Remerging Markets / The Daily Reckoning

verfasst von - ELLI -, 26.02.2003, 22:57

-->Remerging Markets

The Daily Reckoning

Paris, France

Wednesday, 26 February 2003

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

*** Australian dollar hits new high - who cares?

*** The Fed's dirty little secret...

*** Panic levels in the stock market? Those shameful
French? The pornography business...and so much more...

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

Last week, it was the Canadian dollar that made headlines
as it rose against the U.S. brand. Yesterday, it was the
Australian dollar's turn; it hit its highest level since
June of 2000.

Who cares?

"A small increase in interest rates or depreciation of the
U.S. dollar could cause catastrophic consequences,"
concluded an article at Finance Asia.com.

The dollar has been depreciating since the Fed Reserve was
set up to prevent it from doing so. But its most recent
down-swoop began after Fed governor Ben Bernanke told the
whole world the Fed's dirty little secret:"we have a
technology called a printing press...[which allows us to
increase the world's supply of dollars] at virtually no
cost..."

A modest decline in the U.S. dollar may be hardly
noticed...but an immodest decline sends foreign dollar-
holders looking for cover. Recently, for example, it was
reported in the International Herald Tribune that Russian
kidnappers were asking for their ransom money in euros
rather than dollars.

Foreign lending is crucial to the U.S. economy. At the
margin, it is foreign investors who fund the home
refinancing boom as well as the federal deficit. When the
foreigners pull away from dollars it reduces the amount of
available capital and forces up lending rates.

In the second half of 2002, Finance Asia.com reports, the
average U.S. homebuyer made a down payment of only 7% of
the purchase price, and uses 40% of household income to pay
the mortgage. Housing prices are the highest percentage of
average earnings in U.S. history, while the homeowner's
equity is the lowest it has ever been.

"This is unsustainable," the article continues,"and will
end just as badly or even worse than the tech bubble did."

But how? So far, home refinancing has saved the U.S.
economy - but only by luring the homeowner deeper into
debt. Sooner or later, someone will be ruined by it -
either the fellow making the loan or the fellow taking it.
Maybe both. Either the burden of debt will be eased by
Bernanke's printing presses...or it will crush the
homeowner as real rates rise in a deflationary slump. We'll
have to wait to find out...

In the meantime, here's Eric Fry with the latest news:

----------

Eric Fry, on the scene in New York...

- Yesterday, Mr. Market demonstrated once again why he is
such an interesting fellow. After stumbling more than 150
points during the morning, he came charging back during the
afternoon. The Dow finished the day with 52-point gain at
7,909, while the Nasdaq added half a percent to 1,329.

- Meanwhile, the safe-haven investments that attracted
investors on Monday suffered a reversal of fortunes
yesterday. Spot gold slumped $5.90 to $351.85, while energy
prices retreated from Monday's multi-year highs. Crude oil
fell 42 cents to $36.06 a barrel and heating oil dropped
more than 2% to $1.126.

- The stock market's one-day wonder won't do much to cheer
up the beleaguered consumer...The poor lump can't seem to
catch a break. First his tech stocks blow up, then his job
disappears, then his tech stocks blow up again...And all
the while, he has to watch his"idiot" neighbor get rich
buying gold stocks!...It's just too much to bear.

- No surprise then that Consumer Confidence Index tumbled
yet again in February - to a reading of 64.0 from 78.8 in
January, marking a fresh nine-year low. The"present
situation" component and"future expectations" component
both tumbled a similar amount.

-"Lackluster job and financial markets, rising fuel costs,
and the increasing threat of war and terrorism appear to
have taken a toll on consumers," reads the boiler-plate
assessment from Lynn Franco, head of the Conference Board's
consumer research center. Franco must have the easiest job
in America. Once a month she emerges, glockenspiel-like, to
toll the dolorous message of waning consumer confidence.

- Many State and local governments are faring as badly as
the woebegone consumer. Anecdotes of municipal distress
abound, like this one from the Daily Reckoning discussion
board:"A local small city near me [in New York state]
announced a financial problem this year...In 2002, its
contribution to the state retirement system was $32,000,
and this covered all their retirees, past and future. This
year, the state has informed the city that because of the
shortfall in the funds invested by the state of NY, its
share will be $762,000 for the 2003 fiscal year...This city
expected a problem, so they budgeted $300,000, which is
almost 10 times what 2002 cost and were still caught short
by over 50%."

- The story-teller goes on to explain that the small city
fears a $1 million shortfall in 2004."This is a city of
10,000 people," he writes,"so where will this extra
million come from? I expect to see them cut Parks and
Recreation budgets and jack up every taxpayer's taxes by
50% to keep things afloat for a while longer...At this time
a $100,000 property costs almost $4,000 in taxes and
insurance in this small city. So where are they going from
here when the average homeowner has to pay $350 a month in
taxes and insurance before he/she pays the principal or
interest on their mortgage?"

- Good question. This"small city's" experience may be
extreme, but it is hardly unique. State and local
governments are facing increasingly severe budget crunches.
And as desperate times call for desperate measures, many
states are resorting to dubious revenue-generation tactics.

-"Local governments around the nation are taking a new
look at some old vices," says CBS Marketwatch,"encouraging
everything from gambling to nudism in return for more jobs
and fresh revenue streams."

- The governor of Maryland, for example, hopes to raise
about half a billion dollars per year by installing 10,000
one-arm bandits in the state. Seventeen states in the union
have legalized gambling. Many more are reaping the benefits
of a growing porn industry - aka"adult entertainment".
Pornography - long rumored to be a popular pastime among
the nation's lawmakers - is now gaining favor as an all-
season revenue-generator. Many states, says CBS
Marketwatch,"quietly benefit from their relative
toleration of strip clubs and other adult entertainment
emporia, drawing customers from nearby communities where
the businesses are more frowned upon. Few governing bodies
(at least outside of Nevada) like to be seen marching hand-
in-hand with the adult entertainment industry...Still,
there is money to be made..."

- Indeed!...Porn is the ultimate budget-friendly industry -
- fast-growing and recession-proof. What's not to love? The
solution to our national budgetary woes is obvious, isn't
it? Let's convert all of the country's McDonalds and
Starbucks outlets into"adult entertainment kiosks". ("It's
a Wonderful Life" be damned! Our states need the cash!)
Then we'll just sit back and watch the state coffers gush
to overflowing.

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

Back in Paris...

*** Sitting in the JFK airport, CNN was unavoidable:"We're
at panic levels in the stock market," said one dim analyst.
"When people are this negative, it is almost always a good
buying opportunity."

Panic levels? With stocks at nearly 30 times earnings?

*** It was still mid-winter in Baltimore, with snow piled
up in parking spaces...but here in Paris it is early
spring. The sun is shining...people are sitting at outdoor
cafes...nice weather for a picnic, or a war.

*** Le Monde reports that the U.S. expelled its first
newsman:

"Even at the height of the cold war," says Le Monde,"that
never happened. Since the U.N. came into existence,
certainly spies wandered about with press cards, but never
was an accredited journalist expelled from the host
country. But a new precedent has just been created.
Mohammed Hassan Allawi, a correspondent for the Iraqi Press
Agency, and the only Iraqi journalist on American
territory, has been told to leave New York before the 28th
of February."

***"It's easy for people in the safety of their American
armchairs," writes my friend Harry Browne,"to tell how
courageous other people should be - that they should stand
up to tyranny, endure torture, sacrifice themselves. It's
easy when you never have to face the same choices."

See: Those Shameful French
http://www.dailyreckoning.com/body_headline.cfm?id=2968

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

The Daily Reckoning PRESENTS: From 1979 to 1999, stocks rose
by about 1,154%...the biggest speculation bubble to date.
Below, Steve Sjuggerud maps out what he thinks will be the
next sector to take off...


REMERGING MARKETS
By Steve Sjuggerud

"Buy me 10,000 shares of Hopewell Holdings in Hong Kong right
now!!!"

"Yes sir! By the way, my name is Stev-"

"I don't care who you are, just get that order in!!!"

Welcome to my first investment"bubble". It was late
1993/early 1994, and I was a broker specializing in
international stocks...which means I was in the right place
at the right time. Hopewell and other stocks like it had
doubled, and were literally going up every day. The phones
were ringing off the hook, and people were buying
indiscriminately.

It was the emerging markets bubble. And while not as many
people participated compared to the more recent dot-com
bubble, the gains were just as spectacular. Stocks doubling
and doubling again like Hopewell were everywhere. And even
boring funds, like the big fund of the day, the Templeton
Emerging Markets Fund, were up substantially - 359% in the
four years to the peak of the bubble in January of 1994. Then
the bottom fell out...

The Hang Seng Index (Hong Kong's main stock index) lost 38%
of its value over the next twelve months. The hits just kept
on coming to emerging markets like Hong Kong.

In late 1997, the Asian Crisis hit. Then Russia defaulted in
1998, the Nasdaq started tanking in 2000, Argentina defaulted
on $95 billion in December of 2001, and now we're on the
brink of war in 2003. That's nearly a decade of uppercuts and
punches in the gut. Can it get any worse for emerging
markets?

Nobody cares about emerging markets any more. Yet ten years
ago, they were all the rage. They could do no wrong. It
couldn't get any better. I bring this up because this is the
typical sequence of"bubble" and"bust". This sequence plays
itself out regularly around the investment world. As Leon
Levy subtly puts it in his new destined-to-be-classic
investment book,"The Mind of Wall Street","Investors
overreact, and so do markets. Investors get swept up in
moods, and so do markets. And this interplay creates
investment opportunities."

Levy says we all live three lives - our life, the life of our
parents, and that of our children. And the events we've been
through, particularly in our youth, are most deeply branded
on our minds. If you didn't live through the Depression, and
your parents didn't live through the Depression, the
Depression isn't as real to you. Levy gives an example:

"I might warn a [new kid on Wall Street] incessantly about
the horrors of a crash or a bad market. But I will not likely
make an impression on one who hasn't lived through that
experience."

The experience right now we think will last indefinitely. We
think now is the way it is. But it is not.

At the end of the Roaring Twenties, Yale economics professor
(and stock market speculator) Irving Fisher famously
proclaimed that we'd reached a permanent period of
prosperity. He made his statement on October 17, 1929. Twenty
full years after his famous words, the Dow was still 46%
lower than when he talked of permanent prosperity.

On August 13, 1979, BusinessWeek ran a cover story on"The
Death of Equities", saying,"The death of equities looks like
an almost permanent condition." Up until then, stocks had
been floundering for a dozen years. And BusinessWeek stated,
in all seriousness, that"...the truth is that Wall Street's
future still is very much in doubt."

Exactly twenty years after that cover story, the Dow had
risen an astounding 1,154%.

Irving Fisher and BusinessWeek were both ridiculous, in
hindsight. There is no permanent plateau of prosperity -
booms and busts are part of human nature. And there is no
death of equities - investing yourself in a venture to build
something is also part of human nature.

But recently, there's been talk about the death of the
"sovereign" debt markets - and specifically the market for
the bonds of emerging market countries. Standard & Poor's
estimated in late September, 2002, that"the average issuer
default rate on foreign currency bond and bank debt is one of
the highest on record for nearly 180 years". More recently,
on February 1, 2003, The Economist Magazine quoted a paper by
a Harvard economics professor entitled"Will the Sovereign
Debt Market Survive?"

With Russia's default in late 1998, the market for emerging
market bonds was obliterated. The market literally froze up -
ceasing to function, for a while. There were no bids - no
buyers. If you wanted to sell, too bad. Not a single investor
would step up to the plate to buy what you were trying to
sell - at any price.

Interestingly, the bursting of this little bubble had nothing
to do with the underlying asset. The fact that Russia was
defaulting was a sideshow to what was really going on. And
that was the crash of a hedge fund called Long-Term Capital
Management. The U.S. Federal Reserve had to step in and
engineer a bailout of the world's financial system. (For the
fascinating story, read the book"When Genius Failed" by
Roger Lowenstein.)

Since then, emerging market bonds have been a shadow of their
former selves. Burned by rising defaults, investment banks
have simply pulled up stakes and fled. As the quote from
Standard and Poor's suggests, we've seen more debt defaults
by countries in the last 15 years or so than we have at any
time in recorded history.

Now remember Leon Levy. Remember that what we experience is
what we believe. Our instinct says"mental note: stove hot,
don't touch again". We don't generally look back over 180
years at the history of touching stoves.

The truth is, the history of emerging markets is one of non-
stop booms and busts. People start dreaming about big
promises and immense potential riches from far away lands,
and they want to get involved. Like other bubbles, the word
spreads, and pretty soon, everyone is buying. At some point,
people are willing to pay ridiculous prices for investments
in foreign lands. And inevitably, it seems, at some point the
bottom falls out. That's how a foreign country ends up
staying an emerging market.

This is the reality of emerging markets. There are booms.
There are busts. And then after the busts, there are the
"purgatory" periods, as we've seen in emerging market bonds
for the last five years.

The very best time to invest is when an investment category
becomes immune to bad news. Nothing bad can hurt it anymore.
And this class has become immune to bad news. The $95 billion
Argentina default of late 2001? No big deal. War in Iraq in
2003? No big deal.

But judging by today, we have a fair guess as to what might
be the next"big deal" in tomorrow's news...


Happy investing,

Steve Sjuggerud,
for the Daily Reckoning

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• Remerging Markets / The Daily Reckoning - - ELLI -, 26.02.2003, 22:57