The Daily Reckoning

verfasst von - ELLI -, 12.11.2002, 13:23

-->The Daily Reckoning

Baltimore, Maryland

Monday, 11 November 2002

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

*** Is history repeating itself? Maybe...a 6 to 9 month
rally?

***"I could increase my standard of living too...if I
borrowed a million dollars. But what about when I had to
pay it back?"

*** Dow up last week. But the dollar fell. Gold and gold
stocks rise as investors wonder about the 12th rate cut -
what makes it better than the last 11? Terrorism and
generals...and boyfriends...

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

"Is history repeating itself?" asked a headline at
CNNMONEY.

The mainstream financial press is beginning to notice the
similarities between Japan and the U.S.

Your editor laid a few of them before the crowd at the
New Orleans Investment Conference where he was a speaker:

Between '71 and '85 Japanese stocks rose 500%. Then in
the next 5 years, they went up at an even faster rate -
tripling again by the end of the decade.

Ten years later, Wall Street followed, with stocks up
about 500% from '81 to '95, and then tripling in the 5
years, '95-'00.

In January of '90, the Japanese stock market headed down
and had lost 30% of its value 18 months later.

In January (depending on what measure you use) '00, U.S.
stocks entered a bear market. They were down about 30% 18
months later.

Japanese householders never went so deeply into debt as
their American counterparts, but the trend lines headed
in the same direction. Savings rates in Japan fell 10
points during the boom, from about 20% down to 10%. In
America, they fell 10 points too, but from near 10% down
to near zero. In both countries, businesses and
individuals borrowed more than ever before.

"There is no mystery to what is happening today,"
explained Doug Casey in his New Orleans speech."The
president and the Fed have urged Americans to spend,
spend, spend in order to keep the economy going. This
advice is so bad it's almost criminal.

"Here is how it works. You get rich by saving, not by
spending. You produce something in order to get revenue.
And you spend money in order to live and do your work.
The difference is what makes you rich.

"I can go out and borrow a million dollars. And if I
spend it, my standard of living will go way up. But when
I have to pay it back, my standard of living will go way
down...

"Americans are now at the stage where they're going to
have to pay it back."

In both Japan and America, the bubbles were accompanied
by all the usual rational explanations and folderol. The
Japanese were all business geniuses in 1989. Ten years
later, Jack Welch, Ken Lay, Jeff Bezos, Robert (?)
Kozlowski and Michael Saylor were the geniuses and people
who had bought their stocks thought they were better
investors than Warren Buffett.

And in both instances, neither the public nor the experts
were prepared for what happened next. 'It is just a
temporary slowdown,' said the experts on Japan in 1991.
'It will all be over by summer,' said the experts on
America in 2001.

But stocks did not go straight down and stay there.
Instead, the two stock markets staged a series of
alluring rallies - each one helping to convince investors
to stay in stocks a while longer.

"If you look at the charts of almost any of these post-
bubble price movements, you find the same pattern,"
warned Ian McAvity in his talk."You see a powerful rally
developing at this stage that should last for the next 6
to 9 months. That is what we're seeing on Wall Street
now, the beginning of this rally.

"But remember, it's a rally in a bear market. The high
hit in the next 6 to 9 months will probably be the high
for the next 10 years."

Eric Fry was down in New Orleans with me. But he's back
on the job in New York this morning, with more stock
market news:

--------

Eric Fry, reporting from the Big Apple...

- Last week, the stock market showed once again that"it
is better to travel hopefully than to arrive." Hopeful
investors bid share prices higher early in the week as
they eagerly awaited both the midterm election and the
first interest rate cut of the year from the Fed. Once
these events actually arrived however, the stock market
headed lower.

- Despite the Republican's surprising landslide-victory
and the Fed's surprisingly aggressive half-percent rate
cut, stocks ended the week almost exactly where they
started. The Dow gained 20 points to 8,537, while the
Nasdaq added one point to 1,359.

- The U.S. dollar, meanwhile, did not even enjoy the
transitory pleasure of traveling hopefully. It tumbled
below parity, with the euro to 101.3 cents per euro. Gold
responded to the greenback's weakness by climbing $2.50
to $321.70 per ounce.

-"This is the bottom for gold," Doug Casey declared from
the podium yesterday at the New Orleans Investment
Conference."It's not just going through the roof; it's
going to the moon! This is the big one."

- Casey bases his prediction on what he considers the
inevitable demise of the U.S. dollar - the currency he
calls"a floating abstraction." Bearish predictions for
the dollar are par for the course from folks like Casey
and Robert Prechter. But now, even an incorrigible
optimist like Sir John Templeton, who rarely neglects to
praise America's economic prowess, is joining the ranks
of dollar skeptics. Speaking to the conference attendees
live via satellite from his home in the Bahamas,
Templeton called the prospect of a rapidly weakening
dollar the"single greatest threat" to U.S. economic
prosperity.

-"The biggest risk to the U.S. economy is its
unfavorable balance of trade," Templeton warned."No
country has ever had such an unfavorable balance of
trade. If foreigners get nervous, they could start to
sell the dollar aggressively, and the results could be
catastrophic."

- The entire U.S. Daily Reckoning brain trust - Bill,
Addison and myself - convened in New Orleans last week
for the annual New Orleans Investment Conference. During
the four-day blitzkrieg of investment presentations, the
various speakers fired off a broad range of ideas and
insights. But no matter the speaker, one recurring theme
emerged: the dollar is in trouble.

- On the very first morning of the conference, the Daily
Reckoning's own Bill Bonner took the podium to explain
the"bright side" of the dollar's demise - gold will go
up! Bill prefaced his remarks by adamantly refuting his
"sourpuss" reputation. He encouraged all the attendees to
"look on the bright side of things...like we do at the
Daily Reckoning."

-"I think it's likely," Bill cautioned,"that the U.S.
over the next ten years will follow in Japan's economic
footsteps. Our economy will struggle to grow and our
stock market will probably continue sliding. But let's
look on the bright side," he said."A severe economic
contraction isn't all bad. After all, during the great
Depression of the 1930s you could walk into any one of
the finest restaurants in New York City and get a table
without a reservation."

- Bill also suspects that the dollar's value will drop
dramatically over the coming decade."But again," he
pleaded with the attendees,"Let's look on the bright
side. A falling dollar would be a great thing for gold!"

--------

Back in Baltimore...

*** GE fell 4% on Friday, while the price of gold rose
$2.90 last week (gold mining shares rose 5.4%). The
dollar dropped sharply too, as Alan Greenspan and the Fed
continued their march to zero. In fits and starts, the
trends that we thought had to happen 'sooner or later,'
are happening...later than we expected.

*** Remember the days when GE would announce earnings of
'a penny more than forecast' almost every quarter. Jack
Welch was a hero. Money was all-too wonderful during the
boom years; even an extra penny was enough to send GE
shares up.

But busts follow booms, geniuses become morons and money
isn't everything, we remind ourselves. It is a little
late to offer advice, but Welch might have done better to
retire a little earlier, with a little less of it...and
give it a little more readily to the wife he was trying
to get rid of. If he had, he might still be a hero,
rather than a greedy cad.

*** Today, at the 11th hour of the 11th day of the 11th
month, Britain will observe 2 minutes of silence in
commemoration of the armistice in Europe at the end of
WWI. The war was a disaster from nearly every
perspective. Neither the Allies nor the Central Powers
had anything to gain. Still, the soldiers pounded away at
each other for years - in the most costly and lethal
conflict in history. No one knew why the war began. No
one knew why it continued. And when it was over, no one
knew what had been gained. More below...

***"You're full of sh**," said a dim fellow in a white
leisure shirt to your editor at the New Orleans
conference. What had set him off was not money, but
politics.

Among the speakers at the conference was General Hugh
Shelton, retired head of the Joint Chiefs of Staff. The
old soldier seemed like an intelligent and decent man.
But like all good soldiers, he is almost as big a
blockhead as the man in the white shirt.

We do not say that to criticize. Far from it;
blockheadedness is what we admire in a military man. It
is all very well to kibbitz and canoodle, the way we do
here at the Daily Reckoning, but in a shooting war, the
last thing we want is a man who asks sticky questions.
Instead, we want a real blockhead doing the shooting for
us.

A real fighter goes about his work the way a fat man
devours a cream puff. He doesn't stop to wonder if it
would be a good idea...or if there might be some better
way to do it. He just stuffs it in his mouth and goes on
to the next one with no thought of sparing himself.

"Fighting terrorism is not a matter of black or white," I
had said to the man in the white shirt before he raged
off."There is a lot of gray in it."

Of course, there is so much gray in our lives, who can
blame a man for wishing it were otherwise? How much
simpler it would be if it really were 'us' against
'them,' boom or bust, black vs. white, good vs. evil,
bear vs. bull? And how much better it would be if we
could tell the difference?

A good soldier doesn't worry about it; he goes straight
at the enemy without an arrière pensée in his brain. But
the trouble with many is not that they don't have second
thoughts, but they often don't have the first one either.

"Indirection," wrote the great military strategist,
Liddell Hart, is the key to success. The direct approach
rarely works, he points out. Instead, what works is the
same thing that works with investing - hitting 'em where
they ain't, where they least expect it. But this requires
a supple, innovative mind and a contrarian attitude. The
great generals - Napoleon, Guderian, MacArthur, and
Stonewall Jackson - were capable of it. But most military
men are not. They are good at fighting wars, but bad at
winning them.

***"Well, what do you think?" Sophia, my 20-year-old
daughter, has a new boyfriend. Maria and I met him on our
trip to West Virginia.

Your editor didn't know what to say. He felt as though he
had been asked to make an important market call and was
not sure how long he have to live with it.

He was tempted to give a frank assessment, but decided to
hedge.

"Well, he seems nice enough."

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

The Daily Reckoning Presents: A DR Classique, written
three years ago today.


ARMISTICE DAY
by Bill Bonner

"Like a wet, furry ball they plucked me up..."

-- Rupert Brooke

In August 1914, millions of young men began putting on
uniforms. These wet, furry balls were plucked from towns
all over Europe...put on trains and sent towards the
fighting. Back home, mothers, fathers and bar owners
unrolled maps so they could follow the progress of the
men and boys they loved...and trace, with their fingers,
the glory and gravity of war.

I found one of those maps...with the front lines as they
were in 1916 still indicated...rolled up in the attic of
our house in France. I looked at it and wondered what
people must have thought...and how horrified they must
have been at what happened.

It was a war unlike any other the world had seen. Aging
generals...looked to the lessons of the American war
between the states...or the Franco-Prussian war of
1870...for clues as to how the war might proceed. But
there were no precedents for what was to happen. It was
a new era in warfare.

People were already familiar with the promise of the
machine age. They had seen it coming, developing,
building for a long time. They had even changed the
language they used to reflect this new understanding of
how things worked. In his book,"Devil Take the
Hindmost," Edward Chancellor recalls how the railway
investment mania had caused people to talk about
"getting up steam" or"heading down the track" or"being
on the right track". All of these new metaphors would
have been mysteriously nonsensical prior to the
Industrial Age. The new technology had changed the way
people thought...and the way they spoke.

World War I showed the world that the new paradigm had a
deadly power beyond what anyone expected.

At the outbreak of the war, German forces followed von
Schlieffen's plan. They wheeled from the north and drove
the French army before them. Soon the French were
retreating down the Marne Valley near Paris. And it
looked as though the Germans would soon be victorious.

The German generals believed the French were broken.
Encouraged, General von Kluck departed from the plain;
instead of taking Paris, he decided to chase the French
army, retreating adjacent to the city, in hopes of
destroying it completely.

But there was something odd...there were relatively few
prisoners. An army that is breaking up usually throws
off lots of prisoners.

As it turned out, the French army had not been beaten.
It was retreating in good order. And when the old French
general, Galieni, saw what was happening...the German
troops moving down the Marne only a few miles from
Paris...he uttered the famous remark,"Gentlemen, they
offer us their flank."

Galieni attacked. The Germans were beaten back and the
war became a trench-war nightmare of machine guns,
mustard gas, barbed wire and artillery. Every day,"The
Times" (of London) printed a list of casualties. When
the generals in London issued their orders for an
advance...the list grew. During the battle of the Somme,
for example, there were pages and pages of names.

By the time the United States entered the war, the poet
Rupert Brooke was already dead, and the life expectancy
for a soldier on the front lines was just 21 days.

One by one, the people back at home got the news...the
telegrams...the letters. The church bells rang. The
black cloth came out. And, one by one, the maps were
rolled up. Fingers forgot the maps and clutched
nervously at crosses and cigarettes. There was no glory
left...just tears.

In the small villages of France hardly a family was
spared. The names on the monument in the center of
town...to"Nos Heros...Mort Pour La France" record
almost every family name we know - Bremeau, Brule,
Lardeau, Moreau, Moliere, Demazeau, Thollet...the list
goes on and on. There was a bull market in death that
did not end until November 11, 1918...at 11 A.M.

For years after...at 11 A.M., the bells tolled, and even
in America, people stood silently...recalling the
terrible toll of four years of war. Now it is almost
forgotten.

We have a new paradigm now. And a new war. The new
technology has already changed the language we use...
and is changing, like the railroads, the world we live
in. We think differently...using the metaphor of free-
wheeling, fast-moving, networked technology to
understand how the world works.

We are fascinated by the new technology...We believe it
will help us win wars with few casualties, as well as
create vast new wealth...and a quality of life never
before possible.

And yet, we are still wet, furry balls, too.

I will observe a moment of silence at 11 A.M.

Bill Bonner

P.S. The effects of WWI lasted a long, long time. In the
1980s, my father got a small inheritance from his Uncle
Albert."Uncle Albert?" I remember my father saying.
"Who's Uncle Albert?" The man in question was indeed an
uncle...but he had been forgotten for many years. A
soldier in WWI, Albert had suffered a brain injury from
an exploding bomb... and never recovered. He spent his
entire adult life in a military hospital.

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is the place to find it.

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commentary available anywhere and presented it to you
all in one place. Take a look:

http://www.dailyreckoning.com/marketplace.cfm

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• The Daily Reckoning - - ELLI -, 12.11.2002, 13:23