Victory Proclaimed / The Daily Reckoning

verfasst von - Elli -, 12.05.2003, 17:13

-->Victory Proclaimed

The Daily Reckoning

Paris, France

Monday, 12 May 2003

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*** Mr. Hallucination, meet Mr. Delusion...

*** Consensus view: stocks to rise 7% this year. Ha ha ha
ha ha ha ha ha...etc.

*** Bad vibes from the dollar...and unemployment.

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It is hard to get interested in the stock market. The days
of giddy hallucination - when investors thought they were
going to get rich on IPOs, techs, and dotcoms - are over.

Now, investors still think they will get rich in stocks; it
will just take longer. The Delusion du Jour is that stocks
always go up in the long run, which is no less mistaken
than the IPO mania...but less fun to watch.

The consensus view on Wall Street is that stocks will go up
7%. Where do they get that number? If only they were in
front of us so we could laugh in their faces! They must
just make this stuff up...for they have no more idea than
anyone else what stocks will do, which is no idea at all.

Here at the Daily Reckoning, we put up our hands and
surrendered, unconditionally, to ignorance a long time ago.
Mr. Market will do what he damned well wants to
do...without consulting us, asking our opinion, or giving
advance notice.

Not having any idea what Mr. Market will do, we have
developed a philosophy that is ignorance-friendly. As long-
time Daily Reckoning sufferers know, we don't aim to do the
smart thing...we just try to do the right thing. Nor do we
worry about buying investments that we think will go up in
price...we just try to find those that have fallen so much
there doesn't seem much room left.

S&P stocks, at 33 times earnings, still have plenty of
space on the downside. And looking at Japan for a role
model, we notice that the trip from top to bottom can take
a surprisingly long time. Investors began losing money in
Japan in 1990 - 13 years ago. But the Japanese government
and central bank rigged up so many safety nets, the poor
fellows could hardly find a square meter of hard concrete
on which to fall.

No one pays much attention to Japan anymore. 'Tis a pity,
since if you wanted to peek into the financial future at
any time in the last 10 years, you could have read Japan
like tomorrow's newspaper. And even when people do bother
to look across the broad Pacific, they don't seem to
understand what it is they are looking at.

"Trapped like Japan," begins a CNN/Money article. The trap
the piece is talking about is a"liquidity trap," in which
people stop spending or investing money. Money makes the
world go 'round, as they say. And when people grow so
fearful that they're no longer willing to part with it, the
economic world comes to a halt which, I know I don't have
to tell you, dear reader, is very bad news for central
bankers seeking immortality and presidents seeking
reelection.

But don't worry about it, says CNN/Money. It's an easy
problem to fix."You print money until inflation is
introduced to the economy. For savers, inflation means that
the money they have in the bank today will be worth less
tomorrow - so they spend it. For debtors, today's debts
will not cost them as much tomorrow, so they get less
worried about their balance sheets and beginning to spend
as well."

If it were that easy, why didn't Japan get itself out of
the liquidity trap 10 years ago? Why isn't the inflation
rate a positive number in Japan?

We don't know and don't mind saying so. But most analysts,
kibitzers, and shills still struggle against ignorance like
a grown man arguing with his wife; he must know it is
hopeless, but he can't help himself. And who knows, maybe
he will get lucky. Maybe stocks really will go up 7% this
year. And maybe the very same policies that failed in Japan
will work in America.

Then again, maybe not...

And here's Eric Fry with more details on America's stock
market:

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

Eric Fry in New York...

- The stock market mustered another winning week...barely.
The Dow Jones Industrials inched ahead 21 points to 8,604
and the Nasdaq tacked on 17 to 1,520...Hardly a resounding
victory for the bulls, but a gain nonetheless.

- Meanwhile, the dollar continued crumbling while gold
soared. In a volatile week for the currency markets, the
dollar dropped more than 2% to $114.75 per euro. Meanwhile,
gold for June delivery jumped more than six dollars to
$348.90 an ounce.

- The dollar's pronounced weakness may be starting to worry
folks. Clearly, stock market investors exhibit much greater
optimism than they did just a few weeks ago."Investor
sentiment, as measured by surveys and the pricing of
protective options, is suggesting that a large segment of
the public has caught a case of the giggles," Barron's
notes."There's a line of thinking that a lot of investment
professionals have adopted that goes something like this:
First-quarter earnings came in stronger than forecast, and
expectations for the current quarter seem undemanding.
This, say the optimists, should buoy the market until mid-
year, at which point - What do you know? - the Street will
start to focus on happy 2004 profit forecasts."

- But as much as investors would like to maintain a
positive outlook, it's getting harder and harder to block
out"bad vibes" like a collapsing U.S. dollar and rising
unemployment. Notwithstanding the last Friday's sparkling
rally, investor confidence seems to be waning a bit. Absent
for the moment is the bravado that inspired the recent
1,000-point Dow rally.

- Instead, we find most investors warily looking over their
shoulder, like a young child in a dark bedroom...Is that
shadowy image in the closet really a collapsing dollar? And
what's that's scary figure over there?...The one that looks
like massive job losses? These scary images simply refuse
to go away. Almost as frightening is the fact that some of
the recent"good news" may not be all that good.

- With nearly 90% of the S&P 500 membership having reported
their first-quarter results, ISI Group observes, the year-
over-year rise in earnings stands at a hefty 14.7%. Just
for kicks, let's assume that accounting gimmickry is a
thing of the past and that the reported earnings are as
clean as Martha Stewart's apron. Even granting that dubious
assumption, the 14.7% earnings growth reported by the S&P
500 is far less robust than it would appear.

- For starters, as Barron's points out,"the overall S&P
500 numbers got a big boost from energy companies, whose
profits swelled by more than 200% over the prior year,
thanks to the ramps in oil and natural-gas prices, which
have already subsided. The second 'finger on the scale,' if
you will, was the salutary impact of the sinking dollar on
the books of multinational companies. By some estimates,
the benefit of translating euros and yen into dollars at a
favorable exchange rate was responsible for virtually all
of the top-line growth evidenced by large companies so far
this year."

- Net-net, the"strong" quarter owes its entire strength to
a rising oil price and a falling dollar. Hmmm...that does
not exactly seem like a textbook formula for strong
earnings growth, much less for sustainable economic growth.

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

Bill Bonner, back in Paris...

*** We're still trying to figure out what is going on with
the dollar. It is going up against a long list of consumer
items...but going down against most currencies and against
gold. We guessed that the dollar would fall against foreign
currencies. Foreigners already had more than enough
dollars, we reasoned. When they wanted to lighten up...to
whom would they sell?

Already, the dollar is down about 25% against the euro.
Does it have another 25% left to fall? Or 50%? We don't
know.

But as we look around for money that is really cheap, we
stumble on gold. Ignorance and modesty prevent us from
telling you whether gold will go up. But even at $350 we
doubt that it will go down very much. The dollar...and the
euro for that matter...have the potential to go down a lot.
Sooner or later, all paper currencies seem to go away. Gold
remains.

"It's a superb time to back up the truck - although,
naturally everyone felt more like doing so when gold was at
$380," writes my old friend Doug Casey."The name of the
game here is to actively do the opposite of what your
emotions tell you. In the Battle for Investment Survival
the emotional are the victims the cannon fodder. The
victors are the rational, and those who understand the
fundamentals driving the markets."

The fundamentals of today's currency market are dominated
the Federal Reserve - which has promised to print as many
dollars as necessary to keep prices rising. We doubt that
the Fed can get exactly the rate of inflation that it
wants. Perhaps it will get too much, perhaps too little. In
either case, the price of a real store of value - such as
gold - is likely to rise.

"To put that into, well...emotional terms," Casey
continues: Back up the truck...we're in the early stages of
a gold bull market."

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

The Daily Reckoning PRESENTS: The consequences of"victory"
in Iraq are only just beginning to reveal their magnitude."I
don't know how all this will end," Doug Casey writes below,
"but my prediction is: badly..."


VICTORY PROCLAIMED
by Doug Casey

Well, it appears the U.S. invasion of Iraq went about as
well as could be expected. It would have been terminally
embarrassing if the American military couldn't crush some
half-starved fellahin dragooned into the rag-tag army of a
bankrupt Third World dictatorship on the verge of civil
war. So those who supported the invasion are, at once, smug
and jubilant. And, since most people (understandably)
prefer to be on the winning side, those who were fence-
sitters, or only opposed for technical reasons, have joined
the ranks of Bush supporters.

Personally, I'm happy it turned out to be a relative non-
event. But, then, this is only a sideshow in a much larger
circus. To mix analogies, I see Bush and his neo-con handlers
as being like the man who jumps off a 100-story building
and says, as he passes the 90th floor,"So far, so good."
Although most Iraqis appear happy that Saddam is gone,
they're unhappy he's been replaced by foreignoccupiers. Will
the American experience in Iraq start to resemble Israel's
in Gaza and the West Bank? So far, not so good.

The most unsavory part of being against the war, for me, is
the company one has to keep on the barricades. It's most
uncomfortable being surrounded by Greens, socialists, effete
literati, Hollywood bleeding hearts, European politicians,
animal rights protesters, and a vast assortment of other
whacko leftists whom I'd forgotten were even still alive.
Oh well. C'est la guerre. But I can only imagine how
embarrassed Osama must be to have been lumped together with
Saddam.

But the fact that the U.S. Government started the war has
drawn the world's attention to a number of questions.
Although it's true 21st Century Man's attention span is as
short as an MTV video, it may actually last until the next
invasion...err, strike that...I mean re-deployment of
troops. In the meantime, the adventure does raise a few
questions.

Such as...can the U.S. be trusted to obey international law?
I'm not a fan of the UN, which is mainly a cushy club
for bureaucrats. And"international law" is about as
binding and valid between nation-states as the results of
a"sit-down" are between gangsters. But, still, it's
notoriously stupid to disrespect one's peers, even if
you're bigger, stronger, and it's convenient. It's wiser to
play by the rules, if you want to retain the moral high
ground. That's why, for instance, Roosevelt goaded the
Japanese into attacking at Pearl Harbor, rather than
launching the first strike himself.

And then, has the U.S. become an unpredictable bully? It's
one thing when the U.S. conducts a lynching in its back
yard viz. Panama, Grenada, Cuba, Haiti, Nicaragua, etc.,
etc. It was certainly pushing the envelope a bit when a Mad
Bomber like Clinton struck out in Sudan, Afghanistan, and
the former Yugoslavia. But two full-scale foreign wars in
as many years is, I think, a bit much. All these
adventures, and many others (prominently including Vietnam)
were against vastly less powerful opponents, who presented
no credible threat. Based on that, a member of an axis of
evil might want to get serious about getting nuclear
weapons as soon as possible, for the same reason a 98-pound
weakling might want to take a Charles Atlas course.

Is U.S. policy in the hands of pro-Israel ideologues? Based
on who the U.S. attacks, who it gives money to, and what
policymakers say, this is not only a reasonable question.
It's a pointed and disturbing one to Muslims.

And where is the truth in all of this...can the U.S.
government be trusted to tell it? I know this seems like a
stupid question, since no government can be trusted to do
so. And it's become a cliché that, in war, truth is the
first casualty. Still, there are limits. The Soviet
government was a laughing stock because what it said
usually amounted not just to lies, but the perverse
opposite of the truth. It doesn't help the cause of the
U.S. when the main reasons given for the invasion were
Weapons of Mass Destruction (which clearly didn't exist),
and fronting for Osama (which never made sense). I might
add the Creation of Democracy (which seems like a real
long shot).

But even if"Democracy" were to be created, would it only
be acceptable when it produces a pro-U.S. government? I'm
no fan of democracy myself; it usually amounts to no more
than a polite version of mob rule. It's certainly not a
positive value, in my view. Since the end of WWII, the U.S.
Government has a consistent history supporting the idea of
democracy, while attacking its reality, by overthrowing
popular regimes that don't suit it, and supporting
dictatorships when the ruler is compliant. I'd say the
chances of an Islamic radical becoming the next president
of Iraq, even if he's elected with 100% of the vote, are
about zero while the U.S. Army is there.

And what about Americans themselves? Is U.S. public opinion
generally uninformed and are Americans insanely patriotic?
I'm not convinced that any nationality escapes this
indictment. Sure, Americans are jingoistic (e.g., the
boycotting of French wines, re-christening of French fries
as"Freedom Fries", and other embarrassing stupidities).
But I've been to 170 countries, and have to say that things
of this nature, like the Salvadorians and the Hondurans
starting a war over a soccer match, is par for the course.
Americans are actually better informed than the vast
majority of the world's 6 billion people. But that's not
saying much, in that their main sources of information are
sound-bite television, and publications written to a sixth-
grade comprehension level. The point is that Americans
historically were - and should be, in my opinion - held to
a much higher standard. It's not a good thing when"the
natives" in all kinds of benighted places mock Americans
for being, in effect, even more ignorant and irrational
than they themselves.

I don't know how all this will end, any more than does Bush
or Rumsfeld. But my prediction is: badly. Timing is the
real question in my mind, although even that is not so
terribly critical. The important thing is to be on the
right side of the trend. And the trends are quite clear.
The trend in the U.S. dollar is decisively down. The bear
market in stocks has a long way to run. The trend in
interest rates is likely up. And the bull market in gold
and gold stocks is still in its early stages.

Stay on the right side of these trends over the next few
years, and you're likely to not only preserve capital, but
even make a killing. That's saying something during the
best of times. But, in bad times, when the vast majority of
people are suffering real declines in wealth, it makes all
the difference in the world. At some point these trends
will change, as should your investment posture. But it's
not going to be anytime soon.


Regards,

Doug Casey
For the Daily Reckoning

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• Victory Proclaimed / The Daily Reckoning - - Elli -, 12.05.2003, 17:13