Reasonable Expectations / The Daily Reckoning

verfasst von - ELLI -, 07.01.2003, 23:06

-->Reasonable Expectations

The Daily Reckoning

Paris, France

Tuesday, 7 January 2003

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

*** Big fiscal stimulus package sets investors a-tingle...

*** Fiscal stimulus did nothing good for the Japanese...or
the Argentineans...

*** Dividends may be back in style...a bird in the hand is
popular, too...gold at 6-year high...housing could be a
bubble...New York loses jobs...and more!

The Bush family must hate recessions the way others hate
the Devil or the IRS. A recession in the early '90s cost
the elder Bush an election. The younger Bush is determined
not to let it happen to him.

Thus, did word come yesterday that the president is
proposing a huge new fiscal stimulus package. Already,
"fiscal policy changes have produced a stimulus exceeding
4% of GDP - the largest since those of the early Reagan
years and WWII," writes economist David Hale. This new
round of stimulus is expected to titillate the economy even
further.

Alert Daily Reckoning readers may already be asking
themselves: 'where's the money come from?'

We don't like to be a wet blanket...nor can we help it if
we drip a little on the floor. But we feel obligated to
point out that in attempting to avoid the footsteps of his
father, George W. Bush has found the prints of Tomiichi
Murayama.

The Japanese tried fiscal stimulus, too. Lots of it. In
fact, they did so much of it, the entire nation tingled all
over...and then shook, roughly to the rhythm of cement
mixers. Between 1993 and '94, Japanese government
expenditures stunned the world by rising a breathtaking
59.6%.

The apparent effect was to create jobs and spending and
keep the ruling politicians in power. The real effect was
to steal away valuable resources that might have helped the
economy stage a real recovery. Unlike their American
counterparts, the Japanese were always good savers. Even at
the peak of their mania in the late '80s, savings rates
never fell below 10%. This money represented real resources
that might have been used to create new products...hire new
people...and make new profits. Instead, much of it was
sucked up by public works projects and squandered.

As reported here yesterday, the Japanese economy declined
in the midst of the biggest fiscal stimulus program in
history. By the year 2000, GDP per person was no greater
than it had been 7 years before.

Now the Bush administration proposes to squander money
Americans have never saved, an amount equal to 6% of GDP.
Where will the money come from? How long can the nation
depend on the kindness of strangers to fund it spendthrift
habits? Will the day come foreigners decide to spend their
money themselves? And then what?

Perhaps then George W. can pick up the trail of another
figure who got himself in a similarly tight spot - Carlos
Menem. The Argentinean president tried a program of fiscal
stimulation, too...but without domestic savings or foreign
lenders. The result? The Argentine currency crashed and
continues to disappear into the ground. The CPI in
Argentina is rising at 41% per year...the economy is
collapsing by 10% this year...and people are starving to
death.

Eric Fry, our man on Wall Street, gives us the market's
reaction to Bush's proposal:

-----------

Eric Fry from New York...

- 2003 has been a great year for the stock market...and
there's only 12 months left to go!

- The S&P 500 is already ahead 5.5% so far this young year,
which would qualify 2003 as the best year for stocks since
1999. But there are no"byes" in this league; investors
have to play all 12 months before the game is over...or do
they?

- An investor who cashed in this early 5.5% gain and rolled
the proceeds into a very short-term bond fund could wake up
on December 31, 2003 with a portfolio gain for the year of
more than 8%. But what fun would that be? Anyone who sells
his stocks now will miss out on all the excitement that Mr.
Market may have in store for us! It's been a pretty darn
exciting year already.

- Yesterday, the Dow charged ahead 172 points to 8773,
while the Nasdaq advanced 34 points to 1,421. The market
soared higher on the news that President Bush hopes to
spend $600 billion over the next 10 years trying to
stimulate things. We think he can do it...spend the $600
billion that is. As for stimulating the
economy...well...that's a whole other matter.

- More than likely, the economy will do what it wants to
do, no matter what the President does. But most Presidents,
like most investors, feel that they should always be doing
something, even when doing nothing would be the wiser
course of action.

- Of course, there's no"d,jeuner gratuit," as they like to
say in the Paris office. All this spending and tax-cutting
will end up costing somebody some money. For now, we'll
keep borrowing it from foreigners like we always do, which
means our federal budget deficit will likely top $250
billion this year, up from $158 billion last year. And as
surely as boredom follows passion, a rising federal deficit
will lead to rising interest rates. Yesterday, U.S.
government bonds lost ground again, as the yield on the 10-
year Treasury note rose to 4.06% from 4.02% late Friday.

- One of the most interesting features of the Bush"growth
and jobs" package is the proposal to eliminate the taxes
individuals pay on stock dividends. Ironically, very few
corporations still pay a dividend that's large enough to
bother taxing. But the select minority of companies that do
pay a hefty dividend attracted some hefty interest from
investors yesterday.

- The shares of JP Morgan, for example, which pays about a
5% dividend (at least for now), jumped $2 yesterday to
$27.98. The shares of numerous other companies that pay
plump dividends jumped a similar amount. And just like
that, dividends are the hottest new, old thing on Wall
Street.

- In a recent issue of Grant's Interest Rate Observer,
James Grant makes a compelling case for dividend-paying
stocks, no matter what the tax treatment."Dividends were
everything that a regulation New Economy bull didn't need
and couldn't use," says Grant."With the market averages
ascendant (and with capital gains taxed at more favorable
rates than income), a significant dividend yield was taken
as the sign of obliviousness on the part of the management
paying it out."

- But times have changed - at least a little - and most
investors are at least willing to consider the idea that
receiving dividends might be not be a bad idea.

- Grant continues citing a new study from International
Strategy & Investment:"...dividends have contributed an
essential portion of the stock market's total return
through the years - more than 70% in the decades of the
1940s and 1970s and almost 39% in the 1980s. In the 1990s,
as you will not have forgotten, capital gains carried the
performance ball; dividends contributed just 23.2% of the
spoil...Never does the adage about a bird in the hand seem
so apt as during a bear market. In such times, cash is the
highest good. Investors prefer it to forecasts, estimates,
promises, predictions and CEO interviews. And, in most
circumstances, a stockholder in receipt of a dividend check
is ahead of the game."

- If Bush gets his way, and dividends escape taxation
altogether, the stodgy old dividend may become the hottest
thing on Wall Street since dot.com IPOs.

- Who's grinding amphetamines into Mr. Gold Market's orange
juice? Despite the big rally in the stock market - an event
that usually pressures the gold price - the yellow metal
tacked on 50 cents yesterday to $352.10 an ounce. Earlier
in the day, gold had climbed more than $4.00 higher, before
fading into the end of the New York trading session. The
gold market"acts well," but many of the short-term
sentiment indicators in the gold market are registering
extremely bullish readings.

- In other words, gold has gained a lot of fans in a hurry.
That's usually a sign that the market is on the verge of a
short-term drop. We still love the stuff, whether as one-
ounce ingots or as pierced naval ornamentation, but we
wouldn't be surprised to see a sharp sell-off in the yellow
metal very soon.

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

Back in Paris...

*** While we think the fiscal stimulus idea will actually
retard America's economic recovery, we have no quarrel with
the Bush administration's proposal to eliminate taxes on
dividends. We never met a tax cut we didn't like.

*** Gold is at a 6-year high. We've been urging readers to
buy the metal for the last three years. So, if you don't
own gold, dear reader, it is your own fault.

*** The BBC reports that economist Roger Bootle expects a
20% drop in UK house prices, which would trigger a major
recession, he believes.

*** The U.S. home market has the look of a bubble, too. Not
that prices are so high - increases in most parts of the
country have been modest. But the methods used to lure
marginal homebuyers into mortgage debt reveal the problem
of increasing consumer demand without increasing consumer
means; they are bound to blow up.

If we have read the Wall Street Journal article correctly,
as many as 20% of new buyers get"Down Payment Assistance"
money indirectly from the builders. These feeble credit
risks end up as proud homeowners without having put up any
of their own money. Default and foreclosure records are
already hitting records - even as the economy grew by a
healthy 3% last year. What will happen when the going gets
tough? We think we know.

*** You can increase a consumer's demand by giving him an
extra hundred dollars. It seems so simple; why not boost
all consumers' demands....by sending them all checks for $1
million dollars?"Just print more money," says Milton
Friedman. But what would be the effect? Would a single
consumer actually be better off? They would all be
millionaires, but prices should rise immediately too.
Central bankers can create pieces of paper and call them
'money' - but they can't create wealth.

*** New York will lose 300,000 service jobs over the next
12 years...says a report in the NY Post. The jobs - mostly
in sales, call centers and customer service - will be
exported overseas, thanks to lower labor rates in foreign
countries and lower telecommunications costs worldwide.

--- Advertisment ---

IMAGINE...
Having a direct phone line to House Speaker Dennis Hastert.

IMAGINE...
Getting calls from him just before a bill is made public,
a bill that will impact a corporation's stock and cause
billions to trade hands.

OK, now imagine something even better...

To find out how you can learn what is going on in the
White House BEFORE anyone else, click below.

http://www.capitol-gains.com/index.asp?promocode=w05194

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

The Daily Reckoning PRESENTS: One more look at...not
necessarily what 'will' happen in 2003, but what 'ought'
too - at least - and especially to the dollar.


REASONABLE EXPECTATIONS
By Bill Bonner

In the last 2 work days, we have looked at the stock market
and the economy. In neither case did we try to guess about
what will happen, but only about what ought to happen.
Ought is good enough for us; it's the best we can do.

Stocks may or may not go down in 2003, but you ought not
buy them, dear reader. They are already trading at prices
that are two to three times the average, based on P/E. They
may go up...but it would be unreasonable to expect it.

The economy ought to go down, too. Perhaps Mr. Bush's
stimulus...or Mr. Greenspan's stimulus...will be enough to
keep it growing. Perhaps the economy will continue to
expand - thanks to the furious pumping of hot air by public
servants - for the next year or two. We don't know. But it
is unreasonable to expect that such a big boom would not be
followed sooner or later by a bust worthy of it. Sooner or
later, somehow or other...the errors of the bubble must be
fully corrected.

A reasonable man expects things to happen that ought to
happen. A fool ought to be separated from his money. A
thief ought to go to jail. A man who abuses a child or
double-crosses a friend ought to roast in Hell. Whether
they do or not, is not up to us, of course...but we can
hope. And what better way has a man of running his own life
than of figuring out what ought to happen, and then making
his decisions as if they really did? In all the systems,
secrets, formulas, charts and graphs and models that help a
man invest, we have found none more rewarding than this:
assume that what ought to happen will happen...buy low/sell
high...and don't worry about it too much.

But what ought to happen? Alas, it is not always easy to
know...

"The great judge of the world," wrote Adam Smith in his
Theory of Moral Sentiments,"has, for the wisest reasons,
thought proper to interpose, between the weak eye of human
reason, and the throne of his eternal justice, a degree of
obscurity and darkness...[which]...renders the impression
of it faint and feeble in comparison of what might be
expected from the grandeur and importance of so mighty an
object."

Today, we take a feeble look at the dollar. What ought it
do, we ask ourselves?

In the interests of making it easy for Daily Reckoning
readers, we give our verdict before any evidence has been
presented: it ought to go down.

The lumpeninvestoriat, that is, the hoi polloi of common
investors, tend to believe things that are not true. In the
heydays of the great boom, they believed they could get an
18% return on their money invested in stocks - even though
they had no idea what the companies really did or how they
operated. They believed they could trust corporate
executives to make investors rich, rather than just making
themselves rich. They believed that stocks always went up
and that Alan Greenspan would not permit a major bear
market.

They believed that the American system of participatory
capitalism, open markets, and safety nets was the finest
ever devised...and that it represented some sort of
perfection that would remain on the top of the world for a
very long time.

They believed also that the U.S. dollar was as real as
money gets and that it would be destroyed in a orderly,
measured way. A little inflation, they had been told, was
actually good for an economy.

Of all the lies that the new investoriat took up, none was
more provocative than the dollar. In order for anything to
retain any value - particularly a currency - it must be in
limited supply. If there were millions of paintings by
Manet or Rembrandt, for example, they would be worth a lot
less than they are today. Back in the 19th century,
currencies were backed by gold. This had the effect of
limiting the quantity of money - for there was only so much
gold available.

After getting in the habit of accepting paper backed by
gold, people barely noticed when the paper no longer had
any backing at all. Government still printed and
distributed the new, 'managed' currencies. Governments
would make sure that they didn't print too much, or so
people assumed.

Besides, there were times when printing too much money was
actually welcomed. The 1990s was one of those time. Alan
Greenspan created more new money than all previous Fed
chairmen combined. But who complained? The money found its
way first into stock prices...and later into real estate.
People looked at the house that just sold down the street
and felt richer, not poorer - just as the Japanese had 10
years before.

And yet, it was not possible that the central bank could
create trillions in new money - out of thin air - without
affecting the value of the currency itself."The dollar
ought to fall," economists began saying as the '90s passed.

Finally, last year, the dollar did fall - against other
currencies, particularly the euro...and against gold,
against which it went down 19%.

What ought it to do now, we ask again? Here we add two
complicating details.

First, for as much as the American lumpeninvestoriat was
deceived by the dollar's apparent strength, foreigners were
even bigger dupes. They couldn't get enough of them."You
can count the empty shipping containers at America's
saltwater ports," suggests James Grant."Ships laden with
imports arrive full; those departing with exports leave
less full."

How could a country balance its books when it was buying
more from foreigners than it was selling? It had to make up
the difference by bringing the money back home as
investment funds. Foreigners didn't dump their dollars for
their home currencies; instead, they used the money to buy
dollar assets - U.S. stocks, real estate, businesses. By
the end of 2002, the total of foreign holdings of dollar
assets had risen to a Himalayan high of $9 trillion - an
amount almost equal to the nation's entire annual GDP.

With the dollar now falling...and U.S. stocks also
falling...foreigners ought to want to lighten up on their
dollar holdings. And even tossing off a small percentage of
them could have a devastating effect on the price of the
dollar. The dollar fell only about 12% against foreign
currencies in 2002. In the '80s, with far less provocation,
it dropped nearly 50%.

The other complication is that in addition to the $9
trillion worth of existing foreign holdings, the current
account deficit adds another $1.5 billion every day.
However successful the U.S. has been as a military super
power, it pales against its success as a monetary super,
super power.

For every day, Americans strike a bargain with foreigners
in which the latter trade valuable goods and services for
little pieces of paper with green ink on them, of no
intrinsic value, whose own custodians have pledged to
create an almost infinite supply of them, if need be, to
make sure they do not gain value against consumer goods!

"There is a crack in everything God made," Emerson reminds
us. The crack in this bargain is that it undermines the
profitability of U.S. companies. Spurred by the Fed,
consumers spend their money at full gallop. They even spend
money they do not have. But profits at American companies
continue to fall. In fact, as a percentage of GDP, profits
have been falling ever since the early '60s, not
coincidentally as the percentage of the economy devoted to
consumer spending...and the current account deficit...have
increased.

What is happening is obvious. Americans are spending money,
but the funds end up in the pockets of foreign businessmen.
U.S. businesses have the expense of employing U.S.
workers...but the money does not come back to them.
Instead, it ends up overseas.

Profit margins at U.S. businesses fall. They are currently
at a post-WWII low. This is not a trend that can go on
forever. And as Herbert Stein pointed out, if it can't, it
won't.

The dollar ought to fall further this year...maybe a lot
further.

Bill Bonner

Thread gesperrt

 

gesamter Thread:

• Reasonable Expectations / The Daily Reckoning - - ELLI -, 07.01.2003, 23:06