No Expectations / The Daily Reckoning

verfasst von - ELLI -, 09.01.2003, 10:39

-->No Expectations

The Daily Reckoning

Paris, France

Wednesday, 8 January 2003

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

*** Stocks down...gold down... more complexity, all around...

*** A giant gift to the rich. Great! $6,250 for every ounce of
gold??

*** How much longer can consumers keep it up? Don't worry...
jobs and growth are on the way...foreclosures rise...and more!

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

The leftist French newspaper, Liberation, predictably described
the Bush tax plan as a 'giant gift to the rich,' which made us
like the tax cuts even more. The paper found an economist who
predicted that the results would be 'negative.'

We don't doubt that he is right, but it could be worse. The
administration could be proposing to spend more money without
tax cuts. At least this way, people will be able to waste their
own money rather than have the government waste if for them.

For every negative there is a positive, we say to ourselves,
like an electrician in an reflective mood. We're even ready to
look on the bright side of depression -- after all, it will be
easier to get a table at a good restaurant...and more people
will spend more time at home, rather than clogging the nation's
highways with their SUVs, en route to buying more of what they
don't need with money they don't have. What positive is there
in rap music or Lyndon Larouche?

We don't know. But probably if we looked hard enough we could
find something. That is the problem with this world, dear
reader. There is always more to see - if you're willing to
look. (More on life's aggravating complexity, below...)

In the meantime, what we find most interesting in the financial
news is the dollar. Though it lost ground last year, it is
still judged to be worth nearly as much as a euro...and about
1/350th of an ounce of gold.

Since Alan Greenspan took over as the chairman, the Fed has
added $5 trillion to the world's supply of dollars, and may add
another $1 trillion this year. During that same period, gold
about 800 million ounces of gold were added to world
supplies...or one for every $6,250 new dollars. Yet investors
took up the new dollars readily...and the new gold reluctantly.
Yesterday, they priced an ounce of gold at less than $350. That
might change in 2003, we keep thinking.

"A 'strong' dollar policy, however, has been part of the U.S.
economic mantra ever since Robert Rubin first uttered the words
in 1995 after succeeding Lloyd Bentsen as Treasury Secretary,"
explains Bill Gross of PIMCO."His presumed (although never
directly stated) belief was that a strong dollar would attract
foreign investment and lift all market boats. Mr. Rubin
succeeded beyond anyone's most bubblish dreams, but now with
the trade deficit at 6% of GDP, and our need to attract nearly
80% of all the world's ongoing savings just to keep the dollar
at current levels, an end to the party is clearly in sight."

"Future investment by foreigners in anything with a $ sign
attached is at risk," Gross continues."In addition, Rubin's
policy succeeded so famously that our bonds and our stocks now
have lower yields and much higher P/Es than most other
alternative markets. Rubin and his successors have painted us
into a corner from which either a falling dollar, depreciating
financial markets, or both are nearly inevitable... 13% of the
U.S. stock market, 35% of the U.S. Treasury market, 23% of the
U.S. corporate bond market, and 14% direct ownership in U.S.
companies are now in the hands of foreign investors.

"It's a theater crowded with foreigners and if someone yells
'Fire, Feuer, or Kaji' there could be a rather crushing
stampede for the exits," he concludes.

Eric...

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

Eric Fry from New York City...

- The Dow Jones Industrial Average took a well-deserved
breather yesterday, dipping 33 points to 8,741. But the
younger, more energetic, Nasdaq Composite continued to power
ahead, gaining 10 points to 1,432.

- Gold stopped to catch its breath as well, as the yellow metal
stumbled $4.40 to $347.70 an ounce. (Does Mr. Gold Market read
the Daily Reckoning?) Gold stocks retreated in sympathy with
gold, as the Philadelphia XAU Index fell 3.5%.

- President Bush took to the airwaves midway through the New
York trading session to emphasize his concern for the economy
and to explain all the wonderful things he's going to do to
pull us out of our"soft patch." Like most Presidential
proposals, Bush's"growth and jobs" plan is a"borrowing and
spending" plan. And like most Presidential proposals, it is
certain to succeed in borrowing and spending, but uncertain to
succeed in producing either jobs or growth.

- At the outset the Bush plan may be better than a poke in the
eye with a sharp stick. But it might end up being worse that a
poke in both eyes with a turkey thermometer... of course, only
time will tell. From our vantage point, the likeliest
consequence of the Bush plan is resurgent inflation -- the
monetary love-child of"Borrowing" and"Spending."

- Although the economic landscape has changed substantially
over the last 12 months, the main issues confronting investors
have changed very little. Stocks are still expensive, the
dollar is still vulnerable and the consumer will still -
someday, we think - stop buying things he doesn't need with
money he doesn't have. In fact, a few consumers seem to have
reined in their spending already, as evidenced by the dismal
recent sales trends of Home Depot, Radio Shack, Restoration
Hardware and many other retailers.

-"What's the outlook for consumer spending? Dim, in my view,"
says Northern Trust economist Paul Kasriel."If baby boomers
want to retire before they expire, they are going to have to
start saving more. The personal saving rate troughed in 2001 at
2.3%. In the first 11 months of 2002, it has averaged 3.9%.

-"My bet is that the personal saving rate will trend still
higher in 2003. Why? Because households are significantly
poorer...after the bursting of the stock market bubble....Net
worth as a percent of disposable personal income (DPI) has
fallen back to 1995 levels. I would expect that consumption as
a percent of DPI also would start to gravitate back down to
1995 levels. (Another way of saying this is that the personal
saving rate ought to levitate back toward its 1995 level of
5.6%)."

- But even if folks aren't buying as many tool-belts and
curtain rods at Home Depot, they're still binge-buying
expensive stocks from time to time. Folks can't seem to get
their fill of stocks, no matter how many of the things they
might already own. But if the current bear market rally fades
like all of those that have preceded it, investors will wish
they'd purchased housewares instead of Intel shares.

- Stocks are still pricey, not simply because they boast lavish
PE multiples, like 30 and 40 times earnings, but also because
the economic hangover from the bubble years is still with us.
The economy is still beset by the twin ills of excess capacity
and feeble demand. No amount of interest rate cuts or tax cuts
or Dow points will heel these maladies overnight...At least,
that's the bearish point of view. Alan Greenspan offers a much
cheerier post-bubble post-mortem. As he has asserted
repeatedly,"It was better to have boomed and busted than never
to have boomed at all." Nice theory, but it's probably not
true.

-"The Fed's defense is waged in the arcane locution of
macroeconomics," the Washington Post's Steven Pearlstein
explains."But essentially it boils down to this: The economic
dangers involved in trying to pop a stock market bubble are
greater than the risks of letting the bubble pop on its own and
then lowering interest rates to try to limit the economic
damage after it does."

- That's the phase we're in now -- the post-bubble-interest-
rate-reduction-to-limit-damage phase. Unfortunately,
Greenspan's rate-cutting extravaganza has not succeeded either
in restoring economic growth or in limiting the post-bubble
economic damage. The problem with busted bubbles is that --
like chest colds -- they tend to hang around for a while.

- Thirteen years into its colossal busted bubble, the Japanese
economy is still coughing up mucous, financially speaking.
Here in the States, we've only endured three post-bubble years.
So it may be too early to declare the Fed's radical 12-step
interest rate reduction program a complete failure. But it's
not too early to declare the program a non-success...

- But fear not! The"growth and jobs plan" is on the way!

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

Back in Paris...

*** European consumer confidence is at a 5 and a half year
low...

*** Germany's economy is"unlikely to recover this year," says
a Financial Times report.

*** 'Central bankers on trial!' Literally. Bank of France head
Jean-Claude Trichet faces charges of covering up problems at
Credit Lyonnais 10 years ago.

*** Back in the U.S.A., the percentage of mortgages in
foreclosure rose in the 3rd quarter of '02 to 1.15%, a new
record.

*** What else...? Nothing much. More thoughts on what to expect
in 2003 below...

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

The Daily Reckoning PRESENTS: A long and winding road... toward
gold.


NO EXPECTATIONS
By Bill Bonner

Once I was a rich man
Now I am so poor
But never in my sweet short life
Have I felt like this before

The Rolling Stones


The Daily Reckoning offers no forecasts nor predictions. Not
that we are too modest to pretend that we can see into the
future.

On the contrary, we are immodest enough to pretend that we can
know, at least better than most people, how the world works.
But over many years, we've learned our lesson about
forecasting: it is far safer to try to describe how things
ought to work rather than what will actually happen.

Curiously, it is more profitable too.

For the last 3 years, we have been telling you what ought to
happen, not what would happen. To everyone's astonishment,
including our own, much of what we though ought to have
happened, did happen... though not exactly when we thought it
should.

Today, we return to the subject. What ought to happen to gold,
we ask ourselves?

It ought to go up, we conclude. What follows is not a logical
discourse on the gold market so much as a long, windey road of
cogitation leading to gold's door.

The problem with this silly old ball we live on is that life is
infinitely complex. The closer you look, the more you see. What
seems simple from a distance...say, disciplining a teenager or
the politics of South Africa...is alarmingly complicated up
close. The whole truth, being infinite, is unknowable. And for
every tiny little piece of it there's a revolver in some poor
fool's mouth...and a special corner of Hell waiting for him.

"Nobody knows anything," they say in Hollywood, recognizing the
complexity of the film business. A studio might spent $100
million on a block-buster movie...and the thing might be a
complete dud. Or, a young guy with $20,000 might make a big
hit.

The old-timers know that even a life-time of experience is no
guarantee. Even the pros often guess wrong about which films
will box office hits.

But walk up to an investor on the street and he is likely to
have an opinion. He may have even bought stock in an
entertainment company....after hearing about the block-buster
films they had planned for the summer. Of course, he has not
read the scripts, nor met the actors, nor ever earned a dime in
the cinema business...nor even worked as an usher. Yet, he has
an opinion -- based on what he has read in the paper or heard
on TV!

People have opinions on everything -- especially things they
know nothing about. Voters in Baltimore during the '80s could
hardly figure out how their own municipal government worked and
could barely get it to pick up the trash. Yet, though very few
had ever been there....and almost none spoke the languages or
could identify the major ethnic groups of the country....they
nevertheless had strong opinions about how to reorganize the
government of South Africa!

Yet, the more you knew about the situation in South Africa the
harder it was to have a simple opinion. A knowledgeable man,
asked to comment on the situation, preceded his thoughts with
"I don't know..."

Even statements of 'fact' need a qualifying hesitation. A woman
may say she loves her husband, and mean it sincerely. But she
will surely hate him too...in some manner, at some time.

"The dollar is the world's most valuable currency," an
economist might say, for there is more of it than any other.
But he might say the very opposite too -"The dollar is world's
most worthless currency" -- for the very same reason, because
there is so much of it around. Both statements could be 'true'.

Or take an historical 'fact.' As we have remarked in these
letters, everyone knows that the Allies won WWII...but it might
just as well be said that they lost it, because Germany emerged
the clear winner in Europe -- economically, politically and
militarily. We've also observed that the statement about the
outcome of the American Civil War, which everyone recognizes as
true,"Lincoln preserved the union", is a much a lie as a
truth. For while his armies defeated the southern states, his
policies destroyed the very heart of the union, the liberty of
its member states to decide for themselves what kind of
government they would have.

"John crossed the road," you may say, confident of disproving
our point. But Einstien showed that this was not so."John did
not cross the road, the road crossed John," is just as
accurate."And who knows if John really crossed the road or
not," Heisenberg would add.

The more you think about it, the less you know for sure. Here
at the Daily Reckoning we grow more ignorant every day.

Opinions we felt pretty confident about a few years ago are
reprised with"Did we say that?" Now, we begin our sentences
with..."We don't know...but..." Soon, we will know nothing at
all. Perhaps we already do.

The rise of the modern communications...most recently, the
Internet...vastly increased the amount of information available
to the average person. But it was not the sort of information
they got on their own -- from direct experience. Instead, like
the investor in the film business, the new information was
public, not private...it was information based on statistics,
not individual numbers...and organized according to collective
abstractions, and not on an individual's own observations or
his own ideas.

Now, men could know less and less about more and more subjects
-- and have opinions about nearly everything. A man in
Strasbourg could have the same opinions as one in Bordeaux...
participate in the same discussions...invest in the same
markets and vote in the same elections! It was the 'Era of
Crowds,' wrote Gustave Le Bon, anticipating, in 1895, the
largest trend of the 20th century.

Crowds have their own way of thinking. They cannot think the
truth, because they cannot know it any better than we can. But
crowds lack patience with irony, nuance, complexity. Ideas need
to be dumbed down and vulgarized so they can be taken up by the
masses. They end up as dumb as campaign slogans or war jingos,
that is, little more than stupid lies.

The crowd makes no attempt to see the complexities of a modern
economy. Its idea of an economy is as simple as an internal
combustion engine. If the Fed wants to speed it up, it has only
to"push the pedal to the metal," opening up the money spigots
as if they were a fuel line. If the Fed wants to slow it down,
surely there are knobs and switches it can turn to do the job.

Nor does the new lumpeninvestoriat have any better idea of how
the stock market works than the average voter has of how his
laws are made. Instead, they are satisfied with the advertising
themes -"Bullish on America," says Merrill Lynch;"Protect the
Homeland," says George W. Bush. The crowd asks few questions...
for fear it might get drawn into complexity.

Thus are the little guys set up to be the chumps of Wall Street
and the patsies of Washington. Both are encouraged to believe
that they are in control. ("We are the government," wrote
Hillary Clinton in her opus."Wall Street is investors," a
brokerage might claim.) But neither voters nor shareholders
have any control at all -- outside of the great mass movements
of which they are part. Neither the individual shareholder nor
the individual voter has enough at stake to justify the time
and effort it would take to actually figure out what is going
on. If he looked hard he might discover that government
programs are a waste of money....and that corporate executives
are overpaid and that most stocks are overpriced. But what
could he do about it? What matters is the direction of the
crowd. Like it or not, he is swept along, as ignorant as a
congressman, with the mob. If the crowd drives up stocks, his
stocks go up....if they elect a Republican or Democrat he must
put up with the fool along with everyone else.

And if he reaches in his pocket, he finds no gold. Instead, he
sees green pieces of paper. He's been told they are worth
something. Everyone seems to agree...for he can exchange them
for the things he wants. Today, he can buy an ounce of gold for
less than $350. The crowd judges it a fair trade today.
Will it tomorrow?

More to come....

Bill Bonner

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• No Expectations / The Daily Reckoning - - ELLI -, 09.01.2003, 10:39