Snow Job, II / The Daily Reckoning (Nachtrag von Freitag)

verfasst von - Elli -, 01.06.2003, 19:18

-->Snow Job, II

The Daily Reckoning

Baltimore, Maryland

Friday, 30 May 2003

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

*** Recovery? Or recession? Or what?

*** More unemployment. A GUDD day...Stocks fall.

*** Housing bubble trouble? Jumping out of the window...
South African bonds... And more!

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

"This Recovery Feels Like a Recession," says a headline in
the Wall Street Journal yesterday.

Half a million jobs have been lost so far this year. More
than two million since the slump began two years ago. There
are now five times as many people out of work as there are
in jail. And yesterday's news brought word that another
424,000 filed unemployment claims last week.

Help Wanted ads continued to decline. And various
industries, as well as state and local government, say they
are planning more layoffs.

Stock market investors may be hoping for a greater fool,
but the fools may be running out of money.

House prices may not be in a bubble (more from Eric,
below)...but refinancing houses definitely is. The chart of
refi activity, 2003, looks like the Nasdaq, 1999. Only more
absurd.

Where does the money go? Mr. Greenspan says he has evidence
that consumers are using the low-interest mortgage debt to
pay off other debt. Still, many cannot resist"taking out"
a few dollars' worth of"trapped equity" and spending it.
And yet, retail sales...and auto sales...are soft.

Debt just doesn't seem to titillate the economy the way it
once did. More below...

Eric, could we have your report, please...

-----------

Eric Fry, reporting from New York...

-"If the stock market closes up, I'm going to jump out the
f***ing window!" a frustrated trader volunteered to your
New York editor yesterday, while pacing nervously back and
forth in our offices."I've been reading and studying and
analyzing...and for what? To get blown up by the market?"

- The trader, who is a friend of mine despite his frequent
use of the"F-word," and who has been trading options
successfully for more than three decades, is currently
"short the market" in anticipation of an imminent selloff.

- Yesterday, afternoon, he got his wish, or at least the
part of it. The Dow dropped 82 points to 8,711, although
the Nasdaq gained 12 points to 1,575.

- Moments after promising to jump out the window (which, by
the way is 26 stories above the pavement below), the trader
scurried back into my office and said,"Hey, I've got a
trade for you...You see how quickly I bounce back!...Sell
Hovnanian Enterprises [NYSE: HOV]. The stock spiked higher
on the opening, and that was it. The thing's been reversing
off the opening high all day...All these homebuilders look
the same. The group is monolithic. They all look like
shorts!...My guess is that if you short 'em right here you
won't lose too much money," he said with a wry smile.
"How's that for a ringing endorsement?"

- We here at the Daily Reckoning do not know whether the
homebuilding stocks are better bought or sold. We do know,
however, that many unsuccessful short-sellers - like ill-
fated infantrymen at Verdun - have charged into battle
against the housing stocks, only to meet with disaster.
(For perspective, the S&P Housing Index, which hit a new
all-time high yesterday, has gained a hefty 38% year-to-
date).

- We also know that Dr. Steve Sjuggerud, editor of True
Wealth, told those of us assembled at last week's private
Amelia Island investment conference,"There might be a real
estate bubble in some parts of the country (such as the
Northeast and California), but across the country as a
whole, housing prices (after being adjusted for inflation)
have gone almost nowhere in the past 13 years."

- Steve reminded the audience in Amelia - made up of home
price skeptics - to look at the numbers."In August of 1989
the average home price in the U.S., adjusted for inflation,
was $178,000. And, even more importantly, the supply of
homes is at a 30-year low (just 4.1 months), according to
the U.S. Census Bureau." [To learn more about Steve's view
on housing, click here:
http://www.agora-inc.com/reports/TRW/WTRWD212/ ]

- Meanwhile, the housing market's best friend, the bond
market, gained ground for the first time in four days, as
the yield on the 10-year treasury note dipped to 3.34% from
3.42% on Wednesday. The bond market seemed to"catch a bid"
when the disappointing news crossed the wires that weekly
initial jobless claims topped 400,000 for the 15th straight
week. In other words, the job market isn't recovering yet.

- Neither is the US dollar. The beleaguered greenback
tumbled more than 1% yesterday to $1.189 per euro. For
those keeping score at home, the dollar has dropped 21%
against the euro over the last 12 months.

- If it is true that"imitation is the highest form of
flattery," we Americans should be very flattered about
what's happening up in Canada. Their pension plans are as
bad off as ours!

-"The underfunding of corporate pensions in Canada has
reached an estimated $225-billion - about one-fifth of
Canada's annual gross domestic product - according to a
joint study for the Association of Canadian Pension
Management," the National Post reports."The total
estimated shortfall of $225-billion for the entire pension
system would require 2% of Canada's GDP each year for the
next 15 years to close the gap...For most companies," the
National Post continues,"this will represent a serious
drag on earnings. And for some, coming up with the cash to
close the funding gap will likely prove impossible."

-...and that's a very unflattering position to be in.

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

Bill Bonner, back in Baltimore...

*** Another GUDD day. Gold up. Dollar down. Gold shot up to
$369.60 (June contract) yesterday. The dollar fell against
the euro. [To learn more about profiting from the GUDD
trend - or simply about investing in gold, see:

The Case for Gold
http://www.agora-inc.com/reports/905stcfg/w905d503 ]

*** Speaking of house prices...The Economist magazine was
right, three years ago, when it said the U.S. stock prices
would collapse. Now it says house prices are next. Our
South African correspondent, Evan Pickworth, sends this
report:

"House prices in the U.S., the U.K. and four other major
economies will drop 'dramatically' in the next few years,
leading some of those nations to slip into recession,
according to a report by the Economist magazine.

"Rising home values in the U.S., Britain, Spain, the
Netherlands, Ireland and Australia have created a
'property-price bubble,' the magazine said in an e-mailed
release. It collected data going back to 1975 from sources
including estate agents, lending institutions and
government agencies.

"'In all those countries house prices are seriously
overvalued,' said Pam Woodall, economics editor at the
Economist. 'At some stage in the next few years, house
prices in those countries will fall, and when they do the
consequences will be far nastier than the stock market
burst.'

"The magazine advised homeowners in the six countries
identified as having a 'bubble' to sell up and rent until
prices drop. People considering buying a home should hold
off until prices have fallen," the magazine said.

"'Most homeowners will have to stick it out and watch their
wealth dwindle,' Woodall said. 'Where they went wrong was
in expecting double-digit returns to continue.'

"The Economist's survey also showed that London is the most
expensive city in the world to live in followed by New York
and Tokyo."

*** We called home yesterday for an update on the family.
Maria did an audition for a theatre school in Paris; the
show went well and she was accepted. Her 2-year modeling
career is coming to an end.

Jules was pleased, and perhaps surprised, to find that he
had passed into the next grade in his French school.
Despite all his worrying and grumbling, he actually seemed
to do okay.

But he has already decided to switch to the American School
of Paris anyway. His father got the bill for tuition just
this week; he had to grab the back of a chair to steady
himself.

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

The Daily Reckoning PRESENTS: Bill Bonner, re-examining
the underpinnings of the U.S. economy...


SNOW JOB, II
by Bill Bonner

Baltimore is full of strange and curious things; it is home
to bouffante hairdos, the Formstone Preservation Society
and other wonders. Filmmaker John Waters makes the city his
home, he says, because it is the tackiest metropolis in
America. He is inspired by it in the way that other artists
are moved to poetry by Paris or Rome.

But what caught our eye last night was not art but
advertising. A block or two from the huge billboard with
the provocative headline - Who's the Father? DNA Paternity
Testing... - sits another intriguing sign of the times:

BANKRUPTCY!
Chapter 7 -- $50
Chapter 11 -- $100

In America, in the springtime of the third year of George
W. Bush's rule, we conclude, bankruptcy has become as
popular as weight-loss.

The sign is not merely an invitation, but a reproach.
Bankruptcy rates are hitting records despite the best
efforts of those who manage the economy.

In his Congressional testimony last week, Alan Greenspan
sailed through his customary delusions - that additional
mortgage debt is good for consumers...that technology has
brought a New Era to the economy...and that modest
productivity increases have some exceptional quality as yet
unnamed.

He was cruising in the wake of John Snow, U.S. Treasury
secretary who made the following remarkable comment to the
G7 finance ministers:

"...the United States is not growing fast enough and
neither are you, but we are growing a lot faster than
you...We get complaints from our friends around the world
who say, 'your current account deficit is so high.' And our
response is: 'Yeah. You know why? Because you don't buy
enough from us. And because we provide the highest risk-
adjusted returns on capital in the world, so your capital
flows over here. So why don't you take steps to improve
your domestic economy so you'll be stronger and buy more
from us? And you might think as well about steps to improve
return on invested capital, and then capital would flow
your way as well as to the United States."

"The fact is," and the head of the Treasury department may
have been tempted to toss his head back a few degrees as he
made this point,"the American economy is strong. The
underpinnings are good."

And yet, on the corner of Charles and Lombard streets,
bankruptcy is such a good business it is worth advertising
for new clients.

There are other signs that the underpinnings of the U.S.
economy are not as good as Mr. Snow thinks. In addition to
bankruptcies and unemployment, business profits as a
percentage of GDP have fallen to their lowest level in
about 40 years.

No mention of this has been made by either the Treasury
secretary or the Fed chief. And yet, without profits, why
would people invest in new machinery, new ventures, new
employees? How could the economy grow? Why would stocks go
up?

Another question worth asking: what is going on? How is it
possible for an economy to be 'strong' with people going
broke at a record rate...and businesses unable to make any
money?

And why would profits decline - even as productivity
increases and technological marvels proliferate?

Hearing no answer from the authorities, we offer one
ourselves:

Daily Reckoning readers may recall from last week that the
world's central banks' reserves increased only 55% in the
last 20 years of the Bretton Woods/Gold Standard period -
'49 - '69. But then, the Gold Standard was replaced by the
Dollar Standard. Dollars being easier to replicate than
bars of gold, central bank reserves rose 2000% in the next
33 years.

That kind of money was bound to tempt people; all over the
world bankers, consumers and investors gave way to an orgy
of credit excess like looters at a liquor warehouse. Soon,
they were all drenched in the stuff.

The Nixon Administration put a final end to the Bretton
Woods/Gold Standard in 1971. Four years later, stocks
bottomed out in America and the Great Boom began.

Trillions of dollars sloshed around the world, creating
booms...and then busts. Japanese companies - selling to
Americans - were the first ones to get soaked. Then,
Japanese share prices sprouted...followed by kudzu-like
growth in Japanese real estate...and bonds. Then, other
Asian nations boomed - and busted. And then, it was
America's turn. Stocks had begun to pullulate in the late
'70s...by the late '90s they burst into spectacular,
intoxicating full flower...succeeded, as in Japan, by real
estate and bonds. Since 2000, U.S. stocks have wilted
somewhat, but the heady growth in real estate and bonds
continues.

Americans had what appeared to be a big advantage; they
were the ones who got to create 'money...out of thin air.'
But there was a price to be paid for being so close to the
source of such stimulating libations; Americans dipped
their cups in more deeply than anyone. And while they
drank, the source of their wealth slipped away.

"For generations it has been an economic truism and a
matter of simple common sense," begins Dr. Kurt
Richebächer,"that in essence, a person or a nation can
only become richer if it consumes less than it produces."
[For more, see Dr. Richebächer's latest report:
http://www.agora-inc.com/reports/RCH/WaveOfProfits/ ]

What America produced and exported was cash and credit.
Trillions of dollars' worth. Foreigners produced cars,
televisions, food, vacations - anything and everything that
they could trade for dollars. This is the trade of which
Secretary Snow is so proud. It has resulted in a mountain
of empty containers at U.S. ports (they come in
loaded...they do not leave, because America has little to
export, except money) and mountains of dollars piled up
overseas.

The treasury secretary seemed not to notice it, but it also
ruined the profitability of U.S. businesses, stifled real
incomes of American workers and pushed millions of jobs
overseas. American businesses pay their workers in dollars.
Normally, they could expect the money to come back to them
- as the employees spent it on the goods they produced.
Instead, it goes into the hands of foreign producers, who
do overseas what might have otherwise been done at home -
build factories, hire workers and make profits.

And what did they do with their profits? As Mr. Snow tells
us, they bought U.S. dollar assets - thus enabling
Americans to keep buying. In the late '90s, they bought
stocks. Recently, especially for the Japanese, the buying
has shifted to U.S. bonds.

While the effects of so much apparent prosperity continue
to splash here and there, the world begins to wonder about
the source of it. The dollar has lost 31% of its value
against the euro in the last 18 months. Against gold, it
has lost a similar amount. Has the Great Boom of the last
quarter century already turned into a Great Bust?

George Soros told CNBC recently that he had sold the dollar
and bought gold. Other investors might be wise to do the
same.


Bill Bonner

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• Snow Job, II / The Daily Reckoning (Nachtrag von Freitag) - - Elli -, 01.06.2003, 19:18