Empire of Dirt / The Daily Reckoning

verfasst von - Elli -, 18.04.2003, 16:39

-->Empire of Dirt

The Daily Reckoning

Paris, France

Friday, 18 April 2003 (Good Friday)

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

*** More jobs disappear...the West in a slump...but not
China!

*** But stocks up anyway...[though, with dividends this low,
who wants them?...]

*** Forget the long run! Oh, Indonesia...greedy CEOs...and
more!

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

The Bush Administration, with the active connivance of the
Fed, has been trying to return the U.S. economy to its glory
days of the end of the '90s. Back then, an investor could
count on rising stock prices, a consumer could count on a
job, and even a naughty president could count on re-election.

The usual methods have now been given a test -- inflation and
war -- but yesterday's news brought more evidence that the
slump continues:

"Jobless claims jump again," says a headline from the Houston
Chronicle. At 442,000 new claims, unemployment shows no sign
of improvement.

The Philadelphia Fed said activity in the manufacturing
sector was easing off. And a survey of the nation's 100
biggest corporations revealed a pension deficit of $157
billion, compared to a $183 billion surplus in the last year
of Bill Clinton's reign.

Behind these numbers is a backdrop of woe which seems
unlikely to change easily. Throughout the developed economies
-- North America, Japan, and Western Europe -- jobs, income,
and sales are being lost. Not cyclically...but almost
permanently.

Two headlines from the BBC tell the story:

"Alarm as UK recovery stalls," says the first.

"Chinese growth hits 6-year high," says the second.

"More and more goods are produced in the low-cost world,"
Felix Zulauf explained to Barron's."The old world [including
the U.S.] loses profits, jobs and income."

Under these circumstances, he continues,"it is virtually
impossible...for economies to re-enter a normal business-
cycle expansion..."

The Bush/Fed program has been the familiar one -- lure the
consumer deeper into debt with lower interest rates and
distract him with blockbuster military circuses.

We didn't care much for this approach, dear reader, so you
can imagine how delighted we were to learn that the Bush
administration has a new economic plan.

"Oooh, I'm all a-tingle," says Mogambo Guru, taking the words
out of our mouths. Then, without even studying the details,
"I will say right here, for all the world to see, that it
will fail. All economic plans will fail from here on out, as
there is nothing that can be done...

"And it all comes down to the Federal Reserve. If that
particular filthy bunch of moron jackasses had no
underwritten every stupid Congressional free-lunch program
for the last 50 years, we would certainly not be in the mess
we are in." (For a full serving of 'Gambo, click here:
Blossoms in the Hand
http://www.dailyreckoning.com/body_headline.cfm?id=3103

Over to Eric Fry with the latest on the mess we're in:

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

Eric Fry in New York...

- Wall Street kicked off the Good Friday holiday with a good
Thursday. The Dow advanced 80 points to 8,338, lifting its
gains for the week to 1.6%. The Nasdaq, which jumped 31
points yesterday to 1,425, racked up a dazzling 4.9% gain for
the week. All the major averages have managed to claw there
way back into the black for 2003. But where to from here?

- According to the Daily Reckoning's Paris office,"Stocks
may go up, but with a dividend yield of less than 2%, we
can't think of any reason to own them." Nor can the New York
office think of any reason to sink one's nest egg into low-
yielding stocks. After all, a meager dividend buys even fewer
glasses of Puligny-Montrachet in Manhattan than it does in
Paris.

- Despite three straight years of painful capital losses in
the U.S. stock market, most Americans continue to retain the
bad habits they acquired during the bubble-era - namely, an
obsession with capital gains and an ambivalence toward
dividends. Neither habit serves the investor well, but
disdaining dividends is a particularly bad idea. Not only are
dividends a nice thing to receive from time to time, but
also, from an historical standpoint, they are darn near the
ONLY thing that an investor can count on.

-"We've reached a funny position where the long run doesn't
work; where the long run evidence doesn't fit circumstances
as they are today," observes Peter Bernstein."Forget
investing for the long haul. The long run, right now, is
irrelevant."

- This is a remarkable, and somewhat ironic, comment from the
man who -- along with Wharton professor Jeremy Siegel -- co-
authored"Stocks for the Long Run." Bernstein readily
concedes Siegel's assertion that stocks-for-the-long-run have
produced remarkably consistent real returns of 7% per year
since 1880 -- at least when measured over 20-year timeframes.

-"But the average dividend yield during all those 20-year
periods was over 4%," Bernstein points out."Real price
appreciation contributed only 2.1% to that long-run 7% annual
return. All the rest was dividends, received and reinvested.
By contrast, today's dividend yield is in the neighborhood of
2%. Which means that in order to add up to 7% real growth
over the next 20 years, we'd need 5% real growth in earnings,
in addition to those dividends-and that's not exactly a
reasonable expectation over the long run. Impossible, in
fact..."

- That's why Siegel's analysis is as deceptive as it is
factual. When calculating long-term investment returns, the
starting price matters. Even a simpleton, or a Wharton
professor, would understand that a stock market selling for a
low multiple of earnings and paying a high dividend yield is
much more likely to appreciate than a richly valued market
paying negligible dividends.

-"The historical average returns that so many rely on as
guides to the future are misleading," says Bernstein."The
double-digit returns that stocks were able to generate over
the last century were due to equities starting cheap and
getting richer over time."

- The problem is; the stocks that once were cheap are now
expensive. When stocks are dear, investors have two choices -
hibernation or hyperactivity. Buffett suggests the former;
Bernstein the latter. Both men have a point.

-"Despite three years of falling prices, which have
significantly improved the attractiveness of common stocks,"
writes Mr. Buffett in last month's letter to Berkshire
Hathaway shareholders,"we still find very few that even
mildly interest us. We continue to do very little in
equities...Occasionally, successful investing requires
inactivity," the oracle of Omaha concludes.

- While Bernstein would not quarrel with Buffett's caution,
he advocates a proactive approach to profiting from a richly
valued market."I am suggesting that investors just can't put
stocks away and forget them," says Bernstein."They have to
be much more flexible and ad hoc in their asset allocation
decisions."

- But he readily admits the risk of wading into pricey
stocks."A lot of what the last century was about in the U.S.
stock market was a succession of positive surprises," says
Bernstein."Maybe now we're going to have a succession of
negative surprises. There are a lot of other places we could
have them, but earnings growth in particular looks vulnerable
to negative surprises."

- Richard Russell, editor of the Dow Theory Letter, is
inclined to hibernate alongside Buffett, but not because he
anticipates meager, positive returns. Rather, La Jolla's
famous beachside bear fears continuing, sizeable losses.
Stocks that have progressed from cheap to expensive over the
course of many years tend to move in the opposite direction
over the subsequent years. In other words, they will revert
to the mean...and then some.

-"What is so worrisome at this point," says Russell,"is
that great bull markets tend to beget great bear markets and
'great values.' What am I referring to when I talk about
'great values' or extreme undervaluation at a bear market
bottom? Here's what I'm talking about. At the 1949 bear
market bottom the S&P was selling at 5.4 times earnings (and
those were honest earnings) while providing a dividend yield
of 7.6%. Do I think we'll ever see undervaluation like that
again? The answer is, 'Yes, I do, but it may take five to ten
years before we see them.'"

- If the septuagenarian Russell is willing to wait for value
to re-emerge, shouldn't we?

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

Bill Bonner back in Paris...

*** Et tu, Indonesia? While the world was watching American
tanks go through red lights in Baghdad, Pertanina (?),
Indonesia's state-owned oil company, said it was considering
doing what the Iraqis had done 4 years earlier -- switching
from dollars to euros when they sell oil.

*** Home ownership is thought to be such a good idea the
government and private charities actually give away money to
encourage it. But there are times, notes the Boston Globe,
when renting is a better deal than buying. And with the
average single family in Massachussetts selling for $340,166
in February, this may be one of those times. Home ownership
has increased over the last 10 years -- aided by low mortgage
rates and easy-lending policies. That means that fewer
renters are left...which has forced down rents, even while
home prices have gone up. It was axiomatic, in the public
mind, during the '90s that stocks always went up. Now it is
axiomatic that housing prices always go up. Both axioms will
be revealed as myths - eventually.

*** CEOs' compensation rose 14% last year. Funny, we don't
recall shareholders' compensation rising. Capitalism -- the
idea that corporations are run for the benefit of capitalists
-- is largely a myth too.

*** Our train ride back from Rome was a disappointment. The
service was priced as"first class," but anything first class
about it would have been accidental. After enjoying Italian
food for the last week, for example, we ordered the"Italian
Plate" in the dining car...imagining ourselves digging in to
a nice dish of linguini alla funghi or osso buco as we looked
out on the Appenine hills in the distance. What arrived was
like a TV dinner, bearing so little resemblance to Italian
cuisine as to constitute grounds for a libel action.


The Daily Reckoning PRESENTS: A history briefer on the rise
and fall of Rome, Bonner-style.


EMPIRE OF DIRT
by Bill Bonner


You could have it all
my empire of dirt
I will let you down
I will make you hurt

Hurt, by Trent Reznor
of Nine Inch Nails


"What I don't understand," Elizabeth began a conversation on
our last day in Rome,"is why the barbarians -- the Huns, the
Goths, and the Vandals and so forth, wanted to destroy the
empire? They could see that people lived better inside the
empire than outside... I man, they had central heating, warm
baths, art...and just look at all those beautiful buildings.
Wouldn't it have made more sense for them to join it, rather
than tearing it down?"

We had no answer, save resignation.

"Yes, well, you might as well ask why the Roman's went to all
the trouble to build up their empire in the first place?
Wouldn't it have been much more reasonable to enjoy life here
in Rome...?"

And here we offer readers a history of the rise and fall of
the world's greatest empire as brief as the latest Italian
underpants.

In the 8th century B.C. Rome was nothing more than a
collection of villages along the Tiber, inhabited by a
collection of tribes, principally Latin, Sabine, and
Etruscan. Gradually, these 'Romans' grew in number and power
-- and went to war with almost everyone. In a celebrated
early incident, perhaps only legendary, they invited their
neighbors, the Sabines, to a feast...and then stole their
women. The Sabine men did not celebrate; instead, they took
offense and nursed a grudge. But there was hardly a tribe,
kingdom or empire in Europe, North Africa or the middle-East
with whom the Romans did not pick a fight. After the Sabine
war, there were wars against the Albii, the Etruscans, the
Volcii, Carthaginians, Etruscans again, the Latin league --
and this is only a partial list -- the Volsquii, the Equii,
the Veieii, the Gauls, Samnites, more Gauls, Epirians,
Carthaginians again, and more Gauls, Macedonians, Syrians,
Macedonians again, slaves in Sicily, Parthians...and even
Romans in the civil wars....and we have not even arrived at
Ceasar's wars against the Gauls in 58-51 BC. Roman history
has another 500 years of wars to go!

The civil wars in the 1st century BC put an end to the
Republic...then, Ceasar crossed the Rubicon and it was a new
era in Rome, an era of Empire. It was as if Tommy Franks
decided to move his army to Washington and make a regime
change of his own. Some people would object, of course....the
liberal papers would howl...but most people wouldn't care.

In ancient Rome, as in modern Washington, people chose their
ideas like they chose their clothes -- they wanted something
that not only did the job, but also something that was
fashionable. And at the time it was a la mode for emperors
and individuals alike to pretend that they lived in a free
republic, which honored citizens' rights, but in practice...
the government, and its leader, could do what they liked. And
what they seemed to like doing was going out and making war
against everyone they thought they could beat.

Back then, of course, war was a paying proposition. When
emperor Trajan took Ctesiphon (near modern Bagdad) he
captured 100,000 people who were sold into slavery. When
Augustus took Egypt, he used the Nile's wheat harvest to feed
the growing population of rabble in Rome.

But while some people came out ahead, in the aggregate, wars
then -- as now -- were negative gain enterprises. And as the
empire grew, the costs mounted too, to the point where both
became grotesque and insupportable.

"Until the rule of Augustus (who was installed as the first
ruler of the Roman Empire in 27 BC)," writes Marc Faber,"the
Romans only used pure gold and silver coins. In order to
finance his vast infrastructure expenditures, Augustus
ordered the government-owned mines in Spain and France should
be exploited 24 hours a day, a measure which increased the
money supply significantly and also led to rising prices. (It
is estimated that between 27 BC and 6 BC, prices in Rome
doubled.) In the second half of his reign (6 BC to AD 14),
Augustus reduced coinage drastically, as he recognized that
the expanded money supply had led to the rise in prices."

But Rome wasn't built in a day...nor was its money destroyed
overnight. In 64 AD, in Nero's reign, the aureus was reduced
by 10% of its weight. Thereafter, whenever the Roman's needed
more money to finance their wars, their public improvements,
their social welfare services and circuses, and their trade
deficit, they reduced the metal content of the coins. By time
Odoacer deposed the last emperor in 476, the denarius
contained only 0.02% silver.

Still, the impulse to build up an empire seems to be as
strong as the impulse to tear one down. To the question, when
does a country aim for empire, comes the answer: whenever it
can.

Every country in Europe has at one time or another reached
for the imperial purple. Portugal and Spain discovered and
conquered vast jungles, swamps and pampas...and built empires
of them. For Spain, the conquests were extremely profitable -
- after they found huge quantities of gold and silver. But
nothing ruins a nation faster than easy money. The money
supply grew larger with every ship's return from the New
World. People felt rich, but prices soon soared. Worse, the
easy money from the new territories undermined honest
industry. In the bubble economy of the early 16th century,
Spain developed a trade deficit similar to that of the U.S.
today. People took their money and bought goods from abroad.
By the time the New World mines petered out, the Spanish were
bankrupt. The Spanish government defaulted on its loans in
1557, 1575, 1607, 1627. and 1647. The damage was not only
severe, it was long-lasting. The Iberian peninsula became the
'sick man of Europe' and remained on bed-rest until the
1980s.

France and England built their own empires in the 18th and
19th centuries. Napoleon's conquests took less than a dozen
years to complete...but the empire collapsed even faster. By
the end of the 19th century, all that was left of the French
empire were a few islands no one could find on a map and some
godforsaken colonies in Africa that the French would soon
regret ever having laid eyes upon. Almost all were lost,
forgotten or surrendered by the 1960s -- with nothing much to
show for them except what you find in the Louvre...and a
population of African immigrants who now weigh heavily on
France's social welfare budget.

England's empire was much grander, stretched further, and
left more debris when it collapsed. But the end result was
about the same: the pound had been degraded and the British
were nearly bankrupt, while the crime rate in central London
rose to surpass that in New York... thanks largely to
immigration from the former colonies.

Germany lost its overseas colonies after WWI. It then created
another empire -- by conquest -- in the late '30s and early
'40s. The enterprise ran into Russia's empire in the East --
resulting in history's largest and bloodiest land battles. In
the end, thanks partly to American intervention on the side
of the Russians, the German empire was destroyed. The
Russian's empire collapsed under its own weight 44 years
later.

Empires, like bubble markets, end up where they began. Rome
began as a town on the Tiber, with sheep grazing on the
hills. A bull market in Roman property lasted about a 1000
years -- from 700 BC to about 300 AD, when temples, monuments
and villas crowded the Palatine. Then, a bear market
began...which also lasted at least 1000 years. As late as the
18th century, Rome was once again a city on the Tiber...with
sheep grazing on the hillsides, amid broken marble columns
and immense brick walls. They had been built for a
reason....but no one could recall why.

Bill Bonner

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• Empire of Dirt / The Daily Reckoning - - Elli -, 18.04.2003, 16:39