The Transatlantic Gulf / The Daily Reckoning

verfasst von - ELLI -, 20.02.2003, 01:36

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The Daily Reckoning

Stratham, New Hampshire

Wednesday, 19 February 2003

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

*** City governments buried under"$1 million a square
inch" snow...but stocks zoom higher...

*** America's 'debt hangover' persists...Greenspan and
friends in a trap...

*** Has the"housing bubble" even begun? The hot war with
Iraq...and more!

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

It's déjà vu, all over again. But this time it could be
worse.

A decade ago - the last time the Americans were trying to
dig themselves out from a recessionary economy - much of
the eastern United States got buried under snow in a late
winter storm. Retail sales fell almost 1 percent, logging
the biggest decline for any month from '92-'94.

The effects from the storm were then...and are likely to be
now...temporary. City governments, for example, already
cash-strapped from bloated surplus-era budgets and rapidly
dwindling tax receipts, are in trouble. New York's mayor
estimates that clearing roads and sidewalks could cost $20
million, doubling the amount by which the city had already
exceeded its budget for snow removal this winter. News
commentators are throwing around the"price tag" of this
storm -"$1 million a square inch" - as if they had a clue.

"Given the dire financial straits these cities are in, this
is painful," says Economy.com's Mark Zandi."They've got a
lot of cleanup to do at a time when there's a lot of red
ink."

But, like the latest fashions in the Paris spring line,
we'll have to put up with commentary blaming the storm for
the hideous appearance of the economy until the next
panacea presents itself. Iraq, for example, is sure to
reassert itself - drag that it is - very soon. As we noted
yesterday, the IMF projects a U.S.-led war with Iraq could
slow the world economy by 50%...

"This global economic system is based on the American
economy and the dollar," asserts our own William Rees-Mogg.
"The U.S. is already running an external deficit, mainly
financed from Asia, of 5% of gross domestic product. The
dollar has been under pressure. A split between Europe and
the U.S. would be very dangerous for the whole global
economic structure established since 1945. It would be
almost impossible for the British Government, as we have
close ties with both sides. This is a big, big crisis for
the world."

Still, in our humble view, the dominant economic issue
remains: the debt hangover from the 1990's bubble.

"Retirement funds caught in a downward spiral," reads a
headline in the FT."During the bull market companies were
lured into investing more of their investment funds in each
other's success. This may haunt them for a long time,"
explains an article."The prolonged bull market became
entrenched in people's thinking, but now we must adjust to
a very different world," chimes another.

In the U.S., total household debt is at a record level -
both in absolute terms and when compared with disposable
personal incomes.

"Ten years ago," points out CBSMarketWatch.com's Irwin
Keller, producing figures from the Federal Reserve board,
"total consumer debt amounted to 85 percent of annual
incomes, while 20 years ago this ratio was about 65
percent."

During the last 20 years - an era widely believed to have
been the largest economic expansion in U.S. history -
consumer debt has risen by more than 40% of disposable
income."As a matter of fact," says Keller,"the average
household today owes more than its breadwinners bring in
during an entire year."

And there's the rub. If the Fed were to try to raise rates
now...it would squeeze the"average household" to the
breaking point."For consumers," explains Keller,"low
rates translate into debt service that is no higher today
relative to take-home pay than it was back in 1986. People
have to set aside only 14 percent of their disposable
incomes to service their existing debt, a ratio they have
handled easily in the past."

Greenspan, Bernanke & friends are beholden to keep rates
artificially low - whether it draws in undesirable
borrowers or not.

So what?

"After a year of slowly moderating price increases, the
cost of a home is shooting back up," USAToday replies."The
median home price in the U.S. rose at an annual rate of
8.8% to $161,600 in the 4th quarter last year. That's the
biggest quarter-over-quarter increase reported since 1981.
And the upward push on prices is widespread: 39 metro areas
registered double-digit price growth for the quarter,
triple the number of metros with such increases in 1999."

"The big jump reflects the explosive mix of tight supplies
of homes for sale and mortgage interest rates below 6%, the
lowest in four decades," David Lereah, chief economist at
the National Association of Realtors, told McPaper.

We Daily Reckoneers have noted on occasion that throughout
history, as one bubble deflates, investor fervor is often
directly transferred to a new asset class...most notably
real estate. With the Fed locked in low rates for a long-
time, we suspect the"housing bubble" every one is so keen
to talk about may have not even begun.

The Dow defied snow, slush, the odds, the gods and gravity
yesterday by jumping up 132 to 8041. The S&P 500 and Nasdaq
followed suit, rising 16 and 36 respectively.

Gold, on the other hand, continues to attract attention.
But yesterday the once-neglected metal lost $4 to $342.
"Like a long-dormant volcano," observes Andrew Kashdan,
conducting a trade in the Resource Trader Alert,"the
yellow metal surprised nearly everyone recently by erupting
toward $400 an ounce. Gold then retreated sharply and
dropped to $350 an ounce. But investors are keeping a wary
eye on this 'Pele' of the commodity markets, as it may
erupt again at any time. Every minor sell-off, so far, has
been buried by another explosive rally."

Regards,

Addison Wiggin

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

The Daily Reckoning PRESENTS: Lord Rees-Mogg coolly
appraises the unintended consequences of a hot war with
Iraq.


THE TRANSATLANTIC GULF
By William Rees-Mogg

This month is the decisive period for an American war
against Iraq. According to my Washington sources, the
build-up of American forces ready to enter conflict is
almost (if not yet) complete. Unless there is substantial
evidence of Iraq's disarmament, in accordance with the
United Nations resolutions, the United States will enforce
those resolutions by military action.

The whole of the worlds' economies will be affected by
whether this war occurs, and if it does, by its outcome. If
Saddam Hussein is removed from power, either by a deal with
his Arab neighbors, by assassination (which has been a
common event in Iraqi and Mesopotamian history) or by the
U.S., that will be good news for stock prices. If there is
no war or a drawn-out campaign, markets are likely to drift
lower, though oil and gold may go higher. If Saddam Hussein
is still in power in three months' time, it will mean a
defeat for the United States, with serious consequences for
market confidence.

Already, the imminence of war has had a very important
effect on the Western alliance. NATO was held together from
its formation down to the break-up of the Soviet Union by
fear of the Soviet superpower. It has held together more
precariously since 1990, by practical agreement on
successive international issues, and by the predominance of
U.S. defense technology and power. There were strains
between the U.S. and Europe during the break-up of
Yugoslavia, but these strains did not amount to a breach,
despite clumsy policy formation on both sides. Now that
unity has been broken.

Germany and France are in agreement in opposing American
action against Iraq, with Chancellor Schr"der using Iraq as
an issue in the German election campaign. Germany is now a
temporary member of the U.N. Security Council and France is
a permanent member. Both countries have coordinated their
policy, which is one of hostility to American action. They
believe that an attack on Saddam Hussein would be contrary
to international law, despite his alleged failure to comply
with a succession of U.N. resolutions.

This dissent is a crisis for NATO, which is still the main
organization for European defense. The views of France and
Germany are unlikely to deter the Americans, but do
threaten the whole structure of international relations.
The rift obviously threatens the United Nations, which has
relied on the defense power of the United States to give
the only effective backing to its resolutions. When, as in
Israel, the U.S. has been unwilling to act, the U.N. has
been important. The future of NATO is also under threat.
The decision by Lord Robertson, the well-esteemed Secretary
General of NATO, not to serve for a further year when his
term expires, is not a good sign of NATO's confidence.

Undoubtedly, this disagreement over Iraq threatens the
whole future relationship between Europe and the U.S. In
the two World Wars of the twentieth century, the United
States saved Europe from German rule, making it less
popular in Germany than in Britain, its closest European
ally. After the Second World War, the U.S. saved Europe
from Soviet rule, again making it less popular in Russia
than in Britain. Now there is a danger that Europe will be
developed as a rival rather than an ally to the U.S. There
is a strong French nationalist tradition, hostile to the
U.S. and to Britain. President de Gaulle refused to allow
Britain membership of the old Common Market in the early
1960s. President Chirac is a Gaullist. The U.S. already
regards Europe as an unreliable ally, and in the U.S.,
isolationism is not dead.

From the economic and investment point of view, this
potential division between Europe and the United States
threatens the international structure of trade and
currencies. American post-war policy has been globalist,
creating the institutions of the World Trade Organization,
the International Monetary Fund and the World Bank. Anti-
globalist protestors hate these institutions. But they have
managed to preserve a surprisingly high degree of world
financial stability in the last half-century, despite the
breakdown of the Bretton Woods exchange system in the early
1970s, which was followed by global inflation.

The effectiveness of this system depends on cooperation
between the U.S., which remains the world's premier
economy, the European Union, Japan and China, which are the
world's largest savers. Japan has the most efficient export
industries and China the lowest export costs of major
powers. The global system also requires cooperation from
the main Arab oil producers, which makes the confrontation
with Iraq particularly significant.

This global economic system is based on the American
economy and the dollar. The U.S. is already running an
external deficit, mainly financed from Asia, of 5% of gross
domestic product. The dollar has been under pressure. A
split between Europe and the U.S. would be very dangerous
for the whole global economic structure established since
1945. It would be almost impossible for the British
Government, as we have close ties with both sides. This is
a big, big crisis for the world.


Regards,

William Rees-Mogg

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• The Transatlantic Gulf / The Daily Reckoning - - ELLI -, 20.02.2003, 01:36