The Daily Reckoning / ist das überhaupt interessant? Oder soll ich´s lassen?

verfasst von - ELLI -, 18.11.2002, 23:54

-->ACT III

The Daily Reckoning

Paris, France

Monday, 18 November 2002

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

*** Now Bush can fix the global economy...

*** Stocks still rising...industrial output falling...

*** Goodbye Jeff! Mugged on the subway...and more!

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

Our eyes lit up when we saw the headline in the weekend
International Herald Tribune.

"Get serious about the threat of a credit collapse," says
the editorial page article. The secret of editorial
writing is to announce a heartfelt opinion about
something which is none of your business and about which
you know nothing. David Ignatius, listed as the paper's
executive director, is especially good at it...in the
sense that his editorials are particularly ridiculous
and, therefore, entertaining.

Thanks to the recent election results, opines Mr.
Ignatius,"Bush now has the political power to fix
important things that are wrong - not just in Iraq, but
in the global economy."

Heck, with Congress behind him, he could probably fix a
few things here in France, too - such as all the dog poop
on the sidewalks...and the crime problem. (About which,
more below...)

And maybe with a few more votes, he could do something
about the weather, too.

There is no question in our minds about whether the
American president can perform the miracle that Ignatius
imagines, but what puzzles us is what he thinks Bush was
waiting for? Who was there in Congress who didn't want
him to 'fix' the global economy? Not even a Democrat
would stand in the way of that.

No matter. Whoever was barring the route to worldwide
prosperity is now out of the way. Now, the greatest
American president since Bill Clinton can"get serious"
about the threat of a credit collapse. But what can he
do?

Ignatius makes a couple of lame suggestions - such as
"finding a serious financial expert to succeed Harvey
Pitt." And now"Bush has the clout to impose real
regulation on Wall Street and thereby restore confidence
in the global financial system."

If only that were all there was to it! Ignatius notes
that bond defaults in the last 2 years have exceeded the
total of the previous 20 years. Will 'real regulation'
suddenly make the bad bonds worth something?

"To oversimplify," warns Stephen Roach,"assets are about
today. Liabilities are about tomorrow." In the heyday of
the bull market, people seemed to care only about assets.
They were going up...and it didn't seem to matter about
tomorrow. You could promise anything you wanted...borrow
as much as possible...spend like tomorrow would never
come.

But, oops, here it is - tomorrow. It's the post-bubble
economy...with a serious case of post-party blues.

The liabilities were based on unrealistic growth
expectations, says Roach. Pension funds, insurance
companies, stockholders, bondholders, money-market funds,
mutual funds - all are suffering.

And not just in America.

Japan has an estimated 47 trillion yen worth of non-
performing loans.

In Germany, nearly one out of every three insurance
companies is expected to go broke.

And in the U.S.,"as bad luck would have it," Roach
continues,"the retirement of 'baby boomers' has
commenced at just the point when the post-bubble mark-
down of asset returns has occurred... There can be no
escaping the endgame..."

The standard of living will fall in America, Roach
believes, while the U.S. government tries to reflate.

Unless Bush can make it yesterday again.

Over to you, Eric...

---------

Eric Fry, reporting from New York...

- The Dow Jones Industrial Average is advancing like a
1950s football team -"three yards and a cloud of dust."
The blue chips aren't gaining ground very quickly or very
artfully, but they are gaining ground nonetheless.

- Last week, the Dow added 42 points to 8,579."[That's]
just 41 points above where it sat on Oct. 21," Barron's
observes."Since that date, the market has paced between
8,317 and 8,771, a mere 5% range that passes for stasis
in a viciously volatile year." The Nasdaq Composite
outpaced the Dow last week by jumping 3.8% to 1,411.

- While stocks moved ahead, bonds, gold, oil and the
dollar all retreated. Spooked by the faint apparition of
a recovering economy, investors dumped long-term Treasury
bonds to hide out in short-term T-bills and money market
funds. The yield on the 10-year Treasury jumped back
above 4% to finish the week yielding 4.02%.

- Adding fuel to the selloff was the surprising news that
wholesale prices in October registered their biggest
increase in nearly two years. The producer price index
spiked 1.1% last month, which temporarily silenced all
the chatter about deflation. So far this year, producer
prices have risen 2%, more than reversing the 1.6%
decline recorded in 2001.

- Earlier this week, Alan Greenspan characterized the
prospect of inflation as"remote." Maybe so, but the
possibility seems somewhat less remote when producer
prices jump 1% in a single month.

- Still, the inflation/deflation debate rages on, and the
economy generously offers a little something for both
points of view. Those in the deflation camp can point to
this week's industrial production report. Industrial
output tumbled 0.8% in October, the third consecutive
monthly decline. Meanwhile, capacity utilization dropped
0.6% to 75.2% - its lowest level since March. Not
surprisingly, therefore, inventories are once again on
the rise. (See also:"Fry just doesn't get it...Bill is
correct" on the Daily Reckoning Discussion Board:
http://www.dailyreckoning.com)

- These dismal economic reports did little to dissuade
the bullish hordes from buying stocks on Friday."Buy the
dip" is back in vogue. The trading pattern in the market
these days goes something like this: A major item of bad
news crosses the newswires, Dow dives 50 points, more bad
news crosses the wires, Dow dives another 50 points,
stocks thrash around for a few hours, stocks rally into
the close of trading.

-"What's interesting is [investors'] willingness to buy
below a certain price range regardless of bad news,"
writes Adam Lass, editor of the Q-Wave, the highly
successful option-trading service. Such nonsensical
buying has created a market with a split-personality.

-"My compadre, Brit Ryle, called the market
'schizophrenic' in a recent Taipan Trader alert," Lass
writes in a Friday communiqué to subscribers."This term
is frequently used erroneously to describe a person - or
in our circle, a market - suffering from a split
personality. Schizophrenia actually describes a group of
psychotic reactions characterized by withdrawal from
reality with accompanying affective, behavioral and
intellectual disturbances.

-"However, I do think Dementia Praecox (as Schizophrenia
was known in the bad old days) is quite the appropriate
term for this market. Surely the past two days' rally on
the news that Iraq was conceding to the UN's demands was
an escape from reality. Think about it: Tariq Azziz has
issued that press release so many times over the past
decade, all he does now is Xerox it and scratch out the
dates."

- Adam and his partner Bryan Bottarelli expect the market
to break out of its trading range fairly soon...by
heading south. Still, these flexible traders are not
hesitant to reverse their outlook, if their indicators
suggest a different course of action. (To learn more
about the keys to their success, see:
http://www.agora-inc.com/reports/QWV/SecureFuture)

- A heartfelt Daily Reckoning farewell to Jeffrey
Applegate, the latest cardboard-cutout strategist to lose
his cushy Wall Street job. The perennially bullish
Applegate was but one of 500 employees culled from the
herd over at Lehman Bros. Last month, as you may recall,
Credit Suisse First Boston dismissed its own optimistic
market guru, Tom Galvin. And last week, Merrill's glass-
half-full chief economist Richard Steinberg lost his job.

- Applegate, a strategist of no particular distinction,
tried to distinguish himself throughout the 1990s by
monotonously predicting much higher prices for the stock
market, no matter how high the market had already
climbed. For a while, of course, he was a"genius." But
his genius peaked sometime around March of 2000. Bullish
to the bitter end, Applegate currently recommends that
investors dedicate 80% of their portfolios to stocks -
that's one of the highest percentages on Wall Street.

- We will miss Applegate's woefully misguided forecasts.
And we will especially miss the smug confidence with
which he espoused his views, coupled with the arrogant
disdain he cast upon anyone who disagreed with him...Fare
thee well, Jeff!

----------

Back in Paris...

*** Paris can be a tough city for a teenaged boy. Jules,
14, grew tall over the summer, but he is as thin as a 10-
penny nail. Yesterday, he was mugged on the subway. His
report:

"I was with Igor and François. We were on our way to
Igor's house on the RER (one of the subway systems). We
got out at the station and these two Arab guys started
giving us a hard time. One of them was real big and
looked mean.

"We tried to joke with them and get rid of them. But the
station was deserted.

"They stopped us and the big one said, 'Let me have your
wallets.' It was almost as if he were joking, but then he
said, 'You don't want me to get out my knife.'

"Igor gave him some money. He asked me if I had a
cellphone. I said I didn't.

"The other guy told François to give him some money. But
François must have been a little slow to get out his
wallet or something, because he punched him in the
stomach. Then, they left.

"So, we went to the police station and explained what had
happened. The police said something like, 'Those dirty
Arabs are at it again.'

"They put us in the police car and drove around asking us
to look for the guys. And, they were such morons; there
they were standing right there in front of the métro
station waiting for their next victims.

"So, the police stopped and arrested them. The Arabs were
really nasty and called the policemen a lot of names, but
the police didn't seem to pay attention. I thought they
were going to beat them with their clubs or something.
Instead, they just brought them back to the police
station and when they got there, one of the policemen
recognized them.

"'Hey, this is the guy we arrested yesterday...' he said.
They had caught him on Saturday. Those guys had been
arrested 10 times. But they just let them go.

"We filled out our complaints and left.

"Then, when we were on our way home, we saw two Arab guys
standing in the métro at Trocadéro. They saw us and
started coming towards us. We just turned around and ran
in the other direction."

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

The Daily Reckoning PRESENTS: What difference a year
makes, huh? 363 days and 75 basis points later, earnings
and the economy are still looking beleaguered. This DR
Classique was originally broadcast on November 16, 2001.

ACT III
by Bill Bonner

"Economists say America is unlikely to follow into
Japanese-style deflation," said a recent Wall Street
Journal article,"because U.S. leaders reacted to their
slowing economy much more quickly than Japanese leaders
did..."

Oh?

The question bores most people. But here at the Daily
Reckoning, it haunts us like an unsolved crime.
Spectators, we sit on the edge of our chairs to see what
will happen next.

The U.S. economy seems to us to be following a script
written in Japanese. With only an occasional
improvisation, and a broad allowance for cultural
differences, the essential dialog in America 1995-2001
has been very much that of Japan 1985-1991.

The plot was much the same - hotshot new era meets cold
realities of marketplace.

The love interest was identical - investors fell head
over heels for financial assets, and abandoned all sense
of reason or dignity, and made fools of themselves... The
first couple of acts were similar...with rising action in
the investment markets and a climactic sell-off.

But now, the curtain has gone up on Act III...and our
American audience expects a twist. Unlike the dumb
Japanese, U.S. investors and consumers will be saved by
the prompt action of the hero, Alan Greenspan, they
believe.

Greenspan, wielding his rate-cutting sword, has chopped
off 450 basis points in 10 months, while it took the
Japanese central bank more than 4 years to do so.

Bullish economists think his speed will be decisive. We
are less sure. But then, we see an economy that suffers
from too much credit, not a shortage of it. So we doubt
that giving it more credit, more quickly than the
Japanese did, will make any difference.

Anything could happen, of course. But the Japanese
analogy has worked well enough so far. We'll stick with
it.

Most economists, says Dr. Kurt Richebächer in his latest
letter, reject the idea that America might follow Japan
with a prolonged period of economic stagnation. But these
are the same economists who saw no downturn coming the
first place...and who expected lower rates to have
already perked up the U.S. economy by the 2nd quarter.

Each month, they push back their estimate of when the
upturn will happen.

Now that short-term rates have hit 2%, stocks have
rallied for a couple weeks, new unemployment claims are
down for 3 weeks in a row, and bonds are turning
down...these economists, analysts and investors think the
worst is behind us.

But,"in April 1992, as the Nikkei appeared to be hitting
bottom at 17,000 [from a high of 39,000 a year and a half
earlier]" the Wall Street Journal reminds us,"a
consensus of a dozen top forecasters still foresaw
Japanese economic growth for the following year at
between 2% and 3%. It ended up growing at 0.4%. Today,
the Nikkei hovers around 10,000 and the Japanese economy
is back in its fourth recession of the past decade."

Most economists have no idea when the market will turn
up, because they have no idea why it turned down. They
believe lower rates can restore economic activity to
former levels. But as pointed out yesterday, rates are
already below zero in real, inflation-adjusted terms.

And, as mentioned here many times, while it took the
Japanese longer to get there, short term rates in Japan
have been"effectively zero" for more than 5 years.

Does ineffective medicine work better because it is
administered faster?

There are 3 possible effects from lower rates:

They could do the economy some good.
They could do it some harm.
Or, they could do nothing at all.

In Japan, lower rates seem to have done as much harm as
good."Plentiful credit is financing stagnation," reports
the Wall Street Journal,"banks use cheap credit to keep
ailing companies on life support."

That's why, even 12 years after a stock crash,
bankruptcies are hitting record highs in Japan. These
companies should have given up the ghost long ago. Easy
credit has not cured what ailed them...it merely
stretched out the period of suffering.

Ignoring the actual experience, economists turn to
theory. Since the Hoover administration, they have
counted on lowering interest rates and cutting taxes to
boost economic activity, thus putting more dollars in the
hands of people who would spend them.

But consumer spending does not really make people richer.
Consumption is the end result of getting richer...not the
means to it. Real prosperity results not from
consumption, but from its opposite - forbearance. It is
the capital that is not consumed - the savings - that
determine how quickly a society gets rich.

Savings can be invested in capital improvements that
produce more and better products...and give investors a
profit. These profits are the key to everything. They
tell us that the effort was worthwhile - that the
investment is paying off, making people wealthier. They
encourage the business to hire more workers...and spend
more on new plant and equipment.

The"old economists", says Dr. Richebächer, knew this.
But the new ones seem to have forgotten.

"Ever since Adam Smith published his 'Inquiry into the
Nature and Causes of the Wealth of Nations' more than 200
years ago," he writes,"it was undisputed doctrine that
there is but one single route towards economic growth and
the creation of wealth - through saving and capital
accumulation in tangible, income-yielding assets.

"Rising capital investment is the one and only component
in the economy that pulls up with it everything else that
matters in the process of creating growth and prosperity:
capacity, production, productivity, output and consumer
income..."

Of attempts to induce prosperity by making more consumer
credit available, he adds,"only in the alphabet does
consumption precede production. But that is what every
president and every Fed governor has done in America
since the Great Depression." The result?"This country's
economy is geared to rising consumption," Richebächer
quotes Simon Kuznets from a 1961 book,"and our
institutions and patterns of social behavior encourage
higher consumption per capita...Unless in the next few
years the private sector can generate savings and capital
formation in a greater proportion to a rising product,
the pressure in the demand for goods upon the supply of
savings will persist."

But instead of increasing savings to meet the new capital
needs, gross savings plummeted from a 1950s high of
nearly 20% of GNP to personal savings rates near zero
today. Instead of saving resources, the U.S. economy
consumed it.

"Capital has been consumed and misused," writes Sean
Corrigan of Capital Insight."Everyone would surely be
forced to concur that the sooner we cease the first and
the quicker we attempt to correct the second, the better
it will be for all of us.

"Instead, what do we find? Interest rates are slashed,
reserves are injected by the central bank, and the
mindless chant. 'The economy depends on the consumer, the
economy depends on the consumer' is repeated over and
over again, as if a farm thrives on the crows pecking at
the corn...

"Every extra dollar borrowed by a consumer now puts us
all a dollar further from recovery, the debtor a dollar
closer to default, and his bank a dollar closer to a
bigger loan loss provision than it would have had to face
by foreclosing while there was still something to be
salvaged."

Will feeding more corn to the crows - that is, making
more dollars available to borrowers, cheaper and faster -
rescue the situation?

We will see, dear reader, as Act III continues...

Bill Bonner

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gesamter Thread:

• The Daily Reckoning / ist das überhaupt interessant? Oder soll ich´s lassen? - - ELLI -, 18.11.2002, 23:54
  • Den kannst du immer bringen...(owt) (owT) - Boyplunger, 19.11.2002, 05:52