The Daily Reckoning - The Gildered Age (Bill Bonner - Wdh. vom 10.3.2000)

verfasst von Firmian, 02.10.2003, 15:26

-->The Gildered Age

The Daily Reckoning

On the way back from London

Wednesday, 1 October 2003

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

*** The dollar crisis has only begun... 2% of world GDP in
U.S. current account deficit...

*** How will foreigners get a decent return on investment?

*** America's 'job-loss' recovery... and much worse
losses...

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

There is almost no financial news today, neither in the
London Daily Telegraph nor in the International Herald
Tribune. Did nothing happen yesterday? With no access to
the Internet to tell us otherwise, we guess not. And with
no news to distract us, we are forced to think.

What we have been thinking about lately is the way American
consumers have been squandering not only their own money
but also the savings of the entire world. The U.S. economy
has swung further and further towards consumption, so that
it now takes the combined savings of 70% of the world's
people... or an amount equal to 2% of the entire world's
GDP... just to cover the current account deficit. But it is
not by consuming capital that people get ahead; au
contraire, it is by investing it wisely in new means of
production.

What a happy race we Americans have been. Being 'the
world's mouth' has been so agreeable; if only the rest of
the world's people would continue feeding it forever. But
they may decide to stop investing in assets preceded by
dollar signs... especially after they realize that their
talents will not come back to them 3 fold or 2 fold or even
1 fold. Their hard-earned savings will almost certainly be
folded and mutilated by a drop in the dollar before they
are returned.

Emerging economies - or fast-growing ones - often take a
disproportionate share of the world's savings. As Addison
pointed out in yesterday's piece on the crumbling ruins of
Wyndclyffe, America did so in the 19th century. Then, we
were still fresh-faced and frisky - digging canals,
building railroads, putting up factories... just as they do
in China today.

Then, investors had at least a reasonable chance of getting
their money back - enlarged and enhanced - when their
capital investments begin to pay off.

This time it's different. America gobbles up the world's
savings as if they were so many Krispy Kreme doughnuts; it
does not invest them. Few new factories are built; we
cannot recall seeing a single new one in many years. And
when was the last time a new railroad or a new city was
built? Few new employees are hired and trained. Few serious
new businesses are begun. The big capital investments take
place in China, where construction cranes are said to be
more numerous than gubernatorial candidates.

How then will America give foreign investors a decent
return on their investment?

Our guess is that it won't. Instead, the Fed and the Bush
Administration will try to keep current trends in motion -
no matter how grotesque they become - as long as possible.

No easy matter. Inevitably, those who try to sustain the
unsustainable run into problems; nature won't permit it. If
the dollar stays at the same level, more and more jobs end
up overseas... U.S. consumers go further into debt... and,
best case, the economy goes into a long, slow decline.

And on that cheery note, here's Addison with more news:

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

Addison Wiggin writing in Paris...

- Jobs are hard to find in Chicago. Who cares? Well, lots
of people. Chicago is usually considered a hub of the
nation's financial activity. A report published yesterday
by the Conference Board indicated that"hard to get" gauge
of job availability has reached a 10-year high.

- Despite some rather aggressive backpedaling by Chicago
Fed president Michael Moskow, another report issued by the
Chicago office of the National Association of Purchasing
Management (NAPM) suggested that after a brief spurt of
hiring in August, layoffs resumed in September. As is
widely noted in these pages, the manufacturing sector has
lost 2.7 million jobs since 'the recovery' began.

- Fed governor Moskow, a voting member of the FOMC, was
trying to convince the press that the weakness in the areas
job market is cyclical and a result of slowing
demand... which should be picking up. He was not prepared to
suggest his region's woes should be blamed on our brethren
across the Pacific, who are willing to work for cheaper
bowls of rice.

- Mr. Moskow also paid lip service to the Fed's favorite
hobby horse: productivity. This measure of"worker
efficiency" (whatever the heck that is) has been growing at
a"robust" rate. In turn, factory jobs have declined month
after month for 37 months. Of course,"there are
dislocations of workers and households that go hand-in-hand
with the shifting and churning of jobs and businesses that
take place as we achieve greater productivity."

- Again, we might suggest Mr. Moskow check his premises.
Perhaps, workers are getting more and more productive
because they're looking around when they show up at the
jobsite - and they're seeing a lot fewer lunch pails in the
company cantina. That'd be enough to motivate you to be
more productive, wouldn't it?

- The Conference Board released their consumer confidence
numbers yesterday... and... er... they don't exactly reflect
the financial media's prediction that we're already well
into a recovery. According to Reuters, the report indicates
that consumer confidence fell farther than"experts"
expected: down to 76.8 from 81.7. The employment component
of the index - which, in August, had risen above 50 for the
first time since the stock market did its impersonation of
a duck clipped by a hunter's bullet - fell back to 45.3.

-"The much-lower-than anticipated reading of the NAPM-
Chicago report and the drop of consumer confidence,"
Moody's John Lonski told Reuters,"tell us that the U.S.
economy has slowed from its strong [mortgage refi-
empowered] pace of this past summer."

- Retail sales have fallen for three weeks straight.
"Consumers need help," a CNN headline tells us."In July
and August," the article suggests,"consumer spending grew
at a blistering annual pace of 7.6 percent... the effect of
tax credits and tax cuts are already starting to fade. It
appears, at least according to Lonski, that"the boost to
spending by tax cuts was of greater benefit to foreign
manufacturers than to U.S. domestic industry."

- Mr. Market agrees, apparently. Following the ill-auguring
litany of bad economic news, the Dow dropped 105 points to
9275, the S&P fell 10 to 995, and the whipping boy of tech
traders, the Nasdaq, lost 37 to close the day at 1786. And
the dollar? Oh là, the symbolic emblem of all things good
and true in the American dream got slogged against the hard
rock of reality - dropping at one point to more than 1.17
against the euro, but closing at 1.16. The Japanese
government intervened in its currency's rise and pushed the
yen back to 112.

- Fearing a political backlash, Treasury Secretary Snow
seems to want to talk the dollar into an orderly decline.
But doubts must haunt his sleep. As the dollar declines,
prices on imports go up... and the appeal of U.S. Treasury
bonds goes down.

- Next year, the administration anticipates a budget hole
of nearly half a trillion dollars - which can only be
filled by selling Treasury bonds. The effect of a lower
dollar will be to push up interest rates, which will put an
end to the refinancing boom... and probably be the whisper
of doom to the housing and auto industries...

- Our new friend, Richard Duncan, explains further:"In the
short term, it is difficult to guess what measures the
administration will adopt in an effort to sustain the
imbalances in the U.S. economy: record budget deficits,
record trade deficits, record low savings rates, the
property/refinancing bubble.

-"If China and Japan do escape having to revalue their
currencies against the dollar over the next 12 months, they
may have the administration's need to fund the budget
deficit at low interest rates to thank for it. Over the
longer term, however, the outlook is much more certain.
There is nothing than can prevent the imbalances in the
U.S. economy from coming unwound. Not even the United
States can continue going into debt to the rest of the
world at the rate of US$1 million per minute forever.

-"The Dollar Crisis has only just begun."

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

Bill Bonner, back on the train...

*** The numbers for GDP growth, productivity, and stock
prices are nothing more than attractive nuisances, in our
opinion; they are an invitation to injury, suggesting that
things are better than they really are.

The unemployment numbers tell a different story, a tale of
woe.

"The weak labor market threatens to abort the recovery and
possibly even produce the deflation the Fed dreads,"
explains Bob Reid, cited in Barron's. Although the labor
market is often accused of being a lagging indicator, the
ongoing sluggishness of labor demand is not a normal
cyclical phenomenon.

"Indeed, the disparity between the current 'job-loss'
recovery and previous recoveries from recession is
striking. Since the cycle's trough in November 2001, which
marked the beginning of the recovery, the U.S. has lost a
net of more than 2.4 million nonfarm payroll jobs and the
unemployment rate has risen 0.5 percentage points. Even in
the notorious 'jobless:' recovery of '91-'92, the economy
had created nearly 0.9 million jobs after 21 months of
recovery, although the unemployment rate was still 0.6
points higher than at the trough. At the same point in the
previous four recoveries that lasted that long, nonfarm
payrolls grew an average of 4.1 million and unemployment
rate fell by an average of 1.4 percentage points."

Why so few new jobs?

Because there is no real recovery.

Why no real recovery?

Because there has been no genuine recession to recover
from; spending and borrowing actually increased during the
recession and after.

Why no real recession?

Because the Fed and the administration have tried so hard
to prevent it; short-term lending rates were dropped below
inflation... meaning the real cost of borrowing has been
negative... and the federal government made the biggest
switcheroo, from surplus to deficit, of all time.

Isn't that what it's supposed to do?

According to most economists, yes. But most economists are
wrong. As we have seen, dear reader, the real problem in
the economy was not that the cost of money (determined by
interest rates and credit policies) was too expensive... but
that it was too cheap. Making it cheaper only makes the
situation worse and delays the day of reckoning.

At least, that's the way we see it.

Could we be wrong?

Yes.

***"How was the funeral?" we asked last night.

"It was very, very sad. The whole town was there. [Our
friend, Guillaume, is the mayor of Montmorillon; his
daughter died in a car crash over the weekend.] They are
surrounded by friends and relatives... but what can you
say?"

You could tell them that they had just won the lottery or
just lost a million dollars; it wouldn't matter. There are
times in life when grief speaks so clearly; all of a
sudden, the noise of money goes hush.

Another new friend, Byron, sends this reflection:

"Your note on the death of a young girl prompts me to think
about other times and circumstances, when fate left an
empty chair at the family table.

"When the telephone rings in the middle of the night, it is
seldom good news. 'Something has happened. Things have
turned for the worse. Can you get over here quickly?' And
as you travel from where you are to where you must be, you
think many thoughts. You are in disbelief, then in fear,
then anger, frustration, and perhaps despair. 'If only
this...,' you think. 'But what about that...,' you wonder.
'Maybe someone can do something...,' you hope. 'But do
what?' is the question, to which there is no good answer at
that particular time.

"When you boil it all down, all you can really do is hope.
There are things that are simply out of your hands, out of
any modicum of your control. Fate will run its course.
Whether it is your father, dying of pulmonary fibrosis. Or
an old friend wrecked by AIDS. Or a Navy buddy on a
motorcycle who collided with a driver who pulled out in
front of him. Or the young boy down the street, the friend
of your children, with an inoperable brain tumor. You
recall the times you spent together, and hope that the last
minutes of the late deceased were not too bad, and that he
or she did not suffer. And you are sorry, in a way. Sorry
that for all you did with and for another person, for all
the time you spent together, you did not do more. And you
hope that if you erred towards another, and because you
know it and are sorry, that there really is a better and
more forgiving place across the river. At the very least,
such an event makes you want to be a better person.

"People say that God works in mysterious ways. He is said
to reward the just and punish the unjust. But it seems that
many who live waste their precious time on earth, and one
wonders if there is a penalty for that in the hereafter.
And many who die, particularly those who die young, deserve
life, or at least we think so. We know what we know, but is
it truly for us to understand? Re-read the words of Isaiah
53:

Who has believed our message?
And to whom has the arm of the Lord been revealed?
For He grew up before Him like a tender shoot,
And like a root out of parched ground;
He has no stately form or majesty
That we should look upon Him,
Nor appearance that we should be attracted to Him.
He was despised and forsaken of men,
A man of sorrows, and acquainted with grief;
And like one from whom men hide their face,
He was despised, and we did not esteem Him.
Surely our griefs He Himself bore,
And our sorrows He carried."

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

The Daily Reckoning PRESENTS: The essay that inspired
Chapter One of Financial Reckoning Day. (You can view the
actual chapter, by the way, on Amazon.com's"Look Inside"
feature here: Financial Reckoning Day, Chapter One
http://www.amazon.com/exec/obidos/tg/detail/-/0471449733/ref=lib_dp_TFCV/002-7146709-0195264?v=glance&s=books&vi=reader#reader-link )

The essay was originally broadcast March 10, 2000 - the
exact day that the Nasdaq peaked at 5048!


THE GILDERED AGE
by Bill Bonner

The history of the New Era will record that it was Metcalfe
and Moore who, like Moses and Aaron, led their followers
out of the bondage of the Old Economy and into the land of
stock options and café lattes.

Metcalfe and Moore handed down the laws by which the sons
and daughters of Silicon Valley live their lives. [You can
find both described in our Contrarian's Glossary at the DR
website (http://www.dailyreckoning.com ).]

Metcalfe described a well-known phenomenon: that each
element of a system or collectivity becomes more valuable
as it expands. You can see this by thinking about the phone
system. When the Bell Telephone Company was founded in May
1877, its products were almost useless. You couldn't call
anyone because no one had a telephone. But three years
later, there were 30,000 phones in use.

This led to the further insight that you could afford to
spend a lot of money selling and installing telephones,
realizing that you would make your money later on. What's
more, it was critical that people get your telephones
rather than a competitor's. Ultimately, the most valuable,
and presumably most profitable, service will be the one
that is most ubiquitous.

This insight, of course, cleared the way for the current
Internet investment mantra: don't worry about
profits... fight for market share. We have made the point
previously, but will repeat it (it is so good we are sure
you would like to hear it again): the telephone system was
a quasi-monopoly. It made sense to pay a lot of money to
put it in place, because you could expect monopoly-level
profits for a long, long time. Bell Telephone and its
derivatives are still in business. But Amazon.com has no
hope of ever getting a monopoly or anything close to it.
Metcalfe's insight doesn't help justify AMZN's price.

Moore, meanwhile, handed down his own law: he noted that
computational power would double every 18 months - which it
has. This growth rate astonishes everyone and leads to the
other major delusion of Internet investors - that just
because computer power increases exponentially, so should
Internet businesses and stock prices.

Moore's law only applies to the speed at which computers
process information. Government quants assume, wrongly,
that this is equivalent to an increase in the nation's
wealth - as expressed by GDP. This in turn leads to
distortions in other measures - such as productivity and
inflation levels.

This statistical mess has become a poster child for what I
will now style as"Michel's Law": the more information we
have available to us, the dumber we become. Government
statisticians, for example, so impressed with the speed of
information processing, have turned into idiots - unable to
make any sense at all of the nation's financial condition.
The figures mean nothing.

But the protagonist of today's drama is neither Moore,
Metcalfe nor Michel. It is George Gilder.

Gilder is described in an article (from which I borrowed
today's title) by Michael Malone printed in"Forbes ASAP,"
as the"John the Baptist of the Digital Age."

Gilder was a speech writer for Romney, Rockefeller and
Nixon. He authored several well-read books, including
"Wealth & Poverty" and"The Spirit of Enterprise." He was
quoted more often by Ronald Reagan, the record shows, than
any other writer.

His book,"Microcosm," took him farther than anyone had
ever gone into the distant reaches of new technology and
the enterprising spirit. Since then, some would say he has
drifted a bit too far. I find it difficult to read his
"ASAP" pieces - they are simply beyond anything that makes
sense to me.

Never mind. He's a genius and he's been right about a great
many things. He has gotten himself into a state of rapture
over the possibilities of the Internet and never ceases to
rhapsodize about it. His rap has been followed by many of
the shrewdest investors of our time... to such an extent
that this"pale, nervous Yankee" is seen as a demi-god
himself.

But"I don't do price," says Gilder. Too bad. Because
prices are important information. A technology may be
spectacular. The company that owns it may be a great
company. But the stock is only a good investment at the
right price.

Malone, himself, got rich in Silicon Valley - by accident.
He got founders' shares from both Tom Siebel and Pierre
Omidyar. He had no idea what they were worth and was
astonished to find himself a rich man. But he lacked faith
and sold his shares as soon as he could.

Malone reflects on the difference between himself and his
father:

"It had taken him 60 years. An abandoned child, passed from
family to family, razor-blade swallower in an sideshow, 30
missions in a B-17, 20 years in espionage, under fire
crossing the Polish border, a dozen years at NASA, two
heart attacks, he and my mother eating hamburger in order
to make down payments on income property. He had bled for
every penny... And in the end it killed him.

"Now I had traversed the same rugged path as if on an
airplane, a distracted traveler thumbing through a
magazine, rarely glancing at the landscape below, I hadn't
even kept track of my portfolio."

It doesn't seem real. It doesn't seem right."Most of us
know," writes Malone,"intuitively, that these young web
companies minted by the hour will not survive and prosper.
In the coming reckoning, investors will lose money,
retirement funds will be erased and the valuations that
rule the stock market will become rational."

That seems to be the sentiment of Metcalfe and Moore too.
It is as if they had come back to the Valley and found
their tribesmen had turned the Internet Age into an absurd
parody of the land of milk and honey they sought.

Instead of using the power of the silicon chip and the
Internet to launch real businesses and create real wealth,
they find investors dancing recklessly around the graven
image of enterprise - the IPO.

Says Metcalfe:"I'm currently hung up on the stock market
bubble, which I'm watching distort, or causing things to
happen, in a way I'm not comfortable with. I'm worried that
this distortion is going to all blow up. I've predicted
that blowup for Nov. 8, 1999. So I missed, so maybe it's
tomorrow instead of Nov. 8, 1999. It's part of my being
freaked out. There's stuff going on out there that I just
don't get yet, and I'm worried."

"I love entrepreneurs," he continues."I try to hang out
with them. And I'm frequently asking the question, `So,
what's your company going to be?' The answer these days
usually contains the letters I-P-O. That's the wrong phrase
to have in the first five sentences explaining what your
new business is going to be about. If you're thinking IPO,
you've got your eye on the wrong ball. But it's common now.
It's sad. These people think that an IPO is a significant
event. I view it as a minor financial event. They view it
as what life is all about."

Is there a day of reckoning coming?

"The [venture capitalists] get in on the ground floor,"
Metcalfe says,"and they get out early. [But]... these poor
schmucks in the public markets. They are going to start
looking for profits and they're not going to find them.
It's all going to come crashing down. Maybe I'm just out of
step with the modern world and I just don't get it, but it
looks to me like it's all going to explode."


Your correspondent,

Bill Bonner

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• The Daily Reckoning - The Gildered Age (Bill Bonner - Wdh. vom 10.3.2000) - Firmian, 02.10.2003, 15:26