The Ultimate Debacle (Marc Faber) / The Daily Reckoning

verfasst von - Elli -, 24.07.2003, 19:00

-->The Ultimate Debacle / The Daily Reckoning

Paris, France

Thursday, 24 July 2003

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*** U.S. Jobs Jump Ship... where did they go? Just another
bear market rally...

*** Bernanke speaks - gold and the euro rise!

*** Amazon is back (thank God, our book just debuted
there!!!)... the Tour de France... and more!

Yesterday, we wondered.

On what day will the U.S. economy change course? It has
been following Japan... with a 10-year lag... since the mid-
'90s. Stocks boomed up, then bubbled up, then blew
up... just as they had in Tokyo 10 years before.

And then Greenspan, Bernanke, McTeer and Bush came along.
Vowing not to repeat Japan's mistakes - they did almost
exactly the same thing Sakakibara, Mieno, and Murayama did
- they cut rates and increased government spending. Is it
any wonder they got the same results?

Like Japan before it, the U.S. economy has slipped,
slumped, and slid for the past 3 years. It cannot seem to
find a firm footing. So much 'liquidity' has been hosed on
the ground that it is now too sloppy to give a man any
traction. Instead of making progress, he slips and falls.
Prices drop. Jobs are lost. The economy sinks.

More than 2.5 million jobs have been lost since the
beginning of the millennium. At first, no one seemed to
care. Assembly-line workers are a dying breed. Their
incomes have been falling for the last 30 years. But now,
it is white-collar working stiffs who are feeling the pain.

"U.S. Jobs Jump Ship," says a CNN headline. IBM and
Microsoft are moving their work overseas."You can get two
heads for the price of one," says an executive.

And people like Donna Bradley, an unemployed IT specialist
from Mesa, Arizona, are in a tight spot."They won't hire
Americans," she says, missing the point. What they don't
want to do is pay $45 per hour for something they can get
for less than half that amount in India.

Ms. Bradley has been forced to sell her home.

And here, once again, we stop dead in our tracks. Stepping
back, we take a look... in awe. How elegant, how exquisite,
how unrelenting and unforgiving the whole thing is...! Who
was supposed to get rich from the information revolution?
From globalization? From the Dollar Standard... the trade
deficit... Wall Street? Americans! But who will be ruined by
these very same trends? Ah... more below...

There will come a time, of course, when there are too many
Donna Bradleys. At that point, if not before, the U.S. will
stop its drift to sushi-land. Unlike Japan, America is a
nation of debtors. It can't tolerate as much slump; its
Donna Bradleys go broke too fast.

But that day may still be a long time in the future.

In the meantime, we turn to Eric Fry with the latest update
from Wall Street:

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

Eric Fry in the Big Apple...

- Stocks and bonds both gained ground yesterday, but
investors don't seem to be brimming with confidence. The
Dow gained a meager 36 points to 9,194 and the Nasdaq
drifted 13 points higher to 1,719.

- Perhaps the stock buyers were feeling a little nervous
while looking over their shoulders at the newly falling
dollar, which tumbled more than 1% yesterday to $1.147 per
euro. Or maybe the stock buyers felt a twinge of anxiety
while watching the gold price surge more than $8.00 to
$358.70 an ounce. What troubling trend or event, these
nervous investors may be asking themselves, might such a
substantial gold rally portend? Inexplicable rallies are
the most unnerving sort of financial market phenomena.
Whatever the gold market may know, we suspect that it is
not a good thing for the stock market.

- The strongest evidence in support of reincarnation may be
the uncanny resemblance between the bubble stock market of
1929 and its re-emergence in 2000. Was the bubble market of
2000 nothing more than 1929 returned in the flesh? And
therefore, is the stock market's awesome rally since last
October something that we have seen before? Will the 2003-
vintage Dow rally perish as suddenly as the bear market
rally of 1931-1932? Constrained by a kind of déjà vu, is
the stock market predestined to tumble anew and to drop
below the lows of last October?

- We don't know the answer to these"meta-financial"
questions, of course. But we can take our cues from history
and see if the modern market rhymes with the markets of
yore.

- Let's consider the evidence. In 1929, the U.S. stock
market was booming, selling for the formerly lavish P/E
ratio of 33 times earnings, well above the historical fair-
value average of 14 times earnings. Then came the bust.

- For the next three years, stocks cascaded lower, until
they finally bottomed in June of 1932. Along the way from
peak to trough, the Dow mounted six major rallies, the last
of which lifted the blue-chip index about 35% before
exhausting itself. On six separate occasions, the stock
market bulls of 70 years ago believed that"the bottom was
in." And on six separate occasions their optimism proved to
be woefully misguided.

- Fast forward to 2000, when a two-decade stock market
boomed flourished, then mutated into one of the greatest
investment manias of all time. Stocks soared to ridiculous
valuations, with the best-performing stocks soaring to
"infinity times" their non-existent earnings. Then came the
bust.

- Like any self-respecting bear market, the 2000-2003
edition has made stocks much cheaper, if not absolutely
cheap. The Nasdaq's valuation has tumbled from well over
100 times earnings to a still-plump 40 times trailing
earnings.

- Unfortunately, as SafeHaven.com accurately points out,"A
post-bubble bust cannot and will not end until valuations
are once again undervalued by historical standards... The
Nasdaq is up an impressive 38% from its March lows and an
incredible 58% from its October lows... But unfortunately,
as this valuation data reveals, there is simply no
fundamental foundation to this powerful bear-market rally.
Like the 35%, 25%, 41%, 45%, and 34% major bear-market
rallies since 2000 before it, this 38% specimen today is
built on a weak foundation of speculative sand and will
fail. One way or another, before this Great Bear ends, the
S&P 500 will trade under 14x earnings and yield over 6% in
dividends and will be undervalued by historical standard."

- We're inclined to agree with SafeHaven.com, but we don't
wish to pick a fight with Mr. Market.

-"Either stock prices will plunge dramatically in the next
couple of years to get valuations back in line,"
SafeHaven.com winds up, or stock prices will trade sideways
for a decade or more until earnings catch up. There will be
no new Great Bull until stocks are really undervalued,
period. Real bull markets are born from the desolate ashes
of undervaluation, not from the fiery embers of a mini
speculative mania!"

- OK, so now we know what SHOULD happen!

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

Back in Paris...

*** Amazon.com is back in the news. The company was
supposed to make only 6 cents (when you leave out certain
things... such as the cost of stock options and
depreciation). Instead, it made 10 cents a share, again,
leaving out certain things. Of course, when you add back in
the things it left out, you find that the big River-of-No-
Returns stocks lost 11 cents. Still, investors were so
thrilled, they bid up the stock 15%.

And just in time... our book"Financial Reckoning Day"
(John Wiley & Sons) debuted in the"Top 5 Future Releases"
list last week on their home page. (Just below Krugman...
ha, ha, ha)

*** Gold rose $8 yesterday, after Ben Bernanke opened his
mouth."We should be willing to cut the funds rate to zero,
should that prove necessary," said the Fed governor. The
dollar also reacted, with a 1% drop, bringing the euro to
$1.14 and change. We wish we had followed our own advice.

*** The Tour de France approaches its finale. It has been
fun watching the U.S. Post Office team in their zippy red,
white and blue uniforms... often leading the pack. Our
hearts swelled just a little at the sight of it.

"But why is the Post Office paying $40 million to sponsor a
bicycle team?" a kill-joy wanted to know. We have no
idea... after all, the USPS has a monopoly. But the Post
Office loses about $1 billion per year. What's another $40
million?

*** Friend and colleague Karim Rahemtulla, director of the
Supper Club, sends news of some interesting developments in
the heady world of venture capital:

"At the Supper Club, the small group of accredited
investors that I head, we have noticed three things in the
past few months. First, the caliber of companies that are
seeking funds are better today than three years ago. They
are further along with their plans, have a modest cost
structure (the company execs are actually earning money for
work) and much more serious about the amount of effort
required to succeed.

"Second, liquidity events are occurring with greater
frequency. This means that investors are seeing the light
sooner than before. In the past three months, three deals
presented to members in the past 18 months have either gone
public, been taken over or are in process of merging with
public companies.

"Third, the companies that are presenting are getting all
or nothing. This is a relatively new phenomenon. Usually,
any company that presents to our group can generate
meaningful funds... but not anymore. Our membership is
getting very selective, investing heavily in ideas that
look to have potential and letting other opportunities
leave empty-handed.

"If the trends I have seen developing in the Supper Club
continue, then you should begin seeing more IPOs in the
year ahead. That should bode well for the investor with the
foresight to get into a situation early enough that a
liquidity event could mean the difference between a
comfortable future and one that may have been comfortable."

This November, at its annual meeting, the Supper Club will
present between 12 and 15 breaking investment
opportunities. Those new to the club will be given the
opportunity to get in on them... as well as a few venture
capital deals already in progress.

Because you are so special to us, dear reader, we have
arranged for 50 discounted preview spots to be made available
especially for DR readers. If you would like to win one of
them, contact Vickie Beard at vbeard@agora-inc.com.

We advise you to hurry; Supper Club meetings tend to fill
quickly, and the discounted spots will go fast.

*** Yesterday, our friend and fellow investment writer Marc
Faber spontaneously sent us a copy of his book, Tomorrow's
Gold, in the mail. We have not read it yet, but we are
enjoying the cover... (more from Marc Faber, below... )

***"Oh là là..." said our tango teacher."Put some life
into it..."

It may still be years ahead, but we are not going to wait.
We're going to get into the spirit of the next major trend
in the U.S. economy. Not only are we taking lessons in
Argentine Spanish... we're learning how to tango.

"You know," continued Ms. Nanni,"when I give lessons in
Buenos Aires, I have to tell people to calm down. But here
in Paris, you northern Europeans... and especially you
Americans... are so stiff. This is supposed to be sensual,
romantic. In fact, it was considered obscene by many
people... maybe it still is. And maybe that's why I like
it....Oh là là. Live a little....put some style into it!"


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

The Daily Reckoning PRESENTS: Will stemming the flow of
American jobs going overseas save the American economy? Not
likely, says Marc Faber, but that probably won't stop
politicians from trying.


THE ULTIMATE DEBACLE
By Marc Faber

The other day, I received a three-page email from Klaus
Bockstaller, who runs the Baring Emerging Europe Trust. I
have to say that while I get at least 100 emails a day, the
issues that Klaus raised, his thoughts, and the resulting
questions, were some of the most interesting and challenging
that I have ever encountered. They have driven me along an
illuminating path of reflection, and given rise to some
interesting conclusions.

In essence, Klaus has the following theory. When, in the
future, Western political leaders realize that the Bernanke-
type monetary policies don't really work (or are doomed to
fail, as I would put it), but lead to inflation and a
depreciation of the dollar, they will increasingly pursue a
policy of protectionism, which will buy the developed
countries of the West some time and keep jobs from migrating
to low-cost service providers, such as India, and more
competitive manufacturing centers, such as we find in China,
Vietnam, and Eastern European countries, among many others. A
sharply depreciating dollar and import duties will lift the
price level in the U.S., but the disadvantage of higher
domestic inflation could be partially offset if production
and tradable services shifted back to the U.S..

The only remaining problem in this scenario (of depreciating
dollars) would be oil. But, according to Klaus Bockstaller,
the U.S. has wisely already taken steps to ensure that it
will have sufficient supplies at reasonable prices in the
future - by occupying Iraq.

Klaus concludes that while he agrees with me that the U.S. is
headed towards 'ein böses Ende' (disastrous eventual
outcome), he nevertheless feels that a country like the U.S.,
whose money is 'the' reserve currency of the world, can, as
Bernanke suggested not long ago, print money at practically
no cost.

If this policy does not work, however, Klaus suggests that
the U.S. can simply implement protectionist policies in order
to postpone for quite some time the 'ultimate debacle'. If
the U.S. succeeds in putting off its problems for quite some
time, then the equity markets could perform very well for a
while.

While I fully agree with Klaus Bockstaller's basic
presuppositions, I believe that the lease of life of economic
policies that are designed to postpone problems, rather than
to solve them - and to hurt competitors through competitive
devaluations and protectionist measures - is far shorter than
is generally accepted. As Mao Tse Tung wrote during the
revolutionary struggle to 'liberate' China,"a single spark
can start a prairie fire." Let me explain the reasons for my
somewhat less sanguine views.

More than two years after the Fed began to ease aggressively,
it is now becoming more obvious that the policy of
aggressively driving down short-term rates has failed to
produce any meaningful recovery. Consider, for instance, the
booming housing industry. Given the red-hot conditions in
this sector of the economy (don't forget that it is excessive
credit growth that drives residential house inflation), one
would assume that the furniture manufacturing industry would
also be thriving.

But, not so! Industrial production for furniture and related
products has been declining since 2000, while employment in
this sector has totally collapsed. Why? Easy money has led to
new capacities in the furniture industry - not in the U.S.,
but in Vietnam and in China, two countries from which
furniture imports into the U.S. are soaring.

So, it should already be obvious to U.S. economic
policymakers that in an environment of free trade and free
capital flows, monetary policies can stimulate borrowings and
spending in a high-cost country, but not capital spending and
production, which, given the highly competitive situation we
have, will naturally shift to the lowest-cost producers and
lead to the ongoing wealth transfer to Asia via the U.S.
current account deficit.

But what about protective duties, quotas, and regulatory
measures that would prevent service jobs from migrating
overseas? It is on this point that I disagree with Klaus
Bockstaller. Import duties and quotas will make matters
worse, not just in the long term but also immediately. Let me
explain.

First of all, import tariffs and quotas on a large scale
would increase prices for manufactured goods in the U.S. and,
combined with the ongoing inflation for services, would lead
to higher inflation rates across the board and, therefore,
depress bond prices further. In turn, rising interest rates
would bring the refinancing boom, which has kept consumption
up, to an abrupt end. In addition, selective tariffs, such as
were imposed on steel imports, will not create jobs.

Because of the steel tariffs, U.S. steel prices are now far
above steel prices in Asia, Russia, and Brazil. So, what is
the result? Manufacturers of goods with a heavy steel content
(such as car-part manufacturers) are shifting their
production overseas, where not only labor but also now steel
prices are lower. And if across-the-board import duties were
levied, such duties would not only hurt foreign
manufacturers, but also U.S. companies, which in the last few
years have set up production capacities overseas and import
their products back to the U.S. (I understand that about 50%
of U.S. imports originate from U.S. companies overseas).

In fact, under careful analysis, it should be obvious that
the lack of competitiveness of U.S. companies has led to the
shift overseas of goods production and the provision of
services. Import duties or restrictions will 'protect'
unproductive and uncompetitive industries and make them even
less competitive, since duties will now diminish the
competitive pressures.

For the U.S. economy, rising protectionism would also mean
far higher inflation rates, as well as a huge competitive
disadvantage on the global markets for U.S. corporations.
Sure, the lowest-cost providers of services and producers of
goods would temporarily be hurt, but the world's economic
geography is now mutating rapidly. Already, the Asian markets
combined are far larger than the U.S. economy in a number of
sectors. Consequently, American protectionism would merely
redirect trade flows, but not eliminate them. (As an example,
Thailand's exports were up in May year-on-year by 13.5%, but
exports to China soared by 82%.) I might add that the threat
of protectionism will actually make exporters in Asia and
India stronger, because they would then direct their efforts
to lowering their dependence on the U.S. market by looking
for customers elsewhere.

Lastly, rising protectionism in the U.S., which is already
evident in a number of industries where foreign firms are
accused of dumping, will probably mean the end of the WTO and
lead to retaliatory measures by foreign governments. This is
hardly a picture that would be very beneficial for economic
growth and financial markets, not to mention the negative
geopolitical consequences for the U.S.!

In sum, I suppose that American protectionism will be bad for
everyone, but especially so for the U.S., as it would not
cure the cause of job losses and the trade deficit problem
but, rather, would address only the symptoms of these
problems.


Regards,

Marc Faber,
for the Daily Reckoning

Thread gesperrt

 

gesamter Thread:

• The Ultimate Debacle (Marc Faber) / The Daily Reckoning - - Elli -, 24.07.2003, 19:00
  • Denke, diesen Faber sollte man aufheben! - kingsolomon, 24.07.2003, 19:41
    • Warum wiederholst du diesen Text? @ELLI - bitte streichen! (owT) - yatri, 24.07.2003, 20:13
      • Re: @ELLI - bitte streichen! / Nö, fand ich ok (owT) - -- Elli --, 24.07.2003, 20:16
      • ganz einfach deswegen - kingsolomon, 24.07.2003, 20:55
    • Re: Denke, diesen Faber sollte man aufheben! - Boyplunger, 24.07.2003, 20:52
    • Und nochmal auf deutsch - Morpheus, 25.07.2003, 18:38