Dead Men Talking / The Daily Reckoning

verfasst von - Elli -, 20.06.2003, 17:42

-->Dead Men Talking

The Daily Reckoning

Paris, France

Friday, 20 June 2003

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*** Are we just doomed? Yes!

*** Stocks down...people still looking for jobs...We'll end
up like Zimbabwe...

*** Liquidity boost for the gold market?!...The 'culture of
the moron'...and more!

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"Love reading the Daily Rec. and agree with much that is
written," begins a nice letter from a fan,"It would be
nice, however, if along with all the downside written about
the Market and the Dollar, if someone could put forth a
solution, or even give us non-economic types some idea if
anything can be done...or are we just doomed?"

We began yesterday wondering where we were. In the 32nd
year of the Dollar Standard period, we noted. But every
year that passes brings more dollars and lower standards.
Sooner or later there will a regime change in the world's
monetary system. How and when that happens is, broadly
speaking, the biggest financial story not-yet-told...and
the long-term sotto voce storyline of the Daily Reckoning.

So, yes, we are just doomed.

We race down the road to monetary Hell with nowhere to turn
around. But what torments we will suffer on our journey we
do not know. Nor do we know when. We are perhaps at the
beginning of the end...or maybe at the end of the
beginning. But that there will be an end, as there was a
beginning, we have no doubt.

Not that we particularly care. Because even though the
dollar is doomed, you, dear reader, are not. You can still
do what the Chinese government is doing - build up your own
stock of real money, gold - and watch the whole sorry
spectacle with a song in your heart and a trace of a smile
on your lips.

More below...

In the meantime, Eric Fry with the latest news:

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

Mr. Fry chiming in from the Street...

- The stock market slumped again yesterday, as the Dow
dropped 114 points to 9,179 and the Nasdaq tumbled 1.7% to
1,649. Long-dated Treasury bonds also fell, as the 30-year
government bond stretched its losing streak to four
straight sessions, pushing its yield up to 4.41%.

- The Conference Board served up a bite-sized bit of
hopeful economic news yesterday by announcing that its
index of leading economic indicators (LEI) jumped 1% in
May.

- However, before toasting the recovery's long-awaited
arrival, investors should bear in mind that the increase
was largely due to touchy-feely components of the index,
like stock prices and consumer expectations. The
heavyweight empirical components like vendor performance
and manufacturing hours showed much smaller gains.

-"On a fundamental basis, business is still difficult in
most industries," observes Robert Marcin, writing for
TheStreet.com."Capacity utilization is low at 74% and
deteriorating. Initial unemployment claims are high and
rising as companies continue to cut costs. The bubble of
capital investment and personal consumption has yet to be
fully digested. Who needs a new car or new computer these
days? How many companies need a new factory or office
space? Excess capacity and intense global competition
should keep corporate profit margins under pressure for
quite some time."

- Also, we should not forget that weekly jobless claims - a
relevant macro-economic data point from the here and now -
remain stubbornly above 400,000 per week. That's not a
healthy number. Not surprisingly, therefore, the consumer
continues to stagger like a round-15 bantamweight.

-"Total consumer debt represents 90% of personal income -
the highest level 50 years," Avera Global Partners
observes."Additionally, the debt service burden (interest
and principal payments as a percent of personal income)
stands near an all-time high despite the dramatic decline
in interest rates over the past 24 months. There are two
risks with such a high level of debt outstanding. One is
higher interest rates. If the economy recovers and the
yield curve begins to shift upward, the impact on
disposable income at the household level would be
potentially crippling. The second risk is an overextended
consumer and the subsequent impact on consumer spending
trends."

- Wouldn't it suck to be a termite?...Especially a terminal
termite? Who could fathom existence as one of those hapless
insects, marked as sparrow-food from the moment they hatch?
The thought crossed your New York correspondent's mind
yesterday as he was standing on a train platform, waiting
for an express to Manhattan. While staring down at the
tracks, he noticed a sparrow gobbling up newly hatched
termites, just as they crawled out from under one of the
railroad ties.

- These hapless little critters, by simply following their
instincts, passed directly from birth to death...bummer.
Your New York correspondent was reminded instantly of the
lumpeninvestoriat - that phyla of investors whose primitive
instincts lead them so often to an untimely demise.
Instinctively, they buy when others are buying and sell
when others are selling - exposing themselves in the
process to the whims of the stock market's appetite.
Sometimes, like a hungry sparrow, the stock market feasts
on a banquet of hopeful, trusting lumps. At other moments,
a satiated and contented stock market allows the lumps to
scuttle about unmolested.

- Most investors simply cannot help themselves; their
instinct to follow the crowd is too strong to withstand.
"Oppressively high is the psychological burden of not being
part of a popular mass movement," writes James Grant.

- The irony, dear reader, is that we are all termites --
utterly defenseless in the presence of hungry sparrows.
Savvy investors recognize their vulnerability and do not
expose themselves to unnecessary peril, like paying 50
times earnings for a stock, simply because it has been
rising for weeks.

- Better to munch away at the soggy cellulose of 1% CD
rates or the musty dry-rot of value stocks, in order to
live a long and prosperous financial life...

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

Bill Bonner, back in Paris...

*** How will it all end? Like Japan? Or Argentina?

Or Zimbabwe?!!!

"The United States may go under," said Seth Glickenhaus to
Barron's."Look at Zimbabwe...there is 300% inflation...

"You can't be suggesting that we'll end up like Zimbabwe,"
replied the Barron's reporter.

"I'm suggesting we may end up like Zimbabwe...We are in for
a very long period when the economy will not grow very
much. This is intensified on a world basis by the
deteriorating caliber of our political leaders. Bush has no
fiscal sense whatsoever and is radical in his approach...
The Democrats have no leaders or leadership and are barely
conscious of the major issues of the day..."

But what is happening in Zimbabwe, where the government is
targeting a 96% inflation rate?

Our correspondent in South Africa, Evan Pickworth, sends
more details:"...The black market price for Zimbabwean
dollars is at 2,300 to the dollar - nearly three times the
official rate of 800.

"This isn't too surprising, as analysts expect inflation to
actually hit 450% by year-end. With food inflation
rocketing up 334.6%, the poor, already starving, Zimbabwean
consumers aren't just going to need gas masks at that
altitude, they're going to need full space gear."

***"The gold standard acted as a silent watchdog to
prevent unlimited public spending," said Howard Buffett,
Warren's dad, when he was a U.S. Congressman back in the
1940s."I can find no evidence to support a hope that our
fiat paper money venture will fare better ultimately than
such experiments in other lands. Because of our economic
strength the paper money disease here may take many years
to run its course...But we can be approaching the critical
stage. When that day arrives, our political rulers will
probably find that foreign war and ruthless regimentation
is the cunning alternative to domestic strife."

Strangely prescient of the man, no?"There was a time in
America when the political parties debated the nature of
money," adds our own Dan Denning."Not how much to spend.
But money itself. Given the 'printing press' posture of the
Fed...that time is coming again. Gold has always been seen
as a safe haven during times of extreme uncertainty.

"Of course, it's no secret we expect a falling dollar will
help put a new sheen on the midas metal again," Denning
adds."But that may be only the beginning of the story when
it comes to investing in the gold market. A new financial
asset being proposed by the World Gold Council and the NYSE
could provide the gold market with the liquidity it needs
to rocket into the stratosphere."

"...The entire gold mining sector of the market sports a
market capitalization of less than $60 billion - roughly
$10 billion LESS than Oracle, the software company. You
might say gold is undercapitalized. Or, perhaps, simply not
liquid enough. But this new asset could give the gold
market the liquidity boost its so desperately needs..." For
details on the World Gold Council/NYSE proposal, and how
you can take advantage of it...see Dan's article (it's
free):

The Once And Future King Of Assets
http://www.dailyreckoning.com/body_headline.cfm?id=3268

*** We began today's notes with a letter from a reader. We
end them in the same manner:

"Being a 'financial adviser' in New Zealand, I have
subscribed for some time. The last three years has been
harrowing - the party line is things will get better etc,
and now of course these are the signs of recovery! It is
getting rather tedious...

"I was more interested today in your comments about Henry -
what a lovely boy he sounds. I am the mother of two lovely
boys (15 and 12) and way down under we too are subject to
some of the unsavory behaviors and trends of modern youth.
How is it, do you think that the French (and likely many
other European schools) have been relatively unaffected by
this ghastly 'culture of the moron' (a term recently coined
in one of your National newspapers in an article
questioning why girls are outperfoming boys at school now)?
So, my comment is this - the markets will be with us
forever (drat!) our kids will only be kids once!"

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

The Daily Reckoning PRESENTS: Bill Bonner waking the dead.


DEAD MEN TALKING
By Bill Bonner

"Tradition...is the democracy of the dead."

- G.K. Chesterton

Yesterday's news brought word, from deputy Defense
Secretary Wolfowitz, that U.S. troops would be in Iraq for
the next 10 years. Also came an estimate of the cost: an
extra $3 billion would have to be added to the defense
budget for Iraq...and an extra $1.5 billion for
Afghanistan.

"Avoid foreign entanglements," cautioned the father of the
country. But corpses have no voice and no vote, neither in
markets nor in politics. They might as well be dead.

George W. Bush is undoubtedly better informed than George
Washington...and, heck, it's a new era; having foreign
entanglements is just what the times seem to call for.
George W. Bush may not have the wisdom of a
Washington...nor the brain...but at least he has a pulse.

Few people complain about this tyranny of the living. Most
accept it as a fact of life. They would not want people to
be excluded from the pleasures of life because of an
'accident of birth.' But they are perfectly happy to have
the oldest and wisest of our citizens systematically barred
from the polling stations and the trading floors by an
accident of death. The departed shut up forever, leaving
behind them their car keys and their stocks, and their
voter registrations...that is all there is to it. Goodbye
and good riddance. It is as if they had learned nothing
useful...noticed nothing...and had no ideas that might be
worth having, as if each generation were smarter than the
one that preceded...and every son's thoughts - even the
present 'culture of the moron' - improved upon those of his
father.

Oh, progress! Thou art forever making things better, aren't
thou? Throw out the sacred books - for what are they, but
the thoughts of imbeciles? Forget the old rules...the old
wives' tales...the traditions...habits of generations...the
old timers' superstitions...the old fuddy-duddies doubts!
We are the cleverest humans that have ever lived, right?

Maybe. But in today's Daily Reckoning, we convene a council
from the spirit world; we invite the dead to have their
say. Our aim is not to kvetch on behalf of our
ancestors...but to warn the living: the corpses may have a
point.

Many times have we referred to old timers' wisdom in these
letters. The old timers wanted more from a stock than just
the hope that someone might come along who was willing to
pay more for it. They wanted a stock that paid a
dividend...out of earnings. That was what investing was all
about.

But by the 1990s, the old-timers on Wall Street had almost
all died off. Stock buyers no longer cared how much the
company earned or how much of a dividend it paid. All they
cared about was that some greater fool would come along and
take the stock off their hands at a higher price. And so
they did. And now the market is full of them...greater and
greater fools who think the stock market is there to make
them rich.

In the space of 20 years, the character of the American
economy and its markets changed so dramatically, the old-
timers would scarcely recognize them. We mentioned
yesterday how, in the mid-'80s, the U.S. slipped below the
water line separating the net-creditors from the net-
debtors. But almost no one noticed or cared. By then, the
old-timers were already in Florida shuffling along, like
the Mogambo Guru, waiting for someone to adjust their
medication.

"In 1981," Marc Faber explains,"stock market
capitalization as a percentage of GDP was less than 40%,
and total credit market debt as a percentage of GDP was
130%. By contrast, at present, the stock market
capitalization and total credit market debt have risen to
more than 100% and 300% of GDP respectively."

We have wondered how this ends. Not well, is our guess. Too
much debt and credit, too much capacity, too many dollars,
too many bad investments, too much spending, too many
deficits and too much confidence...What is the solution?
'Less' is our recommendation."More," say Bernanke,
Greenspan, Bush, and everyone else in a position to do
something about it...

And so the whole thing rolls forward...towards its
inevitable destruction. Because, and here the dead back us
up 100%, all paper currencies sooner or later come to
grief. The"if" question is settled."When...and how"
remain open.

And so, we turn to ancestors...and ask for advice.

"The state's need of money increased rapidly," says one of
them, Bresciani-Turroni, describing the scene in Germany 80
years ago."Private banks, besieged by their clients, found
it impossible to meet the demand for money...."

As the situation heated up in the summer of 1923, there
were some who gave our advice:"Less," they said.

But officials were in roughly the same situation as
Bernanke and Bush today."More," said they.

One, named Helfferich, the finance minister, explained:

"To follow the good counsel of stopping the printing of
notes would mean - as long as the causes which are
upsetting the German exchange continue to operate -
refusing to give economic life to the circulating medium
necessary for transactions, payments of salaries and wages,
etc., it would mean that in a very short time the entire
public, and above all the Reich, could no longer pay
merchants, employees, or workers. In a few weeks, besides
the printing of notes, factories, mines, railways and post
office, national and local governments, in short, all
national and economic life would be stopped."

When an economy comes to depend on more and more
credit...it must get more and more of it...or it will come
to a stop. A man who has borrowed heavily to finance a
lifestyle he cannot really afford...must continue borrowing
in order to keep up appearances. Or else he must stop. In
market manias, love, politics, war...people rarely stop
until they are forced to.

In Germany, once the Great Inflation got started, there was
no stopping it until it had run its course. In 1921, a
dollar would buy 276 marks. By August of 1923, it would buy
5 million of them. Middle-class savers were wiped out.

If only we could roust Herr Helfferich from his eternal
sleep! We would like to shake the dust off his wormy
cadaver and ask some questions. (And here, we think not of
praising the dead, but of tormenting them.) What fun it
would be to show him what his policies - the same, by and
and large, as are now put forward by Greenspan, Bernanke
and Bush - provoked. How gratifying it would be to see the
little kraut squirm under an intense interrogation: what
was he thinking, after all? Why did he think that more of
the dreadful printing press money would undo the harm that
had already been done by too much?

Bresciani-Turoni continues:

"The inflation retarded the crisis for some time, but this
broke out later, throwing millions out of employment. At
first inflation stimulated production...but later...it
annihilated thrift; it made reform of the national budget
impossible for years; it obstructed the solution of the
Reparations question; it destroyed incalculable moral and
intellectual values. It provoked a serious revolution in
social classes, a few people accumulating wealth and
forming a class of usurpers of national property, whilst
millions of individuals were thrown into poverty. It was a
distressing preoccupation and constant torment of
innumerable families; it poisoned the German people by
spreading among all classes the spirit of speculation and
by diverting them from proper and regular work, and it was
the cause of incessant political and moral disturbance. it
is indeed easy enough to understand why the record of the
sad years 1919-23 always weighs like a nightmare on the
German people."

There, the dead have had their say.


Bill Bonner

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• Dead Men Talking / The Daily Reckoning - - Elli -, 20.06.2003, 17:42