Perfidy Pays The Price / The Daily Reckoning

verfasst von - Elli -, 13.05.2003, 20:57

-->Perfidy Pays The Price

The Daily Reckoning

Paris, France

Tuesday, 13 May 2003

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*** Gone is the comic appeal of the stock market...but
there are still currencies...and bonds!

*** Dollar hits new lows...as"foreigners shun dollar
assets..." after Treasury Secretary lets cat out of bag...
Return-free risk...

*** Job cuts on Wall Street...gold up...Paris semi-
paralyzed by strikes...and more!

The stock market has lost its comic appeal. Gone is the
zany joie de vivre of the late '90s - when people expected
to get rich overnight.

Now, they are no less wrong, believing that they will get
rich slowly in stocks, but it is not as much fun to watch
someone lose his money over a long period of time.

Besides, a slow, drawn-out bear market tends to include
several longish stretches when stocks are not going down -
but up. It is not unusual for stocks to rally for
months...or even years...before finally reaching a bottom.
In Japan, for example, the Nikkei Dow has staged 5 major
rallies...while working its way down to a 20-year low and
losing 80% of its value.

And whenever stocks rally, we begin to get email from gurus
and pundits offering advice, such as this one:

"The stock market is already up 1,000 points...the biggest
mistake you can make is to stay on the sidelines during
this historic bull market..."

And, of course, there are the"I told you so's" and the
interviews with Abby Cohen...and all the people who think
they are geniuses again, just because they guessed right.
The latest polls by Investors Intelligence show 55.8% of
advisors are bullish while only 24.4% of them are bearish.
It is a bit tedious...and even unfunny...when the majority
of these clowns are right, even for a week or two.

But thank God we still have bonds and the dollar. Over the
weekend, the Treasury Secretary let it slip that the U.S.
wouldn't mind a lower dollar after all.

"Foreigners still shunning dollar assets," says a headline
in the Kansas City paper. What surprises us is not that
they shun it, but that they ever got so friendly with it in
the first place. On a trade-weighted basis, the dollar
gained 47% from '95 to 2002. So far, reports Stephen Roach,
it's only down 9%. Which leaves plenty of room for a lot of
people to lose a lot of money.

The Fed and the Treasury are doing all they can. The latest
week shows the money supply (as measured by M3 for the
technically-inclined reader) up $55.4 billion. If this were
to continue, M3 would grow by more than $2.5 trillion in
the next 12 months.

Still, bond investors think they can make money - or even
stranger, they think they can protect themselves from
losses - by buying a long-term investment yielding scarcely
more than inflation, at a time when the Fed is doing all it
can to destroy the currency in which it is denominated.

And Americans, generally, believe they can muddle through a
major decline in the dollar with no loss to their own
wealth...or living standards.

"We continue to believe that a sharp depreciation in the
value of the dollar," writes Stephen Roach,"is the single
most important force that might foster a long overdue
rebalancing of a U.S.-centric world economy. The impacts of
higher real interest rates should show up first in the form
of weakening U.S. domestic demand - a key outcome if
America is ever to rebuild its aggregate saving rate back
to historical norms."

Synopsis: A higher dollar = less spending = more saving.

Vulgate version: Americans are going to have to stop buying
things they don't need with money they don't have provided
by people they don't particularly like.

Implication: More recession coming.

Eric, your news please...

-----------

Eric Fry with the latest from Manhattan...

-"Honey, I Shrunk the Dollar" - the wacky, madcap monetary
comedy co-produced by Ben Bernanke and Treasury Secretary
Snow - has enjoyed a very long run. The show's story line
may have become a bit tedious to foreign audiences, but it
continues playing to rave reviews from the lumpenivestoriat
here in the States.

- Yesterday, even though the dollar tumbled to a fresh
four-year low against the euro, the Nasdaq soared to a new
11-month high. The greenback fell 0.7 percent to $1.157 per
euro, thanks, in part, to wacky comments by Treasury
Secretary Snow in an ABC-TV interview over the weekend.
During an appearance on"This Week", the Secretary
applauded the weak dollar for the helpful influence it
imparts to our balance of trade.

- But the withering dollar didn't bother stock market
investors in the least. They turned a blind eye to the
currency market while rushing in to buy their favorite
over-priced stocks. The Nasdaq jumped 22 to 1,542 and the
Dow soared 134 points to 8,738. The message is clear: As
long as the PRICE of dollar-denominated stocks and bonds is
rising, U.S. investors don't seem to care that the VALUE of
dollar-denominated stocks and bonds is falling.

- Government bonds also posted modest gains yesterday, with
the 10-year Treasury note advancing a 1/4-point to yield
3.65%. The bond market's continuing rally in the face of a
collapsing dollar is even more amazing than the stock
market's rally...How - the bond-skeptics wonder - does a
10-year, dollar-denominated bond yielding a paltry 3.65%
cohabitate with a central bank as overtly committed to
currency-debasement as the U.S. Federal Reserve? Why would
anyone want to buy one of Uncle Sam's long-dated bonds?
James Grant may have said it best when he referred to
Treasury's long-dated bonds as investments that offer
"return-free risk."

- When the Treasury Secretary of the United States cheers a
weakening dollar, it's time to consider bartering for
seashells. What chance does the dollar have when its
principal stewards are rooting for it to decline in value?
How can the dollar possibly advance when it must navigate
the Scylla of reckless musings by Federal Reserve governors
and the Charybdis of irresponsible remarks by Treasury
Secretary Snow?

- Over on Wall Street, the stock market bulls blithely
proclaim that the feeble dollar is a great thing for stocks
because it makes U.S. multinationals more export-
competitive."The greenback's collapse can and will
stimulate better earnings for companies exposed to business
outside the U.S.," chirped Tobias Levkovich, institutional
equity strategist at Smith Barney in a research note to
clients.

- We are not convinced. We suspect that a plummeting dollar
is not a good thing. In fact, we would not be surprised if
a collapsing greenback turns out to be a bad thing - both
for the economy and for the stock market...

- As we noted last week in the Daily Reckoning, technology
stocks are soaring, even while tech sector employment is
contracting. How could this be? Part of the reason, of
course, is that investors HOPE conditions in Techland will
be improving as we head into the second half of this year.
Another part of the reason for the tech stock rally is that
armies of Wall Street"analysts" are forever predicting
resurgent IT spending, and therefore, resurgent tech
company earnings.

- It matters little that the oft-advertised tech sector
recovery fails to materialize. As long as Wall Street
storytellers tell their happy story, investors will
continue to line up to buy tech stocks. But what happens if
the pinstriped storytellers lose their jobs? Who then will
spread the myth of the recovering tech sector? Who then
will urge gullible investors to buy overpriced tech stocks?
Many storytellers are out of work already.

- U.S. securities firms cut 80,400 jobs in the 22 months
leading up to February 2003, according to the Securities
Industry Association. That's more than 10 percent of the
peak employment levels. The New York City securities
industry has suffered an even more painful 20% loss. For
the moment, the Nasdaq is rallying briskly. But the
earnings-challenged high-tech index can ill afford to lose
more of Wall Street's storytellers.

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

Bill Bonner, back in Paris...

*** Gold rose $3 yesterday. Twenty years ago - when stocks
were at an historic low, and gold at an historic top - you
could cash in a single ounce of gold and buy all thirty Dow
stocks, and still have change left over. A couple of years
ago, we passed another milestone - an historic low for gold
and an historic top for stocks, when it took 42 ounces of
gold to buy the Dow. Stocks are less expensive, and gold
more dear, than they were in 2000. But it still takes 25
ounces of gold to buy the Dow. Our guess is that you'll be
able to buy all 30 Dow stocks for one ounce of gold, once
again, before this episode is over.

We don't know how or when we'll get there...but our"Trade
of the Decade" - sell stocks, buy gold - still looks good.

*** The sun is shining. Church bells are ringing. It is
another beautiful day here in Paris. But it is supposed to
be"Black Tuesday." A nationwide strike by government
employees has paralyzed the nation. The subway, hospitals,
and post offices are closed.

The chair-warmers are annoyed because they are being
threatened with reform. Like perhaps every country in the
developed world, France has promised its retirees more than
it can deliver. In the public sector, which is 25% of the
workforce, people can retire at age 55, or even 50 for some
of them. Now, the government is proposing to force
government employees to work two-and-a-half years longer
before drawing retirement benefits.

Jean-Pierre Raffarin, France's Prime Minister, went on
television the other day. In a masterful teary address to
the nation, he spelled out why the current pension system
cannot survive and asked citizens to cooperate. Strikers
hope to force Raffarin to back down.

What a lovely day for a showdown. The streets of full of
people walking...bicycling...roller blading...scooting
along. Too bad...this afternoon, it's supposed to rain.

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The Daily Reckoning PRESENTS: Following Doug Casey's
piercing post-war questions (yesterday's DR), James
Davidson unabashedly declares the impact of the war in Iraq
will be"far more positive than you would be led to
believe" - in politics. But what about for your portfolio?
Caution is still in order.


PERFIDY PAYS THE PRICE
By James Davidson

Contrary to many forecasts and the devout hopes of Howard
Dean, Jacques Chirac and the Axis of Weasels, the war in
Iraq is over. The good guys won.

The downside of lying was convincingly demonstrated by the
Anglo-American rout of Saddam Hussein and his merry band of
plunderers. Notwithstanding the stark evidence of success,
however, broadcast around the world by"embedded"
reporters, the anti-war core of the Democratic Party in the
U.S. continues to oppose the war and criticize U.S. aims in
cleaning up Iraq.

This is remarkable on several scores. It is one of the
first times in history that political campaigns have been
based upon opposition to a short, successful war. Would
Eugene McCarthy have run against the war in Vietnam if the
war had been won a year before the first primary?

The other issue is one of mendacity. It is an illustration
of how facts can get lost in a fog of ideology. As an
investor, you should not let the media bias confuse you
about the impact of the war. It is far more positive than
you would be led to believe.

Firstly, the real-time demonstration of American military
technology in walking over Iraq's vaunted Republican Guard
divisions has had a major impact in reinforcing perceptions
of America as the world's superpower. One of the more
important impacts of this shift in recognition is likely to
be felt in the Korean Peninsula, where the Chinese
government is likely to join the U.S. in pressuring North
Korea's megalomaniacal dictator, Kim Jong Il, to de-
commission his nuclear weapons program.

The new Chinese leadership are not as stupid or unrealistic
as the Dixie Chicks and the reflexive anti-war contingent
in the U.S.. Saddam may, or may not have had weapons of
mass destruction. But there is no doubt North Korea does.
North Korea cannot survive without Chinese backing. If the
Chinese, awed by the latest demonstration of American
power, respond as I believe they will, North Korea will be
de-fanged. The result will be a boom in the South Korean
stock market, as the discount on shares for possible war
and mayhem will shrivel significantly.

For those investors prescient enough to discern them, the
war has also brought two potentially profitable trends. The
first is a sharp decline in crude prices. As I write, June
crude is trading lower by 29 cents at $26.20 a barrel on
the expectation that Iraqi crude exports will rapidly
return to the market.

Crude was not alone in its descent; after its impressive
rally on the battlefields, the U.S. dollar has also taken a
turn for the worse. In fact, the dollar, which has long
been joined at the hip to the stock market, has weakened
and diverged from equities. Since Saddam's statue was
toppled in Baghdad on 9 April, the dollar has lost over 7%
against the euro.

Victory in Iraq did bring about one much anticipated sharp
rally - in stocks. In fact, the victory rally was the first
throughout the whole bear market to break indices above the
40-week exponential moving average. This is quite a bullish
sign, although it does not necessarily herald the start of
a new bull market. That is just one of a number of possible
scenarios now playing out.

While it would be tempting to conclude that the"bull is
back," the problem is that gauges of sentiment do not read
as they should for a true bull phase. In fact, bullish
expectations, at 55.8%, are the highest they have been in
years. Paradoxically, markets seldom rally when sentiment
is too bullish.

That is not to say that a further rally is impossible. The
market may continue to rise. It's not as unlikely as your
winning the Power Ball Lottery, but it could happen.
Nonetheless, sentiment is too complacent at this level to
make holding calls a comfortable strategy. There isn't
enough negative sentiment as reflected in the put/call
ratio.

The critical test is right now. The market could continue
to rise. But historically, 80% of the market's gains are
made between the months of October and April. The second
and third quarters tend to be a more challenging time to
make money in stocks.

It would be a stretch to presume that the whole seasonal
strength has been Doppler shifted into the spring and
summer this year. It remains to be seen if the political
victory in Iraq will translate into gains for your pocket
book.

Regards,

James Davidson
for the Daily Reckoning

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• Perfidy Pays The Price / The Daily Reckoning - - Elli -, 13.05.2003, 20:57