Anti-Leverage: A Theoretical Masterpiece / The Daily Reckoning

verfasst von - Elli -, 23.06.2003, 17:44

-->Anti-Leverage: A Theoretical Masterpiece

The Daily Reckoning

Paris, France

Monday, 23 June 2003

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

*** Serial bubble blowers...Dow up...S&P up...Nasdaq up...
'pucker up'!

*** Bond market: shades of the Nasdaq blow-off circa '99-
'00...

*** Sweet home West Virginia...nubile young women or your
paunchy golf buddies - you decide!...MOGAMBO on Monday!...
and more...more, more, more...

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

The Fed is a"serial bubble blower," says Stephen Roach.
First, it blows up a bubble in stocks...then in
housing...and then in bonds...and then back to stocks. Each
time, when the bubble began to leak air, the Fed puckers
up, and a new bubble bulges out.

And each time, the Fed seems to guarantee that investors
will not lose money - no matter how extreme prices become.
In the stock market, the 'Greenspan Put' was supposed to
make sure stock prices didn't fall significantly; if prices
began to fall, or so the Moms and Pops believed, Greenspan
would simply lower rates and drive them back up again. When
that failed, along came the 'Bernanke Put.' The economy
depends on housing, went the logic, and housing depends on
low mortgage rates. No way will Bernanke let rates rise;
instead, he'll cut them further in order to keep 'the
recovery' on track.

The weekend brought news that the Fed is considering
another bubble-blowing rate cut. Tech stocks are already
puffed up to grotesque size. But the obscenity seems to
attract the simple-minded investor, not repel him. Like
tourists at a Paris show bar, they wait to have their
drinks watered and their pockets picked.

"All of us thought it would take years of healing time
[before the lumpeninvestoriat returned to the stock
market]," said the president of E-Trade to the New York
Times.

"Instead," continues the Times article,"investors appear
to be returning to equities with their wounds barely
healed. Three years of stock market torment seem not to
have shaken the long-held view that stocks are best for the
long haul."

Stocks are best for the long haul, of course, when they are
exceedingly cheap...such as they were in 1980, when you
could get the average S&P stock for 6.8 times earnings.
Then, you could sit back for the next 20 years and enjoy
exceptional returns. But now the average S&P stock sells
for more than 32 times earnings, and the haul back down is
likely to be long and painful.

"It's hard to find any real news to justify the market's
leap," writes Paul Krugman, also in the Times."Payrolls
are still contracting...desperate state and local
government are continuing to slash services...and raise
taxes..."

The U.S. trade deficit just hit a new record, MSNBC tell
us. So did the current account deficit. So did the U.S.
budget deficit. And so did the number of people whose
houses are being taken away in foreclosure.

"Oh, and the banana-republic policies now being followed in
Washington," Krugman concludes,"won't just drive up
interest rates; they'll probably generate a full-blown
fiscal crisis one of these years. That can't be good for
equity prices. In short, the current surge in stocks looks
like another bubble, one that will eventually burst."

Over to Eric Fry, with more of the latest news from the Big
Apple:

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

Eric Fry in New York...

- The stock market continued dancing higher last week,
although the dance seemed to lack its usual élan...Are the
dancers tiring? The Dow sashayed 83 points higher to 9,200,
while the Nasdaq waltzed to a 1.1% gain, to 1644...
Meanwhile, the music stopped altogether in the bond market.
As Treasury prices tumbled, the yield on the benchmark 10-
year note moved sharply higher to 3.38%, up from 3.11% the
prior week. The 30-year Treasury bond yield also surged, to
4.45% from 4.17%.

-"We think bonds have peaked," says Donald Straszheim of
Straszhein Global Advisors."Investors would be wise to not
get too greedy at these levels - the lowest yields in 40-50
years. Are we a little early in making this call?
Maybe...[But] the bond market during 2002-03 has begun to
look like Nasdaq, June 1999 to March 2000 - a blow-off. Too
far, too fast. Too good to last.

-"When memories and their lessons fade," Straszheim
continues,"investors pay the price. The last double in the
Nasdaq took just nine months (2524 on June 18, 1999, to the
peak of 5,048 on March 10, 2000). The bond market move has
been equally outsized...The 5-year Treasury yield is not
2.21%. From 6.35% in June 2000 and 4.34% in June 2002. What
a move!...Looks like a top [in price] in bonds to us."

- The stock market is also looking a little toppy and -
maybe, just maybe - nearing the point of exhaustion...Last
week's trading action resembled the final hour of a 1950s
dance marathon. The once-peppy Nasdaq and Dow are still
standing, but they aren't kicking up much dust...Let's give
the spunky couple a prize for endurance, but don't expect
them to continue dancing for much longer...These kids are
tired! One tell-tale sign of fatigue: the blue-chip stocks
are lagging far behind the market's most speculative issues
- biotech and high tech. In other words, the worst stocks
are going up the most.

- Alan Newman of CrossCurrents points out that biotech
stocks have rocketed nearly 50% since early March. He also
took a look at the companies that comprise the Merrill
Lynch Biotech Holders Trust (BBH) and determined that only
half had any earnings, and these sported an average P/E of
58. One final tidbit about the companies making up the
biotech trust: five insiders bought, 94 insiders sold; the
ratio of shares sold to shares purchased was 67 to 1.

-"The same exercise performed on the (IGW) [semiconductor
stocks]," Barron's reports,"shows that nine of the top 10
issues in the fund have an average P/E of 77.3 (the tenth
is in the red). Insider sellers among the companies making
up the fund outnumbered buyers by 81 to 2 and the ratio of
shares sold to shares bought was a staggering 1,665 to 1."
Plain and simple, since mid-March ugly stocks have led the
way. Another telltale sign of exhaustion is that fact that
the stock market's popularity is soaring.

-"A rising market begets bulls and the crowd en masse has
been hustling over to the sunny side of the Street," says
Barron's Alan Abelson."According to a Merrill Lynch survey
of fund managers, those worthies are the most fully
invested they've been in two years and cash is down to a
minuscule 4% of assets. Obviously, they're no longer
haunted by the fear of redemptions...Very much
participating in this growing but still rather mannerly
orgy of optimism are the investment advisors. According to
the latest soundings by Investors Intelligence, a full
60.2% of the seers are bullish, a mere 16.2% bearish.

- Unfortunately, the stock market is not a democracy; it
does not care what the majority believes or what it hopes.
The stock market is autocratic, and it delights in
frustrating the majority. It gets its jollies by doing
whatever is least expected...

- The stock market may not sell off immediately...but it
should. Even after a wicked three-year bear market, this
thing is pricey."In 1982, stocks sold at 7.9 times
earnings, yielded 6.3%, were priced at less than one times
book value and one-third of sales," says Barron's.
"Currently, by contrast, stocks sell at 28 times earnings,
yield 2%, are priced at 2.75 times book and 1.3 times
sales. In other words, this market is anything but cheap by
any standard of valuation. As a matter of fact, as we've
noted before, those incredibly rich multiples smack more of
bull-market tops than of bear-market bottoms."

- Get ready for the last dance.

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

Bill Bonner, back in Paris...

***"The yuan is the most undervalued currency in the
world," the Economist reported, back on April 24th, 2003.
Using its 'Big Mac' indicator, the magazine showed that in
China a Big Mac costs $1.20, on average. In the United
States, the typical price is $2.40. In order for China's
yuan to reach parity with the U.S. dollar, the yuan would
have to appreciate 56% against the dollar.

"Said another way," writes the always controversial, always
entertaining Porter Stansberry,"because the yuan is kept
artificially low against the dollar, Chinese goods cost
half of what they should in America. China has been taking
U.S. jobs and collecting billions in U.S. hard currency
because it cheats. This can't go on forever. So it won't."

China, believes Marshall Auerback, has the power to shut
down the U.S. economy...the way the IMF pulled the plug on
Argentina. We reported Auerback's thoughts last week.
Porter expects the float of the yuan could set up as big a
default crisis as the Russian default of 1998, or the
Mexican default of 1994...or an even bigger 'windfall' than
the British EMU debacle, when George Soros made a billion
dollars in one day.

When will the Chinese renimbi, er, yuan float? That is
anyone's guess. In fact - will it float? - is perhaps the
better question. We suspect it will, some time before the
Chinese WTO-membership probation ends in 2008. That is, if
China feels the need to keep its membership.

Reading the tealeaves in the media, Porter suspects the
yuan float may come sooner, and suggests a few ways to take
advantage of it without becoming one of China's growing
legion of foreign direct investors:

Make The Chinese Pay
http://www.agora-inc.com/reports/CSR/WCSRD604/

*** Could a floating yuan be"the deathblow for the
dollar"? We are not readily given to accepting hyperbole...
yet it is reasonable to think - as a report we produced
last January in conjunction with the Everbank World Markets
research squad purports - that the U.S. dollar is in the
beginning stages of a multi-year slump.

Accordingly, we've updated the report. As you'll see, many
of the initial forecasts of the report have been accurate.
The Everbank report explains why, regardless of your
opinions on the Chinese yuan, diversifying out of the
dollar is a prudent and remarkably easy thing to do.
Addison will fill you in on the details...Addison?

2003: The Decline of the Dollar
http://www.agora-inc.com/reports/RCKN/Everbank

*** The moment we dreaded came on Saturday. A posse from
West Virginia caught up with us. A colleague and her family
came to visit us at Ouzilly. They aren't actually from West
Virginia, but from nearby Cumberland, Maryland. Still, that
was close enough. The Appalachians were in their hearts;
revenge was on their minds, and a rope in their hands, or
so we feared.

Long-term sufferers of the Daily Reckoning may recall our
comments. To say that we were unimpressed by the great
state of West Virginia would be a lie; we will never forget
the appalling architecture...and the junk. The indigenes
toss out refrigerators and leave old cars lying around, as
if they hoped they would take root and grow new ones.

We say these things not to be negative or unkind. We love
West Virginia. But when we see such ugly blemishes on such
graceful hills...it is as if someone had broken your
girlfriend's nose.

"Oh, your garden is so lovely," said one of the Cumberland
contingent, after shots had been fired and we were all
pleasantly out of ammunition.

"But that's what I mean," came the reply..."I don't see why
the West Virginians don't get off their duffs and do what I
have done - hire a gardener to put in a proper garden."

*** Speaking of dancing, we went to see an exhibition of
Tango last night at the Palais de Chaillot. What impressed
us most was that while the women performers were attractive
and nubile, most of their dancing partners were gray-haired
fellows in their 60s. The old guys were graceful and
dignified, but not the least bit athletic. They merely kept
the pace, while their women made such extraordinary
exertions it looked as though they might become completely
unhinged.

We have been thinking of taking up Tango the way some men
take up golf - as a middle-aged distraction. Like golf, a
man can do it without looking like a fool, until late in
life. But it has an added advantage; he can do it in the
company of attractive young women, rather than his paunchy
golf buddies.

*** Mogambo on Monday!...below...(he's remarkably lucid
today)...

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

The Daily Reckoning PRESENTS: The Mogambo Guru makes an
emergency bid for a Nobel Prize in Economics.


ANTI-LEVERAGE: A THEORETICAL MASTERPIECE
by The Mogambo Guru

As the economy is slowing, I am more desperate for cash
than usual, and so I am making another pathetic, emergency
bid for a Nobel Prize, and that lovely million bucks that
comes with it. Not to mention, of course, the income from
the CD I've been fantasizing about recording,"Nobel Prize
Winner Yodels Songs From ZZ Top!" which I consider an
annuity, you know, in case I actually do live through this
whole thing without my brain exploding.

From a scientific standpoint, I will admit that it is not
the most elegant methodological paradigm that I ever heard
of, but it works for me. And if you want to send me a few
bucks, you know, to sort of tide me over until this whole
Nobel Prize thing gets worked out, that would be swell,
too.

Anyway, my startling and ground-breaking theoretical
insight came to me as I was recently applying large amounts
of cash to a mortally wounded asset, the latest example of
an asset going to Asset Heaven, in this case the air
conditioner. Before that it was the brakes on my wife's
car. And before that it was the lawnmower. And the month
before it was the washing machine, and then there was the
increase in health insurance premiums, and before that it
was something else, yada yada yada. Every freaking month
it's something. And then last night the smoke detector
started beeping that it needs a new 9V battery. So like I
said, it is always something.

But as I was trying to control the involuntary shaking of
my hand as I reluctantly made out the check, it occurred to
me, suddenly, in a revelatory moment that I liken to the
apple falling on Newton's head, that if I didn't have all
these assets, see, I wouldn't be spending this huge chunk
of money on maintaining them or replacing them. But - and
this is the crux of the matter - there was no money in the
damn accumulated depreciation account, because, like the
other spend-o-holic financial managers of the last decade,
I did not actually set aside any cash, and now I have to
use the woefully short stack of money that is listed on the
books as"Petty Cash Account - Sex, Drugs and Rock and
Roll" to plug the sudden income-expense gap. Ginger and
Barbie, down at Stud-Land, which bills itself as America's
Lap-Dancing and Cheap Porno Emporium, are not going to be
happy about THAT.

Then, extrapolating in a simple-minded, linear fashion like
I am forced to do because it is a symptom of that undefined
something that is tragically wrong with me, I realize that
when I have more assets, this increases my total costs when
I add in maintenance and depreciation. Bad enough. But if I
compound my misery by borrowing money to buy the asset in
the first place, then I am exercising - and here is another
of my arsenal of potential Nobel Prize gems -"anti-
leverage." The reason I have not submitted this"anti-
leverage" theoretical masterpiece, this Mogambo gem of
genius, to the Nobel Prize people is that 1) I just now
made it up and 2) I have no idea what the hell it means.
But it just seems so, I dunno, pregnant with potential
somehow. It sounded right as it sprang - pop! - out of my
mouth, and if you are like me, then if it sounds right,
then by golly it must BE right!

Getting back to the point, expenses are rising but income
does not go up as much, and now if I have to borrow the
money to buy the new asset, which makes the original
problem of"more assets and linearly more maintenance and
depreciation expense," into one of"more assets and
compoundingly more maintenance and depreciation expense,"
then there is some multiplier effect.

Yow!

An excited twitter goes through the crowd. It's that
compounding of cost thing that is the big theoretical
breakthrough. Famous economists, even dead ones who now sit
bolt upright in their graves at the revelation, slap
themselves on the forehead, and say,"Of course! It is so
obvious now! Thank you, Mogambo! Praises to Mogambo!"

I hope to call it the 2M, which stands for the Mogambo
Millstone. I chose the word"millstone" because it began
with an M, like Mogambo, and it just so happens, what a
lucky break for me, that a millstone is a huge rock that is
so damn big that it is used to crush cereal grains into
powder. But this is the shortened, popular version. The
full title, as it will appear in the textbooks, will be
"The Mogambo Millstone Around The Neck Of You Debt-Addled
Proletariat Jackasses For Whom It Will Feel Like A Freaking
Millstone When You Start Swimming In Debt That Has Finally
Risen Over Your Head And That Heavy Weight Drags Your
Worthless Butt To The Bottom Of The Ocean of Debt And
Drowns Your Sorry Ass Because There Is No Freaking Way In
Hell That You Can Swim With a Millstone Around Your Scrawny
Neck, You Ignorant Bastard You."

And then - and this is the part that I think will swing it
for me with the Nobel Prize people - I make the leap to the
concept of government as an asset, and one whose
maintenance costs make it also so, so, so, it is hard to
think with your enthusiastic applause still ringing in my
ear, subject to an exponentially approaching natural limit.

As a corollary, this wonderful new theory of economics also
concerns us because the acquisition of a permanent asset,
or more particularly the maintenance and inevitable
depreciation of the asset, namely government, itself
directs and controls FUTURE spending. Namely, and please
ignore how I give my explanation though gritted teeth and a
kind of seething hostility, the installation of an air
conditioner ten years ago has led directly to me here, ten
years later, to deposit a big freaking chunk of my money
into the accounts of guys who sell air conditioners today.

This is how the mere owning of an asset directs future
income streams to itself, especially as concerns
government.

Because, believe me, if I did not have to, I would not be
writing those guys a check. I would instead, in the little
dream-world I call Richard Land, be taking that large sum
of money out of an over-worked ATM in some loud, smoky,
alcohol-besotted, sleazy and deliciously decadent strip
joint, with which to bestow on bevies of scantily clad
beauties, even though I am not sure how many is actually IN
a"bevy," but it has to be more than one, meaning two or
more, and then you could always weave in a little of that
girl-girl action that seems to sell tickets. As an aside, I
don't know why I call it Richard Land, anyway, because in
that fabulous place everybody knows me as"Hunka Hunka
Burning Love," especially Wanda-Sue, the transvestite
hooker with the golden heart, who steals the show.

"Therefore, ipso facto," I say, and grabbing a piece of
chalk, I suddenly wheel around and scribble furiously on
the blackboard as I emphatically expound,"So there is a
natural limit, L, to how many assets, A, you can manage on
a given income, Y, and there is a corresponding lesser
limit, L-max, when you borrow the money, M, for the asset,
which, as we have previously seen, was A, and is still A.
And if the asset, A, is financed at rate I, for time T,
then the total cost, TC, goes non-linear, there is a shift
at the intersection with the applied exponential
multiplier, and with a few arrows, thus, a few dashed
lines, thus, and a few regular lines all gloriously curving
and criss-crossing multivariate graphs in the defined n-
space, I am finished! Behold!" I imperiously throw down the
chalk. I step back. I turn. I await your roar of approval.
Applause applause applause! I close my notes, I bow
slightly at the waist, and bask in your boisterous
acclamation. As Mr. Nobel himself presents me with the
bouquet of roses and the diamond tiara, whose twinkling
diadems are shamed by the iridescent twinkling of my blue
eyes, I say, with tears of joy cascading down my cheeks,
"Thank you! Thank you! Thank you all so very much! When do
I get the money?"

Later, at the press conference, I notice that the beautiful
reporter in the mini-skirt, the bright red lipstick and
ankle-strap high-heels has a question."The answer to the
question that our readers want to know," she asks in that
charming and slow-as-molasses Southern-drawl that invokes
sultry images of Lauren Bacall at her sultriest best,"how
can we make a bunch of lovely," and here she pauses to
slowly, agonizingly slowly, lick her lips provocatively,
"lovely money on this? Because we are hot, so insatiably
hot, sweating and moaning in our unquenchable lust and
lascivious cravings, for making sweet, luscious money."

Naturally, I am enthralled and delighted to see that at
least one stinking newspaper in this whole stinking town
will sink far enough into the proverbial gutter to pander
to my petty, adolescent weaknesses in such a blatant way.
Glancing around the room to see if my wife is in
attendance, or anybody that may know my wife, and not
finding either, I smile broadly and say,"If you are
wondering how to make a profit on the inevitable, my dear,"
and here is where I pause to lick my own lips
provocatively, but am secretly displeased with the gagging
response invoked in the rest of the crowd, I continue,
"then you ought to turn your money over to someone to
manage for you, and I would be happy to talk to you about
it. Later. In my room."

I thought to myself,"If this beautiful piece of fluff is
so stupid that she cannot figure out how to make a profit
on the inevitable, then this could be a lot of fun!" But
apparently she was not as stupid as she sounded, since not
only did she never show up, but now I have yet other
restraining orders lodged against me, not only by her, but
by all the rest of the people who were in the room, who
were so disgusted by my behavior that they are all
demanding that I never be allowed to lick my lips like that
again, at any time, anywhere within fifty miles of them or
their families, and everybody is now laughing at me behind
my back, and I think that my wife is on the phone with that
damned temptress reporter right now, who is ratting me out
with her lies. Damn.

Anyway, how to make money on the inevitable? Jeez! I get so
tired of this question that I am currently soliciting bids
on some tattoo work, so I can have, permanently written on
my forehead, the words"Buy gold, you freaking moron!" and
then I would not have to say anything at all, which would
be a big productivity-booster. I could write this Mogambo
drivel with one hand, and with the other hand, at the same
time, point to my own forehead in answer to that perennial
question,"So tell me, you egghead doofus; how can I make
some money by investing?" And since productivity-boosting
is so dear to the heart of Alan Greenspan, and if you know
him, then I would appreciate it if you would tell him I'd
be happy to enlighten him to this ground-breaking
productivity-through-tattoo thing, and while I have him on
the phone I can tell him how every thing that he is doing
is wrong, because I am sure he really, really wants to know
what I think, even though he never calls me and he won't
answer my calls when I call him anymore, and he has that
same snotty receptionist tell me that he is not at home,
and I say that I KNOW he is not at home, and that is why I
am calling him at work at his freaking office at the
freaking Federal Reserve, where YOU are working, you
irritating worthless skank, so let me talk to Alan pronto,
or I'll come down there and strangle the whole lot of you,
and then she says"No" and hangs up on me. Man, I hate
dealing with the government. They are so rude!

But, on the bright side, I have told you why we are doomed,
I likened the economy of the USA to air conditioners, and I
have told you how to make some money on the inevitable.
Now, all I have to do is get that tattoo on my forehead and
wait for Alan Greenspan to call. Or the Nobel Prize people
to call. Whichever one comes first.

My hand is on the phone, and I am waiting for it to ring.

Sincerely,


The Mogambo Guru
for The Daily Reckoning

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• Anti-Leverage: A Theoretical Masterpiece / The Daily Reckoning - - Elli -, 23.06.2003, 17:44