The Golden Road / The Daily Reckoning

verfasst von - ELLI -, 20.02.2003, 23:43

-->The Golden Road

The Daily Reckoning

Delray Beach, Florida

Thursday, 20 February 2003

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

*** Are we there yet?

*** Cabernet, brie and barley...the U.S. is in record-
setting mode...

*** What's wrong with Chirac? The Decline and Fall...and
more!

Did the war against Iraq begin yet? Have investors
panicked? Has a new bull market begun?

Your editor just returned from a 10-day vacation in
Nicaragua where his internet connection would not work. If
something really important happened, he reasoned, the news
would eventually penetrate the Latin American isthmus and
find him at his tranquil outpost on the coast. But no news
disturbed his peace. No newspapers distracted his thoughts.
No TV nor internet persuaded his attention away from the
paradise before his very eyes. Out in the wilderness, he
knew not what happened in the world...and soon forgot to
care.

But, now that he is back in the land of latte and
nutrasweet, he turns to Addison for the latest market
update:

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

Addison Wiggin, reporting from, er, Baltimore...

-"Bulls holding steady", a headline read briefly on the
USAToday website this morning. Indeed, a late day rally
saved all of the major indexes from greater declines. But
when the snow was finally cleared and the shovels put away
for the day, the Dow was still down 40 points, closing at
8000... giving back a skosch of the 291 points gained over
the last two sessions.

- The Nasdaq gave up 12 points to close at 1334, and the
S&P 500 surrendered 6.

- Chalk one up for the New York editors of the Daily
Reckoning: Following a decline of 0.1% in December of last
year, and not even two months after the infamous Bernanke
speech, wholesale prices sustained the"worst inflation" in
13 years. The Producers Price Index (PPI), says a Bureau of
be-Labored Statistics report released early this morning,
jumped 1.6% in January, the largest increase since the
concomitant month in 1990.

- If you've spent any time on the nation's highways in the
past month, it's no secret what accounted for a healthy
segment of the PPI increase: gasoline surged at the pumps
in January. Heating oil rose significantly too, as cold
winter months, particularly in the North East (thank you,
very much) have put a strain on supplies. Oil, too, has
been stretched - dropping to a 29-month low. Overall,
energy prices jumped 4.8% for the month...and food prices
rose 1.6%.

- And what's this? Surprise, surprise. In addition to
setting an historical record for all of 2002, the United
States has now set an all-new monthly high for consuming
the world's capital. The trade imbalance reached $44.2
billion in December...up 10.5% from the previous record set
a month before ($40.0 billion).

- For the year 2002, the Commerce Department reported this
morning, the deficit shot up like a bull market stock
index: up 21.5% from the $358.3 billion trade gap recorded
in 2001. At $435.2 billion, the trade deficit for last year
is the largest imbalance in history, blowing the old 2000
record deficit of $378.7 billion clean out of the water.

- And now, it looks like Americans are not only scarfing up
the world's capital, but its food, too. For the year,
Americans bought more Cabernet, brie and barley than its
farmers were able to sell abroad. Agricultural products,
normally a healthy U.S. export, fell into deficit for only
the second time on record.

- Faithful Daily Reckoning readers will not be surprised to
learn that the U.S. ran up its largest inter-country
deficit with China. Last year, Americans traded 103 billion
pieces of its Monopoly script for a supposedly equivalent
"value" of Chinese gee gaws. The year now marks the third
straight one in which the U.S. has recorded its largest
trade deficit with China...since pushing aside the former
champion, Japan.

- One unseen, but significant, export from the U.S.:
mortgage debt. According Robertson Morrow, writing in the
American Conservative, nearly 20% of mortgage debt in the
U.S. is securitized and sold to foreign investors - thereby
inextricably linking two of the U.S. economy's greatest and
growing imbalances: mortgages and the trade balance.

-"An indispensable aspect of the debt binge is the
willingness of foreigners to lend us the money," says
Morrow."Not only is 20 percent of mortgage debt sold to
foreign banks and other foreign buyers outright, but modern
finance has made all liquid instruments de facto fungible.
Even when foreigners buy other American financial assets,
they are propping up a market of which mortgages are a
part. Take the foreign buyers out of the equation and the
whole thing collapses, and plentiful, cheap mortgage debt
is no longer available to Americans."

-"Without foreign buyers," Morrow continues,"the wave of
cash-out refinancing and home equity loans would reverse,
and we would return to the normal mode of gradually paying
down mortgages. The foreign-debt bubble, and therefore the
mortgage bubble, is a necessary consequence of our trade
deficits."

For those cashing out the equity in their homes to buy
foreign gee gaws, you might want to take note: the same
crazy wave of financing that whipped its way through the
Tech and Telecom craze and subsequently devastated your
retirement fund...is now setting its course for your home.

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

Back in Delray Beach...

***"What's wrong with Chirac, anyway?"

Even in the wilderness, people want to discuss popular
politics. Learning that we lived in France, a visitor to
Rancho Santana in Nicaragua wanted to know why the French
president was reluctant to support Bush's war against Iraq.

Perhaps it was because France has a large muslim
minority...or because French companies have access to Iraqi
oil...or because a huge majority of French voters oppose
military action against Iraq...

Your editor really has no idea...but the question was a
comic relief from the question generally posed to him in
Paris:"What's wrong with Bush?"

*** Aside from the occasional discussion, life at Rancho
Santana on the wild Pacific coast of Nicaragua is
mercifully free from politics. There are monkeys in the
trees, turtles on the beach, birds among the branches, and
gringos in hammocks. Among them was your editor, with a
thick volume of Gibbon's Decline and Fall on his chest,
itself gently rising and falling in time with the dozing
man's respiration.

Cut off from current events, your editor turned to ancient
ones. For entertainment, he read about Egalabalus, Commodus
and Caracalla...rather than Bush, Rumsfeld and Powell.

The scenes change, he noted, but the dramas remain the
same. The Roman Empire faced it own terrorists on the
frontiers...and suffered its own degradation at the center.
It, too, ran itself into debt and enjoyed a huge trade
deficit. Its emperors were fools and madmen...as well as,
on occasion, exceptionally wise and honorable.

But no matter how smart or good they were, they could not
prevent the Decline. What had been built up over so many
centuries - the Roman Empire - gave way in as many more.

More to come...


The Daily Reckoning PRESENTS: What a long, strange trip
it's been. The International Speculator's Paul van Eeden
takes us on a scenic tour of the dollar demise and the
rebirth of gold.


THE GOLDEN ROAD
By Paul van Eeden

In 1992, the Brazilian economy buckled under debt and
runaway inflation, resulting in a complete collapse of the
Brazilian real. The real literally went to zero and was
replaced with the new real.

During crises, money flees to the safest haven. The
Brazilian crisis caused large amounts of capital to seek
asylum in the U.S.. Careful analysis shows that the influx
of capital from Brazil caused a noticeable uptick (about a
10% gain) in the U.S. dollar from 1992 to 1994. This marked
the beginning of the greatest bull market in history,
encompassing stocks, bonds and real estate.

The next year, 1995, Mexico experienced its biggest
economic collapse since the Revolution and the peso lost
50% of its value. Being our southern neighbor and one of
our largest trading partners, this caused additional
capital to flee to the U.S., which in turn strengthened the
dollar even more. Our stock and bond markets followed suit.

At this stage, the U.S. economy was robust, real interest
rates were running at 5.02% compared to Europe's 3%, and
given a stronger economy and higher real rates of return,
it is no surprise that capital migrated to the U.S. as
economic mayhem continued to plague the world. But the
stock market was already overvalued, with the Dow at around
3,500.

In 1996, the South East Asian Tigers caught a bad case of
the flu. This time, however, the new capital influx into
the U.S. was staggering, totaling $356 billion during 1996
and 1997 alone. It is not a coincidence that gold peaked in
February 1996 at $415 an ounce.

The world was still sniffling from the Asian Flu when
Russia defaulted on its debt in 1998. In January 1999, the
euro was launched and promptly started falling against the
dollar, eventually losing as much as 35% during the ensuing
two years. More capital made its way into the U.S.
attracted by reports of a"New Era", supposedly as a result
of productivity gains and the ultra-efficient U.S. economy.
Not to mention the gains in the U.S. stock market from
earlier flight capital infusions...and of course there was
still the perception of the U.S. as a safe haven for
foreign capital. By this time, it was already difficult to
distinguish between the roaring 20's and the roaring 90's.

From 1992 to 1999, more than $1.2 trillion (net) flowed
into the U.S. economy. This had to have ramifications.
Initially, the money was invested primarily in bonds,
leading to a spectacular bull market in that sector, but
more importantly driving down U.S. interest rates.

The falling cost of capital had an immediate effect on the
U.S. economy and the markets. Lower borrowing costs
increased corporate cash flows and profits. Higher profits
lead to higher stock prices as more cash flow allowed
companies to increase capital expenditures and R&D. The
latter two stimulated the economy by increasing jobs and
the velocity of money in the system.

Individual consumers also benefited. Unemployment declined,
along with mortgage rates and the interest on bank loans.
Cheap access to money induced both corporations and
consumers alike to take on debt at a staggering pace. From
1992 to 2002, consumer credit increased 119% and corporate
debt 95%.

It's important to realize that Bill Clinton and Alan
Greenspan did not engineer these 'good times'. They were
merely bystanders, spectators and orators. The markets did
not listen to Greenspan in 1996 when he warned of
irrational exuberance because he could not stem the influx
of capital. Likewise, Greenspan will not be able to
alleviate the correction we are now experiencing any more
than he succeeded in have preventing it. Finally, the
emperor is seen for what he is.

As mentioned, the dollar's run started in 1992, but it was
not until 1996 that it really got going. And the stronger
dollar had consequences. Exports from the U.S. become more
expensive, hurting the export industries. Imports get
cheaper, hurting those competing with lower prices
(imported products, as in the steel industry). Lower import
prices also stimulated demand for imported goods, causing
the balance of trade to get out of kilter. A negative $36
billion trade balance in 1992 expanded to over $420 billion
by 2002.

Undeniably, a negative trade balance leads to a negative
balance of payments. The influx of capital during the
1990's and the expanding trade deficit are two sides of the
same coin. Foreign demand for dollars was offset by out
demand for imported goods.

The problem with an expanding negative balance of payments
is that never before in the history of the world has there
been a large balance of payments deficit that was not
followed by a recession to correct the imbalance. The
magnitude of the ensuing recession is also in direct
proportion to the size of the deficit. The problem is that
the balance of payment deficit in the United States today
is exceptionally large by any measure. On a nominal basis,
it is the largest the world has ever seen.

The magnitude of our balance of payments deficit suggests
that we are going to have a long and severe correction
ahead of us. The influx of capital into the U.S., which
lowered our borrowing costs and led to exorbitant capital
expenditures, suggests that we are not merely looking at a
recession, but a full-blown depression.


Regards,

Paul van Eeden,
for the Daily Reckoning

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gesamter Thread:

• The Golden Road / The Daily Reckoning - - ELLI -, 20.02.2003, 23:43
  • Re: The Daily Reckoning - Kompliment! Die Leute haben es drauf! - Wal Buchenberg, 21.02.2003, 07:48
    • Re: The Daily Reckoning - Kompliment! Die Leute haben es drauf! - - ELLI -, 21.02.2003, 10:23
    • Re: The Daily Reckoning - Kompliment! Die Leute haben es drauf! - Diogenes, 21.02.2003, 16:44