Cheating Nature / The Daily Reckoning

verfasst von - ELLI -, 16.12.2002, 20:53

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The Daily Reckoning

Baltimore, Maryland

Monday, 16 December 2002

*** People getting nervous, edging for the exits... dollar
drops, gold rises...

*** Stocks down on Friday - where's Santa Claus when you
need 'im?

*** Investors losing money...Cry for Argentina - and
Japan...and more!

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

No real blows yet...but things are getting tense...

You'll recall, dear reader, that we're watching what looks
as though it will be one of the best bar fights in history.

Fed governor Ben Bernanke, along with the rest of the Fed
gang - Greenspan, McTeer, Parry...backed up by a mob of
Keynesian and monetarist economists...notably Paul Krugman
and Milton Friedman...walked in like they were looking for
trouble.

"I can lick anyone in the place," Bernanke seemed to say.
Deflation is no problem, he went on; we've got a printing
press! And we've got inflation under control, too.

And who wouldn't like to believe it? At last, the science
of central banking has progressed to the point where
Bernanke et al. can manage paper money almost perfectly!
Inflation, deflation, the business cycle, panic, fear,
greed - the brutish 'low-lives' are finally cowering behind
the bar, right?

Who could stand up to Bernanke and his gang, we wondered?
With their computer print-outs...their econometric hoop-de-
doo...credentials (including Nobel prizes) spilling out of
their back pockets like dirty handkerchiefs...they look
almost unbeatable.

But then, Mr. Market turned around from his drink...and the
place went silent.

Late last week, the Producer Price Index came out
(unexpectedly) negative. In November, prices took their
biggest drop in 6 months.

The dollar dropped, too. Hardly surprising, since its
custodians have announced that they would rather destroy it
than allow prices to fall. Oh là là...the dollar fell to
$102.5 against the euro...a 3-year low.

Bernanke may think he can control the dollar - but what
about the people who own it? Are they just going to sit
still while the Fed ruins the greenback? Already, dollar
holders are getting out of the way. They don't know which
way the fight is going to go, but they don't want to get
smashed by a barstool finding out.

Gold moved up to $333.80 (Feb. contracts) - a 5.5 year
high. If Bernanke wins the scrap with deflation, he might
still lose to inflation. Either way, gold looks like a good
place to sit while you watch the action.

Here at the Daily Reckoning, we don't know how it will turn
out. But we have a feeling that one way or another, Ben
Bernanke is going to get his butt kicked.

Over to you, Addison...

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

Addison Wiggin in Paris...

- Round about this time of year we start craning our necks
toward the Northern night skies to see if dear ol' St. Nick
will whisk down with his sleigh and sprightly reindeer and
spread good cheer among all the girls and boys busily
crunching numbers in brokerage firms around the world.

- In bad years, as well as the worse ones, Santa - in a
little ceremony that has come to be known as the 'Santa
Claus Rally' - sometimes pays an early visit to the corner
of Wall and Broad in lower Manhattan...and allows even the
naughty and not so nice a chance to get in on the holiday
cheer.

- Alas,"there's little good news out of the US and we're
certainly not going to get a slew of retail money coming
this way, so Santa may disappoint," the New York Times
quotes Hans Kunnen, an analyst in charge of research at
Colonial First State Fund Managers in Australia...proving
that a snub by Santa this year may be felt as far away as
the South Pole (where, curiously, they celebrate Christmas
in the middle of summer).

- In fact, following a 212 point drubbing last week, the
Dow, at 8,433, stands poised and ready to close out the
year at its lowest point since 1997."People are already
closing the books on the year," says Prudential Financial's
Bryan Piskorowski in the same NYTimes piece."The volume
has really died down."

- The Dow has lost 5.3% since a rather boisterous bear
rally came to an end two weeks ago. What do you suppose has
kept Santa away this year? A regime change at the Treasury
and a sliding dollar have forced layoffs at the North Pole,
and now Santa and the missus are having to chip in on the
toy production line? Maybe the old graybeard is fearful of
cruise missiles misfiring on their way to targets in Iraq?
Perhaps Santa's waiting a bit for an earnings announcement
due out this week, harboring some vague hope that corporate
profits are actually on the mend...naahhh, everybody knows
they don't matter anymore.

- My guess is, he of the pudgy red belly has been secretly
hoarding gold bullion and buying shares of penny mining
stocks...and yesterday's intra-day spike beyond $336 has
given the old bugger heart trouble, and right now he's too
spent to make the trip. There are, of course, nine days
left before Santa's time will be fully occupied
distributing toys to another set of needy boys and girls,
so perhaps there's time yet for him to recover and make an
appearance.

- If not...well, there's always the fabled"January Effect"
- that period of time when after returning all the presents
they didn't want...and checking credit card balances and
payment plans left unexploited...consumers spread out in
droves seeking, spending and getting everything from X-BOX
game consoles to overpriced stocks.

- The Nikkei closed nine days down yesterday for the first
time since its woes began to seriously pile up over a
decade ago. Of course, back then the Nikkei was trading at
atmospheric heights of which even Santa would be proud.
Fast forward to the holiday season 2002...and yesterday's
fall to 8,450 puts the Nikkei less than two percent above a
19-year low...and only 17 points away from overtaking the
Dow in the race to the bottom.

-"If you want a little holiday cheer," writes our London
correspondent Sean Corrigan this morning,"look at what's
happening in Japan and count your blessings. There, the
disposal of the gargantuan amount of bad debts in the
system under the present financial revitalization program
could cost 650,000 jobs within a year." That figure,
reports the Asahi Shimbum, depicts a scenario in which the
13 leading banks erase all loans categorized as non-
performing. The Cabinet Office reckons that 220,000 of
those axed...will become long-term unemployed.

- Ouch...we may be able to count our blessings this year,
but, we wonder...will we still be able to do so next?
Today's DR classique (below) makes it seem increasingly
less likely...

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

Back in Baltimore...

*** One of the redeeming charms of macro-economics is that
you never have to think about it. Inflation,
deflation...balance of payments...interest rate policy --
what difference does it really make?

From an investment standpoint, what really matters is what
you can see for yourself...without worrying about the
macro-economic context.

For example, if you can buy a good company at 8 times
earnings...what do you care if the discount rate gets
raised? Or, if you buy an apartment building, in good
shape, with good tenants and good cashflow - does it really
matter to you if real estate is in a bear market?

Or, what difference does it make if the 'battle of the
sexes' is raging across America...as long as you have an
armistice at home?

*** Stocks are headed for their 3rd losing year in a row.
Investors' Business Daily's Mutual Fund Index is down
nearly 30% for the year. The Wilshire index, the broadest
measure of what is really happening to investors, is down
more than 20%. Many of the leading stocks have taken a much
worse beating. AOL is down nearly 60%. AT&T has lost more
than 50%. Cisco is down 22%. GE is almost down 50%. And
even Microsoft has lost 18% of its value this year.

But even after all that, stocks are stubbornly expensive.
Earnings are falling. Even with dropping stock prices,
resulting P/Es are very high. Barron's puts the S&P P/E
ratio on trailing earnings at 29. S&P itself gives a P/E of
48, based on"core" earnings - that is, earnings after
major pension and stock option expenses.

Looking at these stocks up close and personal, without
worrying about macro-economics, is a little like seeing an
aging hooker in broad daylight - not a pretty sight. And
probably not something you'd want to pay good money for.

***"Now is the time to buy land in Argentina," said a
cheerful friend last week."The country is a mess..."

The weekend brought news that Argentina continues to
default on its foreign debt."We're not going to pay," said
an official, confirming what everyone already seemed to
know.

Argentina is in its 4th year of recession. So far, 10
people have died of starvation.

Argentina, recently known as the 'bread basket of South
America', has some of the richest farmland in the world. A
century ago, the country was nearly as rich as America and
widely considered a major competitor. Now, it is no longer
a bread basket, but a basket case.

And yet, during the entire 20th century, the nation - like
Japan - never once lacked for central bankers, central
planners or government policymakers. Could it be that these
people err from time to time? Could it be that central
planners err in the Northern Hemisphere as well as the
Southern one...and in the Western as well as the Eastern?

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

The Daily Reckoning PRESENTS: Not long after the 11th rate
cut, we wondered why cuts 2 through 9 had failed to elicit
the desired effect of stimulating aggregate demand. The
following essay was first broadcast on 14 December 2001.
You'll note we have yet to experience the slowdown in the
auto and housing sectors, which generally make way for
renewed strength in the economy...rather, we experienced
further mutations spurred on by 0% financing and delayed
first payments.


CHEATING NATURE
by Bill Bonner

"What is this madness?"

- John Gutfreund
Former Chairman, Salomon Bros.


A year ago, dear reader, we wondered about the first rate
cut. Today, we wonder about the 11th one. [... the 12th
one, and so on...]

Readers who are tired of wondering about rate cuts - or who
have made up their minds - may comfortably pass over
today's Daily Reckoning. For we have nothing to offer but
more of the same. Except that, today, we explain what not
one economist in 100 seems to understand: why rate cuts
don't always work.

Not that we want to take the mystery out of the market. We
would no more attempt to do that than we would try to turn
women into lifeless mannequins or round off Pi to a whole
number. That is never our purpose at the Daily Reckoning.
Instead of making things simpler...we aim to make them more
complex, like...well...life itself.

You see, not all recessions are created equal. Yesterday's
commentary on The Prudent Bear.com referred to a research
paper from HSBC:"The research paper also noted the
difference between planned and unplanned recessions. HSBC
defines a planned recession as one where vigorous steps are
taken to combat inflation, like the early 1980's recession.
Conversely, an unplanned recession '[is] associated with
collapsing private sector expectations for economic growth
and profits and, from a policy perspective, are very
difficult to turn around.'"

Back in 1959, notes the Prudent Bear, Alan Greenspan
thought something very similar:"Once stock prices reach
the point at which it is hard to value them by any logical
methodology, stocks will be bought as they were in the late
1920s - not for investment, but to be unloaded at a still
higher price. The ensuing break would cause a panic
psychology that cannot be summarily altered or reversed by
easy-money policies."

There is no trace of"panic psychology" in today's markets.
Investors are calm and confident. They are standing their
ground, to use Schumpeter's phrase...but the ground is
giving way beneath them.

Alan Greenspan, now the world's most powerful and
celebrated central banker, tries to shore up the economy
with easy-money policies. The first 10 rate cuts have done
little apparent good. The HSBC research paper, we believe,
tells us why...and why the latest cut will do no better:
because the Fed neither caused the bubble, nor did it end
it. Can it revive it?

There are"planned" recessions - brought about
intentionally to cool inflation in an"over-heated"
economy. And there are unplanned recessions - which happen
spontaneously, when individuals and businesses begin to
realize that they have invested too much money in too many
projects that are not too likely to pay off. They may or
may not panic. But they always sell.

"From an operational viewpoint," explains Ravi Suria, in
Grant's Interest Rate Observer,"the excess capacity
created by excess capital is a highly deflationary force.
This, combined with high fixed interest costs is going to
keep equity returns suppressed for a long time.

"The Fed's not going to help capital spending come back.
Why? It was not the Fed rates that spurred capital spending
in the first place. It was the money coming from the
capital markets. The Fed was not lending you money at 4% or
6%. It was the capital markets...In the telecom industry at
the low, the low on the absolute yield was 8.9%...Right
now, the yield is about 17%."

The nation's most aggressive industries - those that led
the capital spending boom of the late '90s - never borrowed
at the Fed funds rate anyway. And even though the Fed has
cut the cost of money to its member banks 11 times in the
past 11 months, the cost of borrowing for the telecoms has
approximately doubled.

And it is not just the junk bond issuers who are paying
more for capital.

"Just in the past six months," reports Suria,"Ford Motor
Co. actually paid more in absolute yield for its latest
debt offering...than it paid six months ago." Despite about
300 points of rate cuts from the Fed.

Businesses pay more for capital following an unplanned
"break" because lenders see the same thing investors see:
that they may never get their money back.

During a boom, it hardly seems to matter. Investors - cocky
and greedy - provide too much easy money. At the beginning
of a boom, investors tend to invest for the right reasons
in the right projects. Then, encouraged, they invest for
the wrong reasons in the right projects - paying too much
for investments in sensible industries. And finally, they
invest for the wrong reasons in the wrong projects - paying
outlandish prices for investments that can never be
profitable.

The only solution to this problem is to let nature take its
course - giving investors what they deserve, as we say here
at the Daily Reckoning. Bad investments need to get marked
to a cynical, hard-bitten bear market. Unprofitable
companies need to cut back or go out of business.

Easy money policies merely make the situation worse -
postponing the eventual reckoning and making it more
painful. That is why zero rates for the last five years in
Japan have done no good; they've only helped to slow down
the correction and spread the (greater) pain over a longer
period of time.

"...the former 'maestro's' increasingly desperate effort to
keep American consumers borrowing and spending is a
strategy doomed to fail," writes Chris Wood in his Greed &
Fear Report."For, like the carmakers, all he is doing is
borrowing from the future...In other words, stronger
consumption today means weaker consumption tomorrow."

In a"planned recession", the Fed increases rates, which
strikes immediately at interest-rate sensitive industries
such as housing and autos. Sales in these sectors fall.
Then, when the economy is"cooled off" a bit, rates are cut
and autos and housing lead the recovery.

"This cannot happen on this occasion," notes Wood,"because
housing and autos have not really gone down yet."

"...the Greenspan approach," Wood concludes,"should be
viewed, therefore, as an effort to cheat nature and the
business cycle, since there is nothing more natural than
for American consumers to slow down after their decade-
long shopping spree. Like any effort to cheat, it is,
ultimately, not going to work..."

Your devoted correspondent...

Bill Bonner

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• Cheating Nature / The Daily Reckoning - - ELLI -, 16.12.2002, 20:53