of privacy
which it fosters..." wrote Strauss when he was still above
room temperature.
Democracy inevitably leads to a corrosive
egalitarianism...there are hundreds, millions of us down
here to testify to this...a soul-deadening conformity that
Alexis de Tocqueville called"the tyranny of the majority."
The dead men who wrote the Constitution clearly wanted to
help you avoid this tyranny...and the evils that come from
it. For example (returning to the topic which got so many
of us into trouble) they intended for money to be a unit of
gold or silver. It was not something that you could 'create
out of thin air.' By the way, those guys had experience
with printing press money. They had lived through it. They
knew what happened to paper money. You've heard the
expression 'not worth a continental.' Well, continentals
were the paper money printed during the Revolutionary War.
We don't remember how much they were worth, but the phrase
suggests that there was not much that was worth less!
The Constitution also bound the politicians in matters of
war; they couldn't make war without a formal, solemn
declaration. And then they had to raise the money and the
troops to fight it. That was the dead men's wisdom,
intended to spare the nation the near-constant wars of
Europe. But these same neo-cons I mentioned above have made
not just one, but two wars, in the last 2 years. Neither
time did they pay any attention to the Constitution. And
now, they have U.S. soldiers getting gunned down and blown
up all over the place. While Europe is at peace, America
seems ready to go to war with half the world.
What is wrong with these neo-cons? We read a recent
description of the state of the union by Congressman Ron
Paul. Just look at what these men have made of the nation
we dead men left them:
"As our republic crumbles, voices of protest grow louder.
The central government becomes more authoritarian with each
crisis. As the quality of education plummets, the role of
the federal government is expanded. As the quality of
medical care collapses, the role of the federal government
in medicine is greatly increased. Foreign policy failures
precipitate cries for more intervention abroad and an ever-
great empire. Cries for security grow louder, and concern
for liberty languishes!
"Attacks on our homeland prompt massive increases in the
bureaucracy to protect us from all dangers, seen and
imagined. The price goal and concern of the Founders, the
protection of liberty, is ignored. Those expressing any
serious concern for personal liberty are condemned for
their self-centeredness and their lack of patriotism."
But the days of the American constitutional republic are
long over. The neo-cons claim that they are bringing
Wilsonian democracy to the entire world. Somehow, they seem
to know that this is what the world wants and needs.
Everybody gets a vote in this new Democratic Valhalla.
Every half-wit's ballot is worth as much as George W.
Bush's. Every fool and moron gets to have an opinion. Only
we, the dead, are left out. Excluded. Ignored. Forgotten.
It is as if only the living had opinions worth hearing...as
if only the here and now counted for anything. As if this
small, arrogant oligarchy of those who happen to be walking
around had all the questions and all the answers. The very
idea is absurd. If the present generation could have found
the Ultimate Truth and reached the End of History...why
couldn't the last one? Or the one before?
The neo-cons must have never even read the constitution.
But they listen to poll results as if they were hearing
whispers from God Himself. Thus have they broken the sacred
pact with their own dead ancestors.
And here, in this especially hot and putrid corner of Hell,
we stoke the fires and prepare to scorch their fat
derrières!"
The letter is unsigned.
Bill Bonner
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