The Daily Reckoning - Homeland

verfasst von Firmian, 17.09.2003, 21:35

-->Homeland

The Daily Reckoning

London, England

Wednesday, 17 September 2003

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

*** Phony... absurd... laughable... fraudulent... we may have
to start coining new words to describe it... and them...

*** The Fed does nothing... the lumps swoon... even
hurricanes are bullish...

*** Slick Willy headlines the London press... Shui Pao! Shui
Pao! Shui Pao!... swanky Shanghai digs...

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

It is all so phony... so absurd... we scarcely know what to
laugh at first.

The recovery... the echo boom on Wall Street... Amazon.com at
$45... the Demopublicans... the Republicrats... the
Clintons...

The Clintons?

Yes, for some reason the Times of London has been doing a
series on Bill Clinton. Yesterday, for example, we
discovered that it was a bald-faced lie that got Bill
Clinton the White House. The Clinton spin team decided to
go on prime-time TV to deny Jennifer Flowers' claim that
she had had an affair with the man who was now the
democratic candidate for president.

"It necessitated lying by the Clintons and collusion in
such lying by the entire campaign team," says the Times
article. No problem there...

And so on January 26, 1992, following the Super Bowl, a
relatively unknown scoundrel from Arkansas went on 60
Minutes."Wait a minute," said the much-rehearsed candidate
to the interviewer, his wife by his side,"you're looking
at two people who love each other."

"The interview gave the Clintons the national exposure they
needed, as a couple - and the result was beyond all
expectations..."

We don't know why it was beyond expectations. Nearly every
president wins office by fraud of one sort or another.
Woodrow Wilson promised to 'keep us out of war,' and then
sent troops as soon as he was able. Franklin Roosevelt
pledged to balance the budget and maintain the gold
standard; he promptly went on a spending spree and made
gold illegal. George W. Bush said he was a conservative.
And though all presidents pledge to respect the
constitution, the last to do so was probably Calvin
Coolidge.

At least back in the days before 1971, that is, before gold
was removed from the international monetary system... a
president faced limits on how much fraud he could afford.
'Guns, or Butter?' was the question. An administration
could not do both. But then, along came Lyndon Johnson, who
tried to fight the war in Vietnam and the war on poverty at
the same time. He lost both - at huge expense. Nixon was
caught in LBJ's trap; putting the nation back on sound
financial footing would be expensive... and politically
almost impossible; it would require a leader willing to
tell the truth.

Instead, Nixon slammed shut the 'gold window' at the U.S.
Department of the Treasury... and the rest is history.
Ronald Reagan was able to offer taxpayers more guns and
more butter than ever before - even while cutting marginal
income tax rates. A huge boom began... which finally reached
its ebullient stretch in the Clinton years. And now, we
have reached the reign of the younger Bush and the biggest,
most expensive Guns & Butter budget ever.

Every real growth spurt in the U.S. economy has been fueled
by savings and a current account surplus. But now, the
papers tell us the U.S. economy is recovering... beginning a
great new phase of growth... with the largest current
account deficit in history. In effect, the U.S. has to pass
the hat among foreigners... and look under the seat
cushions... to find about half a trillion dollars annually.
That is the amount needed just to continue current
consumption levels. Where will the money for growth come
from?

We don't know, dear reader, we don't know.

Like everyone else... we wait to find out. Or, more likely,
wait to discover that the recovery is as big a fraud as
Bill Clinton.

Meanwhile, over to Eric Fry for more news:

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

Eric Fry in New York...

- The Fed's inactivity, coupled with Hurricane Isabel's
hyper-activity, whipped up a gale-force buying frenzy on
Wall Street yesterday. The Dow swirled to a 119-point gain
at 9,567, while the Nasdaq whooshed 2.3% higher to 1,383.
Gold stayed in the doldrums, dropping $1.00 to $374.60 an
ounce.

- As widely reported, the FOMC governors convened in
Washington yesterday, and then did... well... nothing. The
governors pulled up to the Federal Building in their
respective stretch limousines, schlepped their briefcases
up the steps, strolled through the metal detectors and then
sat around jawboning for several hours. After all that, the
pinstriped FOMC governors decided to do what everyone
already knew they would do: absolutely nothing. They left
the fed funds rate unchanged at 1%.

- Meanwhile, about 700 nautical miles southeast of the
Federal Building, Hurricane Isabel was bearing down on the
coast of North Carolina. As the New York office of the
Daily Reckoning files this report, the category-2 hurricane
is packing 105-mph winds and - to hear Wall Street analysts
tell the tale - a heaven-sent bounty of economically
stimulating devastation.

-"The approaching Hurricane Isabel is likely to destroy
property and claim lives, but it'll probably be a positive
for the nation's economy," a CBS Marketwatch headline
declared (without the slightest hint of irony)."The storm,
currently believed by forecasters to be taking aim at the
North Carolina coast, will disrupt commerce, industry and
travel for a few days - or even months in some cases."
But fret not, the online news service counsels,"[The
storm] is likely to actually increase overall economic
activity in the coming weeks as individuals and businesses
repair and restore their damaged property."

- Unfortunately, those of us living far from the
Hurricane's path will miss out on the storm's devastation-
induced prosperity. We'll have to do the best we can, even
if Isabel does not annihilate our homes and communities.
Alternatively, we could take matters into our own hands -
and contribute to the country's GDP as well as we can - by
crashing a bulldozer through our living rooms.

-"According to the National Oceanic and Atmospheric
Administration, the most expensive storm to hit the United
States was Hurricane Andrew in 1992, whose category 4 winds
caused $35 billion in damages.

-"But when adjusted for inflation, the most expensive
storm was in 1926, back before the practice of assigning
names to hurricanes and tropical storms. That category-4
storm caused $87.1 billion in damages, measured in 2000
dollars, when it struck southeast Florida and Alabama.

- Of course, Hurricane George will likely be the most
expensive environmental disturbance on record, costing more
than $150 billion just by blowing through the Iraqi desert.
Not to worry, though, Hurricane George could be even more
bullish for the economy than Hurricane Isabel.

- Will the hurricane derail the stock market rally when
touches down on the Carolina coast?"Heck, no," Wall
Street's finest maintain."Storms are bullish!" Indeed,
destruction in any form is bullish. The only event more
bullish for the stock market than a natural disaster is a
man-made disaster, like war - especially a distant war
against a feeble army.

- According to the FOMC, however, the economy doesn't need
much help."The Committee continues to believe that an
accommodative stance of monetary policy," the FOMC's post-
meeting statement declared,"coupled with robust underlying
growth in productivity, is providing important ongoing
support to economic activity... [blah, blah, blah... blah,
blah, blah]."

- While it's true that the FOMC left interest rates
unchanged, and that it believes the economy is improving,
the committee did not fail to provide one particularly
riveting insight:"The Committee perceives that the upside
and downside risks to the attainment of sustainable growth
for the next few quarters are roughly equal." Funny, those
odds don't seem too much better than when the Fed first
started cutting rates two and a half years ago. The Fed has
cut its federal funds target rate 13 times since January
2001 by a total of 5.50 percentage points.

- Finally, after nearly two years of non-stop interest rate
cuts, the economy is starting to recover somewhat. But it
is recovering without pulling the job market along with it.
The U.S. economy has lost 2.8 million jobs since the latest
recession began in March 2001. And just last week, the
number of people applying for unemployment insurance jumped
to a two-month high.

- Maybe the 14th rate cut will do the trick.

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

Bill Bonner, back in London...

*** Eric's comment about the approach of Hurricane Isabel
reminds us that at market tops, all events are given a
bullish spin. In Japan, in the late '80s, investors were so
optimistic that they bid up stocks following an earthquake
in Tokyo!

*** The price of gold fell $1 yesterday. But gold stocks
are doing better than the S&P.

***"Greenspan and Bernanke appear to be willing to
sacrifice bond traders for the 'greater good'" writes
Addison."Every time Greenspan speaks, or the FOMC meets,
bonds get hammered."

The following is more from Addison's report on his luncheon
with Jim Bianco and the Arbor Research crew:"According to
Bianco & co: 'Since the FOMC adopted the 'Bernanke view' on
May 6, every time the FOMC/Greenspan speaks, the bond
market has collapsed. It's a record that would make G.
William Miller jealous. Witness:

'On June 25, the FOMC cut the targeted federal fund rates
25 basis points to 1.00%. Bonds fell over three points -
their worst reaction to an ease in the history of the
Greenspan Fed (Since Greenspan became chairman, the Fed has
moved the funds rate 77 times - 45 eases and 32 hikes).

'On July 15, Greenspan spoke about the economy. In his
testimony, twice he said:"The FOMC stands prepared to
maintain a highly accommodative stance of policy for as
long as needed to promote satisfactory economic
performance."

'That day, bonds fell over two points, their worst reaction
to any of Greenspan's 171 testimonies since becoming Fed
chairman in August 1987.

'On August 12, the FOMC re-iterated its dovish talk of June
25. The next day, bonds collapsed over 2 1/2 points.

'On August 29, Greenspan spoke at"Fed camp" (the Jackson
Hole, WY Fed gathering). Over the next two trading days,
bonds slumped almost 3 points... '"

*** Yesterday, after the FOMC decided to leave rates
unchanged, the 10-year Treasury note ending trading in the
red - down a slight 6/32. But if bonds follow the trend set
this summer, they will fall some more today...

*** Shui Pao! Shui Pao! Shui Pao! Want proof? Look in
Forbes. You will find an ad for luxury condos in Shanghai!
No ads for luxury condos in Baltimore have been spotted.

*** Bloomberg columnist William Pesek:"Calls for China to
let the yuan trade freely - in other words, let it rise -
are about politics, not economics. The Bush administration
has failed to create jobs in an economy that's lost 2.6
million jobs since January 2001. The search for excuses has
led the White House to China.

"It's hard to keep a straight face as a nation with per
capita income more than 10 times that of China tries to
play the victim. Yet that's exactly the game Washington
politicians and lobbyists for companies including Boeing
Co. and Nucor Corp. are playing...

"Next year, many elected officials - including President
George W. Bush - will need to explain why the U.S. isn't
creating jobs. The last thing politicians are going to
admit is that their efforts aren't boosting U.S. living
standards. They're also loath to remove U.S. farm
subsidies, which do more harm to developing economies than
politicians may realize.

"Against that backdrop, China makes a convenient scapegoat.
Corporate America used to blame the Japanese for its
deficiencies. The Chinese are now playing that role. And
U.S. politicians know it's a winning strategy for them at
the polls. Chances are, more than a few voters from Seattle
to Miami will buy the idea that communists in Beijing are
stealing their jobs..."

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

The Daily Reckoning PRESENTS: The blow to the average
American's balance sheet from the crash of the stock market
has been greatly softened by the boom in housing
prices... but should you continue to buy real estate?"Not
to build wealth," suggests Doug Casey.


HOMELAND
By Doug Casey

We've discussed property fairly often in these pages in
recent years - but mostly in the context of smart
speculations outside the U.S.. And I strongly urge readers
to have property outside their 'homeland'. But how about
prices within the U.S.?

The Aspen Times recently ran a short note which I suspect
is a straw in the wind. It seems that in Franklin Township,
NJ, near Princeton, there's a 34,000 square-foot house on
forty-eight wooded acres that's been on the market now for
over a year, at $12 million.

Considering its size, location, the boom in property, and
the fact that construction costs were about $10 million,
$12 million doesn't sound outlandish. In the hope of moving
it, the owners put the house up for auction, but it failed
to attract even the minimum reserve of $3 million.

It's apparently an unusual house, although when something
is that far off, we're talking about a weak market indeed.
Which is probably why the Aspen paper took note.

Aspen is a town of about 6,000 people, where it's literally
impossible to buy a detached house for under a million
dollars. The average house goes for about $2.6 million,
making 81612 the most expensive zip code in the U.S. (with
the exception of the anomalous Jupiter, FL). That's the
good news, if you already own a house.

The bad news is that there are presently about 50 houses
being offered for over $5 million in Aspen, and not one has
a contract. It's the softest market in memory, and Aspen
runs on real estate. Most of the people that own houses in
this price range do so for cash, so they don't have the
interest clock ticking, like the average American. But
prices are actually dropping.

This is strictly anecdotal evidence. There really isn't any
such thing as 'the housing market'; rather, there are
thousands of micro markets. But my question is, with
mortgage rates at historic lows (perhaps 4.75% for an ARM),
what is likely to happen when rates cyclically (inevitably)
go back up?

Should you be a buyer or a seller of property in the U.S.
today? Perhaps that's a question best addressed to a
financial planner. And long-time readers know I have little
interest or inclination towards that discipline. Of course
property is always going to have value (possibly unlike
other popular investment classes, like stocks, bonds,
futures, or even cash). And property has always been very,
very good to me.

I'm favorably inclined towards real estate as an investment
class. But as a means of growing wealth, the party is over,
for now at least.

The way I see it, there are two ways to play real estate.
Either sell, and do something better with the capital; or
borrow heavily against it with a fixed-rate, long-term
loan. Do something intelligent with the proceeds, and count
on inflation to decrease the value of the loan faster than
the market can decrease the value of the property.

In a time of rising interest rates, staggering debt loads,
declining economic activity, growing unemployment, and
rising property taxes, real estate just isn't a good
holding. Especially at the end of a manic boom. Sure, there
are exceptions, like farmland, which will be bolstered by
higher commodity prices. But, except for properties I want
to own strictly for personal reasons, all my stuff is on
the block. I hope to buy it back in some years for
substantially less, and have substantially more money with
which to do it.

Remember how ugly things were at the bottom of the national
property market in 1975, or 1982? Or regional busts later
on in places like Denver, Calgary, and California? I
suspect it could look that bad again. Could it get as bad
as it did in the 30s when, believe it or not, property
(including residential) dropped as much as the stock
market, but was less liquid? I'm not making any
predictions, except to say that anything is possible...

The property market correlates closely with long-term
interest rates. Bonds correlate with them exactly. As much
as I dislike property now, I'd rather own property than
bonds. I've always considered bonds primarily a speculative
vehicle. They're a triple threat to capital as long-term
holdings. They're affected by interest rates, the
creditworthiness of the issuer, and the value of the
currency. Right now - although this has really been true
for several years - bonds are a gigantic accident waiting
to happen. The general belief is that U.S. Treasury bonds
would benefit from a catastrophic deflation. Although (and
I know this runs counter to prevailing wisdom), maybe not.

Even though trillions of dollars wiped out by deflation
would arguably make each remaining dollar more valuable,
the size of the Government's debt relative to the economy
at that point might bring the whole issue into question.

But as much as massive inflation or catastrophic deflation
are both possible (possibly in sequence and possibly in
different parts of the economy at the same time), I'm of
the opinion that inflation will win out.

The argument for deflation hinges on whether the market can
wipe out dollars faster than the Fed and the banking system
can create new ones. It's an interesting problem. After
all, trillions of make-believe assets have vanished in the
stock market meltdown since 2000. Yet there hasn't been
deflation. That blow to the average American's balance
sheet has been greatly softened by the boom in housing
prices and bond prices. So a great deal of what people have
lost in stocks (assuming a reasonably balanced portfolio,
which most people with assets in fact maintain), they've
made back in bonds and property. I don't think the housing
and bond markets are going to soften the next plunge in
stocks. The chances are better they're going to aggravate
its effects.

So far, therefore, things haven't been all that bad. The
problem lies with interest rates. When rates head back up,
bonds will crash. Housing prices will inevitably weaken.
And stocks will get even worse. Trillions more will
probably be wiped off American balance sheets as a result.
And the Fed is going to create more dollars, twenty-four
hours a day, seven days a week.

So the question then becomes: what will make interest rates
rise? The single biggest factor would appear to be
inflation (used here as the rise in the general price
level). And what will bring back inflation? I've made the
argument for years that what is actually holding the whole
house of cards together is America's gigantic trade
deficit, now running about $500 billion annually. It's
worth going over again. And again. And again, since people
naturally just don't think of the real macro picture. It's
theoretical; you don't see it before your eyes every day.

Americans export paper dollars, and import shiploads of
Mercedeses, Sonys, and oil. Foreigners use many of those
dollars to buy U.S. stocks and bonds, so the deficit keeps
financial assets high. Many more of the dollars are held as
reserves by foreign central banks, and private savings by
foreign citizens. At some point, however, this moving paper
fantasy must come to an end, simply because, as Fed
Governor Bernanke famously pointed out, the U.S. Government
can create an infinite number of dollars out of thin air.

As far back as October 2001, I came to the conclusion that
the dollar was likely at a peak, and was headed down. Since
then, the Australian dollar has risen 29%, and the standout
New Zealand dollar 41%.

When the U.S. trade deficit turns around and becomes a
surplus, inflation in the U.S. will soar, and the value of
the dollar will collapse. And so will the value of U.S.
stocks, bonds, and property. It's going to be like what
happened in the 70s - except much worse.

In this context, the average American doesn't have a clue
how the value of his house relates to things like foreign
exchange and the trade deficit. If I'm right, he's likely
to be blindsided.

I hesitate to recommend that anyone sell their house, take
the money and run. Even if it turns out to be the most
remunerative thing to do. It's by far the most important
asset most people have, and everyone needs a place to live
- entirely apart from the fact that they might fritter, or
malinvest the proceeds. Maybe that's an academic point,
though, in that practically everyone seems to be
refinancing their home. And sometimes taking out loans for
an unbelievable 125% of the market value of their house
when they do so. That amounts to more than selling one's
house.

What's going to happen when rates go up significantly? A
lot of people are going to have their houses foreclosed on.
It will happen exactly when unemployment starts hitting
serious highs... and it's going to happen in the face of a
weak market. Both the lenders and the borrowers are going
to be in a lot of trouble.


Regards,

Doug Casey,
for The Daily Reckoning

P.S. I really can't think of any conventional financial
assets I want to own. Stocks, bonds, property - they're all
off their highs, but they've just started their slide.

The way I see it, the precious metals - gold and silver -
are really all you need to know for at least the next few
years.

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gesamter Thread:

• The Daily Reckoning - Homeland - Firmian, 17.09.2003, 21:35