Debasing / The Daily Reckoning

verfasst von - Elli -, 14.05.2003, 18:05

-->Debasing

The Daily Reckoning

Paris, France

Wednesday, 14 May 2003

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

*** What is happening in the trendsetter nation?

*** Oil rises...terrorism back...trade deficit
increasing...

*** How much further for this rally? Bad news from
Richmond...and the Hamptons...And God Created Woman...and
more!

What is going on in Japan?

Does anyone care?

After 13 years of bear markets, recession and deflation,
most people think the Japanese are washed-up, financially
incompetent has-beens, who can't figure out how to work a
printing press. For everyone knows the way to fight
deflation is just to print more money! Even Milton Friedman
says so. Why can't the Japanese get the hang of it?

But here at the Daily Reckoning, we, and we alone, have
long regarded the Japanese as trendsetters. With a
population that is 10 years older...and a bubble economy
that blew up 10 years earlier than our own...the Japanese
have become fortune-tellers.

Which is why we noticed yesterday, when Eisuke Sakakibara
spoke to the Financial Times: Deflation, said the man who
knows more about it than perhaps any living human, is
beyond the power of monetary authorities to prevent.

"Even if we don't yet have [global] deflation, you have to
concede that we have disinflation," he said, attributing
falling prices to rapid productivity gains in
manufacturing, particularly in China."Deflation is a
structural, not a monetary phenomenon."

"Alan Greenspan never used the word deflation," he said,
referring to the chairman of the U.S. Federal Reserve."He
called it an increase in productivity. But it's the same
thing."

"In calling deflation structural," continues the FT report,
"Mr. Sakakibara is part of an increasingly vociferous
intellectual movement that thinks Japan has been unfairly
blamed for failing to tackle deflation with conventional
monetary policy. The Bank of Japan, he said, had vastly
increased money supply, but this had merely fuelled a
bubble in the government bond market, in which interest
rates on 10-year JGBs have dropped to 0.575 per cent.
Credit had shrunk.

"Robert Feldman, chief economist at Morgan Stanley, has
also argued that following classical monetary policy is
inappropriate for Japan. 'There's something new going on
out here and I would hope the economic theorists would be
able to think about it without being poisoned by what
they're teaching their students,' he said."

American economists are still teaching their students that
deflation is a monetary phenomenon...and it can be avoided
by monetary means."We have a technology...a printing
press," Ben Bernanke explained to the entire world."And we
can destroy the dollar any time we want," he might have
added.

Foreign dollar holders heard him loud and clear. Without
waiting for Bernanke, they are destroying the dollar on
international exchange markets. But US investors,
economists, analysts, and wishful thinkers still believe
that Bernanke's printing press will keep them from
following in Japan's footsteps.

We will see...

Over to Eric Fry with the latest news from lower Manhattan:

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

Eric Fry in New York...

- Back in the days when investors worried about losing
money, and when fear reigned supreme in the stock market, a
coordinated terrorist attack against American interests in
Saudi Arabia might have elicited a bit off consternation on
Wall Street. But yesterday's alarming headlines from Riyadh
barely caused a ripple. The Dow eased a modest 47 points to
8,679, while the Nasdaq dipped 2 points to 1,540...

- Investors simply can't be bothered with bearish news. But
the grim news from Saudi Arabia did cause crude oil prices
to jump more than one dollar to $28.42 a barrel.
[Editor's note: Outstanding Investments editor John Myers
has long suggested Saudi Arabia is the real target for
terrorists in the region...and has an interesting take on
how this will play out in the price of oil. For more, see:

After Iraq... America's Next Crisis
http://www.agora-inc.com/reports/OST/Riches/ ]

- Remarkably, despite the surging oil price, Treasury bonds
rallied for the fourth day in six, dropping the yield on
the 10-year note to 3.62%. The stock market may be valued
optimistically, but the bond market is priced for
perfection, and we doubt that the world is as perfect as a
3.62% yield on a 10-year government bond would imply.

- Certainly, our balance of trade is far from perfect.
America's trade deficit in March swelled to $43.5 billion -
- the second-highest reading on record. Apparently, the
crumbling dollar has not had enough time to work its magic
on our balance of trade. Maybe, if the Federal Reserve and
Treasury can engineer another 20% dollar decline, we will
have solved our global trade difficulties once and for all.

- It's true that the stock market often climbs a"wall of
worry", but it is also true that the wall of worry can
collapse at a moment's notice, burying investors in the
rubble of excessive optimism. The recent advance on Wall
Street has been impressive. But that does not mean that a
new bull market is underway. Since the Oct. 9 bear market
lows, the Dow Jones Industrial Average has rallied 19%,
while the Nasdaq has gained a sparkling 38%.

-"Does the sizable advance of the past seven months mark
the final transition to a new bull market, or does it
instead signal the beginning of the end for the advance?"
wonders Adam Shell of USA Today. Although we do not possess
a copy of next month's Wall Street Journal, we suspect that
the current rally is nearing its denouement, and will soon
assume its place in financial history as the sixth bear
market rally since the bubble burst in early 2000.

-"Since peaking in January 2000, the Dow has mustered up
five big rallies with gains ranging from 15% to 29%," Shell
observes."But they all proved to be short-lived,
ultimately reversing course and resulting in new lows." We
are not predicting a repeat...exactly...but neither do we
rule it out.

- During the months leading up to the Iraqi conflict, the
lumpeninvestoriat had been retreating from the stock market
and hunkering down in cash and bond funds. Investors pulled
$27.7 billion from stock funds in 2002, and another $11.1
billion in the first quarter of this year, according to the
Investment Company Institute.

- But the swift victory in Iraq unleashed a burst of
optimism, which inspired investors to charge back into the
stock market without regard for life or limb or personal
retirement prospects. Only time will tell whether this
"investor offensive" will come to resemble the brilliant
"Chamberlain's Charge" at the Battle of Gettysburg or the
disastrous"Charge of the Light Brigade." We wish America's
courageous investors well, even if we fear the worst.

- Bear market rallies - once underway - have a knack for
converting terror-stricken investors into fearless
speculators. All but the most timorous of investors begin
to trust the rally and to expect large gains ahead. Case-
in-point, Internet stocks are flying high once again. The
"HHH" basket of Internet has soared a breathtaking 87% from
its Oct. 7 bear market low.

- Even eminent skeptics like Morgan Stanley's Barton Biggs
have joined the bullish legions."I continue to believe
that this rally will carry further than most believe," says
Biggs."My hunch is that it is not too late to play,
because we may have traversed only half of it. The
enthusiasm could grow. It's the old story. After a long
decline, for prices to rise the news doesn't have to be
good, much less great; it just has to be less bad than what
has already been discounted...But make no mistake. It's a
rally in the aftermath of a secular bear market, not the
beginning of a new bull market...yet."

- Biggs is certainly right about one thing - the economic
news has not been great lately, merely"less bad." News
that is"less bad" may be good enough to spark a bear
market rally, but a new bull market will require bona fide
GOOD news.

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

Bill Bonner, back in Paris...

*** Gold slipped back $1.30 yesterday. But June contracts
are still above $350.

*** The Richmond Fed says that it looks like Tokyo or
Yokahama around their neck of the woods. Manufacturing is
down. Employment is still falling. Retails sales are weak,
too.

*** Newsday reports that house prices in the Hamptons are
falling.

*** Bonds hit new highs, with the long T-bond yielding just
4.62% and 10-year notes yielding 3.62%.

Why are bonds going up while the dollar goes down? Mr.
Sakakibara explained, above, that this is what happens when
the central bank tries to fight deflation by lowering
interest rates: it creates a bubble in the bond market.

When will the bubble pop? We don't know...

[And it's worth noting that some investors and thinkers...
some whom even we respect...our friend Jim Rogers and our
colleagues in the New York office of the Daily Reckoning,
for example...are not convinced that we'll see deflation at
all. On the contrary, the Fed's attempts at debasing the
currency will inevitably succeed, they say, and holders of
the U.S. dollar will continue to suffer from declining
purchasing power. See Andrew Kashdan's comments below.]

*** Brigitte Bardot was on TV the night before last, fully
dressed. Alas, she did not look like the same woman who
appears in"And God Created Woman"...but that is the way of
things. Forty years is a long time in the life of a sex
symbol.

Bardot created a very popular sensation when she became the
first actrice to take off all her clothes in a major movie.
Now, she's creating a sensation once again, by mouthing off
on TV and in a new book with opinions that are not avant-
garde, but retrograde. Bardot dislikes immigration, women
in politics, homosexuals and any number of other things.
Many, if not most, other French probably share her
opinions; few dare to say so. One group is threatening her
with a lawsuit for"inciting racism."

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

The Daily Reckoning PRESENTS: Is the U.S. teetering on the
brink of a deflationary death spiral? On the contrary, says
Apogee Research's Andrew Kashdan, your money will continue
to erode in purchasing power, just as it always has.


DEBASING
By Andrew Kashdan

With all due respects to our friends in Paris, let me say
this: not only is the risk of a protracted Japan-style
deflation overblown, but so too is the prospect of any
significant disinflation from here. In other words, prices
are likely to stay where they are, or go up...the latter
being the more probable of the two scenarios.

The dreaded"D"-word made the headlines again recently
after the Federal Open Market Committee tacked on a few
extra words to its standard public announcement of its
decision to keep short-term interest rates unchanged. In
addition to the usual blather about the risks to economic
growth, the FOMC added a shocking admission that it fears
insufficient inflation."The probability of an unwelcome
substantial fall in inflation, though minor," the FOMC's
announcement noted,"exceeds that of a pickup in inflation
from its already low level."

The pundits rushed to praise the Fed's overtly pro-
inflationary disposition."Masterful," said Goldman Sachs;
"historic" and"profound," gushed The Wall Street Journal.
The layperson could surely be forgiven for not fully
appreciating the moment. Did anyone really doubt that the
Fed would maintain low interest rates, despite the lack of
imminent inflation risk? The Journal, in more than one
article, highlighted the irony that the same Fed whose
mission it is to stop inflation now is apparently planning
to aid and abet its rise. It seems a mind-blowing
paradox...unless, that is, you know a little something
about monetary history.

Whether or not the Federal Reserve has a specific target
rate in mind, it is hardly a secret that the Greenspan Fed
is eager to revive inflation. Surely no one is expecting an
actual contraction of the money supply. And while Japan and
its seemingly endless travails always merit an obligatory
mention whenever deflation comes up, few macroeconomic
observers doubt that U.S. banks remain willing and able to
create credit on top of the Fed's already generous gift of
base money. (For perspective, although slowing recently,
the monetary base increased by an annualized 7.6% since
late December.) In this context, it is hard to see where a
sustained deflation might come from. The prospect of a few
more cheap imports from China is not enough to support a
convincing argument.

It's true that that the prices of some goods and services
have been falling, but that hardly means that we are living
in a deflationary world. Most people seem to think that the
CPI - or whichever index is favored at the moment - is the
price level rather than a price level. But if you're
saddled with medical bills, or choking on the cost of
college tuition, or digging deeper into your pocket to pay
for a subway ride in New York City, then you're probably
wondering what all this talk of deflation is about. As long
as your expenditures are not made up of exactly 5.961% for
medical care, 17.293% for transportation, and 0.193% for
infant and toddler apparel, then you've got your own
personal CPI. Stripping out food and energy, as many
economists are fond of doing, leaves the March inflation
rate unchanged at 1.7%, year-over-year.

Overall CPI rose 3% in March and the more accurate measure
of core inflation, the median CPI, increased 2.6% year-
over-year. Obviously, it's not quite time to stuff your
cash in the mattress and reap the returns wrought by
deflation. Even Pat Jackman, an economist at the Bureau of
Labor Statistics, admits that the CPI Index may understate
actual year-over-year price increases. The fact is, he told
the Journal,"more money is coming out of your pocket." And
if the Fed's reflationary mission succeeds, even more money
will be coming out of our pockets.

Nor do we"worry" that the Fed will run out of ways to
debase the currency. As for the problems awaiting the Fed
once it hits the"zero bound" for short-term interest
rates, there are probably much better things to worry
about. If the Fed can't use short-term rates to inject
money into the economy, we are certain it will find another
way. After all, Fed Governor Ben Bernanke brags that the
Fed can"produce as many U.S. dollars as it wishes at
essentially no cost." These dollars won't sit idly in bank
vaults - we are clearly a long way from Japan and its
malfunctioning banking sector, which has prevented the
wonderful process of the money multiplier from taking hold
in that beleaguered Asian nation.

No sir, no need to fret about deflation. We have all the
confidence in the world that the Fed is willing and able to
inflate. There are few sure things in finance, but the
tendency of central banks to debase currencies is as close
to a sure thing as the financial markets offer. Therefore,
the market's implicit forecast of a 1.7% CPI inflation rate
over the next 10 years looks like a sure loser.

Fortunately, the remedy for investors is simple: sell long-
dated, fixed-rate treasuries and buy the inflation-indexed
variety, also known as TIPS. And while you're at it, you
might want to think about refinancing your home while the
getting is good.

Regards,


Andrew Kashdan,
for the Daily Reckoning

Thread gesperrt

 

gesamter Thread:

• Debasing / The Daily Reckoning - - Elli -, 14.05.2003, 18:05