The Daily Reckoning - THE OTHER FEDERAL BUDGET (The Mogambo Guru)

verfasst von Firmian, 13.10.2003, 20:07

-->THE OTHER FEDERAL BUDGET

The Daily Reckoning

London, England

Monday, 13 October 2003

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*** Are they naïve... or just stupid? Nasdaq at 8 times sales...


*** Houses rising... more second homes bought with 'equity'
money... ignoring one's way to financial ruin - where are the
savings?

*** Washington on"a dangerous road"... a report from
Venezuela... more on phony numbers... and more!

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Investors are still buying the most expensive stocks since the
great bubble popped in March 2000. S&P stocks are selling at 30
times earnings. Nasdaq 100 stocks are at 8 times SALES.

They are also still lending to the world's biggest debtor - the
U.S. government - at interest rates that haven't been seen since
the Eisenhower administration. Foreigners are still extending E-Z
credit terms to Americans never before so burdened by debt. And
foreign and domestic investors continue to buy U.S.-dollar assets
at record prices... at a time when the dollar is falling.

Today's question: are they naïve... or just stupid?

We ask the question humbly; we are the ones who've missed the
echo-bubble in stocks and the bubble in housing. We might have
bought a cool house in a hot market such as Minnesota or a hot
stock in cool New York... think how much richer we'd be. So, we
have no reason to feel superior; we're just curious.

There is practically no way an investor who pays 8 times sales
for a stock can hope to get his money back - except by selling to
an even greater fool. That is what leaves us out... we cannot
imagine any greater fool than ourselves. And yet, there they
are... rushing in where angels fear to tread.

They must either be delusional, or have great faith - in the
dollar... Wall Street... the U.S. government... the American
model. There again, we are left out. For, while we have a
residual faith in the free market - and in the good sense of our
fellow man - what we find in America today is a market that is so
jived and corrupted by political tinkers that the poor common man
is lost; he cannot find his bearings, for almost every number is
a chimera and every headline is an invitation to insolvency.

"U.S. Economy Recovers..." Stocks rise again..." Houses up 25%
in San Diego..." No danger of housing decline says Freddie Mac
CEO..." Click here for fast loan approval..." How can he
resist?

So he keeps digging his hole.

In 1957, total private and public debt in America came to $25,000
per person. Today, calculated in the same inflation-adjusted
dollars, it has gone up to $115,000. Real, after-tax incomes,
meanwhile, have barely budged for the last 30 years. And, after
the necessary expenses - health care, housing and taxes - are
deducted, the average household actually has less money to spend
today than it did in the '70s.

James K. Galbraith of the Levy Economics Institute explains.

"The American model... supposedly includes deregulation,
privatization, the free setting of prices and, especially, wages,
in productive markets, without interference from unions or
concern for the shape of the resulting distribution. The
principles favor free international trade, reduction to the
minimum of public subsidies, public transfer of payments,
including pension, and public enterprise. And they favor the
application of 'sound fiscal and monetary policies' with the
former dedicated to budget balance and the latter exclusively to
price stability. The image of the U.S. upon which these nostrums
are based has little foundation in reality...

"The peculiarity of effective demand in the U.S. during the 1990s
was that much of it was generated or encouraged by acts of public
policy....Thus... when households cut back on spending to bring
their outlays into line with their (declining) incomes, a
prolonged period of stagnation, if not recession, is
unavoidable..."

Here's more news from Addison...

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

Addison Wiggin, writing from Paris...

- Stock market bulls raged ahead for most of the week, last week.
The Dow gained 102 points to 9,675 and the Nasdaq added about 2%
to 1,915. The lumpeninvestoriat appear to be fully prepared to
buy"the bull is back" theory hook, line and lead anchor.

- And why shouldn't they?"On Oct. 10, 2002, the Dow hit a 6-year
low of 7,197," Eric Fry pointed out in the Weekend Edition of the
Daily Reckoning,"but then the blue chips stopped falling... and
started rising. They have been rising ever since. The Dow has
jumped a hefty 34% over the last 12 months, while the Nasdaq has
soared an astounding 72%." Impressive, no doubt.

- Impressive... aside from the fact that, as previously mentioned
in these pages, in the wake of the collapsing credit/stock market
bubble in Japan, the Nikkei rallied 15 times, more than 15% each
time, between 1980 and today. On 4 occasions it rose more than
30%. And twice more than 50%.

- We must ignore, too, that as the Economist points out, the
broad money supply grew by 8% in 2002. And that the dollar lost
2% of its value v. the euro last week. And that core PPI numbers
are beginning to reveal... what's this... inflation?!?

- We must especially ignore the Barron's report indicating that
the S&P 500 is still trading at 30 times trailing earnings. (This
fact alone is bound to lead to some nasty surprises as"earnings
season" kicks off next week, with some 110 of the S&P's top firms
reporting earnings.)

- If the lumpen faltered in their ignorance, they might wake up
and recognize the signs of an economy suffering from a
credit-binge collapse. On Friday, Morgan Stanley's Stephen Roach
sighted one of these tell-tale features: scapegoating."Tough
economic times always produce scapegoats," writes Roach.
"Politicians and policy makers are invariably quick to point the
finger elsewhere rather than face up to their own failings. Such
is the human condition."

-"The bubble model always involves a 'displacement'" we quote
Strategic Investment contributor Marc Faber, from the third
chapter of our book,"which leads to extraordinary profit
opportunities, overtrading, over-borrowing, speculative excess,
swindles and catchpenny schemes, followed by a crisis during
which fraud on a massive scale comes to light, then by the
closing act during which the outraged public calls for the
culprits to be taken to account..."

-"America's jobless recovery," agrees Roach,"is a case in
point. The U.S. body politic is now taking dead aim at China -
making it the poster child for the latest outbreak of
scapegoatism."

- But, here, according to Roach, is the key:"As always, those
pointing the finger usually have the most to hide. That's
precisely the case today. As I see it, the real problem is made
in America. Washington is engaged in the most reckless fiscal
policies since the 'guns and butter' blunders of the late 1960s."


- Roach's argument:"Saving must always equal investment. This
isn't some wild-eyed theory - it's just the way that any economy
must always balance its books. If a country is lacking in
domestically generated saving - precisely the case in the United
States today, with its rock-bottom 0.7% net national saving rate
in the first half of 2003 - it is faced with two stark choices:
It can either rebuild domestic saving by suppressing aggregate
demand or borrow surplus saving from abroad.

-"Inasmuch as suppressing aggregate demand is not exactly
politically palatable, America has opted to finesse its
accounting identity by borrowing from abroad. Such a choice, of
course, is not without consequences. In order to attract the
foreign capital, the U.S. must run massive current-account and
trade deficits. In case you haven't noticed, that's exactly
what's happened - America's current-account deficit stood at a
record 5.1% of GDP in the first half of 2003, and the trade
deficit made up about 90% of that imbalance.

-"In other words, for a saving-short U.S. economy, the macro
accounting identity virtually guarantees a massive trade deficit.
In my view, Washington is going down the same dangerous road it
did in the late 1960s - building on the economic hubris of a
failed boom and attempting to provide both guns and butter to a
clamoring electorate. Back then, it was Vietnam and the Great
Society. Today, it is Iraq and the war on terrorism, together
with tax reform."

- The occupation of Iraq presents itself like a pair of cement
chaussures around the ankles of the Bush administration. You'll
recall that one of the stated goals of the neocons, after the
search for WMD lost its justificatory appeal, was to liberate the
Iraqi people and give them the opportunity to express the divine
right of all humans: that of practicing democratic consumer
capitalism (i.e. to charge enormous sums on credit cards and buy
things they don't need with money they don't have). The BBC now
reports that this conversion is going to be a tough row to hoe.
"Iraq's economy declines by half," reads the headline.

- No one, of course, suggested the conversion was going to be
easy. And no one ever suggested the Iraqi economy would turn
around in a year, let alone five... or even a decade. But having
committed the troops, Washington is likely to have to foot the
bill, too."Later this month," the BBC article continues,
"governments and international agencies meet in Madrid to discuss
[the estimated $55 billion needed to rebuild the Iraqi over the
next four years]. Early indications had suggested that few
governments other than the United States will make substantial
pledges." This is, of course, in addition to the funds requested
(and required) to keep the"peace"...

-"Alas," Roach sums up,"there's a major difference between
today and the late 1960s: Back then, the U.S. had an ample
reservoir of net private saving - close to 10% of GNP. Today, net
private saving is running at less than half that rate." (The
'gambo Guru, in his rather eccentric way, adds an additional
painful twist to story below... )

- So, given the macro-trend... what should we make of the ready
willingness of Johnny Six Pack to follow the bull back into the
stock market?"To justify current valuations," writes Mark
Rostenko of the Sovereign Strategist, offering to take a whiff at
the answer,"earnings valuations will have to come in
'surprisingly good.' I don't know what's going to happen, but I
do know that I don't like putting my money on a market that needs
a miracle to justify itself."

- Amen to that.

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

Meanwhile, Mr. Bonner, back in London...

*** How reliable are the employment numbers? Not very. The
Houston Chronicle reports that the Texas Workforce Commission
said the state lost just 600 jobs between March '02 and March
'03. This happy news was later rebutted by the sad truth, coming
from business tax returns. The real loss was more than 66,000
jobs.

*** According to the Economist, the broad money supply in America
grew by about 8% in 2002. Well, how about this... the price of a
house, nationwide, rose by about the same about - or 7%.

In some areas, of course, house prices are going through the
roof. In these hot markets, people are realizing that they can
leverage their gains. Not only do they buy their houses with
little money down... then, they 'take out' the equity to buy a
second home! Since 2000, the number of 2nd houses bought with
'equity' from a first house has risen 60%.

Let's see... if you buy a $300,000 house with 5% down, and it
goes up by 10%, you've made a profit of 200%. So, you take that
$30,000 'equity' and you use it as a 5% down payment on a
$600,000 beach house. If both go up only 10% the following year,
you'll make 500% on your original $15,000 investment. Getting
rich probably never seemed so agreeable. With just $15,000 in
savings, you get to enjoy the sand and sun, while you add nearly
$90,000 to your wealth - effortlessly - each year.

How many people are doing this, we wonder? What will they do when
property prices turn down?

*** We had lunch on Sunday with an ambassador from Venezuela, a
charming and cultured man with a sense of humor. While His
Excellency described his recipe for choucroute, another guest
described conditions at home:

"It's a catastrophe... the currency used to trade at 4 to the
dollar. Now, on the black market, it's more than 3,000 to the
dollar. But everything is taking place on the black market,
because [President] Chavez has imposed so many controls -
including exchange controls - you have to go onto the black
market to get anything done.

"You know, Venezuela was a paradise... a paradise. But it's being
ruined. This guy Chavez is very popular with the people... but
he's trying to destroy the middle classes. This is very obvious.
He's a close friend of Fidel Castro. They have lunch together
once a week. And now we have 30,000 Cuban troops in Venezuela. He
gave them all citizenship and passports....so they are totally
loyal to Chavez. It's a dangerous situation. And his side has all
the guns.

"I only wish that President Bush would stop ignoring us. We're a
major oil country, too. Why doesn't Bush send troops? Chavez is
worse than Saddam... and a much bigger threat to the U.S....I
only hope that once the Iraq situation settles down, Bush will
send his army to Venezuela to straighten things out."

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The Daily Reckoning PRESENTS: Heed the words of the Mighty
Mogambo! $843 billion is"a gigantically, unimaginably huge
freaking wad of money" for U.S. citizens to have to pay for
federal regulatory compliance. Result: stagflation.


THE OTHER FEDERAL BUDGET
by The Mogambo Guru

Now, I know that YOU, fabulously up-to-date on all this stuff,
probably know of a report called"The Impact of Regulatory Costs
on Small Firms," by W. Mark Crain and Thomas D. Hopkins, prepared
for the Small Business Administration, October 2001. In fact, I'm
sure you know it by heart, and are probably sick and tired of
hearing about it. But, I am sorry to say, this is the first time
I ever heard of it. (I've probably been spending too much time
tuning in to the music of the cosmos or something, because you
know how we gurus are, all the time meditating and attaining
transcendent enlightenment. Ommmmmm.)

But according to Ashlea Ebeling, writing in a Forbes.com article
entitled"The Other Federal Budget,""a widely cited study says
that Americans actually spent $843 billion to comply with federal
regulations in 2000," citing the aforementioned report.

"Huh?" I thought when I read the $843 billion figure. It's not
that we peons out here did not already know that the costs of the
regulatory burden were significant. We did. But $843 billion is a
lot of money. Better known as"a lot of money," or perhaps it
should now be known as"a gigantically, unimaginably huge
freaking wad of money."

Of course, the World Bank has also issued a report that details
how regulation by government is a killer of economies. And the
economist Hernando de Soto has written a whole book on the
subject, identifying all the money being wrapped up in regulatory
compliance the world over as"dead capital."

So, in light of the massive evidence, it is amazing that
government continues to pile on regulations to kill the economy.


In a report called"Ten Thousand Commandments: An Annual Snapshot
of the Federal Regulatory State," Wayne Crews, the director of
technology policy at the Cato Institute, argues with unstoppable,
iron logic, striding like a Colossus across the intellectual
landscape because there is no way to argue the opposite, that
"regulation is like an off-budget, hidden tax....State and local
governments, businesses and consumers have to pay - even though
it doesn't appear in the federal budget."

Well, I got some good news and some bad news for Mr. Crews.

The good news is that is that neither the state, nor the local
governments, nor businesses have to permanently pay the hidden
tax. They get all that money back. The bad news is that the
consumers always pay the full cost of everything, eventually, as
the state government, and the local government, and the
businesses always get their money back, and more, through taxes
and higher prices. Always higher prices. The August CPI, for
example, is up 2.2% from a year ago. This follows the rise of
2.1% in June and the 2.1% in July.

The goal of Fed policy"ought to" be zero inflation. But now,
looking nervously up at the gauge on the wall, I note with alarm
that the needle has climbed, and is now quivering at 70% of
red-line, which is 3% price inflation.

Dark, moody music fills the soundtrack, and the camera comes in
for a close up, where the twitching of my eyebrows and barely
perceptible tics of my handsome leading-man face betray my rising
nervousness, as evidenced by the little beads of sweat that
suddenly glisten on my manly brow. So we are in the 'yellow
zone,' which is entirely appropriate, because the color so
perfectly matches that wide streak up my back, as concerns
inflation. Price inflation, even after the intense and fraudulent
massaging of the raw data to subtract quality improvement and the
other hedonic devices, is running at two-thirds of red-line!

You can tell by the way that the rest of the audience is moaning
and groaning that they are less than overjoyed to see me raising
my hand in the air, saying,"Excuse me please! I'd like to be
recognized to speak!"

But, rising to my feet, I refuse to acknowledge the fact that
everyone on the dais and everyone in the audience are all yelling
and pleading with me to shut up and sit down. Undaunted, my voice
rises to a commanding pitch that causes even rabid dogs to cower
in the corner, and delivered in that hypnotically sing-song way
that top evangelists have, I remind everyone to heed the words of
Mogambo:"Friends and neighbors, heed the words of Mogambo! Heed,
heed, heed the words of the Mighty Mogambo! The Mogambo speaks,
and says thus: The regulatory burden is ultimately income to some
of our citizens, but like slugging back one shot of good liquor
makes all women pretty, makes me witty and eases the horror of
actually interacting with any of you morons in person, chugging
down an entire bottle of liquor will kill you. Therefore, beyond
an absolute minimum, regulatory burden is completely contrary to
the Darwinian imperative that you do not go around inventing ways
of harming yourself."

Of course, I think that this is as profound as all get-out, of
course, and I search for a way to provide a boffo ending. But the
best I can come up with is that chestnut, my old boilerplate
speech that I carry around on a 3X5 card, the old"Now you are
going to die speech," which is as hoary as Martin Luther King's
"I have a dream" speech:"And now you are all going to die!
Hahahaha!" I scream,"You have economically killed yourselves,
and now you are going to die! And you have economically killed
your children, and you have economically killed your
grandchildren! And grandchildren! Hahahaha! You have murdered all
the seeds of your own loins! Your names shall forever be as the
name of serpents, and you will be forever vilified, condemned as
vile, a Biblical seven times over, for your sin of (insert
economic sin here)."

Of course, I inserted"increased regulatory burden" there at the
end, since that is what we were talking about, and I wanted to
kind of tie it all up.

James Cook at Investment Rarities is one of those guys who has
taken a look at things and is justifiably alarmed about, and here
I reproduce his exact list, the lack of savings, inflation,
over-consumption, debt, deficits, the trade deficit, asset
inflation and speculation. And then, I add one of my own: the
aforementioned"increased regulatory burden". The difference
between Mr. Cook and me is that I take a look at these things and
see death and destruction descending on us, which I can only try
and forestall by clutching my ratty blue flannel security blanket
to my chest and screaming in hysterical fear for extended periods
of time, while he remains curiously calm and still in possession
of his faculties.

"We don't know the future or the precise timing of the things we
warn about," Cook writes."But, at the very least, it seems
certain that, in the near term, a malevolent form of stagflation
is inevitable with much worse to follow."

Now, for those of you who are not familiar with the term
"stagflation," it is a word that combines stagnant, as in"a foul
smell emanated from the fetid, feculent swamp of stinking,
stagnant water," and inflation, which means that prices of things
are rising, as in"a foul smell emanated from the swamp of prices
that rose above your knees, and then above your hips, and then
above your chest, and then above your neck, and then above your
head, and you suddenly found yourself drowning in higher
prices."

You see, today we are on a fiat currency, and there is nothing to
stop the government from merely printing up all the dollars it
needs! Print them up and just hand them out!
Of course, all that extra money suddenly coursing through the
veins of the economy is going to cause the general price level to
rise to hyper-inflationary rates, but who the hell cares anymore?
Certainly not John Snow. Certainly not the Fed. Certainly not the
President. Certainly not the rest of the government. Certainly
not the lackluster university-trained economists that like to
demonstrate their profound ignorance of economics. Certainly not
the blowhard stock touts on TV.

So why should YOU care?

As a nice lesson in why you should care, the recent Zimbabwe
experiment in this area has now so devalued their currency that
toilet paper, per sheet, or per square, or whatever you call each
little piece of toilet paper, is now more valuable than the money
it takes to buy it! In practical terms, toilet paper costs over a
thousand Zimbabwe dollars per roll, and so it is cheaper to wipe
your funky behind with Zimbabwe ten-dollar bills than it is to
use a thousand Zimbabwe dollars to buy actual toilet paper!

And now, for your optional essay question, how much is a Zimbabwe
401(k) retirement plan worth?

Regards,

The Mobambo Guru,
for The Daily Reckoning

P.S. And, parenthetically, if you want to be richer in the
future, you had better be moving into gold, too, because the
un-holy monetary and fiscal insanity that got us to where we are
today is getting exponentially worse with every passing moment in
time. And with each new passing of each moment in time, when very
bad things are growing exponentially, this is where the smart
guys got out of Pompeii when the volcano starting rumbling, and
they got a good price for their house, too, unlike the guys who
ignored the rumbling, and whose real estate holdings are, even to
this day, centuries and centuries later, still worthless, as they
are still encased in mountains of rock-like volcanic ash.

Mogambo Sez: Judd W. Patton, PhD, a professor of economics,
enumerated the"Seven Economic Laws," and the fifth law is"Law
of the Quantity of Money: there is no economic benefit from
increasing the quantity of money. Prices and costs adjust to the
available supply. More money means higher prices and less money
means lower prices."

Today, and all the yesterdays for the last decade or so, the
money supply of the USA and the world is boosted to levels only
dreamt of in the nightmares of real economists. Now you don't
have to wait in suspense to find out if you will really spend the
rest of your life slowly starving for goods and services. You
will.

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• The Daily Reckoning - THE OTHER FEDERAL BUDGET (The Mogambo Guru) - Firmian, 13.10.2003, 20:07