The Daily Reckoning - As We Go Marching

verfasst von Firmian, 19.09.2003, 22:24

-->As We Go Marching

The Daily Reckoning

London, England

Friday, 19 September 2003

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*** Dow up again... what are investors thinking? Are they
thinking at all? Gold keeps rising...

*** More dollars... but falling prices! Oil below $27...

*** Guns and Butter... real democracy... short the dollar!
Financial Reckoning Day is here...

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The war against deflation... who's winning?

Each week, the U.S. fires off another $20 billion or so in
ammunition; that is the amount by which the money supply
(M3) has been rising recently.

Some prices are rising... natural gas, for
example... stocks... houses...

"No wonder it takes so many more dollars to buy a decent
house these days," says a message from the Internet.
"Today's $250,000 house would have cost you only $95,000 in
1971!

"Unfortunately, the outlook for your dollars is not getting
any better. Not with the government printing dollars around
the clock to pay for the escalating costs of the war in
Iraq as well a multitude of voter-pleaser projects in
advance of next year's elections."

But, continues our correspondent,"the global currency
market, the largest and most liquid financial market in the
world, is beginning to smell blood. In fact, between
February 2002 and September 1, 2003 alone, the U.S. dollar
lost 22% against the Swiss franc, 27% against the euro, 39%
against the New Zealand dollar. The list goes on..."

Gold, we add. And here is the curious thing. While the
dollar is falling against foreign currencies... houses and
stocks... and gold... it is rising against other commodities.
Oil, for example, fell below $27 dollars yesterday. And the
bond market's guess about inflation - as measured by the
difference between what investors are willing to pay for
10-year Treasury notes and similar bonds that are indexed
to inflation (TIPS) - fell below 2%. Looking 10 years into
the future, bond investors do not see inflation as a
threat. Or, they are just stupid.

We suspect it is a little of both. It is the dumb money
driving this market. Who else would buy stocks at these
prices? Who else would lend money to the Bush
administration at the same rates it asked in Eisenhower's
term? Back then, the nation was the world biggest creditor;
now it is the world's biggest debtor. Then, the U.S. ran a
large trade surplus; now it aches under the biggest trade
deficit ever recorded. In the '50s, the nation was just
recovering from a major war and depression; now it is near
the end of a major boom and bubble. The conservative
Eisenhower team produced government surpluses; the pseudo-
conservative Bush bunch comes up with the worst deficits in
history.

Even buying bonds in the '50s - when the nation's finances
were solid - was no ticket to easy wealth. Eisenhower was
succeeded by Kennedy and he by Johnson. Guns and Butter
became the formula for re-election... and interest rates
rose along with inflation. Bond buyers suffered losses on
both fronts... their bonds dropped in value while their
coupons lost purchasing power.

Here at the Daily Reckoning, we are connoisseurs of
absurdity. But the spectacle of today's lenders and stock
buyers is almost too much, even for us. Not that we know
whether they will make money... or lose it. Or, whether they
are really smart or really stupid.

We just don't know. But on the evidence, perhaps they are
neither. Instead, they may have sunk into a CNBC-induced
stupor. Without thinking at all, they seem to believe that,
somehow, everything will muddle through and come out all
right.

In fact, these investors may not be dumb after all, but
brain-dead. Maybe we should check for a pulse... or hold a
mirror under their noses?

Let's find out what Eric thinks...

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

Eric Fry with the latest news:

- A storm surge of buy orders on Thursday lifted the Dow
Jones Industrial Average to a 15-month high-tide, tossing
the Nasdaq above the 1,900 mark for the first time in 18
months. The blue chips rose 113 points to 9,659, while the
Nasdaq rallied 1.4 percent to 1,909.

- Neither the arrival of Hurricane Isabel, nor the
departure of NYSE chairman Richard Grasso troubled stock
market investors. They lined up to buy stocks, just like
they've been doing every day for the last several months.
As a result, the Nasdaq Composite is enjoying a nice little
'echo bubble' that has carried the index to its highest
level since March, 2002 - a stunning 70% above its lows of
last year.

- But the Nasdaq echo-bubble is only one little star in the
constellation of financial bubbles that illumines the
global macroeconomic firmament. This dazzling constellation
- also known as 'Greenspan's Belt' - features many
celestial marvels, both great and small. There are numerous
'lesser lights' like the 'executive-NYSE-chairman-
compensation bubble,' 'the zero-percent financing bubble'
and the 'Eliot Spitzer investigations bubble.'

- And there are also several 'greater lights' - easily
visible to the naked eye - like the 'Fannie Mae, mortgage-
refi bubble,' the 'U.S. dollar bubble' and, of course, the
'unilateral-U.S.-military-action-against-presumed-
terrorist-nations bubble.'

- Then too, the macro-economic heavens are dotted with
innumerable black holes: bubbles from earlier financial
epochs that shone brilliantly for a time, before flaming
out like supernovas - the most infamous recent example
being the 'Nasdaq-Y2K bubble.'

- Recently, a few amateur monetary astronomers announced
they believed they'd discovered a new light in the heavens:
the so-called 'China bubble.' Is it, or isn't it? No one
can say for certain. Perhaps it is merely a high-flying
surveillance plane or a low-flying UFO. But it does possess
bubble-like characteristics, as the Daily Reckoning's Paris
office has been noting frequently of late.

- However, here in the New York bureau, the China bubble is
scarcely visible at all. Perhaps that's because the
blinding glow of financial excess in this big city make it
difficult to see any of the lesser, distant lights.
(Remember, a 'stretch limo' in Peoria is merely a 'car
service' in New York). Compared to the spectacular bubbles
that the U.S. financial markets spawn on a regular basis,
the China bubble hardly bears mentioning.

- Even so, it strikes your New York editor that all the
bubbles in the constellation - the China bubble included -
lead to one very specific hedge: short the dollar.

- If the mortgage market collapses or the stock market
tumbles or the bond market implodes or Fannie Mae tests the
too-big-to-fail doctrine, or Iraqi terrorists prolong their
bloody resistance to becoming the 51st state, the dollar
will suffer... a lot.

- Likewise, if the Chinese economic juggernaut were to
discontinue recycling its excess dollars into U.S.
government bonds and Fannie Mae debt, the dollar would
suffer mightily. Selling the U.S. dollar, therefore, seems
like the all-season, all-country, all-market hedge.

- Shorting the dollar is, perhaps, not a great 'trade' or
speculation, because bubbles always endure far longer than
any bear can imagine, and can take their sweet time
deflating, once pricked. But as a hedge against the global
financial system's most plausible debacles, shorting the
U.S. dollar could be the hedge par excellence.

-"From the American vantage point on transpacific debtor-
creditor relations, there is nothing to be improved upon,"
writes James Grant, editor of Grant's Interest Rate
Observer."Asians produce; Americans consume. Asians ship
merchandise east; Americans move dollars west. And then
something even more wonderful happens. The same American
dollars rapidly move east again, there to be invested in
U.S. Treasurys, Fannies and Freddies (it's as if the money
never left!)..."

- This state of affairs is a delicious privilege for our
savings-lite, consumption-heavy nation. So delicious, in
fact, that no politician could possibly resist trying to
mess it up... and that is precisely what our lawmakers are
trying to do by proposing steep tariffs on most Chinese
imports.

-"After all," our elected representatives reason,"China's
undervalued currency is making it harder for us to produce
competitively priced products here at home. So if China
won't revalue the yuan of its own accord, we will revalue
it for them by slapping 27% tariffs on their products."

- It is the Bush-Rumsfeld geopolitical doctrine applied to
the foreign exchange markets. But instead of seeking out
and punishing nations that may be harboring terrorists,
Congress is advocating seeking out and punishing nations
that may be harboring currencies of mass destruction.

-"It was inevitable that this witch-hunt would arrive at
China's doorstep," observes Stephanie Pomboy of
MacroMavens.

- But Pomboy explains that the ill-conceived attempt to
force a Yuan revaluation will do more harm than good to the
U.S. economy, to U.S. consumers and to the U.S. currency -
the beloved and well-traveled greenback... More to come in
the Daily Reckoning's Weekend Edition!

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

Bill Bonner, back in London...

*** Peter Jones, writing in the Times of London, reminds us
that real democracy has little in common with modern
elections.

"The ancient Athenians provide the answer. It all has to do
with their unique invention - real democracy. It lasted
from 508 BC until 322 BC, never to be repeated. In ancient
Athens all male citizens over 18 took all political
decisions. They were put into effect by executive
officials. With a few exceptions, these were not elected.
Greeks understood that elections are not democratic because
elections are meritocracy, i.e., designed to choose the
best.

"The only way democratically to appoint people is by
lot..."

A House of Lords chosen by lot - that is, by chance rather
than by fraud -"could, just possibly, restore to this
country some faith in the democratic process," Jones
concludes.

*** Today's news suggests that campaign to win the hearts
and minds of Iraqis may not be going as well as hoped:

"It was obvious that the Americans were dead," the Times of
London quotes a taxi driver who witnessed an attack on a
U.S. convoy."You could tell from the way they dragged them
away along the road. I am very happy about it and every
Muslim, every Iraqi feels the same. Tell the coalition that
Iraq will become a mass grave for the Americans."

"As the sun set," continues the Times report,"a convoy of
U.S. tanks, armored cars, a crane and a truck escorted the
burnt-out shell of one of the trucks back to base. Young
Iraqis raced to the site of the first attack, carrying a
framed portrait of Saddam Hussein.

"Passing cars sounded their horns in celebration, young men
danced around the smoldering remains of the truck's tires,
and boys gathered up scraps of charred metal and cartridge
cases.

"I will keep this and do you know why?" asked one teenager
carrying an un-exploded grenade."Tomorrow I will drop it
myself on an armored car."

*** And a recent press release from the Independent
Institute:

"Two years after the 9/11 terrorist attacks, the Bush
administration is earning mostly failing grades in the war
on terrorism," according to Ivan Eland, director of the
Independent Institute's Center on Peace & Liberty. In a
report-card-style op-ed released last week, Eland gives the
administration a letter grade of"F" in five out of seven
categories and mediocre grades in the remaining two
categories - a failing grade overall.

"To date, the biggest accomplishment - the elimination of
Afghanistan's Taliban regime that was harboring al Qaeda -
has been significantly diminished by the al Qaeda
leadership's escape and by the nascent quagmire there that
is embroiling the United States," said Eland."Remnants of
the Taliban are now using the continued U.S. military
presence in the country as a rallying cry for a Chechnya-
style guerilla war against the U.S. client government of
Hamid Karzai."

The administration's performance falls from mediocre to
failing when the war outside of Afghanistan is considered,
according to Eland. The U.S. war in Iraq, one of the
countries Bush designated as part of the"axis of evil,"
has made Iraqis even worse off than under Saddam Hussein
and has emboldened other countries to accelerate their
weapons programs, Eland argues.

Rather than"make Americans safer and impede the
proliferation of WMDs to rogue states and terrorist
groups," the administration's broadening of the war on
terrorism to include groups other than al Qaeda"has drawn
a bull's eye on the American people and undoubtedly caused
rogue states to speed their weapons programs," writes
Eland.

"In the war on terrorism, I believe the president deserves
an 'F' on his report card."

The following is Ivan Eland's Report Card on U.S. War on
Terrorism:

1. Removing al Qaeda haven in Afghanistan and neutralizing
the group's leadership:
Grade: B-

2. Avoiding a quagmire in Afghanistan:
Grade: C-

3. Finding weapons of mass destruction (WMD) in Iraq:
Grade: F

4. Making Iraq better off by eliminating Saddam:
Grade: F

5. Reducing proliferation of WMD to rogue states and
terrorist groups:
Grade: F

6. Adopting a more"humble" foreign policy to prevent
overstretch of U.S. military:
Grade: F

7. Making U.S. citizens and territory safer from terrorism
and bringing 9/11 conspiracy to justice:
Grade: F

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

The Daily Reckoning PRESENTS: The roots of Italian
fascism... as a case study for modern governments facing
(er, taking advantage of) tough economic times.


AS WE GO MARCHING
by Bill Bonner

"The mind thus turned loose, thus emancipated from facts,
took unexpected directions..."

- John T. Flynn

"One of the funny things about the situation..." Alexander
Chancellor began a sentence, speaking of the war in Iraq,
"is the way the Germans have come through this...

"They took the same position as the French - they didn't
want to get involved. But the American press focused on the
French as traitors and cowards... and hardly mentioned the
Germans."

The Germans occupy a special place in recent world history.

"Give a German a gun and he heads for France," was a common
expression in the last century.

"The Hun is either at your throat or at your feet," was
another.

People wondered what it was about the Germans that had made
them so ready to go to war... and so willing to go along
with ghastly deeds on a national scale. Was it something in
their blood, in their culture... or in their water?

Now, of course, the Hun has been tamed; the Kraut has
become a pacifist. America urges him to join the war
against Iraq, but he demurs; he has had his fill of war.

And so the question is more puzzling than ever. Has his
blood changed? His Kultur? Or his economy?

We raise the question after beginning a marvelous little
book by John T. Flynn,"As We Go Marching," written during
WWII.

Flynn argues that fascism had no particular connection to
the Germans themselves... nor was there anything in the
Teuton spirit that made them especially susceptible.
Instead, he points out that the creed was largely developed
by an Italian opportunist, Benito Mussolini. It was the fat
Italian who figured out the main parts - including the
glorious theatrical elements. The Germans merely added
their own corruptions and attached a peculiarly vicious
policy of persecuting, and later exterminating, Jews.

But it is Flynn's description of the economic circumstances
in Italy in the late 19th and early 20th centuries - the
fertile soil in which fascism took root and flourished -
that caught our attention.

Italy went to war, in the month of September, 1911, against
Turkey. The war was over 12 months later and soon forgotten
by everyone.

But the impulse that drove the Italians to war in the first
place... and led to their next move... was the focus of
Flynn's attention:

"The vengeance of the Italian spirit upon Fate was not
appeased. Instead, the appetite for glory was whetted. And
once more glory did its work upon the budget. But once more
peace - dreadful and realistic peace - peace the bill
collector, heavy with her old problems - was back in Rome.
The deficits were larger. The debt was greater... the
various economic planners were more relentless than ever in
their determination to subject the capitalist system to
control."

Perhaps they should have lowered interest rates. Or
pressured China to raise its currency. Any policy
initiative, no matter how absurd, could be considered. As
Flynn puts it:"Out of Italy [as out of America currently]
had gone definitely any important party committed to the
theory that the economic system should be free."

Italy had dug herself into a deep hole of debt. Between
1859 - when the centralized Italian state came into being -
and 1925, the government ran deficits more than twice as
often as it ran surpluses. Politicians, who depended upon
giving away other people's money, found themselves with
little left to give away.

"All the old evils were growing in malignance," writes
Flynn."The national debt was rising ominously. The army,
navy, and social services were absorbing half the revenues
of the nation. Italy was the most heavily taxed nation in
proportion to her wealth in Europe."

Of course, there followed many episodes of financial
risorgimento and many pledges to put the books in order.
None of it stuck for long. Italian politicians were soon
making promises again.

When grand promises must be fulfilled, debt creeps
higher... and so does the resistance of taxpayers and
lenders, especially from conservative groups.

"Hence it becomes increasingly difficult to go on spending
in the presence of persisting deficits and rising debt,"
writes Flynn."Some form of spending must be found that
will command the support of conservative groups. Political
leaders, embarrassed by their subsidies to the poor, soon
learned that one of the easiest ways to spend money is on
military establishments and armaments, because it commands
the support of the groups most opposed to spending."

Military spending gives an economy the false impression of
growth and prosperity. People are put to work building
expensive military hardware. Assembly lines roll and smoke
stacks smoke. Plus, the spending goes into the domestic
economy. Americans, for example, may buy their gee-gaws
from China, but their tanks are homemade.

Military adventures not only seem to stimulate the domestic
economy; they also goose up popular support for government.
Soon,"it was a time for greatness..." as Flynn describes
the approach of war. War, Giovanni Papini raved, was"the
great anvil of fire and blood on which strong peoples are
hammered."

The romantic appeal of war... and the political pull of
military spending... the economic delusion... the polished
brass and boots... it was all too much to resist. Despite a
disastrous experience in WWI, under Mussolini's leadership,
even the fun-loving Italians were soon marching around like
popinjays and getting out maps of Abysinnia.

Even Americans were impressed."He is something new and
vital in the sluggish old veins of European politics," said
Sol Bloom, then chairman of the House Foreign Relations
Committee in 1926."It will be a great thing not only for
Italy but for all of us if he succeeds."

In investments, as in war, an early defeat is often more
rewarding than a later one. Fortunately for the Italians,
the African campaign was a fiasco. In a few years,
Mussolini was hanging from a meat hook and Italians went
back to making shoes, handbags and pasta.


Bill Bonner

P.S. Mussolini was the perfect fascist. Like America's
leading neo-cons, he was really a leftist... who saw an
opportunity. And also like America's neo-cons, he was an
admirer of Machiavelli, who believed that the ruler"must
suppose all men bad and exploit the evil qualities in their
nature whenever suitable occasion offers."

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• The Daily Reckoning - As We Go Marching - Firmian, 19.09.2003, 22:24