The Daily Reckoning - Under The Economic Sun (Mogambo Guru)

verfasst von Firmian, 28.10.2003, 01:46

-->Under The Economic Sun

The Daily Reckoning

Ouzilly, France

Monday, 27 October 2003


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*** Fed has lost control of U.S. economy... lower rates
produce boom in Asia!

*** Savings rate down... consumers worse off than
ever... rats on a treadmill...

*** Buffett prefers cash... sell the techs... sell the
dollar... onion skins... and more!

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During a radio interview last Friday evening, your editor
suddenly stopped short: the economy is out of control, he
realized.

"There has been a meaningful breakdown," explains Stephen
Roach,"of the time-honored relationship between aggregate
demand and employment growth in high-wage, developed
countries like the U.S."

The Fed can cut interest rates all it wants, in other
words. It can bring short-term rates down from a 45-year
low to a 55-year low. It may bring about a boom in asset
prices... and even a boom in consumer spending, but it
cannot bring about a real boom in the economy. Because half
of all the manufactured items the consumer buys are now
made overseas... and it is overseas where the new factories
are built. When the consumer spends, his money stimulates
the economy. But not in America. It's the Chinese economy
that feels the tickles.

We are now nearly two years beyond the bottom of the 2001
recession. If the economy had followed the path of previous
recoveries, says Roach, there would be 4.3 million more
jobs available. And maybe there are... just not in the U.S..

Artificially low interest rates do have an effect, of
course. They make it almost irresistible for the American
consumer to go deeper into debt. The Chinese, Japanese,
Taiwanese, Malaysians, Indonesians, Indians and dozens of
other groups should bow down before him; he nails himself
to a cross of debt, so that other people in other countries
may have a more abundant life.

Richard Berner, Stephen Roach's colleague, adds that"a new
measure [of consumer indebtedness] suggests that the recent
peak in the ratio of debt service to disposable income is
roughly 100 basis points higher than the previous peak in
late 1986; the old measure put them at roughly the same
level. So it would appear that consumers have taken
advantage of lower interest rates to lever up recklessly."

The U.S. national savings rate has fallen to 0.5% of GNP in
the 2nd quarter of this year. In the 1960s, the net private
savings rate was 8.5%; today, it is less than half that
amount. Without the savings of foreigners, the whole weird
system would come to a quick end. There is madness on both
sides of the wide Pacific, in other words. In Asia, people
save 20% to 40% of their incomes and lend to Americans. In
North America, people save barely anything. Instead, they
borrow from the Asians in order to be able to buy more
imported products and boost employment in foreign
countries.

Looking ahead, we guess that the madness will come to an
end: the dollar will fall, Asians will begin spending their
money on themselves, and Americans will spend years working
their way out of debt. But, peering through a dark glass at
the newspapers of the future, we think we can make out the
headlines... but not the dates.

Over to Addison, in Paris, with more news on the markets...

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

Addison Wiggin at the Daily Reckoning HQ...

- As painful as it may be for your American expat editors,
desperately trying to support their wine habits in Paris,
the"Dollar decline[d] an 8th week in 9 against [the]
euro," says a Bloomberg headline. The dollar fell to $1.17
per euro on Friday - a penny lower than its Monday opening.

- For the week, gold jumped $17 to $389.20 an ounce. The
broader market indices all fell... The Dow by nearly a
percentage point and half; the Nasdaq by two and half. They
closed Friday at 9,582 and 1,866, respectively.

-"To be sure, the 'recovery' is statistically
pleasing... But something is not quite right with this
thing," wrote Eric Fry, our man on the scene in New York,
in The Daily Reckoning Weekend Edition."Our Greenspan-
sired recovery is a freakish changeling - not the hardy,
all-American variety that we are used to seeing. We are
happy it's here, but boy is it ever ugly! Sure, GDP boomed
during the third quarter; yet, many American workers are
struggling to find a job... and many of America's blue-chip
companies are producing noticeably un-boom-like earnings."

- A quick harvest of the headlines this morning yields more
of the same fermented fruit."Earnings do not live up to
hopes," reads a headline from the Philadelphia Inquirer.
"Wealthy won't spend more for holidays," reads another from
The Rocky Mountain News in Denver.

- And yet, here's a curious one from the New York Times:
"Gains In Wages Expected To Give Economy A Lift." The logic
of the recovery scenario is about as impeccable as the
FDA's chestnut:"you are what you eat." The idea has been
dumbed-down enough to get repeated ad nauseum in the minds
of nine-year-olds around the nation, but doesn't possess a
lick of truth. At least, we haven't noticed any new
arrivals from the States mutating into a globulous mélange
of Bordeaux and Brie... nor do we detect any changes in our
own exteriors when we look in the mirror.

- The economic version goes something like this: 'Low rates
and tax cuts will lead to new job growth.' Sure, sounds
great on the surface... but let's look under the hood."Wage
increases for almost all income levels are giving important
and unexpected support to the nation's economy," says the
NY Times piece."If the gains continue, they offer hope
that the rapid economic expansion of recent months could
prove more durable than other spurts of growth over the
last two years."

- So far, so good. The Commerce Department expects to
report this Thursday that the economy grew about 6% during
the July-September quarter. But what's this?"Most of that
growth," the article explains,"stemmed from a sharp rise
in consumer spending, driven largely by a continuing boom
in mortgage refinancing and checks that were mailed out as
part of the recent tax cut." Aha, there it is: low rates
and tax cuts will lead to job growth.

- Wages are rising faster than inflation - that much
appears to be true. The Economic Policy Institute, reports
the Times, says wages have increased faster in the past
quarter than any other post-recession period. They're up
more than 2% since after being adjusted for inflation - to
a median rate of $14 an hour.

- But here's the problem... or problems..."hours worked" are
actually falling, and incomes"excluding tax cuts and home
refinancings" are in high reverse. If you measure income
year-over-year and include"tax cuts and refinancings,"
personal income appears to have risen as high as 8% this
year; take them out and they've fallen by as much as 2%.

-"What appears to be happening," writes Stephen Sleigh,
with the International Association of Machinists and
Aerospace Workers,"is that companies that are staying in
business want to hold on to the people they have." But no
new jobs are being created. The workers who are staying on
the job are getting squeezed off the time clock by the
Greenspan hobby horse 'productivity increases'... not to
mention competition from Mr. Samir and Mr. Wong, who are
busy toiling away on the other side of the planet.

- Never fear. To make up for falling incomes, while
simultaneously keeping up with the Joneses, Mr. Smith
simply whips out one of his 16.1 credit cards and
blissfully continues about his delusional day. Americans
following the FDA's"you are what you eat" dictum have
gorged themselves to a 64% obesity rate. Consumers
following the Fed's recovery recipe are doing the same to
the debt side of their financial ledgers.

- Likewise, a company that must pay more in wages has less
dinero in the bank to build new factories or refurbish
rusting equipment. And that's the crux of the economic
problem with the low rate/tax cut remedy for a collapsing
bubble.

-"It seems investors made a bad bet when they bid up
stocks sharply higher this month in anticipation of strong
third quarter earnings," says the Philly Inquirer."The
earnings have been good, but not magical." One wonders what
the policy strategy for goosing up the 4th quarter will be.

- Thus far, the recovery resembles a rat on a treadmill
undergoing chemical experiments. We suspect one of these
days, the geniuses in the lab coats are going to pick up
the wrong beaker... and the rat is going to keel over dead
from exhaustion.

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

Bill Bonner, back at Ouzilly...

*** We are in the country for the kids' school vacation.
The days are bright and sunny... but the nights are clear
and very cold. After a long, hot summer, people are sure
that a cold winter is coming.

"Onions..." said a guest yesterday."You just look at the
skin of the onions. When they are thick... it means the
winter will be cold."

"Well... are they thick this year?" came the question.

"I don't know, I didn't bother to look last year..."

*** A wise man, we recall writing on Friday, might hold
onto a little cash... just in case tomorrow's investment
opportunities are better than today's. Now comes news that
one very wise man, Warren Buffett, has"more cash than
[investment] ideas." The Sage of Omaha regrets not having
sold Coke at the end of the '90s... and now believes that
cash will be a better investment than most stocks or bonds.

*** Among the stocks Buffett is not buying are our old
friends, Amazon.com and eBay. Amazon has tripled since the
beginning of this year - to $54, or 10 times its price 2
years ago. The River of No Returns has never made a dime of
profit... though it hopes to do so by the end of this year.
At least eBay has earnings... at which it is priced at 93
times. Sell the techs, dear reader, sell the techs.

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

The Daily Reckoning PRESENTS: There may be nothing new in
Economics Land... but the Mogambo Guru educates us in
lessons of old.


UNDER THE ECONOMIC SUN
By the Mogambo Guru

The Fed has now jumped back into the fray, increasing total
credit by $7.8 billion last week, although the trend in
increases seems to be somewhat flat here lately. Even the
foreigners who have their holdings at the Fed stepped back
from the plate a little. I'm just naturally suspicious that
maybe they thought the potential bad press,"Foreign
custody holdings go over one trillion!" was too scary. Or
it was a fluke. Or some other reason.

And if you think that foreigners accumulating so many U.S.
assets and claims on assets is not so bad, then I turn my
eyes and stare directly into your soul, and I see that you
think those old aphorisms of"Neither a borrower nor a
lender be" is a load of hooey. And you think that those old
sayings about how the lender comes to hate the debtor, and
vice versa, are also a real hoot. And you forget that that
preachy old Aesop fellow probably had some moral in a story
about bees and ants, or squirrels and grasshoppers or lions
or something, anthropomorphic animals borrowing something
from some other bee, or ant, or squirrel, or grasshopper,
or lion. And then can't pay. And then gets eaten.

And there are, of course, many, many more references in all
of classical history and literature, all the way back to
10,00 years ago when Og borrowed some clams from Caveman
Mutual to buy spear points, and of course the classical
wipeout when the bank went belly up is all part of history
now, or it would be if it weren't censored out of the
history books by the government.

But, and this is the first important part that I want you
to take away from our little chat together, one of the
constants in the universe is that the Tale of the Borrower
and the Lender, in whatever incarnation it takes, always
has an unpleasant ending. Always. In fact, I shall call it
the Always Unpleasant Ending Effect, which we will refer to
as AUEE, or better yet the Mogambo AUEE, which you can
further shorten to MAUEE, which is a pretty good phonetic
spelling of where I am going if this AUEE thing works out
with me winning the Nobel Prize in Economics next year like
it should, and when they hand me that cool million bucks,
man, like, I'm outta here. I mean, the subtle hostility of
sullen and angry neighbors is one thing, but to have to
listen to people trying to exorcise demons out of my house
by chanting is getting to be pretty unnerving, and so you
can see I really could use that Nobel Prize money.

The big problem with economics is that there has been
nothing new under the economic sun for thousands of years.
There has always been a Borrower and a Lender. There has
always been government, and taxes, and buying and selling,
and borrowing and lending, and investing and interest, and
sleazy powerful people enriching themselves, running off
into the night with the company payroll, and bosses
sexually harassing employees, and of course graft, and
corruption, and nepotism, all those relatives needing
favors and jobs, and friends needing favors and jobs, and
so on. It wouldn't surprise me to find that this is
actually where the phrase"some things never change" comes
from. And all of them trying to live, as has been said many
times, at the expense of everybody else.

The only variable that makes the big difference in the
long-term economic health of a nation has been (pause for
effect) the nature of the money. When money is something
that the government cannot, or will not, depreciate by
over-issue, then everything is fine, and the economy
burbles along with attenuated booms and busts.

But burbling aside, borrowing from the savings of the
people who save money is inherently self-limiting, and
pretty soon all the available savings have been borrowed
and spent, and then interest rates rise due to the smaller
supply of loanable funds, businesses slow down, a recession
ensues, the idiot businesses die and the strong businesses
find a way to hold on, people start saving their money
again, prices fall to some more reasonable value, and then
the cycle starts all over again.

That's why the busts in the old days were usually
concentrated little 'bust-lets,' more appropriately
characterized as a few people getting their fingers burned
from being greedy and stupid, with lots of innocent little
people having to pay a price, as they always do. Yet the
nations always survived, and went on making progress from
there.

But today everything is different, and the sky is suddenly
dark with ominous clouds, and very low notes from some
hidden organ lets you know that something spooky has
appeared. You look out of the window and you see buzzards
sitting on the bare branches of long-dead trees, and
everything is colored in shades of gray and black. The
voice-over sounds eerily like Vincent Price saying,"When
money, the delicious blood of life, is conjured up by mad
scientists in forbidden laboratories in secluded castles
late at night, or printed up in state-of-the-art modern
printing and engraving facilities of a mindless, zombie-
like government body, then a strange, forbidden, and very
dangerous voodoo alchemy will cause rips in the time-money
continuum, and dead economists will rise from their graves!
Their ghosts will be angry and vengeful, and they will
torture you with all the pains and horrors that only over-
issuance of money can cause!"

This is nothing new at all, and that is why the Founding
Fathers were so careful to include in the Constitution, in
black and white so there would be no mistake, that money
shall only be silver and gold, because the government
cannot depreciate the currency by printing up more silver
and gold. And therefore the time-money continuum should
never be ripped open, and vengeful specters should not rise
from their graves to haunt and vex us, and macroeconomic
idiocies would not be committed, and I would not have
anything to write about, and then I'd have to end up
getting a real job, and then I'd end up getting fired
because I'm an idiot, and then I'd end up committing some
crime out of my frustration and constant failure, and then
go to prison and be a burden on the rest of society until I
died, many years later, old and bitter.

So amid the gloom, doom and imminent onslaught of vengeful
specters, why does the stock market go up? One reason is
that the central banks of the world are financing the whole
mess by flooding the system with money, and so that damn
money has to go somewhere. And where the heck do you put
that much money? I helpfully suggested that I would be
happy to store a bunch in my basement, and even guys from
outlaw biker gangs are afraid to go down there, so it is
certainly safe. But no dice.

Ergo, the big-ticket items like the stock market, the bond
market and the world's real estate are the easiest places
to go, and so, like water and electricity finding the
shortest way to lower ground, that's where the money goes.
And price doesn't matter anymore, because tomorrow there
will be another big bundle of money coming, and it has to
go somewhere, too. And then the day after tomorrow, there
is going to be another big bundle of money coming that has
to go somewhere...

And I gather from this consensus opinion of the world's
biggest hotshots that if everybody inflates their money
supply at the same time, then the resultant, roaring global
price inflation won't matter, because roaring inflation in
stocks, and the blistering inflation in bonds, and the
screaming inflation in houses, and the soaring inflation in
every freaking other thing in the whole economy, will be
all hunky-dory with them, because everybody is in the same
boat.

And it certainly fights the Fed bogeyman of deflation,
which in this case means keeping the absurdly over-priced,
over-valued, over-subscribed, over-leveraged assets of any
kind from falling so much as one red cent in market price,
and the government stands ever-ready to finance any buying,
by anybody, at any time, for anything, if it is for a
higher price, which keeps prices from going down. The
ultimate in government control of the economy!

But, in the final analysis, the government is actually
creating inflation, the one thing that is most feared, so
that the current prices of overpriced assets will keep
inflating! This doesn't sound insane to you? Huh? How can
it NOT sound insane? To even espouse such a mentally ill
notion is nothing more than having a raving lunatic at the
controls. And when you examine the rules and regulations of
the railroad industry, for example, you'll find that there
is an actual prohibition against using insane people as
locomotive engineers. Fortunately for Greenspan and the
Fed, our central bank and government seem to have no such
prohibition.


Regards,

The Mogambo Guru
for the Daily Reckoning

P.S. The thing that survives and prospers is gold. And so
when the government finally has its back up again the wall,
and it will, and gold soars in price to levels undreamt of,
prices that never appeared even in my most magnificent and
greedy dreams, which usually involves an eager-to-please
Barbara Eden, starring as the genie in"I Dream of Jeanie,"
granting one of two wishes to me, starring as Maj. Anthony
Nelson, handsome and brave and single astronaut, these
gold-owners will probably be the people the government
comes after.

The reason I bring this up is that Marc Faber, author of
the infamous Gloom, Boom and Doom report, warns - and this
is the second warning like this that I have read in the
last week alone - that maybe the government will end up
confiscating gold, again, since they have already
demonstrated that they have the power and willingness to do
that. It is a concern, all right. But they give you dollars
for it, so they are not actually confiscating it from you.
They are forcing you to sell it to them, and get a fair and
just number of dollars for the gold. This is the Fifth
Amendment prohibition against a 'taking' without just
compensation, that is in the Constitution, thank God. But,
there you are with dollars, the one thing you didn't want.

The added worry, for me, is that this Supreme Court has
already amply demonstrated that they are willing to
misinterpret and/or ignore the Constitution according to
their wishes, and they will allow new things for the
federal government to meddle in, tax, regulate or
confiscate. After all, they are already on record as making
anything they figure may be in the temporary common good,
or suits their tastes, or satisfies their private agendas,
suddenly Constitutional. And things that they don't like
are un-Constitutional, to add a little symmetry to their
do's and don't's. So, one may assume, even if you are not
even fractionally as paranoid as I, that the prohibition
against 'takings' is just another part of the Constitution
that is now just, alas, pretty words. It's a worry,
alright.

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• The Daily Reckoning - Under The Economic Sun (Mogambo Guru) - Firmian, 28.10.2003, 01:46