Great Expectations / The Daily Reckoning

verfasst von - ELLI -, 09.01.2003, 21:26

-->Great Expectations

The Daily Reckoning

Paris, France

Thursday, 9 January 2003

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

*** World's growth engine...world economy - both in
trouble. Stimulus package - 'a drop in the bucket.'

*** Stocks down...gold up. Bonds beat stocks. Stocks for
the long haul? You've got to be kidding!

*** Tech stock insiders are SELLING...3 out of 4
Frenchmen are against Iraq war...and more...


The world's 'growth engine' is running out of gas; the
end of the world is coming.

The U.S. has accounted for 60% of the world's GDP growth
in the last 5 years - most of it by way of increased
consumer spending. Put credit cards in their hands and
Americans will outspend anyone on the planet. As a
percentage of national GDP, consumer spending has
steadily risen since the '60s, while the current account
deficit and business profits fell. That's the post-war
American consumer-led economy!

The beauty of it is the financing. Americans didn't buy
more and more from other Americans...they bought from
foreigners, with dollars furnished by the Fed. The
foreigners were nice enough to send the money back...in
exchange for stocks and bonds and other financial assets
- thus closing the deficit gap.

What a marvelous system! If only it could last forever.
Alas, that's the trouble. Except for Christmas
fruitcakes, nothing does.

"Profits and business investment have suffered their
worst decline since the '30s," says an Economist article
from last fall.

Is it any wonder?

Their profits are going to overseas producers. Nor were
American employees getting rich. In the past 30 years,
the real average annual salary rose only 10%, over the
entire period, from $32,522 in 1970 to $35,864 in 1999
(in 1998 dollars).

And now comes a report that health care costs are soaring
- up 8.7% last year alone. Is it any wonder businesses
are reluctant to hire new employees? Is it any wonder
consumers are finding it hard to continue spending money
twice or three times faster than they earn it?

If it can't go on forever, to paraphrase Herbert Stein,
it won't. Sooner or later, the consumer exhausts himself;
he goes broke and can spend no more. This won't be the
first time we thought we noticed it happening...but signs
of consumer exhaustion are mounting. Auto sales were off
last year - despite giveaway incentives. The Christmas
shopping season was a disaster. And home sales may fall
10% this coming year, says a report from Houston.

But along comes the Bush administration with a $600
billion plan of fiscal stimulus. That ought to be enough
fuel to keep the world economy running, right?

"[It] sounds like a lot of money," says an article in the
International Herald Tribune,"but in a world economy
that generates more than $40 trillion in output each
year, it is little more than a drop in the bucket."

Everything comes to an end sooner or later, even the
world as we have known it. More below...

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

Eric Fry in New York...

- The stock market's stellar start in 2003 is looking a
lot less celestial. After bursting from the ashes of 2002
like a supernova, stocks"flamed out" once again
yesterday. 145 Dow points went up in smoke, as did 30
Nasdaq points...And just like that, the stock market
looks like the same old black hole for capital that it
has been for the last three years.

- Meanwhile, gold continues to dazzle and amaze. Gold for
February delivery soared $6.60 yesterday to $354.30 an
ounce - the yellow metal's highest level in nearly six
years. The message from the gold market would appear to
be unequivocal: Beware inflation! Alan Greenspan's Fed
has failed to revive the economy. But it has succeeded
very nicely in reviving inflation, or at least the traces
of it. The inflationary antibodies coursing through our
economy (and the global economy) are becoming more
numerous by the day...

- After three straight losing years in the stock market,
investors may be a tad less confident than they used to
be about stocks-at-any-price. But their faith in stocks-
for-the-long-haul remains unshaken. Ironically, stocks-
for-the-long-haul isn't all it's cracked up to be.

-"The five-year average annual return for the S&P 500
through 2002 was negative 0.6%," Barron's points out,
"versus an 8.55% gain for 10-year Treasuries. For the
past 10 years it's a close race, with stocks at 9.34% to
bonds' 8.36%. And for 30 years, it's even closer, at
10.68% for stocks to 10.11% for government bonds."

- Kinda funny isn't it? Over the past five years, boring
old bonds have trounced stocks, especially those super-
exciting tech stocks. And over the past 30 years, a
couch-potato investor who sat around watching TV and
"clipping coupons" from Governments would have earned
nearly as much money as an investor who battled for a
buck in the stock market trenches day after day.

- And yet, Wall Street still preaches the gospel of
stocks-for-the-long-haul. The gospel is partly true: if
you pay rich prices for stocks, it can be a very long
haul before you make any money at all. Historically
speaking, stocks have been a sensational investment only
when purchased on the cheap. But they have been a lousy
investment when purchased dearly. It may seem obvious
that"buying high" is less successful then"buying low."
But this truism is one that most of Wall Street quite
obviously ignores.

- In fact, they're ignoring it right now. Despite the
blatant and pervasive after-effects of the 1990s bubble
economy, and despite the still-high valuations prevailing
in the U.S. stock market, bullishness reigns.

- Unfortunately, says Doug Cliggott, a bullish
disposition toward stocks will be as expensive in 2003 as
it was in 2002. Cliggott made a big splash last year as
the lone strategist from a major Wall Street firm to
predict that that stocks would fall in 2002. While still
employed by JP Morgan, Cliggott predicted the S&P 500
would ring out 2002 at 950, or 17% below its level at the
close of 2001. Looking ahead to 2003, Cliggott remains an
unrepentant bear."I can't come up with a reason why a
high market multiple is warranted," he says matter-of-
factly...Nor can we.

- Most investors have discovered over the last three
years that richly priced stocks - like a herd of pigs
spilling out of an airborne C-130 - have a hard time
staying airborne.

- It's true that expensive stocks sometimes soar higher
on temporary flights of fancy. But like their cloven
counterparts, they are no less certain to cascade
earthward - eventually - and hit the ground with a
hideous thud. When flights of fancy fail to levitate the
U.S. stock market, and U.S. stocks do finally splatter on
the hard ground of a bear market bottom, it will be time
to start buying with both hands. But we aren't there yet,
as Jim Grant artfully explains.

-"The place to find a safe and remunerative investment
is usually where others aren't looking for it," says
Grant."What appears safe is often risk-fraught, e.g.,
the crowd-pleasing U.S. stock market at the March 2000
peak...On the other hand, what appears risk-fraught often
turns out to be safe and remunerative. Paradoxically, a
washed-out stock market is one of the safest havens in
all the kingdom of money, though the sight of it will
curdle milk. At the bottom (which, we think, we have not
yet seen), recriminating bulls will be prepared to
believe that common stocks do not excel in either the
short run or the middle run. Concerning the long run,
they will not want to hear about that any more."

- Keep an ear to the ground and listen for the"thud"
that signals value.

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

Back in Paris...

*** Tech stocks have been crushed. Is this the time to
buy them? The moms and pops in the lumpeninvestoriat may
think so, but what are the insiders doing?

"In the past six months, in [the top 10 tech companies],"
reports Alan Abelson in Barron's,"there were 137 sellers
against three - that's right, three - buyers. All told,
the buyers purchased 92,000 shares, while the sellers
unloaded 47.6 million shares."

Any resemblance between today's buyers and real
capitalists, we keep pointing out, is a case of
fraudulent impersonation.

***"Three out of four Frenchmen oppose war in Iraq,"
says the headline in today's Figaro. The poor frogs just
don't get it. But what do you expect?

"Why do Americans want to attack Iraq?" our friend Michel
asked at lunch yesterday."Why not attack North Korea or
Zimbabwe?"

"I guess they don't like Saddam," your editor replied.

"Why not? What has Saddam ever done to people in
Minnesota or Arizona?"

"Beats me. I never even met Saddam."

"Sounds to me like the lumpen voters are just as
benighted as your lumpen investors - none of them seem to
have any idea of what he is doing," Michel concluded.

The Daily Reckoning PRESENTS: Making room for 'Ought' -
and debunking the perfection of mass markets along the
way - Bill Bonner follows the trail of the gold market.


GREAT EXPECTATIONS
by Bill Bonner


"Truth, like gold, is to be obtained not by its growth,
but by washing away from it all that is not gold."

- Leo Tolstoy


We wander. And we wonder. Whither gold, we ask? We have
already given you our conclusion. We don't know if gold
will go up or not, but it ought to do so.

Today, we take another look at 'ought' - and hope to
discover more of life's secrets.

If 'Ought' were a person, it would not be a bartender or
a good-hearted whore. Ought is not the kind of word you
would want to hang out with on a Saturday night...or
relax with at home - for it would always be reminding you
to take out the trash or fix the garage door.

If it were a Latin noun, Ought would be feminine, but
more like a wife than a mistress. For Ought is
judgmental...a nag, a scold. Even the sound of it is
sharp...it comes up from the throat like a dagger and
heads right for soft tissue, remembering the location of
weak spots and raw nerves for many years.

Ought is neither a good-time girl nor boom-time
companion, but more like the I-told-you-so who hands you
aspirin on Sunday morning...tells you what a fool you
were...and warns you what will happen if you keep it up.
"You get what you deserve," she reminds you.

A man who lets himself be bossed around by Ought is no
man at all, in our opinion. He is a dullard, a wimp, and
a wuss...a logical, rational, reasonable lump.
Thankfully, most men, most of the time, will not readily
submit. Instead, they do not what they ought to do, but
what they want to do. Stirred up by mob sentiments or
private desires, they make fools of themselves regularly.
Besides, they can't help themselves.

Of course, Ms. Ought is right; they get what they
deserve. But sometimes it is worth it.

Modern economists no longer believe in 'ought'. They
don't appreciate her moral tone and try to ignore her. To
them, the economy is a giant machine with no soul, no
heart...no right and no wrong. It is just a matter of
mastering the knobs and levers.

The nature of the economists' trade has changed
completely in the last 200 years. Had he handed out
business cards, Adam Smith's would have borne the
professional inscription: Moral Philosopher, not
Economist. Smith saw God's 'invisible hand' in the
workings of the marketplace. Trying to understand how it
worked, he looked for the 'Oughts' everywhere. Everywhere
and always people get what they deserve, Smith might have
said. And if not...they ought to!

Today, the 'Ought to' school of economics has few
students and fewer teachers. Only here at the Daily
Reckoning is the flame still alive, flickering. Most
economists consider it only one step removed from
sorcery.

"Call it the overinvestment theory of recessions of
'liquidationism,' or just call it the 'hangover theory,'"
Paul Krugman begins his critique of the 'Ought to'
school."It is the idea that slumps are the price we pay
for booms, that the suffering the economy experiences
during a recession is a necessary punishment for the
excesses of the previous expansion...

"The hangover theory is perversely seductive - not
because it offers and easy way out, but because it
doesn't," he continues in his December 1998 attack."It
turns the wiggles on our charts into a morality play, a
tale of hubris and downfall...

"Powerful as these seductions may be, they must be
resisted, for the hangover theory is disastrously
wrongheaded..." he concludes.

In Krugman's mechanistic world, there is no room for
Ought. If the monetary grease monkeys of the Great
Depression of the '30s or of Japan of the '90s failed to
get their machines working, it was not because there are
any invisible hands at work or any nagging moral
principles to be reckoned with...but because they failed
to turn the right screws!

It is completely incomprehensible to him that there may
be no screws left to turn...or that the mechanics might
inevitably turn the wrong screws as they play out their
roles in the morality spectacle.

Krugman is hardly alone. As the 20th century developed,
mass democracy and mass markets gradually took the Ought
out of both politics and markets. In the 19th century, a
man would go bust and his friends and relatives would
look upon it as a personal, moral failing. They would
presume that he did something he oughtn't have. He
gambled. He drank. He spent. He must have done something.

But as economies collectivized, the risk of failure was
removed from the individual and spread among the group.
If a man went broke in the '30s, it wasn't his fault; he
could blame the Crash and Depression. If people were
poor, it wasn't their fault; it was society's fault for
it had failed to provide jobs. If investors lost money,
that too was no longer their own faults...but the fault
of the Fed...or the government. If consumers spent too
much money...whose fault was it? The Fed had set rates
too low...or something.

In every case, the masses recognized no personal failing.
Instead, the failure was collective and technical...the
mechanics had failed to turn the right screws. Ought had
disappeared.

In politics, the masses recognized no higher authority
than the will of the sacred majority. No matter what lame
or abominable thing they decided to do, how could it be
'wrong?'

Likewise, in markets, economists won a Nobel Prize for
pointing out that mass markets could never be wrong. The
Perfect Market Hypothesis demonstrated that the judgment
of millions of investors and spenders must always be
correct.

The whole method of modern economics shifted from
exploring what a man ought to do...to statistical
analysis."There is more than a germ of truth in the
suggestion that, in a society where statisticians thrive,
liberty and individuality are likely to be emasculated,"
wrote M.J. Moroney in his 'Fact From Figures' book.

"Historically," Moroney explains,"statistics is no more
than 'State Arithmetic,' a system by which differences
between individuals are eliminated by the taking of an
average. It has been used - indeed, still is used - to
enable rulers to know just how far they may safely go in
picking the pockets of their subjects."

Economists attached sensors to various parts of the great
machine as if they were running diagnostics on an auto
engine. Depending upon the information they twisted up
interest rates...or suggested opening up the throttle to
let in more new money.

Of course, it was absurd. Had not the perfect market
already set rates exactly where they needed to be?

The day before yesterday, the gold market judged a price
for an ounce of the metal at $347. Yesterday, the masses
set the price $7 higher. What will be tomorrow? We don't
know. But we note, ominously, that even though modern
economists took the moral 'ought' out of their
calculations, they could not take the moral hazard out of
the market.

The masses, the lumpeninvestoriat, scarcely noticed - but
the more economists and investors ignored the ought...the
more the hazard grew.

More on moral hazard...and gold...tomorrow.

Bill Bonner

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• Great Expectations / The Daily Reckoning - - ELLI -, 09.01.2003, 21:26