The Daily Reckoning - Mogambo Monday

verfasst von Firmian, 20.10.2003, 18:26

-->Mogambo Monday

The Daily Reckoning

Paris, France

Monday, 20 October 2003

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

*** The cruel month is not over... Dow slips, Nasdaq slides, S&P
falls...

*** Perils of the"Gilder Effect"... contemporary features of
investment manias gone bad...

*** Killing camellias... tango lessons, encore... and more,
including Mogambo on Monday!

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

The month of October can be a cruel one for investors. The other
months that can be cruel are January, February, March, April,
May, June, July, August, September, November and December.

Many investors are already looking forward to leaving October
behind and coasting to the first year of stock market gains since
1999."If we can just make it through October," they say to
themselves...

But October isn't over yet.

The source of much optimism about the economy and stocks has been
rising productivity... and rising profits. The latest figures
presented as evidence purport to show that, excluding tillers of
the soil, productivity rose at a 6.8% rate (annual rate) in the
3rd quarter of '03 and corporate earnings are expected to come in
20% higher than the year before.

We don't have to tell you, but the numbers are already so jigged
and jived there is little telling what is really behind them. But
taking them as we find them, we would still like to ask a couple
questions.

First, isn't it true that cozy relationship exists between
productivity, employment and profits? The fewer people you have
working to produce something, the greater the productivity of
each one. So it is common, in a downturn, for businesses to cut
marginal workers. The rest of them carry on... typically, the
most productive of them. While productivity goes up, so do
profits, since labor is the denominator of the productivity
fraction and also usually the largest business expense.

Then, as a recovery develops, businesses typically rehire workers
in order to keep up with rising demand. This causes profit growth
to ease off, but it sustains the recovery by putting more money
in more pockets.

The more we think about it, the curiouser and curiouser this
'recovery' becomes.

While productivity numbers have risen faster than they have since
1970, oddly, payrolls are off by more than a million people since
the recession. Had employment increased as it normally does,
there would be 4.3 million more people working today, that is,
more people with real money to spend to keep the recovery going.
And, had there been the usual uptake in jobs, both productivity
and profits would have been much lower.

What gives? How come so much apparent productivity and so
little employment?

We don't know. But we can take a guess. While stimulating the
U.S. consumer to buy things, neither the Fed nor the Bush
Administration could make him want to buy things made in America.
Instead, he shopped for bargains and found them overseas.
Employment rose, but in places such as China and Bengladesh,
where 2 or 3 workers were probably hired for every one American
who was laid off.

Unlike those fulminating politicians in the U.S. senate, we have
no problem with this. But neither should the resulting economic
phenomenon -- in the U.S. -- be mistaken for a"recovery."

A real recovery requires more than just debt and credit; it must
have investment in new machinery and new employees -- at home,
not just in China. What is happening is no recovery; it is merely
an adaptation to a perverse set of conditions... and is sure to
lead to an even more perverse outcome.

Over to you, Addison... for more news:

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

Addison Wiggin standing fast on bubble watch...

- It's déja vu all over again... During the height of the tech
stock mania, there was no more influential voice in the markets
than Mr. George Gilder. So great was his influence that simply
talking about a stock in the discussion board for his newsletter,
a board called the Telecosm Lounge, was enough to give unheard of
tech companies a boost in stock price. If the company was
actually added to the recommendation list of The Gilder
Technology report, within minutes the stock might jump as much as
80%. The phenomenon became known"the Gilder effect" is back.

- Unfortunately, as we point out in chapter one of Financial
Reckoning Day, Gilder didn't"do price". When the stocks he had
been covering began getting trounced alongside the rest of the
collapsing market Gilder was in no position to get his readers
out."I was in this really ridiculous position," Gilder told the
NYTimes, in a feature piece published in yesterday's Sunday
edition,"because I explicitly didn't do timing."

-"Many of the companies - including Global Crossing, Global
Star, Metromedia Fiber, WorldCom and Corning," the Times piece
goes on,"are now either reduced to wisps of their former selves
or gone entirely." Of the crashing market Gilder says:"My whole
optical paradigm crashed, and it crashed on my head." On the
subject subscribers to his newsletter he said:"They were mad and
hurt and aggrieved and pained and broke. And they had a real
grievance. These people didn't lose 50 percent or 80 percent of
their money. They lost 98 percent of their money."

- Rich Karlgaard, perhaps correctly so, comes to Gilder's
defense."I don't think anything [Gilder] said or written about
the trajectory of technology or the underlying economics has been
wrong," says the publisher of Forbes."But George, like all of
us, got caught up in the stock market to heights that were
unsustainable." [Ahem, not all of us.]

- And yet... here we go again. Usually the expression"the more
things change, the more they stay the same," takes years even
decades to bear fruit. But, thanks to what is largely perceived
as an effective"policy" response to the collapsing stock market
and credit bubble"money" that might otherwise find its way into
productive application, is finding its way right back to the
tables of the world's largest casino. As the Fed keeps rates at
garden slug levels and the Bush administration encourages
consumers to spend at the expense of skyrocketing federal debt
levels, the lumeninvestoriat are piling back into to tech stocks
with abandon. And Gilder is getting his wind back.

-"Today," the NYTimes proudly proclaims,"as the telecom sector
rebounds, Mr. Gilder appears to remerging as an influential
thinker who can once again move markets." [Ooooh, la la... ]
"Over the last 52 weeks, the Gilder Technology Index has risen
221 percent, while the Nasdaq was up 71 percent and the S&P was
up 29 percent...

-"A little bit of excitement is beginning to creep back into the
Telecosm Lounge. One day this month, after Mr. Gilder mentioned
the Avistar Communications Corporation, a small company that
sells videoconferencing systems in the Telecosm Lounge, the stock
price doubled over the next two days." And a whole new heard of
sheep shuffle off to get fleeced. May we remind you Gilder, in
his own words, does neither price or timing.

- Maybe it's just the fact that we have recently reread the book
ourselves... or maybe we have brainwashed ourselves into finding
proof for the argument everywhere... but everywhere we look - in
the days headlines, in the e-mails of our friends and colleagues,
in our coffee - we see evidence that"Financial Reckoning Day" is
right on target. As the Mogambo Guru points out below:"S&P
stocks are selling at 33 times earnings. Nasdaq 100 stocks are
selling, by one estimate, at 8 times SALES, and by another
estimate for a P/E of 233. Houses are selling at over three times
median income. Private household debt is financing 20% of GDP,
and the debt is at record levels, both absolute and relative, in
all of American history. Interest income has been slashed to
negative real returns. Government deficit spending is
exploding."

- The Dow slipped 70 points Friday to 9,722. For the week, it
still managed to close with a modest 47-point gain. The Nasdaq
fared worse Friday, as the tech-powered index dropped nearly 2%
Friday en route to a three-point loss for the week to 1,912.

- As our man at the scene of the crime, Eric Fry pointed out over
the weekend, two high-profile tech companies -- Intel and IBM --
posted positive earnings reports for the third quarter last week.
And followed up with upbeat pronouncements about the fourth
quarter and next year."IBM wowed its fans by announcing plans to
add 10,000 new employees next year," writes Mr. Fry,"But the
earnings-surprise euphoria faded very quickly. Intel shares
closed out the week with a small gain, while IBM slumped 4% after
its earnings release."

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

Bill Bonner back in Paris...

*** Next year, the tax cut will save the average family about
$700. But the U.S. government will borrow an additional $1500
per family.

*** Many are those who think the price of gold is manipulated.
People seem to think the price of the yellow metal is being held
back by a powerful cabal of insiders. We hope so. Gold is at
$372. This is close enough to our new buying target of $370. We
will buy.

*** We went out yesterday to a huge garden show about a half hour
from Paris at the Chateau de Couzances. Thousands of people came
to see and buy plants. We had never seen anything like it. You
could buy rare oaks, forgotten fruit varieties and gaudy
cross-bred dogwoods... or discuss the merits of a peculiar
camellia with an expert -- a substantial woman whose nose had
spent so much time sniffing the flowers it had turned yellow.

We began the conversation by confessing that our attempts at
growing camellias had failed.

"Failed? You mean, you actually killed them?," she replied, and
took out her cell phone. We feared she was going to call the
cops.

"It's almost impossible to kill them," the woman sniffed,"so you
must tell me how you did it. I will put it in my next book. In
fact, the only other person I know who killed one was Catherine
Deneuve. She bought a huge one from me and then called me to tell
that the plant was not well. I realized immediately that she was
over-watering it. She had it on one of those infernal automatic
waterers. So I told her to bring it to me and that I would take
care of it.

"But no, she called me again to tell me that it was still on the
automatic waterer and was nearly dead. I pleaded with her to
bring the plant back so I could nurse it back to life. But I
never heard from her and I guess the poor thing is dead by now...
"

As we left her, she looked as though she might press charges.

*** The show was stunning, but the food service was appalling.
We had to wait in line for half and hour in order to buy a
pathetic sandwich and cup of coffee. Then, we found nowhere to
sit except on the grass itself. So we took a place next to an
alert young woman and struck up an conversation. Upon learning
that we might have an opinion on financial matters, the woman
wanted to know what it was.

"Buy gold," we suggested.

"Gold? Gold? Why it's so... well... prehistoric. I don't see how
that would help the economy..."

"No, it doesn't help the economy at all, it helps you..." your
editor tried to explain, adding a short explanation of the Dollar
Standard system. But we could see we were wasting our breath. The
woman believed there was something wrong with buying gold. To
her, buying gold was anti-social... and probably mad.

*** In the Rush Limbaugh spirit of humbug confessions, we pad our
list of bad habits today by acknowledging that we have taken up
the tango. Reporters from the National Enquirer need not follow
us around; we admit it -- when we finish this letter, in fact, we
will go off to a studio and take it up again.

"It is just like golf or tennis," we explain to people. It is
physical exercise. The only difference is that you do not chase
balls and you try not to sweat too much. And, oh yes, you do it
in the arms of an attractive young woman. Unlike golf or tennis,
it probably damages the heart rather than strengthens it; but it
is worth it.

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

The Daily Reckoning PRESENTS: Mogambo on Monday! The great one is
horrified at this year's choice for the Nobel Prize in
Economics... especially since they have eclipsed his own bid,
yet again.

I note with a certain shudder that econometricians have won the
Nobel Prize in Economics this year.

And if there is one thing that raises goose-bumps up and down my
spine, it is econometrics. This is the crowd of mathematical
idiot savant dimwits that got us where we are today, as they
prove that up is down, square is round, left is right, and black
is white. When psychiatrists can accurately measure personal
behavior, and then use that to accurately measure crowd behavior,
and use that to accurately predict crowd behavior over the long
term, THEN you can start giving out prizes in econometrics. But
not a minute sooner, as far as I am concerned.

Perhaps an analogy will help to explain.

It's Saturday morning. You are slouched in front of the TV,
having a cup of coffee, trying to ignore your wife screaming at
you,"Are you going to sit there in your underwear all day
watching TV?" and there is this movie on, and an exciting one,
too, where Godzilla is attacking Tokyo. The army general is
explaining that they are optimistic, although to date they have
found that guns, rockets, grenades, tanks, fighter aircraft and
large-diameter artillery have proved totally ineffective against
this enormous, rampaging monster.

Meanwhile, Godzilla continues terrorizing the city
infrastructure, stomping on bridges and things.

Now, here is where it gets weird, because the hero, who is an
American economics professor, is explaining how econometrics
proves that this whole Godzilla thing is not as bad as it looks.
"Consider that the clean-up and rebuilding of a devastated Tokyo,
which would unleash a massive burst of economic activity, as you
can see in my new equation!" he says."Construction jobs for
everybody! More activity! More spending!! Therefore more taxes!
And therefore more government programs, which will cost us
nothing, because they were paid for by the increased economic
activity!"

And then the American economist hypnotizes everybody by waving
some equations and computer models seductively, and says the
magic words"Nobel Prize And Incomprehensible Math! Nobel Prize
And Incomprehensible Math!!" and convinces everybody that these
Nobel Prize winning equations prove, with the he absolute
finality of mathematical precision, that letting Godzilla destroy
the city and kill all the people is a recipe for a glorious boom!
That will end up making everybody rich!

In a rising wave of revulsion, you look at your coffee cup and
wonder if the cat did something inappropriate in it, because a
bad smell is suddenly coming from somewhere. But you decide it is
just the movie, so you idly pick up the remote, and you switch
over to another channel - click! - and there is a Pharaoh, whose
American economist son-in-law is explaining how the mighty
Pharaoh should pay attention to econometrics and start building
pyramids, which would be a terrific program, and it would employ
millions of people.

"And you are actually making an investment in the future,"
explains the American economist, laying prostrate before the
divine king,"as the building boom would guarantee rising
aggregate income, and the multiplier that I have included here in
this ancillary set of equations proves that tourists will come
from around the world to see these things. I mean, it ain't
Disney Land or anything, but they are these huge freaking piles
of rocks! And if you declare the pyramids to be one of the Seven
Wonders of the World, you'll be knee-deep in tourists in no time,
and you'll make a fortune, dude! I mean, oh Merciful and Wise
Pharaoh, and Egypt will have a glorious expanding economy, and in
the end we will all end up gloriously rich! And people will sing
your praises forever, mighty Pharaoh, as I have proved
mathematically that Egypt will always reign supreme over the
whole world!"

No, apparently the analogies didn't help. Sorry. Unless it
demonstrated my profound natural antipathy toward econometrics,
and then it is a big success. And I have a natural antipathy
towards it because Alan Greenspan and his Fed buddies all love
that stuff, and, I mean, look around you at the result!

I almost hate to keep harping on this, but the one thing that
happened that did NOT cause instant panic was the news that the
central banks of the world, the G-7, having met at Dubai, all
agree that the dollar is going to finally be devalued, but in
deliberate, controlled steps!

Therefore, every imported thing that you buy, from now on, will
now cost you more, unless the exporters decide to cut prices and
cut their own throats. Every day, day after day, more and more
higher prices!

It staggers the mind! I am actually surprised to find that the
world is not erupting in flames! If you check back through your
library of Mogambo Guru, you will note that this is the damned
price inflation that I say always follows monetary inflation. The
same price inflation that always follows monetary inflation that
the Austrians have always said was coming. And now it is coming
to a theater near you! And now, it's here! This is it! The
central banks have all agreed to do it!

So things will cost more! All thing will cost more. How much
more? A lot more! Wake up! Get up and run for your life!

And the people who are paying these higher prices for things are
going to then find that they have to charge more for the things
that THEY sell, or suffer a decline in their standard of living!
And so they raise THEIR prices! And then everybody else starts
raising THEIR prices, and that causes all OTHER prices to go up,
and that increases costs, and so everyone finds that prices must
be raised some more! And the rapid rise in prices causes the
reported inflation rate to rise, and then interest rates rise,
which increases costs to businesses, who must then raise prices
to offset these new higher interest rates costs!

Perhaps an example from my own life will clarify. Suppose I only
have ten bucks a day to spend on food, and I get a six-pack of
beer, a tub of fried chicken, and a pack of smokes.

Then prices go up by ten percent. Then my ten bucks a day will
only buy a six-pack of beer, a regular chicken platter, and a
pack of cheap smokes.

Then prices go up by another ten percent. Now I can only afford
two beers, an economy-sized chicken dinner, and a pack of really
cheap smokes.

Then prices go up by another ten percent, and I can only buy one
beer, a drumstick, and a pouch of"Cheap-O Loose Tobacco," which
has the motto"Premium floor sweepings from real cigarette
companies!"

And in case you are at a loss to understand why the sirens in the
Mogambo Bunker are blaring, why the klaxons are sounding, why all
the bells are ringing, or why I have maps showing emergency
routes out of town, the answer is that price inflation is here!

So forget Godzilla smashing through your garage; the rapid rise
in prices is going to be far worse than anything Godzilla can do
to you!

Jonathan Clements, a columnist for the Wall Street Journal,
wrote an interesting piece in last Wednesday's issue, entitled
"Why the Rising Market is a Bummer: Practically Everything's
Overpriced." And this is exactly what I have been saying, because
it is what real economists have always said, namely excess
production of money and credit eventually works its way into
prices. And now this Clements fella says that the gigantic,
cancerous volumes of money and credit generated by the profligate
and totally irresponsible Fed for the last decade or two, and I
see that I forgot to include a gratuitous insulting remark, such
as"the Fed is also a bunch of morons who couldn't think their
way out of a paper bag," has now worked its way into the prices
of everything.

In the old days, of course, this used to be known as inflation.
Now the Fed calls it"fighting deflation."

And when we say everything is overpriced, I do mean everything,
from stocks and bonds, to houses, to collectibles, to overly
generous government salaries and benefit packages, to overly
generous executive salaries and benefit packages, to practically
every other freaking thing under the damn sun.

Since I am one of those who grew up during a time when America
was the smartest, toughest, wisest, richest and most wonderful
dog on the street, it's embarrassing to watch, as we prove that
we are among the dumbest dogs on the damn street. Because if
there is one thing that you do NOT want, it is price inflation.

And yet here we are, creating credit and money at levels never
before seen, guaranteeing roaring inflation! And we're doling out
prizes to the geniuses who help make justify it with math.

Regards,

The Mogambo Guru,
for The Daily Reckoning

P.S. Just as I am putting the revolver to my head in a coward's
way out, I notice that even California wised up enough to get rid
of Gray Davis, so I am still hopeful that there is a spark of
that old America left. And to show my gratitude, I am not going
to say any bad things about California for a long time.

Mogambo Sez: S&P stocks are selling at 33 times earnings. Nasdaq
100 stocks are selling, by one estimate, at 8 times SALES, and
another estimate is that the Nasdaq is selling for a P/E of 233.
Houses are selling at over three times median income. Private
household debt is financing 20% of GDP, and the debt is at record
levels, both absolute and relative, in all of American history.
Interest income has been slashed to negative real returns.
Government deficit spending is exploding.

And gold is only selling for...?

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gesamter Thread:

• The Daily Reckoning - Mogambo Monday - Firmian, 20.10.2003, 18:26