Animal Spirits And Other Amusing Fictions / The Daily Reckoning

verfasst von - ELLI -, 14.12.2002, 12:55

-->Animal Spirits And Other Amusing Fictions

The Daily Reckoning

Baltimore, Maryland

Friday, 13 December 2002

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

*** Big jump in gold...Mr. Market picks up the gauntlet...

*** Wussies in Japan...nincompoops on Wall Street...'Wrong
Way Ed's' latest guess...

*** Investors pull out of mutual funds...here's one up
17%...stocks to fall 41%...London tailors...and more!

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

The big news yesterday was that the price of gold jumped
$6.60...and the dollar fell to a new low.

What would make gold go up so much? Ah, this is what is so
interesting. Fed Governor Bernanke announced to the whole
world that the Fed had both the means and the will to
destroy the dollar. It was as if he had walked into a
waterfront bar and said he could beat anybody in the place.
Is it so surprising that Mr. Market would want to take a
swing at him?

Let's get a couple more drinks, dear reader, and see what
happens next:

All the world's central bankers are crowding 'round.
They're putting their money on Bernanke and the Fed. They
all believe they'll knock out deflation. Mieno wasn't able
to do it in Tokyo, true enough they say...but the Japanese
just can't punch; everybody knows that.

"It's really simple," Milton Friedman says from the end of
the bar,"just print money."

Well...yes. Just like the way to avoid a winter cold is to
blow your brains out in October. Everybody knows it's true,
but who's going to pull the trigger?

Given a choice between mild deflation and the risk of
hyperinflation...maybe a little deflation isn't such a bad
thing."Maybe the Japs aren't so dumb after all," says a
quiet voice in the corner.

"Nah, they're a bunch of wussies in Japan," shouts back
Paul Krugman, célèbre Keynesian economist for the New York
Times."What the Japanese need to do is promise borrowers
that there will be inflation in the future!"

Bernanke, with perhaps more guts than brains, has made it
clear to Americans that if the nation's prices are stable
in the future - it won't be his fault. He can lick
deflation any day, he says. And inflation? Heck, a little
of that is a good thing...and he can control it.

In a more genteel world, we would say he had 'thrown down
the gauntlet'. Mr. Market, we think, has picked it up. The
room goes silent...

Over to you...Addison...

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

Addison Wiggin, keeping score from Paris...

- As if to accept the Bernanke challenge outright, the
Department of beLabored Statistics released Producer Price
Index numbers today revealing...what's this?...after a
miniscule 1.1% rise in October, prices for finished goods
dropped 0.4% in the month of November. (Yeehoo! Chalk one
up for the deflationists...)

- Nor was the current account balance the hoary number
economists and analysts the world over seemed to expect it
would be yesterday morning. In fact, it came in just shy of
the record-setting pace of $127.6 billion pace set in the
2nd quarter.

- Yet, it still takes $1.4 billion a day to feed America's
bad habit of consuming the world's capital...the dollar
still fell to a 34-month low against the euro...and gold
did jumped to a 3-year high...so in all, I'd have to
begrudgingly concede a point to the inflationists,
too...awwww...

- Alas, even with a slipping dollar, it still only costs a
about $2.00 for a good red table wine in Paris. So we Daily
Reckoneers are happy with both reports. Neither provide any
clear indication of a trend setting in...and we expect
there will be plenty of opportunity for entertainment
through the holiday season.

- On the day, Mr. Market barely noticed any economic
activity...the Dow hiccupped 50 points lower to 8,538 by
the close, while the S&P 500 index shrank a whopping 3
points to 901. The formerly-proud-home-to-the-TNT-sector
Nasdaq index showed a little sign of life - very little -
it closed up 3 points to 1,399.

- And here's news...the erstwhile American consumer
appeared to have averted his eyes from the television long
enough to form an opinion last week, too. An ABC News/Money
Magazine survey appropriately titled The Consumer Comfort
Index reportedly fell 5 points to negative 22 on a scale
from +100 to -100. We have no idea what these numbers
represent, nor do we necessarily suggest you accept them as
an accurate sentiment indicator, but serious people with
real opinions say,"this is not good." Only 19 times in 900
continuous weeks of polling has this indicator dropped 5
whole points or more. Doesn't bode well for the Walmarts of
the world if there's any correlation between that number
and consumer buying habits this season.

- Likewise, the World Bank has gotten all gloomy on us. The
officious institution headquartered in Washington, but
responsible for mucking around in economies as far away as
Bangladesh, issued a report yesterday suggesting the global
economy faces a"significant risk" of recession in 2003.
After just 1.1% growth was logged in the books for 2001,
the WB projects a slovenly 1.7% for earthly expansion in
2002. Soon to be revised no doubt, up or down. Despite it's
'warning' however, it left the 2003 growth projection at a
respectable 2.5% - lest anybody get concerned.

- Also, more as a side note than anything, we suspect that
Japanese Finance Minister Masajuro Shiokawa may be a Daily
Reckoning reader. You recall that in yesterday's edition we
discussed Bloomberg's William Pesek Jr. suggestion that now
might be the right time to revalue the Yuan? Well, this
morning, the BBC news reports Shiokawa as saying,"China
might also benefit if it makes the yuan's value higher."
What do you think? Coincidence? Hmmmnnn...

- In any case, it appears as though China may unseat the
U.S. as Japan's most favored nation of import. Since the
end of WWII, the U.S. has exported more to Japan than any
other nation. But new figures show that 6.31 trillion yen
in Chinese goods sold in Japan - up 9% since last year -
has outpaced the 6.04 trillion yen worth of product the
U.S. sends to Japan.

- As we noted yesterday, China is the object of increasing
scorn for exporting deflation around the globe, largely
because it has pegged the yuan at 8.3 to the dollar...an
exchange rate that some analysts say doesn't accurately
reflect it's share of the global economy. [For more on
China and its supposed"exported deflation", see the
Prudent Bear's Marshall Auerback's article,"The Rotten
Fruits Of America's Strong Dollar Policy"]
http://www.dailyreckoning.com/body_headline.cfm?id=2728

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

Back in Baltimore...

*** Small investors are pulling out of stocks. This will be
the 3rd year in a row (unless something dramatic happens
between now and the year's end) of falling stock prices.
People are getting tired of it. 350 mutual funds have
closed this year.

*** Wall Street strategists, of course, missed it. Almost
all of them expected a higher Dow by the end of the year.
'Wrong way Ed' Yardeni, for example, thought the S&P 500
would be at 1260 by the close of December. He's reduced his
estimate 4 times...and now guesses the S&P 500 will end the
year at 900, about where it is now.

*** But what's this? The Templeton Dragon fund, run by Mark
Mobius, is up 17.5% this year. How did it do so well? It
invests mostly in Chinese companies.

*** We do not get to read tomorrow's newspapers. So we
don't know what the stock market will do. However modest
our own view of our forecasting ability, it is probably not
modest enough, you may be thinking, dear reader.

But here at the Daily Reckoning, we've learned to live with
ignorance the way men learn to live with fat wives -
happily and comfortably.

All we know is that things are usually as they usually are.
If they are not as they usually are, chances are good that
they will be - sooner or later. We look for regression to
the mean in all things - and are rarely disappointed. By
definition, things that are extraordinary are uncommon, and
like snowstorms in late spring and managed paper currencies
- they can't last.

Regression to the mean, alas, is neither simple nor
compulsory. We look to the long run to figure out where
things are meant to be...but how long? In the long run, we
are all dead, as Keynes pointed out. Obviously, it the
extraordinary part - those precious hours when we defy the
odds by being alive - that is most interesting to us.

But what about stocks? If stocks were to regress to the
mean, where would they end up?

My friend, Steve Sjuggerud, examined the question as if he
were an oilman eyeing a belly dancer. Here is his
conclusion:

"THE MARKET WILL BE 41% LOWER FIVE YEARS FROM TODAY.

"Since we have no concrete knowledge of the future, the
safest guess for five years from now may be that the market
will be in line with its historical values. Of course, the
market may be substantially higher than history would
suggest...or substantially lower.

"I came up with that number by looking at the three most
time-tested measures of valuation...the price-to-earnings
(P/E) ratio, the price-to-book value (P/BV) ratio), and the
price-to-sales ratio (P/S) ratio. Over history, the
average value of these has been 16, 2, and 1, respectively.
(I'm actually being a little generous, here, so I can't be
accused of being a bear or fudging any numbers.)

"All I could assume was that these numbers will be roughly
in line with history in five years time. In that same
spirit of history, I assumed that sales, earnings, and book
values will all increase by 6% a year for the next five
years, again, (very) roughly in line with historical
averages. Based on that, the S&P 500 would be at 530 in
five years - or 41% below it's current value of 900."

*** Well, your editor visited his London tailor for the 7th
time.

"What's that bulge..?" Elizabeth wanted to know.

"Oh my...something not quite right there..." the tailor
replied,"it seems to want to go out where it should want
to go in... Well, we'll have it ready for you the next time
you come to town."

"I hope so," said Elizabeth,"I'd like to see it on him
once or twice before he begins shrinking from old age."

--- Advertisement ---

Protect Yourself - And Profit - From Investors' Secret
Enemy

The market's current troubles are nothing compared to what's
ahead - and the culprit is not what you think. But one
special class of investments is quietly on the move...and
savvy investors are cashing in,already posting profits of
53%...125%...and 332%, even during one of the worst markets
in history!

Click here for a strategy that could protect your wealth and
lead you to 500% profits or more.

http://www.agora-inc.com/reports/OST/GainToday

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

The Daily Reckoning PRESENTS: The latest bout of bullish
euphoria rests on some shaky foundations - like GDP data
that are woefully short on profits. Meanwhile, on the other
side of the Atlantic, the ECB is attempting to use the same
remedies now proven ineffective by Japan and the U.S. What
are these guys thinking?

ANIMAL SPIRITS AND OTHER AMUSING FICTIONS
by Andrew Kashdan

The"bear" camp is a little lonelier these days with the
stock market rallying and a few economic indicators showing
some life. But we aren't ready to pull up stakes and
shuffle over to the"bull" camp. Less bad economic data are
not the same thing as strong economic data. And yet, a
stock market selling for 49 times the S&P's estimated
"core" earnings for the 12 months ended in June would seem
to be discounting super strong economic data.

Someone, we think, needs to warn exuberant investors about
the still-prevalent downside risks so they can position
themselves for the likelihood of another bout of selling.
An editorial in last week's Financial Times suggested that
"for all their newsworthiness," the data on existing home
sales, durable goods orders and the GDP revision"are an
extremely poor basis for valuing equities." We couldn't
agree more.

With the possible exception of durable goods orders, they
may even be insufficient for judging the health of the
economy. But you'd never guess that from reading the
growing cadre of commentators who are basing their bull
case on what we consider to be shaky foundations.

Take, for example, Charles Wolf Jr., economist at two
different think tanks, who complains in The Wall Street
Journal about the media's"hyping of the gloomier
forecasts." Wolf argues that"the ingredients of a benign
trajectory for the American economy are numerous and
strong," one reason being that"federal deficits, at a
level of perhaps 2% to 3% of GDP principally due to
increased outlays for defense and homeland security, are
likely to have a mildly stimulative effect without
entailing consequential risk of inflation." We have no
doubt that running up deficits would augment the GDP data,
since government spending is, by definition, a direct
contribution. But profits are the lifeblood of sustainable
stock market rallies, and the GDP data are very
enlightening on this point - bearishly enlightening.

The jump in third-quarter GDP, to a 4% annualized growth
rate from 1.3% in the second quarter, sounds pretty good -
until you look more closely at its components and consider
the evidence of weakness at quarter's end (most notably the
collapse in auto sales). For instance, what about profits?
In the third quarter, profits from current production fell
$14.1 billion, after a drop of $12.6 billion in the second
period. Current-production cash flow, the internal funds
available for investment, fell $12.2 billion.

It's perfectly normal for profits and investment - which
are both key to a sustainable expansion - to lag in a
recovery. So, in itself, the profit decline is potentially
not cause for panic. But what could be worrisome is that
profits have fallen longer than nearly all U.S. economists
were expecting. [Our own Dr. Kurt Richeb"cher
notwithstanding.] Which means, we think, that it's far too
early to declare that a healthy expansion is under way.

Keep in mind also that, unlike most of the reported data,
the profits number is in nominal, as opposed to real, or
inflation-adjusted, dollars."Real measures are not
available for the specific income-side components," says
the Commerce Department's Kenneth Petrick,"because there
are not direct price indices available as there are for
product-side measures." Nonetheless, we know that inflation
still exists (despite some exhortation to the contrary),
and therefore the dollar continues to lose purchasing
power. Therefore, comparisons to prior-period profits are
even worse than they appear.

The breakdown of GDP is clear enough - it's all about
consumption. Out of the four percentage points of
annualized growth, 2.9 came from personal consumption
expenditures, while nonresidential fixed investment
subtracted 0.7 points. Government spending contributed 0.58
percentage points. The next largest component came from a
rise in inventories.

If consumption were self-perpetuating, as many economists
(and consumers!) seem to think, this breakdown wouldn't be
so bad. Unfortunately, we live not in fantasyland, but in a
world in which, at some point, you've got to make money to
spend it.
Not to mention the fact that, by nearly every measure,
consumers are overstretched. That is not to say they
couldn't stretch even further, only that the risks of a
break are ever-present. Until profits and investment get
going, we'll put on our hard hats and keep a wary eye out
for falling share prices. Profitless"strength" is not the
stuff of sustainable bull markets.

Charles Wolf Jr., in the aforementioned Journal article,
lauds"the important if ill-defined 'animal spirits' of
American entrepreneurs" as another reason for optimism. If
anything is worthy of the title"voodoo economics," it is
the lingering use of Keynes's concept of"animal spirits."
Journal editor Robert Bartley, in his"Thinking Things
Over" column, picks up the same theme when he says that
"the recovery has been lackluster so far because
businessmen have lacked animal spirits," but he adds that
"perhaps risk aversion started to break last week."
Keynes's famous phrase is often used by those who
misinterpret the causes of a downturn, and hence the
stimulus necessary for recovery, as being mainly
psychological. On the contrary, until the unprofitable
investments of the boom are liquidated or adapted to actual
consumer preferences (as opposed to the dreams of
investors), the recovery will be based on wobbly footings.

Meanwhile, following the same line of, um...thinking, the
European Central Bank finally pulled the trigger and cut
interest rates by 50 basis points. They must have been
admiring how effective 12 rate cuts have been here in the
New World at raising the spirits of American animalia. Or
perhaps they have missed the point. Europe, like the U.S.,
is trying to grapple with the lingering ill effects of the
post-bubble economy.

Should the ECB be taken to task for lounging on the couch
while Greenspan was doing the heavy lifting? Well, we don't
know. Certainly its stated purpose is to keep inflation
from rising above 2% year-over-year. Presumably, it also
aims to keep inflation from hitting zero, and
theoretically, at least as far as anyone can tell, European
central bankers have done their job: the inflation rate has
even picked up speed, rising from 1.8% in June to the
latest reading of 2.2% in October.

European politicians - like their wild American
counterparts - would like it if the ECB could solve their
problems with the touch of a button; hence the widespread
criticism of the bank's inactivity. But the fact that one
interest rate would seem to be appropriate for, say,
Germany and another for Ireland testifies to the folly of
excessive centralization. There is little that ECB
President Wim Duisenberg can do about it now, without
risking some major imbalances. We might add that Europe's
woes include a tendency towards fiscal ineptitude - and
we're not even talking about the Growth and Stability Pact,
which sets a"limit" on government deficits. In Germany,
for example, Chancellor Gerhard Schroeder has decided that
what his struggling economy needs is higher taxes.

Morgan Stanley's Joachim Fels and Elga Bartsch suggest
their may in fact be a"Dark side of an ECB Rate Cut." [You
think!?] Their concerns include the potential loss of
credibility should inflation remain stubbornly high, the
emergence of asset bubbles due to excessive monetary growth
and the moral hazard of sanctioning imprudent behavior by
governments, unions and corporations, thus forestalling
necessary reforms.

Is it possible that a rate cut is not the panacea it's made
out to be? We don't know for sure, but with Europe
following Japan and the U.S. down a well-trodden, but
hardly illuminated path, we're certainly going to find out.

Cheers,

Andrew Kashdan,
for The Daily Reckoning

P.S"Greed is good," Gordon Gekko proclaimed in the 1987
movie"Wall Street." Now comes The Economist to proclaim
that war is better. The British magazine joins the chorus
of those trumpeting the most dangerous myth of all."[M]ost
wars in America's history have - thanks to massive
government spending on defense - tended to stimulate the
economy," it says. All we can do is implore you not to
believe everything you read in the GDP - and ask yourself,
perhaps, why we haven't heard economists propose what would
seem to be the obvious all-season remedy: perpetual war for
perpetual growth.

Thread gesperrt

 

gesamter Thread:

• Animal Spirits And Other Amusing Fictions / The Daily Reckoning - - ELLI -, 14.12.2002, 12:55