Preventing Speed Deflation / The Daily Reckoning

verfasst von - Elli -, 16.06.2003, 18:45

-->Preventing Speed Deflation

The Daily Reckoning

Paris, France

Monday, 16 June 2003

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

*** Mild deflation? Lethal inflation?...give us a damned
one-armed economist!

*** Mr. Market's"Performance Anxiety"...contradictions
abound...

*** Hot, sultry, lazy daze...Bush & Blair's Big
mistake?!...Mogambo on Monday!...and more...

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"You seem to contradict yourselves almost every other day,"
writes a confused Daily Reckoning reader."One day you say
the U.S. is headed for Japan-style deflation...which would
be good for bonds. The next day, you tell us that the
dollar will be destroyed and warn us to get out of
bonds...Can you make up your mind?"

Ah, that...well...

Our surly response is that if we knew the course of
tomorrow's markets, we'd at least charge a few bucks for
the Daily Reckoning.

Our polite answer is that we are as puzzled as he is.

On the one hand, the U.S. economy seems to be tracking the
Japanese into a long, slow-motion slump. Perhaps even with
deflation. Prices are not exactly falling across the board,
but enough of them are falling around the edges of the
board to make economists worry about it.

On the other hand, Alan Greenspan and George W. Bush are
fighting for their careers - by opening every monetary and
fiscal spigot they can get a wrench on. The money supply is
increasing 4 to 5 times faster than the GDP; the only thing
that is growing more quickly are the federal government's
deficits.

"Get me a damned one-armed economist," quipped Harry Truman
in a similar puzzlement.

Where will it all lead? Our guess is that it leads to a
mild case of deflation...and a lethal case of inflation, in
that order. But we're not ready to cut an arm off with a
pen-knife in order to tell you for sure. At least, not for
free.

In the meantime, we live happily with the apparent
contradiction. Will the nation suffer a Japan-style slump,
increasing bond prices even further? Will it be beset by an
Argentine-style inflation and currency default? Will the
bond bubble burst? Without a doubt. Yes. Probably. Most
likely. Maybe. Could be.

Over to you, Eric...

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

Eric Fry, writing in New York...

- Peer-pressure wields a powerful influence in the stock
market...Both individual investors and their professional
counterparts are equally susceptible to its dastardly
influence. Individual investors - a.k.a., mom and pop -
just can't bear to sit idly by while their neighbor racks
up paper profits week after week. So, they try to keep up
with the Joneses by buying what the Joneses own: ever-
rising common stocks.

- The higher the market climbs, the more enthusiastically
mom and pop rush in and buy stocks. And just about the time
the last mom or pop has rushed in, the market falls. We
call this process:"Buying high and selling low"...and we
do not recommend it.

- Even so, many professional investors also pursue this
questionable investment strategy. They charge into a rising
market because they suffer from a kind of"performance
anxiety." These insecure professionals are deathly afraid
that their assets may fail to rise and stay up with a
rising stock market. So, the higher the market climbs, the
more they want to buy stocks.

- Without question, this mass national peer pressure is
helping to push share prices higher. But peer pressure
alone can lift the stock market only so far. At some point
- we never know exactly when - fundamental economic factors
must take the lead, or the stock market falls lower...maybe
much lower.

- Early last week, all the major averages soared to new
one-year highs. But a late-week sell-off left the stock
market with a big"nothing done." The S&P 500 barely
budged, rising less than a point to 988, while the Nasdaq
slipped by less than a point to 1,626. The Dow gained a
meager 54 points to 9,117.

- Despite the market's lack of progress last week, most
investors remain supremely confident that stocks will
continue their ascent. Bullish sentiment has, once again,
become quite extreme...and that's a very bearish omen.
Here's a stunner: the weekly Investors Intelligence poll of
newsletter writers showed a big drop in bearish sentiment
to 16.3%. That's the lowest bearish reading since early
1987."That's the sort of evidentiary item that could build
toward a convincing case that the bulls have gotten carried
away, and will soon be carried out," Barron's surmises.

-"It seems to us that the stock and bond markets are both
pricing in a 'sweet spot' that is vulnerable to any number
of things going wrong," writes Andrew Kashdan of Apogee
Research."Until recently, stock prices were falling and
bond prices were rising (yields falling) as investors
became increasingly concerned about the weak economy. But
since March 11, the major stock indexes have reversed
course, shooting up 20% to 25%, and bonds have continued in
rally mode, with the 10-year Treasury yield declining to
below 3.2% from about 3.9% over the last six weeks...and
that's not something that you see every day, especially
when stocks are soaring.

-"According to the conventional wisdom, the stock market
'smells' a recovery (finally!) that has reached its self-
sustaining critical mass. However, at the same time, the
bond market apparently lacks the stock market's acute
olfactory sensibility. The bond market hasn't even caught a
whiff of recovery. So it continues to soar higher on the
notion that the still-lurking deflation threat will force
Mr. Greenspan to keep his omnipotent thumb on ALL interest
rates, both short-term and long-term. It is, indeed, the
best of all possible worlds for both bonds and stocks!"

- What will happen to interest rates - and, by extension,
the rallying bond market - if the Fed succeeds in its
'inflation or bust' strategy? And what will happen to the
'bulled-up' stock market if the 'recovering economy' fails
to recover, or if the heavily indebted and underemployed
American consumer refrains from spending every spare
(borrowed) cent buying either a house or a tech-stock fund?

-"We wouldn't be so bold as to suggest that thousands of
well-informed stock and bond traders are mistaken," says
Kashdan."But looking at the overall picture, we aren't too
keen on jumping aboard either bandwagon." [For more, please
subscribe to:

Apogee Research
http://www.agora-inc.com/reports/APG/YourMoney/

- Finally, for those concerned about what might happen if
the Fed takes interest rates all the way down to zero,
here's something that may cheer you. Jesper Koll, of
Merrill Lynch (Japan), speaking of Japan's banking sector,
says:"With zero interest rates and zero funding costs,
there cannot be a financial crisis because the banks are
infinitely wealthy."

- Just think...every basis point by which Greenspan lowers
interest rates brings us that much closer to infinite
wealth.

- [Ed note: 'Meet and greet' Eric Fry...Eric will be among
20 of the nation's hottest investment analysts speaking in
San Francisco at Agora's annual investment pow-wow this
August. Advance discounts are still available - but not for
long:

The Agora Wealth Symposium
August 13-17, 2003
The Fairmount, San Francisco

Follow the link below to lock in your discount:
http://www.agora-inc.com/AGW03/home.cfm?code=14

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

Bill Bonner back in Paris...

*** It is hot. Sticky. Sultry. Lazy. Few buildings are air-
conditioned in Paris. So, we strip and sweat.

This morning, a half-naked fat man hangs out of a hotel
window across the street. That is not the meat we were
looking for as we turned our own eyes out the open window.

*** We checked the weekend papers to see how the war was
going.

"U.S. troops keep up the pressure," was the International
Herald Tribune's contribution to enlightenment. While
admitting that it could be a"long, hot summer" in the Iraq
desert, the article was most upbeat:"Battles intense as
GIs track Iraq militants."

But over in the French press, every note seemed to portend
calamity. A photo on the front page of Le Figaro shows a
group of American soldiers, not on the attack, but huddled
back-to-back, guns pointed out, looking around for a
sniper."Forty-five U.S. soldiers have been killed since
George W. Bush announced the end of fighting," the article
points out. Heavy-handed U.S. measures are stirring up more
and more resistance, it continues.

"Big mistake," the article quotes an Iraqi general,
commenting on the U.S. decision to dissolve the army as
well as various militias and other defense workers."The
soldiers returned to their tribes with their guns...the
Americans created 1.5 million opponents..."

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

The Daily Reckoning PRESENTS: The Mogambo makes a bid for
shallow and fleeting fame and fortune...


PREVENTING SPEED DEFLATION
The Mogambo Guru

Good news.

I finally have an exact quote from Alan Greenspan as to
what in the heck he thinks this deflation thing is; this
horrible bugbear that is clogging up his mind so much that
he cannot even think clearly.

Here it is:"Corrosive deflation, that is a deflation that
essentially feeds on itself, creates falling asset prices,
which in turn bring down levels of economic activity
through the wealth effect, contracting profit margins and a
type of weakness which we all at least theoretically
conclude is far more of a concern than inflation."

Right. This apparently means, as Greenspan has said, he
cannot see a bubble, either as it is forming or after it
has formed, and therefore does not fear a bubble in
anything, but that as soon as that bubble-that-cannot-be-
seen starts to deflate and bring down those overvalued
asset prices to some semblance of normal value, THAT is the
exact moment that he finally decides to spring into action
and do something about the bubble-that-previously-could-
not-be-seen-but-is-now-seen. Namely, keep it inflated!

But that is only half of it. Starting to get animated in my
seat and punching the keyboard with more than the usual
amount of thinly veiled sardonic hostility, I desperately
try and convey the most sarcastic, sneering, disrespectful
and condescendingly snotty tone of voice that I can muster
from the pit of snakes that currently characterizes my
current mental condition when I rhetorically ask,"And just
who in the dangity-dang-dog, ding-dong hell IS this 'we'
that has the guts to stand up and say, in front of people
who know better, that they '...at least theoretically
conclude (that deflation) is far more of a concern than
inflation'"?

There may be a"we" that would agree on such a thing, but I
sure ain't in that group. And given the historical record
of economists and their ideas, I am not sure that saying
that some"supermajority-we" of modern economists has
agreed on something can be anything other than alarming.

So who are these"we," anyway?

I need names here! I want to know the exact names of the
people who think that falling prices are a danger, when
they have never said that rising prices were a danger! I
want to see actual names, addresses and Social Security
numbers, and color photographs would be a nice touch too,
of the morons who think that prices of things coming down,
and thus making them more affordable to more people, after
they have risen so much for so long, is something worse
than the inflation which drove prices too high to start
with!

I want to see these brain-dead jackasses lined up, shoulder
to shoulder, so that Mister and Missus America can get a
good, hard look at them, so that we can transfix them with
our steely gaze and commit their faces and names to memory
on the off-chance that one of them may run for public
office one day, like Janet Reno rising from whatever Land
of the Undead she lives in, and then we will be able to
intelligently and vengefully use our votes against them.

At the end of the day, we have the Federal Reserve saying
that inflation and bubbles are good, well, maybe not good,
but not so bad that we would actually go out and look for
one, and if we did see one we would pretend that we didn't
see it, and also that, on the other hand, deflation and
lack of bubbles is bad.

This doesn't even SOUND like anything that a normal person
would say, and yet people are in awe of this, this, this,
words fail me here!

Not even in my most manic phase - and I can tell you
stories about record-setting manic phases that would make
you scream in your sleep for a month - can I come up with
an expletive-deleted word or phrase that comes even close
to expressing not only my outrage, but my out-freakin'-
rage!

On the bright side, if that is all it takes to impress the
mouth-breathing, brain-dead, sub-human, commie-think morons
that now call themselves Real American Intellectuals, then
let me take my cork-cored bat, step up to the plate and
take a mighty swing at the same ball, so that I, too, can
get a little of this cheap glory! Let ME be on the talk
shows! Let ME be quoted in the paper! Let ME get some
undeserved honors!

In pursuit of this new goal of mine to also win shallow and
fleeting fame and fortune by saying patently preposterous
things, let me start off by promising, and note that I am
crossing my heart in deepest sincerity, that I will not
recognize the danger when I exhort you to exceed the speed
limit in your car, and when you are finally going as fast
as the engine will allow, I will do everything in my power
to make sure that you never have to slow down. In fact, I
will make it my personal goal in life to print up higher
octane gas, and I will call it"Preventing Speed Deflation:
Making Sure It Doesn't Happen Here."

I will not recognize the danger when your children have
swum too far offshore, and once they start getting tired
out there in the deep, deep water, and if I listen closely
I can hear that"Jaws" music,"Buuuuuum, dum! Buuuuuum,
dum!" I will do what I can to encourage them to just keep
swimming - swim, my little darlings! Swim! - and maybe even
swim out even farther, but at least stay where they are.
Because it is obvious that the children will not drown if
they just keep on swimming, then so it is also obvious that
encouraging them to keep swimming will save their lives!
All they need is a little food and water and amphetamines.
I will print up encouraging slogans, and provide money to
produce food, water and amphetamines, and call my program
"Preventing Swimming Deflation; Making Sure It Doesn't
Happen Here!"

Also, I will not recognize the danger when you and your
family gets so obscenely fat, tipping the scales at more
than two-hundred pounds over your ideal body weights, but I
will do everything in my power to make sure that nobody
ever loses a pound! I will spend my every waking moment
printing up cookies, and I will call it"Preventing Weight
Deflation: Making Sure It Doesn't Happen Here!"

I will not recognize the betting of the entire future of
America and Americans on bubbles of ever-increasing shares
of stock, nor the debt incurred to buy the stock, or
houses, or just anything and everything. Even when the
prices paid for financial assets (stocks and bonds) and
even physical assets (houses) get to be so completely out
of whack with real value that the mind rebels just by
looking at it, boinnngggg! So I will do everything I can to
make sure that they get even more absurdly priced, by
printing up money. I will call it"Preventing Deflation:
Making Sure it Doesn't Happen Here!" Oops. Sorry. This
preposterous promise has already been made, so I will just
do the first three.

But note, I am doing THREE things, and Greenspan's Fed is
only doing ONE.

So how come I, the real Mogambo, have to live in a dumpster
behind Wal-Mart, and Greenspan gets to be on TV? And at
night, when I am kept awake from the blinding red dots of
laser-sighting scopes being trained on my forehead by
government agents, all the time whispering to each other
"Do we have permission to shoot yet?" Greenspan probably
has government agents posted outside his house protecting
him, making sure that nobody gets to do a little zeroing-in
of THEIR laser-sighting scopes!

Talk about your asymmetries!

Regards,


The Mogambo Guru,
for The Daily Reckoning

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• Preventing Speed Deflation / The Daily Reckoning - - Elli -, 16.06.2003, 18:45