Sentimental Lessons / The Daily Reckoning

verfasst von - Elli -, 09.05.2003, 17:19

-->Sentimental Lessons

The Daily Reckoning

Paris, France

Friday, 9 May 2003

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

*** Dollar down...or dollar up...or dollar stable? What's
with this dollar, anyway?

*** Stocks down a bit...gold up sharply...

*** Unemployment grows...a cheap stock from New
Zealand...bonds...school tuition...and more!

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

If only things were simpler!

The dollar sank even further yesterday.

Gold rose. The euro rose. Shouldn't consumer prices rise
too?

The dollar is"heavy," say the traders. It seems to want to
sink. But as it goes down, shouldn't it become less
valuable? Shouldn't it buy you fewer loaves of bread or
fewer six-packs?

It is either worth more...or worth less, right? It's either
inflation or deflation...up or down...black or white?

Nah...

On international currency markets, investors are making the
same judgment of the American dollar as they are of its
president: it is not a real Top Gun currency, they believe,
but just another goofy Hot Shot paper money.

When a nation's president puts on a uniform, you can be
almost certain that its currency will fall. There is just
something so clownish, so buffoonish about it...like a
Latin American dictator or a million-peso note. Who can
take them seriously?

But back in the U.S.A., economists are afraid that the
dollar might be holding its value.

"Inflation's slowdown has many economists worried," says
the headline from USA Today. The paper was responding to
the remarkable announcement from the Fed on Tuesday that
what it worried about was an"unwelcome substantial fall in
inflation."

People generally do not go to bed at night with sweet
dreams of inflation. Nor do they wake up in the morning and
read the headlines, hoping to discover that the inflation
rate has increased. In fact, many people get a little
cheesed off when prices rise. So, it took USA Today a
couple of days to figure out why a"substantial fall in
inflation" would be so"unwelcome."

But there it is. Inflation is running at less than 1% per
year, according to the government's"personal consumption
expenditure price index." And the economists are worried
about it.

Oh, ye gods of the money heavens...how could ye visit such
an awful fate upon such a happy and virtuous people -
stable prices! Take every first-born child...send a pox
among us...turn all our women into shrews, hags and neo-
cons...but make not our consumer prices not rise.

The whole thing is, of course, absurd. But no one asked our
opinion.

Inflation has been on a downhill trend ever since 1980,
when it was clocked at 12.4%. Since then, the rate of
inflation - and here we speak of it not like an economist
who knows what he is talking about, but as one who
doesn't...that is, we're using the term like everybody
else, as consumer price inflation, not increases in the
money supply, which is another matter altogether - has
fallen about 1% every year. We are 13 years into this trend
and the rate of inflation is barely positive. Housing,
medical care and college tuition keep rising - but other
prices fall. Already, the inflation rate has fallen below
the Fed's lowest lending rate. And still the economy
sinks...along with the dollar on foreign exchange markets.

Here at the Daily Reckoning, we are trying to figure out
what it all means....but no one ever said it would be
easy...

Over to our man on The Street, Eric Fry...

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

Mr. Fry with the news from New York...

- Yesterday's headlines did not seem to be any different
than the headlines we've been reading for the last several
weeks: the dollar is still collapsing, jobs are still
disappearing, Donald Rumsfeld is still scouting around for
another country to bomb and Wall Street strategists are
still bullish. But for some inexplicable reason, this
intriguing constellation of macroeconomic phenomena
inspired little buying yesterday. The Dow dropped 69 points
to 8,491, while the Nasdaq forfeited the 17 points it gained
on Wednesday to close at 1,490.

- Meanwhile, the dollar got pounded again, falling to a new
four-year low near $1.15 a euro. A moment of silence,
please, for the"strong dollar"...we will miss it. And the
Daily Reckoning crew over in the Paris office will miss the
strong dollar even more. Their Big Mac lunches are becoming
très cher.

- The dollar's recent selloff, rather than pausing to catch
its breath, seems to be accelerating. As the greenback
hurtles downhill, some investors are becoming a little
anxious and are seeking sanctuary in the gold market. The
precious metal jumped $6.50 yesterday to $348.70 an ounce.
Why might investors be buying gold when the dollar is
withering? Hmmm...A recent headline from Beijing's
"People's Daily" provides a helpful answer:"Gold
Increasingly Viewed as a Safe Heaven Investment: Experts"

- The story that followed began:"Gold's generally upward
trend seems very likely to continue and it is increasingly
being viewed as a safe haven investment, experts from ABN
AMRO Bank said here Wednesday..."

- Thank goodness for the"experts," what would we do
without them? We are not experts, of course, but we did
receive passing grades in our history classes. And we seem
to recall a multi-millennial connection between gold and
the phrase"store of value." Further, we seem to recall
that folks who worried about the value of their currencies
tended to buy gold. Maybe that's why gold rallied
yesterday. But we're just guessing. We are not experts.

- Despite yesterday's stock market retreat, investors, by
and large, remain bullish. Investors Intelligence, which
polls money managers to see if they're bullish or bearish,
counts 55.8% bulls at present and 24.4% bears."Everyone is
enthusiastic," says the publication's editor Michael Burke.
For perspective, Burke's poll showed 55.7% bulls and 26.4%
bears at the market top in March 2000. In other words,
bullish sentiment has become quite extreme - a phenomenon
that often presages market peaks.

- Over the last few weeks, investors have been accentuating
the positives and minimizing the negatives. But some of the
negatives refuse to be minimized. Unemployment, for
example, is becoming an increasingly worrisome trend.

- A whopping 525,000 jobs have been lost in the past three
months and the economy continues to shed jobs at a rapid
pace. Although the number of initial claims for state
unemployment benefits fell by 28,000 to 425,000 in the most
recent week, the average number of weekly first-time claims
over the past four weeks hit a fresh one-year high of
446,000 in the week ending May 3.

- More worrisome however, is the fact that the average
number of Americans who collected state benefits over the
past four weeks rose to 3.6 million, the most in six
months."Of the 8.8 million jobless workers in America,
almost 2 million have been out of work for half a year or
longer," the Washington Post reports,"the highest number
in two decades, according to the Bureau of Labor
Statistics.

-"Blue-collar jobs in the manufacturing sector...continue
to be hit particularly hard...There were 817 mass layoffs
of 50 workers or more in January, 427 in February and 385
in March, according to the Bureau of Labor Statistics.
Overall, about 2.7 million jobs have been lost in mass
layoffs since January 2002, with about one-third in the
manufacturing sectors."

- As we've noted previously, unemployed consumers don't do
a whole lot of consuming. They tend not to buy TVs or cars
or houses, or even rounds of drinks at the local bar. In
fact, they tend not to buy much of anything. Meanwhile,
most fully employed folks aren't spending with their
habitual gusto. Perhaps they, too, are feeling the pinch of
a sluggish economy or the squeeze of too much debt.

-"We're not really laying a very strong foundation for an
economic recovery when it's on the backs of consumers who
are either going into debt through refinancing mortgages,
or taking equity out of their homes, or whose net worth has
been declining with the stock market," says Comstock
Partners' Charles Minter."Typically, to have a good,
sustained recovery you need investment and hiring by
corporations."

- Fortunately, a stock market rally does not require any
evidence of a recovering economy...It requires only a large
population of optimistic buyers.

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

Bill Bonner, back in Paris...

*** The bond market sees no inflation...or doesn't care
about it. Despite a falling dollar, bond prices have
remained high. And the differential between the yield on
inflation-indexed Treasury notes and regular 10-year
notes...has actually fallen. You can get a yield of 3.66%
on a 10-yr. T-Note and only 1.92% on TIPS, treasury notes
indexed to the inflation rate. This implies that investors
expect an inflation rate of only 1.74% for the next 10
years...which is down from the 2.5% they expected a year
ago.

***"The Fed is doing everything it can to support this
market," said our old friend Jim Rogers. We had him on the
phone yesterday to talk about his new book...and our own
new book. What we spoke about was inflation."I just spent
three years traveling around the world," he continued in
his Alabama voice."You can't tell me there isn't any
inflation. Everything I buy has gone up in price. And it's
going to go up a lot more when all this liquidity the Fed
is putting in the system in order to support the bond
market and the stock market finally reach consumer prices."

[By the way, you can check out the route of Jim's world-
record-setting 3-year trip around the world by visiting his
website: www.jimrogers.com. You can also pre-order copies
of his book, Adventure Capitalist, which he wrote to
describe the first-hand insights he gathered during his
remarkable journey.]

*** Why bother with puny yields on overpriced, vulnerable
U.S. dollar assets? While the U.S. dollar falls, the New
Zealand dollar rises to multi-year highs. And you can buy a
big company such as Telecom New Zealand, with a monopoly
position in a critical industry, at a PE of 11...and a
yield of 6.25%.

*** One of the things that always seem to go up in price is
college tuition. Jules, 15, has had enough of the French
schools. Looking for an alternative, his parents checked
out boarding schools in the U.S....and an American high
school located on the outskirts of Paris.

None of the choices were cheap...with the boarding schools
up to $30,000 per year...and even the American High School
over $20,000.

(The American High School looks like almost any public high
school in America, except that there is no flag flying over
it...and not even a sign to tell you what it is. You'd
hardly know it was there.

"We keep a low profile," explained the director."With all
this talk of terrorism...you just never know. We don't want
to be a target.")

Jules' father suspects that education is one of the biggest
frauds in America. Well-meaning parents mortgage their
homes so they can send their children to lectures they'll
never remember, about nonsense, given by people without a
real clue. Young people would do better to get out in the
world, go to work, read a book and learn for
themselves...in his opinion...rather than sit through
sermons on gender politics in the afternoon and attending
keg parties in the evening.

So, inspired by his friend Gary North, who wrote a report
on the subject, your editor tried to interest Jules in
dropping out of institutional schools and undertaking a
learning program of his own...backed by a home-school
curriculum, and tutors, so he could still get his diploma
and go on to college. He even offered to deposit the
tuition money in Jules' account so he'd have a nice next
egg by the time he finished school, rather than a large
unpaid credit card balance.

But the boy wasn't interested."I don't want to do anything
that weird," he told his father.

*** What else is new? With all this racy lingerie
advertising we can hardly keep our minds on interest rates
and world politics. But thank god for them all. Without the
titillation of sex, baseball, politics and money...a man
might become preoccupied by his own wife. And what woman
would want a man like that?

The Daily Reckoning PRESENTS: Bill Bonner, stooping to the
past and extending to the future...


SENTIMENTAL LESSONS
By Bill Bonner

Yesterday, work stopped in Paris as people commemorated
Victory in Europe Day. When the war was over in Europe in
May of '45, people celebrated. Americans in Paris were
cheered as heroes and liberators...barkeepers poured them
free drinks and women offered free kisses. And everyone was
glad the fight was finished. On both sides of the Atlantic,
it was time to get back to work and families...the war was
over.

We stoop to history again today, dear reader. You will
pardon us, I hope. But what else can we do? What else do we
have...other than the record of what Voltaire called the
"crimes, follies and misfortunes of mankind"? Though we
know little about what actually happened...and are
suspicious about how people interpret it...we know nothing
at all about the future...except that it is an extension of
what came before it.

"It's all happened before," said Jim Rogers on the phone
yesterday, referring to the boom/bust cycle."Just look at
history. You know, I teach college classes here in New
York. My students sometimes ask me what they should study
if they want to be successful. I tell them to read history
and philosophy. They say, 'shouldn't we be studying
accounting or business...?' I say, 'No, you've got to study
history because that is all we have...a record of all we've
learned or should have learned.'"

What Europe learned from WWI and WWII was not to do that
again. This was not so much an intellectual lesson as a
sentimental one. Those who lived though the wars...the
occupations...the uniforms...wanted nothing more to do with
them. The anti-war sentiment was on their lips and in their
blood.

But now the old soldiers are dying off. We missed the
little gathering in Lathus, but there were only a handful
of veterans left, Mr. Minig told us....this past winter had
claimed a couple more. Soon, there will be no one to recall
what it was really like.

The new generation of warriors - mainly in America - has a
different sentiment.

Arnold Toynbee explains:

"The survivors of a generation that has been of military
age during a bout of war will be shy, for the rest of their
lives, of bringing a repetition of this tragic experience
either upon themselves or upon their children,
and...therefore the psychological resistance of any move
towards the breaking of a peace...is likely to be
prohibitively strong until a new generation...has had the
time to grow up and come into power. On the same showing, a
bout of war, once precipitated, is likely to persist until
the peace-bread generation that has lightheartedly run into
war has been replaced, in its turn, by a warworn
generation."

War is still a lark to the peace-bred generation in the
U.S....still an exercise in geo-political jingoism as daft
as Wilson's"making the world safe for democracy," but
without the casualties! They think they are defending
western civilization...fighting terrorism...spreading
democracy and freedom.

It is a different world for them than it was for the
survivors of '45. Then, it was the Europeans who stirred up
war...and a reluctant American who helped put things right.
Now, it is the Americans who go looking for trouble...but
who will sort out the mess they make?

Then, it was the Germans who tried to crush everyone who
got in their way. Now, it is the Americans who are on the
move...offering a new kind of Empire...a soft
empire...whose intention is not to conquer and steal, but
merely to slather peace and democracy throughout forlorn
areas of the world...thereby making the rest of it safer
and more prosperous, too. This new Empire of Goodwill is
led by a warrior...but not a Commodus (who fought hundreds
of combats in the arena...the spectators scarcely noticed
that his opponents had their feet cut off in advance to
make sure the Emperor won...)

No, Mr. Bush sees himself as Tiberius or Hadrian or Marcus
Aurelius...a fighter, but not a tyrant.

Things have changed. It is not the world of 1945. The U.S.
stands on the threshold of a new era in world politics.

Rome stood in a similar position in 146 BC. In that year,
Scipio Emilius finally put an end to Rome's ancient enemy -
Carthage. He lay siege to the city, then took it and
destroyed it.

But as Carthage burned before him, Scipio is said to have
cried; he seemed to understand that a new era had come to
Rome. She no longer had a rival; she was now master of the
Mediterranean world. She was an empire. Scipio must have
looked ahead...and seen the spectral image of Rome in the
smoke of Carthage. Sooner or later, all empires collapse.
This was not necessarily the beginning of the end for Rome,
he may have thought...but perhaps the end of the beginning.

About that same time, the consul Metellus put down a revolt
in Macedonia...and Mummius took Corinth and razed it.
Greece, formerly the great power of the region, became a
Roman province.

Like Europe compared to the U.S. today, the Greek city-
states were the old world. They were the source of much of
the culture and learning of the Romans, but they had lost
their military edge. If they had ever really had an empire
of their own, it was definitely yesterday's empire. The
empire of today and tomorrow was Rome.

But before destroying Corinth and enslaving the Greeks, the
Romans first rescued them.

"In the spring of the year 176 before Christ [that is about
a quarter of a century before Greece was made a Roman
province]," writes Peter Bender,"all of the notables of
Greece assembled at Corinth in order to hear what Rome had
decided for them. After a century and a half of oppression
of the Greeks by the Macedonians, the Romans had beaten
Philip V and had made him renounce all his possessions in
Greece. But all their experience suggested that the Greeks
were merely exchanging one master for another."

"At the sound of a trumpet, the herald of the assembly
imposed silence and read the message from the senate: 'We
give you liberty and administrative independence; there
will be no occupation and no obligation to pay tribute.'"

The Greeks couldn't believe their ears. But when the word
got around, and they realized what had been said, they gave
the Romans a loud 'Huzzah!' and tried to get rid of them as
soon as possible.

Everyone had the best of intentions. But history had
intentions of her own.

"Every super-power has, by nature, a tendency to oppress
more and more inferior nations," a Greek orator had warned
after the Romans imposed their"soft empire" in '76.

Like markets, politics has to run its course...from the
beginning to the end...


Bill Bonner,
offering no particular insight or prediction...

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• Sentimental Lessons / The Daily Reckoning - - Elli -, 09.05.2003, 17:19