The Daily Reckoning - Trade Policies Of The Cavemen

verfasst von Firmian, 22.09.2003, 20:51

-->Trade Policies Of The Cavemen

The Daily Reckoning

Paris, France

Monday, 22 September 2003

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

*** Dollar down against euro and gold...

*** Bonds up....mortgage rates fall sharply... China buys
U.S. debt... Asia gets hot money...

*** Our new book - a best-seller! Thomas L. Friedman soaks
in war fever... gold to $400... and more...

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

If you had to sum up as much financial outlook, investment
advice and economic theory as possible in just a few words,
what would you say?

"The dollar will fall," is our choice. We thought of it
Saturday night at a dinner party for a group of Lebanese
and American friends.

The dollar will fall because the dollar-based international
monetary system is doomed, we explained.

It will fall because too many dollars and dollar-based
credits have been issued... and because Americans are too
deeply in debt to the rest of the world.

It will fall, too, because the current recovery is a fraud.
And because U.S. assets are overpriced. And because Asian
assets are a better deal.

"I don't know anything about international finance," said
Ibrahim,"but I know that stocks and real estate are rising
in America now. That's where the economy is improving.
That's where to invest.

"In America, they know how to manage these things," Ibrahim
continued, speaking of economic downturns."They don't do
anything in Europe. But in America, they cut interest rates
and so forth... and get the economy moving again."

"Good luck," said your editor.

The dollar fell on Friday, whether measured in euros or
gold; against gold it dropped $5. We don't know whether
gold buyers anticipate the frothy seas of inflation or a
whirlpool of deflation... but what they don't expect is
smooth sailing ahead.

And why should they?

"Local employment still stagnant," says a headline from
Houston. How can you have a recovery without an increase in
employment, enquiring minds want to know? We have already
given you the answer, dear reader. We repeated it for our
Lebanese friends:

"The recovery is a fraud," we replied.

The second-quarter GDP numbers were largely mythical or
misinterpreted. Half of the increase came from military
spending, which makes people poorer, not richer. Another
$38.4 billion was listed as spending on computers.

Too bad it didn't exist:"The vast majority of computer
investment never occurred," explains U.S. News & World
Report article (thanks to Richard Russell for mentioning
it)."Given the bizarre way government statistics are
compiled, nobody actually paid anything and nobody received
anything. That's because Washington measures computer
investment by calculating how much it would have cost in
1996 to buy a computer of equivalent power to today's
machines. On the $38.4 billion in increased computer
investment, therefore only about $6 billion was real
spending. The other $32 billion was a statistical
construct, which is just a fancy way of saying that it
wasn't real. Without that false comfort, we would have been
looking at a second-quarter growth not of 3.1 percent, but
of roughly 1.7 percent - and most of that attributable to
defense spending. Profits tell the same story, down $31
billion from the first quarter."

(More on the statistical mirage, from the great
Mogambo... who has a few of his own economic magic tricks up
his sleeve... below... )

"I don't think the recovery is a fraud," said Ibrahim,
standing his ground."Lower interest rates put more money
in people's pockets. We refinanced our house in Virginia
twice in the last year. And the house keeps going up in
value. This is great..."

USA Today reports that the refinancing boom has gotten a
second wind. Mortgage rates had their"steepest plunge in 8
years," last week, falling to 6%.

Meanwhile, an advertisement on the USA Today website shows
a house sitting atop a pile of moneybags."Are you sitting
on an equity gold mine?" asks the headline."Access it
today." Daily Reckoning readers who want to go deeper into
debt are invited to call 1-800-71-FIXED. And who knows?
Maybe a 20-year fixed-rate mortgage at today's low rates
will turn out to be a great bargain. In a few years, you
could see it wiped away by inflation... if you're not
bankrupted by deflation and foreclosed first.

Well... at least the dinner party ended on friendly terms.
Long after midnight, your editor said good night to his
guests with this solemn prediction:"The dollar will fall."

Here's Addison with the weekend news:

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

Addison Wiggin, writing in Paris...

-"Well," reports our London correspondent, Sean Corrigan
"it looks at first glance as though the Americans have
gotten what they wanted out of the weekend's Group of Seven
meeting in Dubai - no, not an upwardly valued Chinese Yuan,
but a downwardly valued U.S. Dollar!"

- In early trading in Asia, after the weekend meeting, the
dollar fell to its lowest level against the yen since
Christmas 2000. What does that say for the imperial
currency, dear reader? The greenback is falling against
another specie backed by unpayable public debts, a rapidly
aging population, near insolvent banks and insurers and
zero percent interest rates! Wait... that kind of sounds
like the dollar itself... hmmmnnn...

- Markets across the board fared well last week
(inexplicably, my internal editor desperately wants to
add). Eric Fry gave us the run down in the Daily Reckoning
Weekend Edition: the Dow gained a total of 173 points for
the week to close at 9,471... the Nasdaq jumped nearly 3% to
1,855. Even the bond market"enjoyed steady buying
interest"... the yield on the 10-year Treasury issue dipped
to 4.16% from 4.27% the week before.

- The meeting in Dubai seems to have been 'the place' to
create 'buzz' over the weekend - if you can ever imagine
the collective heartbeat of a room full of economists,
bureaucrats and politicians rising above 60 beats per
minute.

- Russian central bankers, for example, used the meeting to
announce they're ready to buck the trend set by their
European and U.S. counterparts. Rather than unload their
gold supplies, as the European banks just announced they
would continue to do, the Russians want to add bulk:"Our
gold reserves," the Deputy Governor of the Russian Central
Bank, Oleg Vyugin, told Reuters on the sidelines of the
conference,"are around seven to eight percent of our total
international reserves and actually we think that we have
to get at least 10 percent of international reserves."

- Friday, partially in response to such announcements, one
suspects, and partially reacting to dollar weakness against
the yen, gold closed near its highest level since 1996.
"This could be a very interesting week for the devotees of
hard money," notes Corrigan,"versus the paper crowd!"

- On the other hand, if the dollar doesn't continue to
fall, it won't be John Snow's fault. Another Reuters
report:"While the G7 meeting in Dubai over the weekend may
not have contained the explicit language of the Plaza
Accord, the desire to weaken the USD and spread the burden
of USD weakness from Europe into Asia could not have been
clearer," said National Australia Bank strategist Greg
McKenna.

-"The wording of the communiqué seems stronger language
than we anticipated. It could be viewed as a victory for
the U.S. side of the argument and for (U.S. Treasury
Secretary) John Snow," McKenna said.

- The Plaza Accord of 1985 brought the dollar down against
yen... and triggered, perversely, a bubble in Japan. This
time, it could stimulate a boom in the whole Asian region
and a bubble in China. Japan's trade surplus, for example,
is rising at a 23% annual rate.

-"Hot money surging back to Asia," says a headline in the
Business Times. The IMF named Asia, minus Japan, as the
world's largest economic region. China bought $41.4 billion
in U.S. securities in the first half of the year, twice as
much as the year before. China now owns more U.S.
Treasuries than any other nation except Japan.

- Kenneth Rogoff, the IMF's top number-cruncher, also took
the opportunity at Dubai to elaborate on warnings we
recapped in these pages last week about soaring government
spending and a trade deficits."Right now," said Rogoff,
"the U.S. is just charging ahead. The United States has the
best recovery that money can buy. [Unfortunately,] it's
borrowing a great deal in order to sustain this very high
recovery... this comes at the cost of mortgaging growth
further down the road."

-"The real thrust of the IMF's message on the world
economy is pretty obvious," writes Morgan Stanley's Stephen
Roach, summing up the Dubai conference."While near-term
vigor is not to be denied, there are some increasingly
worrisome signs on the not-so-distant horizon with respect
to the sustainability of yet another burst of U.S.-centric
global growth. I couldn't agree more."

- We've had our eye on the 'other twin towers' - government
spending and private debt - for some time here at the Daily
Reckoning HQ."Americans are in debt for $31 trillion,"
says a report released by the Strategic Group,"three times
what we produce in a year. The last time our debts were so
totally out of control was the 1930s. In 1980 - just 23
years ago - we owed only $4 trillion. This is just one
indicator out of many that point to a coming [soft, slow]
depression."

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

Meanwhile, Bill Bonner, back in Paris...

*** NY Times columnist Thomas L. Friedman has been in such
a hot sweat of war fever for so long he's begun to
hallucinate. He was one of the biggest backers of plunging
into war against Iraq; every week he urges the Bush
administration to get itself in deeper.

But his latest delusion is to treat any alternative
suggestion as an act of war."The U.S. and France Are Now
at War," says his latest column. What stirs Friedman's
bellicose blood is French president Chirac's plan for
straightening out the Iraq situation. It is an absurd plan,
of course, but compared to Friedman's preposterous neo-con
nostrums, it seems almost brilliant.

Here in Paris, the French are taking the news rather
calmly. We look out our window and see people enjoying the
warm Indian summer weather. Women walk down the street in
light, filmy dresses, admiring the new fall fashions in the
shop windows... children go off to school, as usual, with
heavy backpacks... businessmen and saloonkeepers go about
their daily chores... Should we warn them that Friedman is
preparing an attack?

*** Today, we received our first copy of our new book,
Financial Reckoning Day. We also learned that the book was
a best-seller on the BN.com list over the weekend, that it
had completely sold out, and that Amazon hasn't even
received its first shipment yet. And, as we shared with you
on Friday, our publisher, John Wiley & Sons, has already
gone back for a second printing.

So once again, dear reader, we make financial publishing
history; we have a best-seller that no one has yet read. We
only hope that we don't make publishing history twice; we
hope the book gets to bookstores before it is remaindered.

Financial Reckoning Day (temporarily out of stock... but
still 35% off!) http://www.bn.com/financialreckoning

*** Our old friend Martin Spring sends this update on gold:
"Expect the gold price to fall back a bit over the next few
weeks, but then to resume its uptrend and possibly breach
the $400/oz level before the end of the year, says the
research house Gold Fields Mineral Services.

"At a seminar I attended in London this week, GFMS's MD
Philip Klapwijk said he is bearish short-term because of
the overhang of speculative long positions which have
driven up the gold price 'too far, too fast.'

"But further ahead - before year-end - the uptrend should
resume.

"[Klapwijk] bases his optimism primarily on the growth of
investment demand, forecast to increase 23 percent this
year to 468 tons, which is underpinned by these factors:

* The 'powerful political backdrop' - tensions in the
Mideast, terrorism, potential crises over North Korea/Iran
going nuclear.

* Economic uncertainties such as fiscal deficits, inflation
fears, interest rates and currencies. 'The dollar will
probably drop, maybe sharply,' and there is a fairly strong
inverse correlation between gold and the greenback (they
trend in opposite directions).

* Non-performance of, or fears about, major investment
asset classes such as shares, bonds and property.

"You couldn't ask for a better mixture for investment
demand and higher gold prices - and the positive dynamics
are likely to remain in place next year," Klapwijk says.

"Although much of the strength of the gold price in recent
months has come from speculative buying, there are some
signs of improvement in the quality of investment demand.
Over the past two years HNWIs (high net worth individuals)
have begun to buy. And private banks have started to
recommend a gold content in portfolios to lower their
overall risk."

*** And this from a dear reader:"USS Dollar Standard,
riding low in the water and laden with trillions of dollars
of interest-bearing debt, plunges ahead towards monetary
maelstrom. Film at eleven..."

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

The Daily Reckoning PRESENTS: Mogambo on Monday! This week,
our hero descends on government statistical quants and the
politicians who love them.


TRADE POLICIES OF THE CAVEMEN
by The Mogambo Guru

US GDP is supposed to be still rising, even though the
number of people with jobs is going down.

One question: who are these people with jobs that can
maintain their spending lifestyles, and actually increase
their spending to make up for the fact that less people
even HAVE jobs with which they are to get the money to do
the spending?

Well, the fact is, none of it's really true...

Just as Michael Boskin showed the government how to lie
with statistics about inflation - as if the government ever
needed any help with lying, since they seem to cleave to it
so naturally - our sainted leaders make ludicrous
assumptions about adjusting prices for quality and the
substitution effect and all the rest of that lying crapola
that any second-grade kid can easily see through. But to
get with the program and show that I am a team player, I
want to prove to you that the Mogambo can be just as
clever, and has just as many tricks up his economic sleeve.

The lights dim, and I reach out and slowly raise my
seemingly empty hand, turning it slowly around, presenting
to the audience every square inch of my empty hand for
their inspection, so that later they can verify that there
is no freaking way that anyone could have had anything
concealed. And yet, they all agree that an instant later, a
white-tipped black magic wand, which eye-witnesses estimate
was about a foot long, maybe more, appeared at my
fingertips out of nowhere! The audience, of course, is
delighted, and claps their hands in glee, shouting
"Mogambo! Mogambo!"

For my first trick, I note that there are fewer people with
jobs. To demonstrate, I remove some billiard balls out of
one bowl filled with billiard balls, and deposit them into
another, but empty, glass bowl. I continue to move the
balls one by one, as I explain that the filled bowl
represents the traffic situation, as all of the billiard
balls filling up the bowl were likewise filling up the
roads. As I remove the balls one by one, I explain how
there are fewer people on the road in the morning, and so
there are fewer people clogging up the roads getting TO
their jobs.

When I get to the last ball in the bowl, I say,"Therefore,
the traffic congestion is lessened, and therefore you don't
spend as much time tied up in traffic, and in fact you have
the whole road to yourself. And therefore you are spending
less time commuting, which means that you are more
productive, and therefore GDP must," (I strike the bowl
with the magic wand, producing a puff of smoke and a loud
bang. The bowl is instantly, magically, filled with money),
"go up!"

Again, the audience is delighted beyond words, and they
instinctively rise to their feet and clap their hands,
again in childish glee, shouting"Mogambo! Mogambo!"

Encouraged, I go on to my next trick. I note that there are
television shows that have an"and" in the title. For
example,"Law and Order." You are not just getting law. You
are not just getting order. So you are getting, at once,
both law AND order. You are getting twice the entertainment
value for your buck! Therefore, for the same expenditure of
time watching the TV, you are more productive! Therefore
GDP again (I strike out with my magic wand, and another
bowl of money appears out of thin air) goes up!

This time, the audience has sunk into their chairs in
stupefied amazement, struck dumb by the fabulous magician,
namely me, Marvelous Magical Mogambo, performing what seem
to be impossible feats. They clap wildly, shouting
"Mogambo! Mogambo!"

Not giving the audience a chance to catch its breath, I
launch into my third trick, which shows how the Patriot Act
allows the government to go snooping around, even breaking
into your house for a 'sneak and peek,' and all the rest of
that Big Brother-ish police-state stuff that is so popular
these days. In theory, they will round up all the nasty
people, and then you will feel so much safer, and since you
feel so much safer, then you don't have to spend as much
time on self-defense and home-protection, and therefore you
will experience an adjusted quality of life! Therefore, GDP
(and again we do the magic wand thing and again another
bowl full of money appears) goes up!

The audience collapses in a swoon, literally falling to the
floor unconscious, paralyzed with amazement, trying to
mouth the words"Mogambo! Mogambo!" but it comes out
sounding like"Moahgo! Moahgo!"

Man, this is all so cool! I could do this all day long! I
can prove to you, just like Greenspan and that group of
lying hustlers he hangs out with do it, that GDP has risen
by any number you want!

So you would think that this demonstration of my talent, my
Big Mojo, would have Alan Greenspan calling me on the
phone, offering me a big, fat contract to create economic
guidelines based upon my genius. The bad news is that, in
grim reality, I have to sit here in this locked closet,
with burly caretakers sitting outside the door to make sure
I don't get out again, angrily banging away on my little
computer, while Michael Boskin and Alan Greenspan get to
eat high-cholesterol foods in a classy restaurant and rake
in the big bucks for doing the exact same thing! So they
next time somebody says"Life isn't fair," you tell them
that the Mogambo says"Amen, brother!"

Congress, for their part, who seem to delight not only in
being stupid but also in doing one stupid thing after
another, are now threatening China with a 27.5% punitive
tariff on Chinese imports if they don't trash the U.S.
dollar. Oops, I mean, if they don't let their currency
float.

Who gets the money raised by these tariffs? The government.
But that is, of course, not news. I mean, that's all
governments EVER do, so it WOULD be news if the government
DIDN'T act like greedy vampires and suck the damn money out
of you.

But, on the other side of the coin, right off the bat you
and me and the rest of us doofus consumers out here will
immediately notice a big increase in the price of things
for sale in WalMart, almost all of which come from China,
as far as I can tell. So the government GETS the money that
tariffs bring in, and that makes the prices go up, and we
final consumers PAY all the money. Which will also be
reflected, then lauded mercilessly by the great unwashed
financial media hoards, in a rising GDP number.

In the old days, in those halcyon days before Michael
Boskin and Alan Greenspan, when prices went up, it was
called 'inflation,' and it was considered a bad thing.
Nowadays, of course, is called 'preventing deflation,' and
for some reason it is NOT considered a bad thing.

But, just as a rose by any other name smells as sweet, the
end result is the same. Namely, prices go up. You can call
getting hit on the head with a baseball bat a 'goodnight
kiss' if you want, but it still feels exactly the same as a
whack on the head, because it IS a whack on the head.

The idea behind the tariff is simplicity itself, and you
might want to write this down because in later years you
are going to think about this time in your life and wonder
to yourself,"Were we ever so stupid as a nation that we
believed such a thing could possibly work?" The answer, of
course, is 'yes,' but the theory is that these higher
prices, see, will induce American producers to salivate
over making that big moolah, and vow to produce some of
that now-expensive stuff we are importing from China, which
is, as you know, damn near everything anymore.

And when we industrious Americans gear up the factories,
pack our lunchboxes and head off to work to produce this
stuff again, see, it will be putting Americans back to
work. And, for all I know, it might work. Stranger things
have happened.

But, and when I say 'but' you know that there is something
wrong here, I mean, was there ever a time in all of history
when tariffs didn't have a huge downside? Huh? I mean, how
many times do I have to read about our pre-Neanderthal
ancestors levying tariffs on cheap imported dinosaur meat
on the theory that local hunters could then compete and
stimulate their economy? We've all read the damn articles,
and there was that whole History Channel series about
"Trade Policies of the Cavemen," so it is obviously NOT a
new idea.

And since tariffs are NOT a new idea, the results are
probably not going to be new, either. At the end of the
day, and at the end of the year, and at the end of many
years after that, prices are higher. And you will not like
that. Nobody likes that. And that is why, in subsequent
years, everybody agrees that tariffs are a bad idea, and
they stop, and then they start yammering about free trade
again.

I'm surprised nobody is bringing up Smoot-Hawley. Which
was, if memory serves, a tariff! And Smoot-Hawley is
commonly regarded as one of the worst ideas to come out of
a Congress, and is considered by some, me for one, to be
strongly implicated in the causes of the Great Depression!

For crying out loud, people! And yet here we are in 2003,
and we pick up the morning newspaper and are astonished to
read that Congress is passing another tariff! The same
Congress, but populated by a different set of ignorant
bozos sitting on their fat worthless butts, who are
obviously even dumber than the clods who passed the
original Smoot-Hawley tariff, because these current weenies
have the disaster of the Smoot-Hawley to look back on and
learn, and can say to each other,"Hey, dude! We better not
pass this tariff, because - wow! - look at what happened
with the Smoot-Hawley thingie! What a gnarly bummer, dude!"

Whereas the guys who actually DID pass the Smoot-Hawley
back in those old days at least had an excuse for their
stupidity, because maybe they did not have a specific,
horrific example to learn from.

And, I note for the record, that all the guys who voted to
pass Smoot-Hawley are now dead, so maybe there is a curse
thing attached to tariffs. Spooky, huh?


Sincerely,

The Mogambo Guru,
for The Daily Reckoning

P.S. Fortunately, I am not as alone as I feared. Stephen
Roach of Morgan Stanley weighed in and wrote,"In my
opinion, this is a classic example of opportunistic
politics leading to bad economics. Such an approach would
have negative impacts on the U.S., China and the broader
global economy. It is right out of the script of the
nightmares of the 1930s."

So, now that's TWO of us talking about this Smoot-Hawley
thingie, dude.

Mogambo Sez: I remind you, every day, to take the time to
stop and smell the flowers, as one day very soon the world
that we know will be swept away in the coming economic
cataclysm, as all other worlds in all other times were
swept away when their economic stupidities got to the point
where we are now.

As a coda to that, I will quote Doug Noland,"This is an
extraordinary, fascinating, historic period for Credit
Bubble analysis. And if there were doubts that the Credit
Bubble had entered the precarious 'blow-off' stage, the
Federal Reserve's second quarter Z1 'flow of funds' report
certainly provides ample evidence. It's One for the Time
Capsule.

"In the 21 quarters prior to the second quarter (since the
beginning of 1998), total Credit Market Borrowings (Non-
financial and Financial) surged 51% - or $10.9 Trillion -
to $32.1 Trillion. After such an extended period of
historic excess, Credit growth has now gone 'parabolic.'"

And if you don't know the horrific ramifications of debt
growth going parabolic, don't worry. You will.

Thread gesperrt

 

gesamter Thread:

• The Daily Reckoning - Trade Policies Of The Cavemen - Firmian, 22.09.2003, 20:51