The Daily Reckoning - Rage Against The Machine

verfasst von Firmian, 29.08.2003, 11:04

-->Rage Against The Machine

The Daily Reckoning

Paris, France

Thursday, 28 August 2003

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

*** The sum also rises:

Increase in money supply: $3 billion per week
Cost of Iraq adventure: $1 billion per week
U.S. federal deficits: $10 billion per week
U.S. current account deficit: $10 billion per week.
It adds up!

*** Gold soars $7... Dow sinks... Some recovery!

*** Boom for cargo ships... bust for mortgage industry... the
genius of the war... good strategy, but how long can this go
on?

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

We were looking at the day's headlines. All of a sudden, it
was like being at a wedding with a large family. Not for
the first time, we gasped when we noticed the resemblances.

And so we stand back and marvel again today; what an
amazing world we live in, dear reader.

There are so many pretty women in Paris. We mention this,
not as a digression, but an elaboration and observation.
Only a happily married man can appreciate beautiful women
properly; they pose no threat to him, so he is free to use
his imagination and enjoy their company. A free man, on the
other hand, must close his eyes; he is in constant danger.
He has to watch himself, for he might get himself into
trouble with any one of them... on almost any day, his whole
life could be turned upside down.

When Richard Nixon divorced the dollar from the gold
standard, the world's economists got hair transplants and
bought convertibles. Whoopee... at last, they were free to
dally with inflation and credit expansion all they wanted.
It was fun for a while, but now we see the results of it -
the world has been turned upside now... and we find
ourselves amidst a whole tribe of half-wit love children.
You read about them in every news story...

If George W. Bush has his way, the federal government will
run deficits of more then $5 trillion over the next 10
years, says the Congressional Budget Office.

China's export growth has created a"boom for cargo ships,"
says the New York Times.

Oh no! The price of gold rose more than $7 yesterday. The
index of gold stocks rose more than 6% to its highest level
in 6 years. Merde! We are just like every other lump
investor. We made up our minds to buy gold when it was near
$350, but we didn't get around to doing it. Now that the
price is $25 higher, we buy... because we are afraid the
really big move in gold has already begun!

The money supply is growing by nearly $3 billion per day.
Richard Russell calculates that at the present rate, M3
will increase in the next 18 months by enough to buy up
every ounce of gold in the entire world.

Still, the public has no idea. It looks at each headline as
if it were a foundling, unrelated to the other kids in the
orphanage. As far as it is concerned, the price of gold has
as little to do with the federal deficit as an Olympic
skater with a walrus. Stocks are going up, they believe;
the economy is recovering. Why bother to look hard or run a
paternity test?

And yet there, in the family of financial news, is a
genetic strain as striking as red hair. Every headline
seems to have a carrot top - even the recovery.

"Some recovery," says the Atlanta paper. Nine million
people are looking for work. It quotes an analyst:"With
recoveries like this, who needs recessions?"

What is the matter with the recovery? Why is China booming?
How come the price of gold is going up? Whither the U.S.
budget deficit?

All of it - the whole line of today's news - is touched by
the sin of the Nixon Administration... a sin neither
original nor capital, but common and sordid. Cutting the
dollar loose from gold freed the world's monetary system to
get itself in the worst kind of trouble. We are in it
now... surrounded by the mad offspring of the Dollar
Standard system. It will be a long evening.

Eric is out this week, but Addison brings more of the
latest news:

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

Addison Wiggin in Paris...

- The recession that wasn't has morphed into the recovery
that isn't. And the long, soft depression of the 21st
century inches another toe into the light. Soon we'll see a
whole pied... and maybe by next year, a jambe.

- The depression, of course, like all great bear markets,
wants to take its time and lure in as many unsuspecting
players as possible. After all, the build-up since"Nixon's
Sin" (as Bill terms it) arrived slowly and subtly enough to
escape attention... causing people to believe that the good
times were permanent and a New Era had arrived. It will
take a long, slow destruction of wealth before 'believers'
give up the ghost.

- Still, the details inch their way out of the darkness.
Since the 'recovery' began, over a million people have lost
their jobs. Go back 18 months, and the number rises to 3
million. In all, some 9 million Americans are
jobless... more than a million have given up looking for
work... and about 4 million more are scraping by in part-
time jobs, when they would prefer to be fully employed.
That's a hefty 14 million people - 9.9% of the U.S. labor
force - sitting on the sidelines during the 'recovery.'

- The problem, as an Atlanta Journal-Constitution article
accurately describes, is a lack of corporate profits."A
typical recession starts when consumers pull back on
spending," writes Michael Kanell."When they flood back to
stores, they kick recovery into motion. But this time,
consumer spending was solid through the recession. There
was no pent-up desire to be unleashed. And no sudden spur
to recovery... What spun the economy off the rails in the
first place was a collapse in companies' investment in
2000. That spending has come back only in corners of the
economy, and only modestly."

- U.S. capacity utilization - or the total use of the
nation's existing factories - is not helping matters; it is
still hanging around 74%. Economists tell us real hiring
doesn't begin until that number jumps above 80%.

- Throw in a strange brew of historically significant one-
off events - the productivity 'miracle,' just-in-time
delivery, global outsourcing, and rising levels of trade
protectionism... not to mention the War on Terror, the War
on Drugs, the burgeoning surveillance state... plus, the
aftermath of a burst investment Bubble, replete with
corporate accounting scandals - and it's no wonder this
recovery ain't what it's generally cracked up to be.

- As longtime DR readers are painfully aware, the
'recession-that-wasn't' of 2001 was softened by incessant
Fed meddling and slashing of interest rates, tax cuts
pushed through Congress, and huge outlays to the security,
defense and airline industries. Rather than cut back on
Government spending, this Republican administration has
been spending other people's money like a Vegas hustler
after a particularly large score. This is no secret to even
the dimmest of news consumers: the Congressional Budget
Office released a report yesterday projecting that deficits
will reach $5 trillion in less than a decade. The
occupation of Iraq alone is expected to drive the 2004
shortfall to a record $480 billion.

-"They kept the recession from being so deep," former
Federal Reserve economist Dean Croushore told the Atlanta
Journal-Constitution, referring to federal spending and
artificially low interest rates,"so you don't get the
bounce back as much." And so the long, slow depression
glides a little further into the light.

- The major indices yesterday, for their part, appeared
simply clueless, directionless and otherwise mystified. The
Dow lost 7 points to 9,334; the S&P remained virtually
unchanged. Tech stocks helped pull the Nasdaq 11 points
higher to 1,782 - a fresh 16-month high.

- But behind the scenes, institutional investors and
foreign central banks seem downright clear about what
they're expecting to result from the shenanigans coming out
of Washington. Signified by three key events:

* Yesterday, the Treasury held an auction of 2-year
treasury notes... and only 26% of those available were
picked up. The biggest buyer of this kind of debt is
generally a stiff suit from a foreign central bank."It
looks like foreign central banks were reluctant to show up
for this sale," Michael Cloherty, a banker at CSFB,
reported ominously. The U.S., we Daily Reckoneers are wont
to say, has been relying on the kindness of strangers to
finance its historically high current account deficit... but
now, it looks like the strangers have begun to get a little
less kind.

* By contrast, Dan Denning pointed out to me this morning
that according to the Commodity Futures Trading Commission,
large-scale institutional speculators added 61 tonnes of
gold to their long positions in the last week. Those
holding short positions reduced their exposure by 12
tonnes. Net gain? 73 tonnes to the long side, or a gain of
35% in one week.

* Mortgage applications dropped to a 14-month low last
week... down 65% from their peak in the last week of May.

- Bankers are getting nervous about holding U.S. government
debt... and institutional investors are going long
gold... and the housing bubble is about to collapse:"It has
begun," a reader of Dan Denning's new Strategic Insider
blog service noted, referring to the great deleveraging of
America. Buy gold... sell the dollar. (If you want to know
more about Dan's new blogging project - an effort to
chronicle the unwinding of America's debt obligations and
offer useful investment steerage throughout - send the
gentleman an e-mail: DanielkDenning@aol.com.)

- Gold, by the way, my friends at the Everbank World
Currency Research desk tell me, has outperformed the dollar
by 81% since 1972 - within months of the date Nixon
dissolved the bonds between the two. (More from Everbank to
come... )

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

Bill Bonner, on the other side of the desk in Paris...

*** The key struggle, said George Bush this week, is
between"civilization and chaos." At a cost of $1 billion
per week, the U.S. is attempting to impose American
civilization in the area where civilization began.
Civilization may have gotten its start in the Tigris and
Euphrates valleys. But it has been chaos ever since.

The administration now says that the project involves a
"generational commitment." Hmmm... said an expert from the
Cato Institute on CNN last night... that sounds like about
20 years at $1 billion per week... hmmm... that's over a
trillion dollars!

Here at the Daily Reckoning, we know no more about foreign
policy than we do about economics. But a trillion bucks
seems like a lot of money, even to those of us who have
just written checks for college tuition. First, we're not
sure the Chinese will lend us that much money. And we kind
of doubt that the world will stand still for 20 years while
George W. Bush tries to get the desert tribes to watch
reality TV shows and shop at Walmart.

Chaos, or civilization? Which is more likely? Our guess is
that Iraq will still be in a state of chaotic civilization
20 years from now... and that the U.S. will go broke long
before Bagdad turns into Butte or Cleveland.

*** But what do we know? An e-mail from a reader made us
realize that we had failed to grasp the genius of the war
against Iraq.

"Tactically and operationally, what we are seeing is the
'flypaper' strategy. Draw the bad guys to some place far
from lower Manhattan, and get them stuck in their own
quagmire. Now, they are fighting us in a hot, dusty
climate, far from any support bases (like San Diego or
Miami, host-towns of several 9/11 hijackers), without
access to easy funding, and wondering which next-door
neighbor will turn them in to the U.S. forces in the next
couple of days. We can duke it out with the bad guys on
non-U.S. soil. No triple-canopy jungle to hide from prying
eyes. Not much of a Ho Chi Minh Trail for resupply. No
Great Power patrons overtly supporting the bad guys (but
see below). Advantage to the U.S., tactically and
operationally, as I said.

"A not-insignificant number of bad guys are from the
'internationalist' school of militant Islam. Many are
alumni of the training camps in Afghanistan. They would
hate the U.S. and the West in any event, and be out looking
for a fight. If not fighting the U.S. in Iraq, they would
be fighting Russians in Chechnya, or building shoe-bombs in
the anterooms of some mosque in Liverpool, or tossing
carbon fibers onto electrical trunk-lines outside of
Toledo, Ohio in an effort to trigger a power blackout to 50
million people (some of their ideas are just so silly... )

"We can fight them there in Iraq, or on the streets of
Paris if you prefer (from what I hear, there are parts of
Paris where white boys dare not go). The U.S. presence
gives them a short bus ticket to the front lines; there,
(they hope) to kill some Yankees and martyr themselves. (I
like that part about martyring themselves. We can arrange
that.)

"In the grand scheme, these Bin-Lincoln-Brigade guys will
not make much of a difference to the outcome. By comparison
with the Vietnam War, it took a massive Soviet-Chinese
resupply effort over two years (1973-74), coupled with a
rather large North Vietnamese Army invasion lasting about
three months (early 1975), to bring us to the calamitous
events of April 1975. And this latter was in the face of no
U.S. airpower dropping bombs on their red NVA heads,
because Congress had cut off funding for military
operations no matter what Pres Ford and Dr. Nobel-Prize
Kissinger wanted to do. (Actually, there were a couple of
B-52 strikes on fuel supply lines that stopped the NVA
advance in its tracks. Sen. Church et al. were outraged.
Payback came in 1977, when Pres Carter cancelled the Air
Force's B-1 bomber program. Forgiveness came in 1981 when
Pres Reagan revived it. There are no accidents, Comrade.)

"Moving from the tactical to the theatre-level, my larger
concern is that there are significant players over there
and elsewhere in this great big wonderful world of ours who
do not want the U.S. to succeed. Is a fairly free,
politically moderate, economically viable Iraq in the
interest of many of the entrenched interests in the Middle
East? Do the Saudis really want to see an Arab nation just
to the north, with moderate mullahs in the mosque where
they belong, and women out in the workforce? Does the
present gang of Iranian leaders want to see a U.S. success?
How about the Syrians? Or Der Fuehrer und Partei of Ein
Volk, Ein Reich, Ein Palestinian Authority? Heck, do even
the Turks want us to 'do Iraq' successfully, so as to
create a model for ethnic minorities in Turkey? Do the
French, Germans and/or Russians want to see the U.S.
succeed, and win this round of the Great Game? How about
the Chinese, when they are not busy exporting crap to Wal-
Mart and accumulating U.S. Bonds?

"The Chinese view their oil security as coming from the
Middle East over the next 75 years. Do other world oil
producers (e.g. the enlightened despots of Venezuela or
Nigeria) really want to see Iraq's oil come on line to
anything approaching its potential? A U.S. success in Iraq
will be bad for a lot of people's business, it seems to me.
It is probably worth it to be 'paranoid' when everyone
really does want to see you go down.

"Getting back to Iraq, there are a lot of different
political-economic-cultural interests in Iraq. What of
them?

"Will any politically successful party be viewed simply as
a U.S. Quisling? It's not like in Japan, where MacArthur
bought off the Emperor (well, let him keep his head
attached), and in turn His Highness (the Emperor, not
MacArthur) told the people to behave and fall in line. Or
like in Germany, where out of the rubble we found Konrad
Adenauer who understood a thing or two about economics. And
as to Germany, we could always point to the USSR's Red Army
and those nice East German Stasi boys as a sobering
influence.

"This nation-conquering and nation-building stuff is hard
work. And expensive, too. And that is my grande problemo.
How do we support all this world leadership we are doing?
What economic sacrifices are the U.S. politicians (and
American people) making to pay for all of this? The malls
are full of late-model cars, and the shoppers are rushing
home with their treasures (mostly, from some 40-foot
container that was loaded on a ship in Hong Kong).
Expensive houses still sell in expensive markets, and it
only costs a bit more to fly first-class. Yes, I know, we
are all suffering from sleepless nights as we worry about
the increasing national debt. But how long can this go on?"

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

The Daily Reckoning PRESENTS: Departing from our
premonitions of where the U.S. may be headed, we pause to
wonder in what direction mankind is 'progressing'... and
why. This DR Classique was originally published on 27
October 2000.


RAGE AGAINST THE MACHINE
by Bill Bonner

"I think I will strangle myself."

Thus did Henry, 10, begin his letter.

One of 6 children, Henry realizes that a little dramatic
flourish will get the reader's attention.

It turned out that he was not really upset... but merely
frustrated. He has been staying at an abbey deep in the
French countryside with his school class. He mentioned
something about a fire - but, like the key clue in a
mystery novel, gave no further details. His only complaint,
with himself, was that he kept losing pens and pencils -
and perhaps underwear.

Henry seems to have a flair for writing. In an earlier
stage of his academic career, parents were called in to the
school to encourage the children to write. Each parent
worked with two or three students. But Henry was
so prolific, he needed one long-suffering parent all to
himself.

And maybe I have already told you this, but I will do so
again - the story of how Henry, at the age of 6, came to be
considered a genius by his teachers.

You may be wondering, as you often must, what this has to
do with investing. Well, I don't know either. But since the
Daily Reckoning is free, I feel entitled to some gratuitous
bragging about my children from time to time. And perhaps,
you'll find something in this story or what follows that
may be useful to you.

When kids begin school they are given a simple test to make
sure they are ready. The children at 5 or 6 cannot yet
read, so pictures of various things are held up... as the
kids are asked to identify them.

Well, the background to the story is that we were living on
our farm in Maryland, and Henry would help milk the cows
and goats from time to time. Being an inquisitive
chatterbox, he kept the dairyman busy by asking questions,
inducing a flow of information about the dairy trade.

So, when the teacher held up the cards, Henry correctly
identified the cat as a cat, and the dog as a dog... but
when he got to the cow Henry chirped,"Oh... that's an
American short-horned milking breed."

Part of the program out at the abbey was an introduction to
computers and the Internet. Every child in the civilized
world is now supposed to learn how to use the Internet
before he learns how to conjugate verbs or find the median
line of a triangle.

What's more, teachers now expect their students - at least
here in Paris - to have access to the Internet at home.
Homework assignments often involve Internet research.

So important is Internet access thought to be that
editorialists worry about the 'Internet gap' between rich
countries and poor ones, and between black and white
population groups in the US.

At this point, dear reader, you may be expecting a
curmudgeonly - almost sourpuss - comment from your editor.
I won't disappoint you:

Now that the Internet is considered an indispensable
learning tool, I can't help but wonder how the poor
unfortunates in pre-Internet, pre-Bandwidth plenty era ever
got along. Aristotle, Archimedes, Plato, Plutarch, Galileo,
Michelangelo, Erasmus, Pascal, Newton, Jimmy Rogers,
Jefferson... why do I even bother to list the names?
Rockefeller, Carnegie, Morgan... in any era, in any
pursuit... throughout all of mankind's history - people have
done remarkable things without ever getting an email
message or typing out www.

Dylan Thomas, who was born on this day in 1914, wrote in
ink on - would you believe it - paper:

"In my craft or sullen art
Exercised in the still night
When only the moon rages
And the lovers lie abed
With all their griefs in their arms,
I labour by singing light
Not for ambition or bread
Or the strut and trade of charms
On the ivory stages
But for the common wages
Of their most secret heart"

"What we call progress," said Havelock Ellis,"is the
exchange of one nuisance for another nuisance."

The Internet is certainly a handy communications
tool... like the telephone or the television. But it doesn't
improve the quality of a writer's poetry... and could even
reduce the wage rate 'of their most secret heart.' Like TV
and the telephone, the Internet is a great tool for people
who want to waste their time or the time of others.

Hardly a day goes by that doesn't demand hours of time
spent handling various Internet-related chores. My e-mail
in-box has hundreds of messages in it at any given moment.
Which ones are important? Which ones are insipid? Which
ones will interrupt my thought process or maybe even my
sleep? I just don't know. But I know it will take me a long
time to find out. As I have pointed out many times, the
world has not too little information, but too much - most
of it useless rubbish.

No respectable desk from Helsinki to Singapore is without
its computer screen. Take it off, and the desk is like a 4-
star general without his clothes on... a figure of ridicule
and contempt. And yet, how many hours of each working day
are wasted, sorting through the useless information
delivered in bulk via Internet?

Sophia, doing a research project for school, spent hours on
the Internet trying to find out about some event in
history. In less than a minute, better information was
available from a discarded set of encyclopedias, now
gathering dust on the shelves, like the forgotten horse
collars in the barn.

You may want to disregard this letter as the ruminations of
a romantic fuddy-duddy, but not every technological
development is beneficial. Television, which lights up the
houses of even the poorest families in America, is probably
a net loss to everyone. Hours and hours are wasted in
silent viewing - which could have been used to produce
things... or at least to get in a good argument with your
spouse. Who has not lost a good drink... or a good meal... or
maybe even moment of honest reflection to the constant
bawling of the electronic media?

Are people richer since the advent of the Information
Revolution? Not really. Real incomes peaked in the 70s.
People work more hours now, and more family members work
per household, but real disposable income per hour worked
is actually down. And most recently, as noted above, real
incomes are actually rising at only half the rate of the
GDP.

What's more, the Internet is expensive - eating into net
family income like a starving Ethiopian into a banana tart.

"Twenty years ago," observes Marc Faber,"[a family] spent
its income on housing, clothing, food appliances, cars, a
radio and a TV. Today, it will spend additional money on a
DVD player, computers, fax machines, printers, several
cellular phones and a whole host of other new electronic
gadgets... modern society requires people to continuously
enlarge the 'basket of goods' that are considered necessary
to lead a 'good life.'"

My question is simply this: is all this communications gear
really improving the quality of life? Or is it
impoverishing us... drowning us in trivial pursuits and
time-wasters as television did?

If the Internet does not make us richer... perhaps it makes
us happier. The most popular websites, I am told, are those
that offer pictures of people without any clothes
on... doing things that are usually done in private. Surely,
this amusement must lift the spirits of the general
population. After all, Bush's comment that a NYTimes
reporter resembled a 'major league' fundamental aperture
lifted his poll standings.

But the only surveys I have seen on this subject suggest
just the opposite. People report that they are less happy
today than they were before Al Gore invented the Internet.

The only figure I have readily in hand is this (from the
Internet, of course):

*** A shrinking share of Americans is happily married. The
percentage that said their marriages were"very happy" fell
from 60% in the mid-1970s to 53% by the late 1990s.

What to make of this? What to make of the Internet... and
all the other communications paraphernalia...?

It is not necessarily bad... but like every technological
'improvement' - it comes at great cost.

Your upbeat... plugged in... e-savvy correspondent...


Bill Bonner

P.S. Soon after Henry was declared a 'genius,' I decided
to conduct my own test:

"Henry," I asked,"if you were in the bathtub with the
water running... and the water was getting up to the
rim... and you couldn't turn the water off... what would you
do?"

"Uh," said the genius pre-schooler, who didn't think of
pulling the plug,"go get you, Dad."

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• The Daily Reckoning - Rage Against The Machine - Firmian, 29.08.2003, 11:04