Something Ugly This Way Comes / The Daily Reckoning

verfasst von - Elli -, 02.06.2003, 19:13

-->Something Ugly This Way Comes

The Daily Reckoning

Baltimore, Maryland

Monday, 2 June 2003

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

*** Do you have enough money yet?

*** 'No name stock investing' is back in style...Nasdaq up
almost 20% this year...

*** Government-guaranteed bond bull market! Deflation is
'no threat', but too little inflation makes Bernanke
'uncomfortable.' You figure it out!

Have we told you, dear reader?

I mean, that it is all nonsense, rubbish, and folderol?

Our beat here at the Daily Reckoning is money and how to
get more of it. We have been accused of being skeptics. But
we deny the charge. A skeptic is one who doubts accepted
doctrines and suspects that 'what everybody knows' is
moronic. He trusts only his own judgment, reason and
perception. We are suspicious, by nature, 'tis true...but,
we doubt nothing so much as our own ability to reason
things out.

We are even suspicious of our métier. We try to help people
get more money, but in the modern world, nearly everybody
has enough of it already. In just a few hours of work per
week, you could earn enough money so you wouldn't
starve...or freeze to death. In fact, with a library card
and a small garden plot in the West Virginia hills, a
couple could live quite well. Maybe they couldn't afford a
big-screen TV or an SUV...but they'd be better off without
them. They could enjoy the beauty of nature and eat
well...and warm their backs against a crackling fire. What
more could you want?

No, it doesn't take much money to live...and even live
well. The rest is just vanity.

People want more money so they can feel superior to the guy
who has less. The poor man must be a fool, they say to
themselves. And so they bus, and hump, and schlep all their
lives in order to buy bigger and better things. And then,
when the sky is clear, usually on a day near the end of
their lives, they look around them at all that they have
acquired...and suddenly a stark and sober thought descends
upon their minds like a smart bomb on an Iraqi restaurant.
In an instant, the meaning of life explodes. They realize
that they are fools, too - maybe the biggest fools of all,
for they have spent their whole lives in pursuit of
something that didn't really matter.

For most people, the thought lingers for only an instant,
hardly long enough to do lasting damage. The debris is then
cleaned out of their minds and they are able to go back to
work the next day - humping, bussing, and schlepping to
make more money.

And thank God. Every day, your editor gets up at 5 A.M. to
write the Daily Reckoning - for reasons of pure vanity. It
would be a pity if no one read it.

Here's Eric with the latest news:

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

Eric Fry in New York...

- Cold, dispassionate securities analysis has as little to
do with the current stock market rally as a biology
textbook with a one-night stand. The sparkling rally on
Wall Street is the love child of hope and speculation,
nurtured by a dash of short-covering. And yet, the buying
passion shows little sign of cooling down.

-"The [recent] lift in the stock indexes since mid-March
has generated lots of ungrateful probing by investors who
aren't quite sure where all the strength has come from,"
says today's issue of Barron's."Sure, the war ended,
interest rates have dropped, first-quarter earnings
overachieved, companies have been able to raise capital on
better terms, the Federal Reserve is leaning on the money-
supply throttle, taxes have been cut for stock owners, and
there's even been a bit of hopeful economic data."

- And yet...the prospects for corporate profit growth would
not seem to be as glittering as the stock market's festive
trading action would imply. Last week, the Dow Jones
Industrials danced 248 points higher to 8,850, while the
Nasdaq skipped to a splendid 5.7% advance, ending the week
at 1,596. The Dow, S&P 500 and Nasdaq all ended the week at
new highs for the year. The Nasdaq has gained a bull-
market-esque 19.5% since January 1st.

-"No-name stock investing is back in style," an
incredulous stockbroker explained to your New York editor
over a pint of beer last Saturday night."I'm not kidding.
I had one conversation this week where the client called me
and said, 'Hey, buy me five thousand shares of XJSD.' I
said, 'What is that?' He replied, 'I don't know. But I see
that it's up a lot on big volume. So let's buy some.'

-"I can't tell him 'no way,'" your editor's friend
explained."The best I can do is talk him down from a
5,000-share order to a 2,000-share order. But, I've been
getting a lot of calls like that lately, where the client
knows only the symbol, but nothing about the stock itself.
I try to talk clients out of trades like that, but they do
them anyway. So I've got a couple of accounts that are an
'alphabet soup' of Nasdaq stocks...and the clients don't
have any idea what these companies do...From where I sit,
this is a very speculative rally."

- Government bonds retreated a bit last week, as the
benchmark 10-year note yield edged up to 3.35% from 3.34%
one week earlier. The yield on the 30-year Treasury bond
ended the week at 4.35%, up from 4.26% the previous Friday.

- Has the spectacular bond rally finally exhausted itself?
Only an intrepid, or foolhardy, investor would dare to make
that bet. After all, the Federal Reserve itself promises to
buy long-term treasury bonds, if need be, to conquer the
demon deflation. Who would hazard to bet against a
"government-guaranteed" bond rally? Then again, not every
single government project works flawlessly.

- The U.S. government may attempt to vanquish the as-yet-
unseen deflation by buying bonds from itself with money
that it prints for itself. But this bizarre self-dealing
may undermine confidence in the treasury bond market to
such an extent that the federal government would end up
being just about the only buyer of its own bonds...unless
interest rates were to rise dramatically.

-"There's nothing unprecedented about interest rates
beginning with the numbers 1, 2 or 3," writes Jim Grant,
editor of Grant's Interest Rate Observer."They were the
rule rather than the exception in the days of the gold
standard. But, as far as I know, no rates such as those
quoted today ever appeared in a monetary system unballasted
by gold or silver. What ballasts the millennial U.S.
monetary system is debt, and its weight is palpable. In the
1960s and 1970s, total nonfinancial debt (corporate,
government and individual) was around 140% of GDP. In the
junk-bond revolution of the 1980s, the portion leapt to
180% and never looked back. Today it stands at 195%."

- Unfortunately, debt is the sort of ballast that tends to
capsize currencies, not stabilize them.

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

Bill Bonner, back in Baltimore...

*** Has the long, extreme bond bull market finally peaked
out? Eric wants to know. We have no idea about the future,
but we're beginning to put the pieces of the past together.
For the last 30 years, the U.S. has boosted the supply of
cash and credit all over the world. The Dollar Standard,
which replaced the Bretton Woods/Gold Standard in 1971,
made possible a huge increase in the world's 'money.' The
Fed could create it 'out of thin air' at virtually zero
cost.

This new money stimulated the process of globalization -
luring the Japanese, Chinese and other Asian economies to
grotesque excesses. They floated high...and sank low...as
tidal waves of dollars rolled around the globe. Most
recently, the money is going into U.S. bonds...mortgage
refinancing...and housing in certain parts of the U.S..
Stocks, too, are enjoying a lift.

The lumpeninvestoriat are buying bonds. So are Japanese
central bankers. The former have neither a clue nor a
prayer. But the latter at least have a theory. They do not
want the dollar to fall against the yen. And they believe
that the U.S. economy has fallen into the same hole they
have been in for the last dozen years. They expect the Fed
to lower short-term rates even further and to buy even more
bonds - thus driving up bond prices.

They may be right.

While deflation poses"no immediate threat," Fed governor
Ben Bernanke explained to a polite audience in Tokyo last
week, there is a risk that inflation rates may be
"uncomfortably low." We have never met a consumer who
complained that prices were not rising fast enough, but we
have never met Ben Bernanke either.

"Low compared to what!?" asks the Mogambo Guru of similar
comments made by the Fed chairman before Congress last
week."Prices are SUPPOSED to be slightly falling! That is
how you increase standards of living! Falling prices and an
expanding economy is the Promised Miracle of Productivity
Made Manifest, for crying out loud!" (More from Mogambo,
below...)

*** April numbers showed the U.S. economy still following
the Japanese trendsetter. There was no increase in personal
income...while wages and salaries actually fell for the
first time in 9 months. The Detroit paper reports that the
unemployment rate - at 6% - is understated, because it
doesn't account the growing number of people who have given
up looking for work; they've either gone back to school,
taken part-time, low-paying jobs, or spend their time
reading the Daily Reckoning. Plus, the NY Fed released
figures showing the household debt burden compared to
disposable income; the ratio has reached a record high of
74%.

Oh, and here's something interesting...that 'secret' report
commissioned by former Treasury Secretary O'Neill that we
mentioned last week puts the 'real' federal deficit at $44
trillion.

*** So you figure it out, dear reader. Incomes are flat or
falling. People have more debt than ever. The government
has obligations equal to more than 400% of the total
GDP...an economy that seems to be slouching toward
Tokyo...and a printing press. Is this a good moment to buy
stocks at 35 times earnings (the current P/E for the S&P)
or bonds denominated in the currency of the world's leading
debtor...after 30 years of a credit boom?

*** Gold fell $5.10 on Friday.

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

The Daily Reckoning PRESENTS: Mogambo on Monday! Harsh
invectives and heaps of opprobrium for the Fed chairman,
delivered with care by the angriest guy in economics...


SOMETHING UGLY THIS WAY COMES
The Mogambo Guru

Watching Greenspan addressing the Congressional Joint
Economic Committee, I constantly interrupt myself by
vacillating between gagging in revulsion and laughing
hysterically at what is being said.

Nevertheless, it is a real pleasure to know that Ron Paul
is alive and well. Actually, this past session the
questions by the group did not seem as insipid as usual, so
that was nice, too.

There was one interesting spectacle, where some bozo, I
forget who, wanted to allow Afghanistan or Iraq or
something the contract to print our money and let them keep
the seignorage."Seignorage" is the mark-up between what it
costs to print a twenty-dollar bill (a few cents) and what
they get, namely twenty dollars of spending power.

The idea, I guess, is that Afghanistan or whoever would
exchange the dollars they print up by buying, at full
value, American-made goods and services, and thus everybody
would win, in the big scheme of things or something, and
Iraqis would end up with brand-new SUV's, and American auto
companies would book sales and pay sales taxes and remit
taxes on the profits to the government and everybody would
be happy, happy, happy.

He was ignored. But it shows the unbelievable degree of
stupidity and commie/socialist/fascist redistribution
schemes that run rampant in Congress.

Well, let's don our waterproof boots and wade through the
muck of Greenspan's prepared remarks."Incoming data on
labor markets and production have been disappointing.
Payrolls fell further in April, and industrial production
declined as well." I was not expecting him to be so candid
and refreshingly accurate, even though the second sentence
is completely redundant to the first, but sometimes us old
guys repeat ourselves repeat ourselves repeat ourselves.

"Businesses are apparently continuing to discover un-
exploited areas of cost reduction that had accumulated."
First, let me stick my big fat nose in here and say that
your"cost reduction" is my sales shortfall. It forces me
to reduce my prices to clear inventory. So that's another
economic bummer.

But it also says something verrrrryyyy ugly about the
general competence of these high-paid executives, now that
more"un-exploited areas of cost reduction" are
revealed. How much are we paying these jackass executives,
who are just now discovering more and more"un-exploited
areas of cost reduction"? And when did these"accumulated"
costs accrue, if not right under their noses?

Where have these guys been all this time, other than at the
bank, cashing their outsized and obviously undeserved
paychecks?

Now, this next part here is where I got so shook up that
trained scientists think they detected a seismic tremor
that coincided with my reading it. He says,"In recent
months, inflation has dropped to very low levels. As I
noted earlier, energy prices already are reacting to the
decline in crude oil prices, and core consumer price
inflation has been minimal. Inflation is now sufficiently
low that it no longer appears to be much of a factor in the
economic calculations of households and businesses. Indeed,
we have reached a point at which, in the judgment of the
Federal Open Market Committee, the probability of an
unwelcome substantial fall in inflation over the next few
quarters, though minor, exceeds that of a pickup in
inflation."

Now, I don't know where to start! Let's start at the top
with,"In recent months, inflation has dropped to very low
levels." Low compared to what? Prices are SUPPOSED to be
slightly falling! That is how you increase standards of
living! Falling prices and an expanding economy is the
Promised Miracle of Productivity Made Manifest, for crying
out loud!

Okay, inflation has not been as bad as it has been in the
past, considering that the Fed is the root cause of decades
of persistent price inflation, which is also one of my big
beefs, and speaking of beefs, as in juicy and delicious
hamburgers, all this talking about beef has made me
somewhat peckish, but the point is that not only am I
getting more and more hungry by the minute, but that
inflation is still running at well over 2% a year!

This is intolerable!

And yet, here is not just a Fed-weenie, but THE Fed-weenie,
saying that inflation is too low at 2.5%, that they want
MORE freaking inflation! I wish you could see me now,
because I am sure that it is quite entertaining to see me
writhing on the floor in some weird fit of convulsions, my
brain cooking in its own juices, and my hair literally
standing on end. It kind of tingles, too! Like when
lightning is getting ready to strike. Which may be a very
profound analogy when talking about trying to ignite
inflation.

And, anyway, this lowball 2.5% inflation is the inflation
figure that emerges from the government AFTER they drag it
into the basement and, umm, massage it with blunt
instruments and jabs to the kidneys, as they manipulate the
poor little raw-inflation number to seasonally-adjust down,
substitution-effect adjust down, income-effect adjust
down, adjust adjust adjust down down down. And even after
all that, allowing the poor old inflation number to stagger
to its feet, it is so bloodied and smashed that it can't
even recognize itself in a mirror, and it is STILL not a
good inflation reading! 2.5% inflation is still a BAD
inflation number! Bad!

Watch my lips! Baaaaddddd!

Now, let's examine the exquisite phrase"Energy prices
already are reacting to the decline in crude oil prices."
How about re-wording that to"With thanks to the idiot
exporters of crude oil, they have not increased the price
of a barrel of oil to reflect the drop in the value of the
dollars they are getting in payment. Hahaha! Almost nobody
here at the Fed expects those morons to keep THAT up for
much longer, but we are not going to mention that
inconvenient fact. Except Eddie, the cloakroom attendant,
who is not a team player, and who will probably blab it all
over town."

Now, we move to,"Inflation is now sufficiently low that it
no longer appears to be much of a factor in the economic
calculations of households and businesses."

Man, I heard that!

Most people I know are wondering how to cut costs, how to
scratch up a few extra bucks, how to sell one or more of
the kids to slave traders for a little ready cash, and they
spend hours upon hours pacing back and forth wondering how
in the hell they can pay down a few of the bills that seem
to be getting bigger and more numerous by the day.

When I bring up the fact that inflation is still a problem,
they act like I'm not even there. In fact, most of the time
they are acting like THEY aren't even there, like when they
tell me to answer the ringing telephone and tell whoever is
calling that they are not there, so I tell the guy on the
end of the phone that he is not there, and he gets all
flustered and huffy and says that he certainly IS there and
he wants to talk to you, and then I tell him that you are
standing right there in front of me, and you just told me
to tell the guy at the other end of the phone that he is
not there, and then I scream"And that means you aren't
there! And if you aren't there, then you can't possibly
talk to anybody, you dumb jackass!"

And then I slam down the phone. And then we all have a
cold, frosty brewski and get back to wondering what in the
hell we are going to do about these bills.

Finally, he puts us out of our misery by saying,"Indeed,
we have reached a point at which, in the judgment of the
Federal Open Market Committee, the probability of an
unwelcome substantial fall in inflation over the next few
quarters, though minor, exceeds that of a pickup in
inflation." So now we are quoting probabilities, are
we? Something in the fifty-fifty range? The sixty-forty
range?

Seventy-thirty?

And, yes, he is correct that there will be some falling of
some prices, thanks to cutting prices in a desperate last-
ditch attempt to at least clear out some inventory, because
people just do not have the wherewithal to keep buying and
buying and accumulating more and more debt.

But a fall in inflation is"unwelcome"? That shows you he
is a real supply-side kind of guy! From us drooling, debt-
besotted consumers out here on the demand side, a FALL in
inflation would be wonderful news! And rises in inflation
are NOT good news at all. So you can see whose team Alan
Greenspan is on.

Alan also continues to weasel that he doesn't want to talk
about the dollar.

He retains the right to destroy the dollar by his serial
episodes of profligate excesses, but the result of those
excesses on the dollar is something that he doesn't want to
talk about!

He does, to his credit, admit that neither he nor the Fed
have any idea about how to deal with deflation. This is
manifestly true, as most of the time the whole purpose of
central banking is dealing with putting out the fires
caused by their own mismanagement.

In most cases, we are talking about inflation that they
fostered by one of their recurrent episodes of money and
credit-creation, because one of the unwholesome by-products
of the sin of having a central bank is constant, persistent
inflation and boom-bust misery.

So, I call out,"Take a memo to Alan Greenspan!" Oblivious
to the fact that absolutely nobody is paying the least
attention to me, I begin.

Leaning back in my chair, I assume a pose of contemplation,
tent my fingers and close my eyes for a moment, and
mentally compose the message. I decide to start out with a
standard salutation,"Dear Alan." I suspect that when I
used to send him memos and letters addressed as"Dear
Dimwitted Jackass" that he never even read them.

Anyway, continuing past the opening of"Dear Alan," we move
directly to a new paragraph, which will introduce"the
body" of the letter, wherein we state the problem and the
facts."People are not buying things because they have no
money left at the end of the month. It's not a supply-side
thing, Alan. It is a demand-side thing. We Americans are
sitting on new, huge mortgage payments, big gas-guzzling
SUV's with huge zero-interest car loans, being saddled with
more and more taxes and fees, and having more and more very
expensive benefit costs passed onto us. In short, the
problem is that after-tax wages are not going up as fast as
prices. And for the non-workers who live on their savings,
the after-tax yield on saved and invested money, thanks to
your meddling in the economy, is less than the rate of
inflation, so these people have less money to spend, too."

Next we move to a"summary paragraph" section, in which I
state,"And if people are not in possession of more money,
then obviously money does not get spent."

And then I get to the part I like the best, I guess because
this is the part of Modern Literary and Communication
Theory and Practice that I personally invented! My
momentous achievement, however, is never mentioned in the
history books, probably because the government is out to
get me, as I have been saying all these years. Anyway, this
section of the letter is the part that I used to call"the
action section," where I proceed to insult the recipient
mercilessly.

To wit,"And yet, somehow, all this is some big freaking
surprise to you, Mister Big Shot Alan Greenspan and your
jackass buddies, you know who I am talking about, that
Bernanke guy for instance, because you are all idiots and
morons, and you all smell funny, and your butts stick out
when you walk."

This is not"the action section" of yore, since the
original version also contained an escalating verbal abuse
clause, where opprobrium was piled onto opprobrium until it
reached the glorious Crescendo Phase of story and song,
which was defined as using gratuitous profanity to issue
vague, violent death threats and place nonsensical gypsy
curses on them and their whole nasty families for seven
generations as punishment for their daring to Piss Me Off,
also known as PMO.

I used to tell them,"Don't PMO the Mogambo!" but of course
they did not listen.

But I don't do that anymore, since copping a homicidal
attitude these days may give John Ashcroft the idea to send
Janet Reno, who now has a lot of time on her hands, over
here to my house to give me a little Waco-style"talking
to."

Nowadays, I merely paraphrase one of my favorite quotes
from Marlon Brando in"The Mutiny on the Bounty," and I now
conclude my letters with the line,"And you can thank
whatever pig-god that you pray to that I can't overtly
threaten to come over there and strangle you with my bare
hands, you slimy little bastard!"


Thank you,


The Mogambo Guru,
for The Daily Reckoning

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• Something Ugly This Way Comes / The Daily Reckoning - - Elli -, 02.06.2003, 19:13