The Daily Reckoning - Gluttonous Indulgences

verfasst von Firmian, 25.08.2003, 19:59

-->Gluttonous Indulgences

The Daily Reckoning

Ouzilly, France

Monday, 25 August 2003

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

*** Dow, Nasdaq up... gold down... interest rates up... banks
falling...

*** Tales of the virile stock market...

*** Verdun... the symbol of what? 'MORE inflation!' says
Alan... and more.

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

The Dow finished a long, slow August week in the black last
week, but barely. Gold lost 40 cents for the week... but the
Nasdaq raced ahead nearly 4%.

Banks stocks dipped about 2% because, as Barron's helpfully
explains,"investors are continuing to question whether all
banks have successfully weathered the ferocious rise in
market interest rates and the tumult in the mortgage-backed
securities market..."

Self-evidently, not all banks have successfully weathered
the ferocious interest rate storm of the last two months.
"Mid-sized lender Capitol Commerce Mortgage abruptly shut
down," the Associated Press reports."Friday's closure came
just a few weeks after Sacramento-based Capitol Commerce
celebrated one of the busiest months in its 17-year
history; the lender funded $3.7 billion in mortgages during
July, according to several account executives interviewed
Friday."

The current interest rate on a 30-year mortgage is about
6.6%, well above the low of 5.31% on June 11, according to
HSH Associates."A small or mid-sized lender unprepared for
a sudden swing in rates can get into trouble if it is
holding a large basket of unfunded loans locked in at the
low rates available a few weeks ago," the AP story
explains.

We would guess that a large or giant-sized lender like,
say, Fannie Mae, is probably not immune from getting into
trouble.

Patient Daily Reckoning readers are aware, we are sure,
that your editor in New York has been droning on and on for
weeks and weeks about the possible hidden hazards that may
be lurking within the balance sheets of Fannie Mae and
Freddie Mac, the two gargantuan mortgage lenders.

Though we have not followed Fannie and Freddie as closely
as Eric, still... we note that their saga continues: Friday
evening, Freddie Mac's chief executive, Greg Parseghian,
announced he would step down from his post. The disturbing
part of this announcement is that it followed news report
earlier in the day that a federal regulator investigating
Freddie Mac wanted Parseghian removed... Hmmm... The plot
thickens!

Eric, what else is going on?

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

Eric Fry in New York...

- Hooray for Bayer! Last week, the German drug company
received FDA approval to begin marketing its"Levitra" drug
in the United States. As a result of the new approval,
Levitra becomes the first major erectile dysfunction drug
to compete against Pfizer's Viagra... and Bayer becomes the
only pharmaceutical company to offer a comprehensive
"intimacy-dysfunction solution" - Levitra for the husband
and Bayer aspirin for the wife.

- Meanwhile, the virile stock market requires no
pharmaceutical assistance whatsoever, as it rises
effortlessly every day. Last week, the Nasdaq strutted its
stuff by rising nearly 4% to 1,765.

- Apparently, the monetary stimulus provided by the Federal
Reserve is more than sufficient to arouse buying activity
in the stock market. The Fed's easy-money policies, along
with the widespread expectation of a robust economic
recovery, seem to be the main stimuli lifting the major
equity averages these days. Certainly, nothing as unsexy as
"value investing" is causing share prices to rise.

- We wish we could embrace the latest stock market rally
with the child-like faith of a Wall Street strategist. But,
alas, we are too jaded. We have learned to distrust a stock
market selling for 35 times earnings like a dentistry
patient distrusts the phrase,"This won't hurt a bit."
Furthermore, we are somewhat troubled by the so-called
"market internals."

- It's a little unnerving, for example, that the Dow and
S&P 500 both lagged so far behind the Nasdaq last week. The
Dow added a mere 27 points to 9,348. And the S&P 500 also
struggled to put points on the board, as financial stocks
weighed down the popular benchmark index.

- We would like to believe that a new bull market in stocks
is underway, but we keep colliding into opposing evidence.
The towering economic delusions erected by the stock market
bubble of the 1990s have crumbled and the nation is still
trying to clear its way out of the rubble.

- Consider GM... again. During boom times, the company did
not set aside sufficient reserves for the inevitable,
upcoming bust. Therefore, as we have noted innumerable
times in this column, the giant automaker labors under a
crippling debt load and pension plan liability.

-"Few Chevrolet drivers would guess that the single
biggest cost of making their car was medical care for
retired workers," the Financial Times reports."But General
Motors... spends more on healthcare for pensioners than it
does on steel. On each one of the 5.5m vehicles churned out
by GM's north American factories, healthcare for pensioners
cost more than $1,300, well above the steel cost."

- As a result, General Motors, which is the world's largest
buyer of steel, has become one of the world's biggest
healthcare providers.

- At the end of last year, GM's total post-retirement
benefits liability - consisting almost exclusively of
healthcare obligations - totaled a staggering $51 billion.
Even worse, GM's already considerable liability will likely
increase by an additional $4.5 billion this year. How much
money is $4.5 billion? Almost double GM's anticipated
profits this year.

- But despite the troubles at GM and the looming
difficulties in the U.S. financial sector, the virile stock
market seems to rise every day. Even so, the market may be
vulnerable to the embarrassment of premature expectation.

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

Addison Wiggin, back in Paris...

*** We traveled to Verdun this weekend... site of a ten-
month battle in 1916 that sent over 700,000 German and
French farmers, artisans, shopkeepers and merchants to
their deaths. Many of their skulls and bones are on display
at the 'ossarie' atop Douaumant hill.

Raymond Poincaré, then president of France, proclaimed that
the very name of the town had come to symbolize the valor,
honor and national pride in the hearts of all Frenchmen. We
were reminded of William Tecumseh Sherman's warning
following the American Civil war:"It is only those who
have neither fired a shot nor heard the shrieks and groans
of the wounded who cry aloud for blood, more vengeance,
more desolation."

Verdun has been sacked and plundered 11 times since the
birth of Christ. More tomorrow...

*** The latest CPI numbers, which came out last week, were
'only' up 0.2 for the month... or, if you multiply that
number by the twelve months in a year, are growing at a
2.4% annual rate.

"This is NOT good news," writes the Mogambo Guru."This is
NOT neutral news, but it is likewise NOT end-of-the-world
and we-are-all-going-to-die news, so THAT is good news, but
it IS, nonetheless, bad news. But you wouldn't know it from
the jackasses that like to run their mouths and thus
demonstrate their lack of intellectual capacity, who all
say how this proves that inflation is, in their egregious
estimation, neutral and tame and benign and all the rest of
those Pollyanna terms that make me so angry that I spit up
blood whenever I hear them say them."

And yet, Alan Greenspan is promising to make you suffer
MORE inflation!

"The government wants the stock market to recover," writes
James Cook of Investment Rarities, commenting on
Greenspan's 'War on Deflation'."[Fed governors] don't care
about value. They are doing everything in their power to
drive stock prices higher. That includes a positive
economic spin from the Fed and questionable economic
statistics."

*** Here at the Daily Reckoning, we have on occasion
remarked upon a certain peculiar feature of the post-bubble
landscape: an interconnection between everything and
everybody and the economy. While the world used to revolve
around politics - as in the days before Verdun - all
retirement funds, government tax revenues, foreign
governments, foreign citizens, and every financial entity
in the country and the world have placed their bets on a
reflated stock market.

"That it will end badly is guaranteed," suggests Mogambo,
"as there is no precedent in history where government
attempting to boost economies and stock markets did NOT end
badly, even though every attempt to do so always STARTED
out great. And it always starts out great because all of
that money suddenly appearing in the economy cannot fail to
generate activity. If all that goosing of the economic
embers did not also allow the growth of the cancer of big
government, then perhaps the bursting of the bubbles
created would just be a matter of some tough luck for the
greedy people who got involved."

"The road to big government," concludes Mr. Cook,"is the
road to social disintegration. In the end, the safety net
erected by the state will fail to do its job. Government
programs, with their high cost and runaway expenses, will
contribute to the bankruptcy of the nation... Markets will
crash and the dollar will undergo a disastrous drop.
Interest rates will soar and the debt will never be
repaid."

*** You'll find more Mogambo below...

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

The Daily Reckoning PRESENTS: Learning how to be
'flexible,' with... Mogambo on Monday!


GLUTTONOUS INDULGENCES
by the Mogambo Guru

Mars, a planet we Earthlings have never trusted because its
inhabitants are always launching some sinister invasion
plan, and if you don't believe me all you have to do is
watch old movies on TV some rainy Saturday afternoon and
you will learn what I am talking about, is now closer to
the Earth than it has been for a long time, and closer than
it will be for the next big bunch of years, the exact
number of which doesn't matter because we will all be long
dead and buried when it happens again.

But it means that the invisible mind-controlling rays that
they are beaming at the Earth are now that much more
powerful because they are closer to us, and the single-ply
aluminum foil hats that we are all wearing in self-defense
are now too thin to provide the requisite level of
protection.

One of the guys I figure obviously failed to beef up
cranial security is the Prudent Bear's Marshall Auerback.
He has weighed in with an essay entitled"Euroland's
Deficit Hawks Are Wrong" and decided that Euroland needs to
scrap its stability pact so that things can get back,
somehow, to growth and stability via deficit spending.

Although he quotes the Greek Finance Minister Nikolaos
Christodoulakis, who said,"I have never believed, and do
not believe that unrestrained handouts, wide deficits and
increased debt create conditions for growth or social
policy. On the contrary, they lead to stagnation and
recession," Mr. Auerback disagrees with that trenchant
assessment of stark Reality As We Know It. Instead, Mr.
Auerback, who I must assume is suffering mightily from the
aforementioned Martian rays, insists that Mr.
Christodoulakis, who is obviously a deficit-hawk, is wrong
in this instance.

While maintaining that Mr. C is right in the theoretical
big picture, Mr. Auerback nonetheless takes the opposing
tack and says that now, right now, things are so
dangerously fragile that it is appropriate to disregard the
stability pact that requires fiscal deficits to be 3% or
less of GDP. According to Mr. Auerback, who is obviously
not in his right mind due to these aforementioned Martian
rays,"These are not normal times, and solutions need to
move beyond prevailing economic orthodoxy," which I assume
is defined as"What everybody agreed to do and everybody
concerned agreed was the right thing to do." I suppose that
this is in line with Alan Greenspan's vow to use
"unconventional methods" to jam growth down the throat of
the U.S. economy.

Well, then, why AREN'T these normal times? Because, like a
morbidly fat person that has gorged himself for years and
years and who now no longer resembles a normal person,
economies that have gorged themselves for years and years
on one feel-good central bank and government idiocy and
malinvestment after another, the economy likewise no longer
resembles normality.

And getting beyond that, what, exactly, is the prescription
that is beyond this normal orthodoxy that poor Mr. Auerback
says is not needed? In the case of the morbidly fat person,
I suppose the doctor is supposed to prescribe milkshakes
and cookies? And in the case of Euroland, which is what we
started talking about before I got sidetracked into a
pleasant reverie about milkshakes and cookies, it is more
feel-good excesses of credit and money?

I strongly disagree with both the physician and Mr.
Auerback for four, count 'em four, reasons. First off, the
reason that they are IN the damn mess they are in is
because they acted like they DID believe, again quoting Mr.
Christodoulakis, that"unrestrained handouts, wide deficits
and increased debt create conditions for growth or social
policy."

The second reason is that breaking the pact to allow
"unrestrained handouts, wide deficits and increased debt"
is NOT the path one takes to get one's house in order, as
gorging on milkshakes and cookies is NOT the path one takes
to get slim and trim, although both are, to be sure,
satisfying and delightful to those chugging them down, and
as one who has chugged down his fair share of milkshakes
and cookies in his life, I happen to be somewhat of an
expert in that area, and I am highly disposed to break off
this whole train of thought and go have some of each right
now.

The third reason is that inflation is rising at the same
time as the economy is stagnating, and adding more excess
money and credit will make it predictably worse.

And the fourth reason is that this is pure situational
ethics; when times are good the argument is that the
economy will grow out of the problems, and so the problems
are never corrected, and when times are bad the argument
is, as Mr. Auerback says, that it is always"the wrong
time" to address the problems, since it would add misery to
people who were already miserable. So, therefore, there is
NEVER a good time to address the problems, and so the
problems grow and grow. If you know how to make something
good happen when you never address a growing and deadly
problem, then you need to register to run for governor of
California, because you are obviously brighter than me and
everybody else I ever knew.

If there is one thing that you can take to the bank, it is
that Euroland, like everybody else, will certainly take any
opportunity to continue right down that same feel-good path
that got them where they are now. Mr. Auerback even quotes
a guy named Professor Paul de Grauwe, who said the same
thing, in a Financial Times piece, which reads,"Structural
reforms... are very difficult to implement in democratic
societies. They imply changes in the distribution of income
and in economic security, and are resisted by those who are
called upon to be more flexible. The implementation of
these reforms will take many years." I like that; asking
people to be"flexible," which is a euphemism for"not
acting like grubby, greedy little children who will always
show their petulant pique by voting for any yahoo that
advocates bankrolling all of the wishes of grubby, greedy
little children, regardless of the disastrous consequences
of doing so."

And I am faaarrrr too old and jaded to believe that"this
time is different," or that any politician has learned any
lessons, or that any citizen in the whole of Euroland
enjoying their bankrupting cradle-to-grave nannyism is
going to sit still for even the minutest change in their
extensive menu of unearned benefits and unearned
lifestyles. Oops, I mean, I don't think they are going to
be"flexible."

From a more philosophical perspective, which you will
immediately recognize as"I told you so," to even imagine
that there even COULD be a single currency and monetary
regimen against a dozen separate fiscal and nationalistic
policies was, as I stridently proclaimed in my snottiest
voice the whole time, ludicrous to start with. And trying
to overcome the stupidity of even thinking such a thing was
even remotely possible, given the inflexibility of the
voting populace, was the reason for the strict pact in the
first place.

And now that I, the mighty Mogambo, and all the other nay-
sayers have been proven correct, here come the experts,
saying that what Euroland needs is do more of the exact
wrong thing, namely to run as much deficits as necessary,
for as long as necessary.

Mr. Auerback writes that the EU should"pay more attention
to structural deficits so that a country's fiscal deficit
would be judged in relation to its economic cycle." And
what in the hell CAUSED the economic cycle in the first
place, except for central banks and redistributionist
governments creating more and more excess credit and money
so as to enlarge and expand a increasingly dysfunctional
and bankrupting economic paradigm?

So I am being asked to believe, like we here in America are
being asked to believe, that the governments acting like
jerks can be cured by the governments being given leeway to
act like bigger jerks? My God! I thought only we Americans
and the Japanese had cornered the market on that kind of
idiocy! The mind reels!

Fortunately, the Europeans may be saved from their fate, as
they have the fabulous advantage of having the clear-headed
Wim Duisenberg in charge of the EU, and although I have not
seen any recent photographs of Mr. Duisenberg lately, I am
pretty sure that he is wearing an aluminum foil hat and
staying strictly out of the line of sight with Mars. How do
I know this? Because he said that the Euroland countries
have not used the good times to"... consolidate their
budgets. Now they bear the burden of it." Exactly right!

See? Didn't I tell you he was clear-headed?

And like the fat slob in the doctor's office, whining and
complaining about always feeling hungry and out of sorts
because a necessary low-calorie diet is the only thing that
will save his life, it is a burden they must bear, and
hopefully learn from.

Not that they will. And not that we will, either. Until it
is too late. And probably not even then, since neither they
nor we have shown any inclination in that regard, because
if either of us had, we would not be in the mess we are all
in now.

Now, all of this petulance may be caused by the results of
my own gluttonous indulgences, as I went to a party over
the weekend where there was this gigantic taco bar, see,
and of course I made a big embarrassment of myself in front
of my wife who was doing her wifely duties by reminding me,
by slapping me on the back of my head, that stuffing tacos
into my mouth with both hands was one thing, but making
horrible slobbering and grunting noises while doing it was
quite another, and so I was finally reduced to constantly
fending her and all the other guests off with one hand and
stuffing innumerable delicious tacos into my mouth with the
other. And now I am reminded, days later, that mature men
cannot act like starving, ravenous beasts, and that the
penalty of ridiculous, massive overindulgence is lethargy
and indigestion, replete with moaning and groaning.

But I feel a little better, now that I know I was just
being, ummm, inflexible.


Warm regards,

The Mogambo Guru,
for The Daily Reckoning

P.S. Mogambo Sez: Insiders are selling. NYSE Members are
selling. Specialists are selling short. So who in the hell
is doing all this buying? And why?

Thread gesperrt

 

gesamter Thread:

• The Daily Reckoning - Gluttonous Indulgences - Firmian, 25.08.2003, 19:59