A Critical Juncture (Richebächer) / The Daily Reckoning

verfasst von - ELLI -, 04.03.2003, 12:19

-->A Critical Juncture

The Daily Reckoning

Paris, France

Monday, 3 March 2003

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

*** You can't get your hair cut in China...unless you live
there.

*** But can the Fed create money faster than China can
create 'things?' The dollar is 'a mess'...

*** Oil soars...Japan and Argentina...church affairs...and
more!

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

"Too Much of Everything," said a Business Week article,
pointing out that overcapacity is forcing price cuts,
hurting corporate profits, and reducing employment. But if
BW has caught on to the deflationary slump, does that mean
it's over?

The prices of most 'things' are falling. Televisions fell
by 10% last year. New cars were down 2%. Furniture dropped
1%.

But prices for services are rising. Funeral expenses rose
4.3%, according to the Bureau of Labor Statistics. College
tuition went up 7%. The cost of filling your car's tank
posted a 25% increase. (Crude oil has nearly doubled in
price in the last 14 months.)

Why are services rising while the prices of things are
going down? The simple answer: you can't get your hair cut
in China.

(On his recent visit to Granada, Nicaragua, your editor
discovered that he could get his hair cut for just $1.35.
He liked the price so much he wished he could have his hair
cut twice and save two times as much money. But that is the
problem with services. You can neither export them easily,
nor can the traveler stock up.)

From the Hindu Kush in the West to the Eastern-most
Indonesian islands, Asia is home to more than 3 billion
people - 60% of whom are below 30 years of age. Almost
anything that can be manufactured in America can be built
at less expense, and faster, in Asia. That's why prices on
things that can be imported are generally headed down.

But can Asia produce new goods faster than the Fed can
produce more dollars? Ah...there's a question! The U.S.
trade deficit is headed towards $600 billion. Government
deficits are expected to come in at about $400 billion.
Hey...that's about $1 trillion...or about 10% of the
nation's GDP. The savings rate in the U.S. is only about
3%. Even if every dollar of the nation's savings were used
to fund these deficits, there would still be a huge
shortfall. The money has to come from somewhere. Perhaps
out of thin air? Foreign lenders have been getting worried;
they sold the dollar last year (it fell 18% against the
euro)...and may sell even more in 2003.

"The dollar is not just in decline;" writes Jimmy Rogers,
"it's a mess. If something isn't done soon, I believe the
dollar could lose its status as the world's reserve
currency and medium of exchange, something that would lead
to a huge decline in the standard of living for U.S.
citizens like nothing we've seen in nearly a century."

"Whenever there has been an economic crisis like this,"
Rogers continues,"a new player has always emerged on the
economic landscape. A century ago, few people would have
believed that the dollar was going to emerge out of the
19th century as the dominant world currency. There's always
a phoenix that rises from the ashes. Who will it be for the
21st century? My guess is the Chinese yuan may eventually
have its day in sun. The nation has a recipe for a sound
currency - a huge population, an enormous balance of
payments surplus, and a sizeable GDP to match. China is now
the world's largest importer and the world's second largest
creditor (Japan is first). For the moment, its currency is
not convertible, which must change now that it has been
admitted to the World Trade Organization. There are still a
lot of cultural barriers to get over - rampant xenophobia
and fear of capitalist interests - but nothing assuages
fears like steady flows of money into your coffers."

Over to Eric Fry, with this morning's report from Wall
Street:

-----------

Eric Fry, reporting from Wall Street...

-"Never sell a dull market short" is one of the many"old
saws" on Wall Street. And as old saws go, this one is
pretty accurate. The phrase literally means that an
investor should not bet against a sleepy market. That's
because, oftentimes, the stock market will become"dull"
immediately before an explosive move to the upside.

- For the past few weeks, stocks have been oscillating
between dull and comatose. They've been drifting in a
narrow trading range since late January, while the trading
activity has been light and languid.

-"With most long-term investors standing down for lack of
confidence," writes Barron's Michael Santoli,"the daily
activity in the current environment reflects the efforts of
agitated traders feinting and sniping for momentary
advantage. The major market indexes last week alternated
down and up days through Thursday, then went nearly still
on Friday." After all was said and done, the Dow fell 127
points for the week to finish at 7,891, while the Nasdaq
Composite dipped less than 1% to 1,337.

- We have no idea what the somnolent trading action on Wall
Street might portend, but we love guessing games. So we'll
hazard a guess: the Dow will soon break out of its one-
month trading range between 7,700 and 8,100 by rallying a
few hundred points...Remember, this is not a prediction,
merely a guess.

- Furthermore, our long-term bearish posture toward richly
priced U.S. stocks remains an inviolate article of faith.
In other words, it's tough to get rich buying richly priced
stocks hoping they will become more richly priced. And the
U.S. stock market remains a pretty pricey equity bazaar.

- Like stocks, gold and the dollar both spent most of last
week napping. The yellow metal dipped $1.50 to $350.20,
while the greenback slipped less than half a percent
against the euro to $108.00.

- By contrast, the energy markets were as raucous as a
fraternity party. Heating oil for March delivery rocketed
about 15% to $1.26 a gallon - that's record-high territory.
Natural gas also vaulted to an all-time high of $11.90 per
million BTUs, before easing back to"only" $8.10 - a
whopping 28% gain for the week. Crude oil soared to nearly
$40 a barrel, before settling with a $1.02 gain for the
week at $36.60.

- No one knows quite what to make of the energy
markets...neither the bulls nor the bears. Are prices
spiking higher due to a short-term squeeze, or is there
something more serious afoot? For what it's worth, the
stock market crowd seems dubious that the recent
pyrotechnics in the energy markets presage a massive bull
market in energy products.

- Stock investors greeted last week's massive rally in the
energy complex with a yawn. The XNG Index of natural gas
stocks gained little more than half a percent, while the
XOI Index of oil stocks ended the week almost exactly where
it started. What's more, both of these energy stock indexes
are well below their record highs set two years ago. This
is not the sort of action one would expect to see if the
energy rally were"for real." Watch this space.

- U.S. consumer confidence is plunging, but that's only
part of the story. Taking a peek inside the Conference
Board Consumer Survey for February shows just how
dispirited the consumer has become. The once-sacrosanct
summer vacation is now on the chopping block along with
most other discretionary spending items."Only 42.0% of
U.S. consumers stated that they intend to take a vacation
in the next 6 months," observes Greg Weldon, eagle-eyed
macro-analyst of Weldon's Money Monitor."This [percentage]
marks a new secular low, surpassing the August 2002 low of
42.2% and down hard from December's reply of 43.3%."

- The only traveling some folks will be doing this summer
is"hitting the pavement" looking for work. The nation's
job market is becoming increasingly inhospitable, according
to the survey.

- Only 11.2% the respondents say that jobs are plentiful,
compared to the 18.2% who held that optimistic viewpoint
one year ago. On the flipside, 30.1% of respondents say
jobs are hard to get, well above the 22.6% reply posted a
year ago."Most tellingly," says Weldon,"observe that the
percentage of U.S. consumers saying a job is hard to get is
triple the percentage who say a job is easy to get."

- Rising unemployment and falling share prices make Mr.
Economy a dull boy.

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

Back in Paris...

*** What will America's economy look like in the years
ahead? We have two models - Japan and Argentina. In Japan,
14 years after its bubble economy popped, unemployment has
risen to its highest level since WWII. But Japan's misery
has been relieved by a deep cushion of savings. And even
its worst joblessness rate in 50 years is still better than
the equivalent in North America or Europe.

Meanwhile, a headline from the New York Times tells us
about life on the pampas -"Once secure Argentines now lack
food and hope".

*** My friend Rachel is always cheerful. It is amazing when
you think about it. Her sister was killed by Rachel's
brother-in-law...who then shot himself...her parents both
died recently...and her son, who must be about 30 years old
now, is severely retarded."

*** Your editor's 82-year-old mother recently returned from
a visit with relatives in America. She took the occasion of
a long drive to the country to bring him up-to-date.

"Life is very hard for some people...and yet they don't
show it at all, whereas other people seem to have
everything go well, but they are often very unhappy..." she
continued.

"I admire your sister so much. Oh...I don't think I told
you about the terrible things that happened at your
brother-in-law's church...

"...well, first there was the deacon who had taken up with,
was it the organist...or one of the kindergarten teachers?
And he was married...so your poor brother-in-law had to
straighten that out...I think both of them left the
church...

"...and then he had a couple of kids who were too old for
kindergarten, but their mothers would leave them in with
the smaller children...and they were causing trouble. You
know, they turned off the Bible show on TV and put on
cartoons...that sort of thing. Well, he finally had enough
and told the kids to leave the nursery and go back to their
parents. Of course, this set the mothers off - and they
complained, openly - in church - that he was a
hypocrite...and they said terrible things...and sent around
email messages to everybody....and had everyone up in
arms...

"...and all because of a couple of misbehaving children...

"...well, it weighed heavily on your brother-in-law. He is
building a big new sanctuary...the church is growing...and
now this... Margaret [your editor's sister, and the
minister's wife] was afraid he was getting an ulcer...So,
she called a few of the key people in the congregation to
her house. I think she must have read them the riot act or
something...because, after that, the whole thing seemed to
blow over. I think the women who were causing trouble left.
It's a terrible thing for a church to have to get rid of
people...but sometimes, I guess you have to...

"I guess it's easier to run a business than a church...at
least you can fire people..."


The Daily Reckoning PRESENTS: From time immemorial, busted
bubbles have wreaked havoc on the economy which gave rise to
them. The U.S.' current malaise, suggests Kurt Richebächer,
traces its roots as far back as 1970s - when corporations
first started undergoing the"profit carnage" so prevalent in
late, degenerate capitalism.


A CRITICAL JUNCTURE
By Kurt Richebächer

Economic downturns are generally caused by monetary
tightening responding to rising inflation rates. Clearly,
this has not been true for the U.S. economy's present
slowdown. Instead, the current slump happened against the
backdrop of runaway money and credit growth and plunging
interest rates.

This economic downturn had very different causes. The
single most striking cause was the profit carnage, which
acted as a savage depressant on business fixed investment.

It is now fully two years since the U.S. economy went into
recession. And for the first time ever, business fixed
investment - the key to economic growth - has continued to
decline through the recession, with the growth of net fixed
investment at an historic low.

The mainstream explains today's persistent investment
drought is generally explained by referring to low demand
and existing idle capacities in business inventories. But
its obvious, original cause was the profit carnage that
started in 1997, at the height of the U.S. economy's boom.

This apparent explanation, however, only raises a
subsequent question: what has been ravaging profits?

America's profit malaise is nothing new; it started in the
late 1970s. Until then, profits of non-financial
corporations had fluctuated around 8% of GDP. A steep
plunge in the following years slashed it to half that
level. From then on, there were only feeble recoveries. In
hindsight, the 1980s clearly emerge as the critical
juncture in the development of the U.S. post-war economy.

But what explains that sudden, drastic rupture in the
profit performance? The fact is that the U.S. economy
experienced a variety of changes to its structure in the
1980s that significantly altered its whole growth pattern,
some of which were highly detrimental to business profits.

The most striking and hotly disputed novelty in the U.S.
economy's new pattern of growth was, of course, the surging
trade deficit. It started in 1982 at $11.4 billion, after a
surplus of $5 billion in the prior year, and peaked in 1987
at $167.4 billion, equal to 3.5% of GDP.

Just as striking and also hotly disputed was the equally
soaring federal budget deficit. After a steep jump in 1982 to
$161.3 billion, from $85.5 billion the year before, it peaked
in 1985 at $225.7 billion, equal to 5.3% of GDP.

While the twin deficits almost monopolized the public
attention, rather dramatic changes occurred simultaneously
in the financial behavior of both the consumer and
businesses. Both suddenly discovered the joys of
unrestrained borrowing. Over the three post-war decades
until 1980, the consumer ran up an overall indebtedness of
$1,404 billion. He boosted that in the following 10 years
by 158% to $3,624 billion. Business debts soared over the
same time almost in lockstep by 153% from $1,474 billion to
$3,735 billion.

The consumer's new borrowing binge essentially had two
important macroeconomic effects. In the late 1980s,
consumption had accounted for 70% of GDP growth, a record
high that compared with a share of 63% in the late 1970s.
Its flip side was a decline in the consumer savings rate
over the decade, from 10% to 7.5% of disposable income. But
given the bursting budget deficit, the net national savings
rate - domestic funds and resources available for net new
investment - dropped to an unprecedented low of a little
over 2%, less than one-third of its historical average of
7.5%.

In the case of businesses, the new proclivity to reckless
borrowing went together with a drastic change in the use of
the proceeds of borrowing. Businesses borrowed increasingly
for financial transactions - including mergers,
acquisitions, leveraged buyouts and stock repurchases - and
decreasingly for growth through investment in new plant and
equipment. As net new investment of the nonfinancial
corporate sector progressively lagged GDP growth, the
economy's capital stock fell sharply as a percent of GDP.

Nonfinancial profits increased between 1981 (a recession
year) and 1991 by 37.6%, from $159.6 billion to $219.6
billion. Measured as a share of GDP, they declined from
5.1% to 3.7%. It was a profitless expansion.

In hindsight, the U.S. economy in the 1980s already had the
key features of a bubble economy, though at a much more
modest scale than in the late 1990s. While profit margins
fell, stock prices on average more than trebled. Yet
American economists preferred to focus their attention on
the"productivity miracle" and other fictitious
explanations for America's boom-time economy.

It has always utterly amazed us how anybody with some
knowledge about the essence of economic prosperity could
ever have hailed this pronounced shift in American
corporate strategies away from investment in tangible
assets towards investment and speculation in financial
assets as an expression of superior, new corporate
governance.

Regards,


Kurt Richebächer
for The Daily Reckoning

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• A Critical Juncture (Richebächer) / The Daily Reckoning - - ELLI -, 04.03.2003, 12:19