The Daily Reckoning - The Trouble With The Whole World (Bill Bonner)

verfasst von Firmian, 31.10.2003, 18:19

-->The Trouble With The Whole World

The Daily Reckoning

Ouzilly, France

Wednesday, 29 October 2003


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

*** Party time! Quick... before the hobgoblins come out!

*** Dow up 140... Fed does nothing... debt counseling clients
in worse shape than ever...

*** Buffett sells the dollar... gold down... what
recovery?... news from the savannah... and more!

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

"Party like it was 1999," says a message from a friend.
October is almost over... all that is left of it are the
hobgoblins, demons and spooks of Halloween.

So why not enjoy it? The stock market partied yesterday -
with the Dow up 140 points on news that the Federal Reserve
had decided to do nothing at all.

One percent... not 1.5% nor.75% nor any other number... was
deemed the correct level for short-term borrowing by the
Federal Open Market Committee. Said the august group:"The
committee judges that, on balance, the risk of inflation
becoming undesirably low remains the predominant concern
for the foreseeable future."

"Artificially Low Rates Will Cause More Future Grief,"
warns a headline in the Korea Times.

We don't know whether they are artificially high or
artificially low. But we know they are artificial. And
since there are a lot of possible numbers, the one chosen
the Fed is more likely to be wrong than right.

We presume that the Korea Times is on the mark with its
suggestion that rates are lower than they should be. Rarely
do government appointees make it hard to borrow in advance
of national elections.

We presume also that the Korea Times is right about the
"future grief." Americans are undeniably adding to their
debts. Rarely do people borrow in order to spend
more... without regretting it. Myvesta, a credit counseling
company, reports, for example, that its clients have
increased credit card and unsecured debt by 50% over the
last 12 months - to an average of $77,036. Mortgage debt
has risen by 25% to $207,958.

Still, the prevailing mood is one of optimism, self-
delusion and mass hallucination. Yes, Americans are going
deeper into debt, say the kibitzers, but consumer spending
is powering the U.S. economy to a strong recovery. We'll be
able to work our way out of debt, says practically
everybody.

Americans are hard-working people, as everyone knows. But
so are the Chinese and the Indians. The problem for a
nation working its way out of debt is that it has to do
more than just moan and sweat. It has to make something it
can sell. And as time goes by, Americans spend more and
more money... but make fewer items that they can exchange
for ready cash. In the past year, retail sales rose 6.3%,
but manufacturing fell 1.6%.

How we will 'work our way out of debt' without actually
producing anything is yet to be discovered.

We don't know what will happen, but at some point, if not
this year, maybe the next, the zombies and werewolves are
likely to be out in force.

Over to you, Addison...

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

Addison Wiggin, writing in Paris...

- The Sage of Omaha said he never bought foreign currency -
until now. Yesterday's BBC report tells us that Warren
Buffett is worried about the dollar. The U.S. government
deficit has"greatly worsened," he said,"to the point that
our country's 'net worth,' so to speak, is now being
transferred abroad at an alarming rate." The budget deficit
this year is nearly twice the previous record.

-"Our country [the U.S.] has been behaving like an
extraordinarily rich family that possesses an immense
farm," Buffett warned in an interview with Fortune
magazine."In order to consume 4% more than we produce -
that's the trade deficit - we have, day by day, been both
selling pieces of the farm and increasing the mortgage on
what we still own." Continuing his analogy, Buffett goes on
to explain that, as foreign ownership of the"farm" grows,
income flows out of America in the form of dividends and
interest payments.

- The U.S. trade deficit with China was a record $11.7
billion in August, according to U.S. government figures
cited by Bloomberg. The trade gap with China, which widened
to $77 billion in the first 8 months of this year, was a
record $103 billion last year."We have entered the world
of negative compounding," laments Warren."Goodbye
pleasure, hello pain."

- Back in the bubble days - when New Era hero George Gilder
and his ilk 'got it' - Buffett was crying wolf. When it
came to investing in Cisco, Yahoo!, or Amazon, Buffett just
didn't 'get it.' He couldn't understand the valuations... so
he stayed away. And unlike the thousands - nay millions -
of investors with the New Era light flashing in their eyes,
Buffet still has his money. In fact, as we pointed out a
few days back, Buffet has more money than he has investment
ideas.

-"I am crying wolf again," Buffett continues,"and this
time, I'm backing it with Berkshire Hathaway money. Through
the spring of 2002, I had lived nearly 72 years without
purchasing a foreign currency. Since then Berkshire has
made significant investments in - and today holds - several
currencies."

- Coca Cola announced another layoff yesterday. Nine
hundred more people will get pink slips. Coca Cola was one
of the companies that helped make Berkshire Hathaway
shareholders into millionaires... and Buffett famous for it.
Now he regrets not having sold the stock in '99... he wished
he had got going when the going was good.

- Easy Al and his Fed pals decided after breakfast
yesterday to further underwrite the rapidly swelling U.S.
asset and housing bubbles; they left interest rates
unchanged at 50-year lows. And there they will remain for
at least another six weeks.

-"Surely it must mean something when U.S. house prices are
up nearly 20% in two years," writes our London
correspondent, Sean Corrigan, commenting on the Fed's
decision,"pushing up medical costs, tuition fees and
insurance premiums by double digits, too? Or that good,
old, speculative equities are roaring - with Semiconductors
up 136%, Internets up 142% and Networkers up 209%? Or that
four major commodities indices - each with a different
composition - are up between 37% and 55% from their late-
2001 lows?

-"Doesn't it matter that long bond yields on U.S.
Treasuries have risen 1% from their lows... meaning a 14%
drop in T-bill prices? Shouldn't economists worry that U.S.
household credit continues to boom, as current and budget
accounts yawn ever-wider to record gaps...?"

- Well, apparently not. The Fed's official communiqué
stated:"The probability, though minor, of an unwelcome
fall in inflation exceeds that of a rise in inflation from
its already low level. The Committee judges that, on
balance, the risk of inflation becoming undesirably low
remains the predominant concern for the foreseeable future.
In these circumstances, the Committee believes that policy
accommodation can be maintained for a considerable period."

- In plain English, the Central Bank of history's greatest
debtor nation thinks it wise to keep on fuelling today's
enormous consumption of capital.

- The lumps loved it... by the market's close, fools had
rushed in to push the Dow up 140 to 9748, the S&P 500 up 15
to 1046, and the Nasdaq up 49 points to 1932. One wonders
whether the greater fools will show up when those in
question decide that buying stocks at these valuations
isn't such a good idea.

- Select foreign currencies also loved the Fed's decision.
"The Kiwi [New Zealand Dollar]," writes Chuck Butler, our
friend over at the Everbank trading desk,"hit a 6-year
high overnight, and hasn't stopped on profit taking! In
December 1997, the Kiwi last traded at.6142, and again, it
was going in an opposite direction then on the slippery
slope down to 39 cents 3 years later! Both the Aussie
[Australian Dollar] and Kiwi got a nice kick when the Fed
left rates unchanged, which gives the positive interest
rate differential that both of these enjoy, new life!"

Chuck also reports that the"Commodity Currencies" of
Australia, New Zealand, Canada and South Africa remain the
top performing currencies v. the dollar this year...

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

Back in Ouzilly...

*** Recovery?"We completely fail to see any recovery at
all in the United States," writes Kurt Richebächer.

*** Rather than work their way out of debt, our guess is
that Americans will default. Their debts are denominated in
dollars. Sooner or later, the dollar will fall
substantially, wiping out trillions' worth of obligations.

*** The price of gold fell $4.80 yesterday. It is still
$100 above its price in 1999.

*** Our correspondent in South Africa, Evan Pickworth,
brings us the latest news from the savannah:"I don't see
the Daily Reckoning opening an office in Harare any time
soon. The political situation in Zimbabwe is now very bad.
On Monday, police arrested four directors of the publishers
of the country's Daily News.

"Only problem was, when they arrived to arrest the Chief
Executive, they couldn't find him. Minor problem for the
Zimbabwean gulag. They simply arrested his niece instead as
some kind of a hostage.

"The reason for the arrests is that the government has
accused the publishers of publishing the Daily News
illegally without a license.

"A court, however, nullified the closure of the newspaper
on Friday as they felt the commission which refused the
license was improperly constituted and had exhibited bias
against the paper.

"The government went ahead with their arrests on Monday
anyway - what's a small court order to them? Apparently, in
the swoop, they also arrested a retired high court judge -
in my opinion probably to send a message to the
'recalcitrant' judges who made the ruling against the
government-run media commission on the Friday.

"If convicted, the directors - including the CE whose niece
was arrested as a hostage - face at least two years in
jail."

*** Back in the States, the Financial Reckoning Day Brigade
is out in full force.

"Greetings, Addison," begins a reader:

"I visited a local Borders in Tulsa, OK over the weekend
and was able to find a single copy of Financial Reckoning
Day. Since I am taking advantage of the 35% discount
online, my mission was a simple search and rescue from the
dark trenches of a bottom shelf in the business/investing
section where I found the lone copy tucked ever so snug
between various day trading and options investment books.

"On a much more appropriate eye level shelf I managed to
create my own display by moving aside the previous
contents to prepare adequate space for my next move. Being
careful not to over-handle the merchandise, I quickly
placed the copy face forward on the shelf paying close
attention to achieve a proper viewing angle. The book now
stands out among all others in its section so I am fully
confident my work there was not done in vain!

"Until the Day Comes,"

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

The Daily Reckoning PRESENTS: How runaway credit fed the
bubble in Japan... and, with a ten-year time lag, in the
U.S. too. This Classique, originally aired on 20 September
2000, gave rise to themes in Chapter 4 of Financial
Reckoning Day.


THE TROUBLE WITH THE WHOLE WORLD
by Bill Bonner

"Kim An Wu, a 55-year-old housewife," says a report in
William Fleckenstein's SiliconInvestor.com column
yesterday,"believed the [South Korean] government's vow
last year that it would foster technology stocks. She spent
more than $250,000 to buy shares listed on the Kosdaq
index.

"Instead of profiting from the Kosdaq's Internet and mobile
phone stocks, Kim posted a loss. No longer able to afford
the home she hoped to buy for her soon-to-be-married son,
Kim is so incensed that she phoned the presidential palace
yesterday to complain. 'The only way I can make up for my
losses is through the stock market,' she said, standing
amid a grimfaced group of retirees at a Seoul brokerage
today, as stocks slipped yet again. 'So I want the
government to do something fast.'"

The article went on to say,"housewives and retires
watched, dazed, yesterday and today as screens on broking
floors quickly filled with green, that in many parts of
Asia marks declines."

Ms. Wu may not know exactly what she wants the government
to do. But the central bankers who work for the world's
governments know. Another dose of 'liquidity'... of
cash... of credit... usually sends equities higher.

"Look at this," said Addison to me yesterday, pointing
excitedly to a group of charts."Credit expansion and stock
market growth go together."

Sure enough, the group of charts, from a study done in 1996
- produced by the Japanese central bank - showed that
credit growth paralleled stock price movements. When stocks
were in a boom - credit growth was, too. (None of the
parallel lines, I noted, went up forever.)

Japanese monetary officials made a reasonable inference:
looser credit policies must CAUSE stock market increases.

In 1996, Tokyo was looking for a way to boost its economy
and stock market. Lower interest rates - lowering the cost
of borrowing - looked like a decent bet. Besides, it was
about all central bankers could do. So, interest rates came
down. By 1999 they had reached what the Financial Times
called"effectively zero." Yet, even free money failed to
revive the Japanese economy or its stock market. Why?

Digital Man is stumped. To him, everything works by simple
cause and effect logic. When the cost of borrowing goes
down, the demand should increase. And yet, not even giving
money away could persuade Japanese business and consumers
back into the credit market.

But Analog Man, more heart than brain, understands. He
knows it is his fault. He knows that, were it not for him,
the world would be a different place.

Paul Erdman, former analog gloom-and-doomer, explains [via
Gary North] how monetary officials reacted to the Long Term
Capital Management crisis of 1998. The LTCM geniuses had
gotten themselves into multi-billion-dollar dry hole... into
which the entire world's financial system threatened to
slide.

But the Fed, according to Erdman,"pushed immense liquidity
into that system within hours and saved the day."

Erdman, reborn a digital man, does not believe night
follows day:"In this information age," he says,"we live
in a new world in which decision makers are immeasurably
better informed..."

Daily Reckoning readers who have endured my letters on the
value of information will be tempted to click off at this
point. Let me reassure you... my point in today's letter has
nothing to do with the value of information. It is not the
nature of information that interests me today, but the
nature of man.

Whatever technological improvement the 'Information Age'
represents, it is neither the first nor the last to get
investors noticeably aroused. The railroads, internal
combustion engines, electricity - all of these were seen in
the same light as we see information technology today. And
each time, investors"under-reacted... and over-reacted" in
what has become a predictable fashion. They got
excited... they bid up prices to outrageous levels... and
then there came a bust.

But, Erdman continues:"The business cycle may not be dead.
But there are increasing grounds to believe that the boom-
and-bust phenomenon is. Which reinforces the view that the
place to keep your money is in index funds, not in gold."

In short, if the central bankers were able to 'save the
day' in 1998 - why not now? Why not forever?

A boom is accompanied by an expansion of credit... a bust,
by a contraction of credit. The Japanese tried to create a
boom by reducing interest rates - making credit more
affordable. But, it didn't work. They were not able to get
their own people to borrow yen.

But animal spirits still ran high in the western world. The
'yen carry trade' developed. Speculators borrowed yen and
then invested the money in U.S. stocks and bonds.

Speculation is, however, a zero-sum game. (Actually, taking
into account the friction costs... it is a minus-sum game.)
So there have to be some losers as well as winners. And
with trillions of dollars at stake, it was only a matter of
time until a there was a big, big loser. LTCM would have
been that big loser - had not the Fed stepped in.

A little later, the Fed and other central bankers stepped
in to save the world from the Asian currency meltdown.
Then, two years later, they protected the system from a Y2K
shock.

These efforts at rescue, resuscitation and protection have
produced a moral hazard of grotesque proportions. The
amount of derivatives outstanding today [in September of
2000] is estimated to be as high as $100 trillion. And the
debt in the U.S. economy has reached $26 trillion.

Most interesting, from our point of view, for a boom to
continue, it needs an expansion of credit - at a faster and
faster rate. A man with a $1000/wk lifestyle and a $100,000
debt needs a lot more new cash than the man who lives on
$100/wk and owes only $10,000.

Likewise, it takes a lot more money to move a billion-
dollar company up in price than a million-dollar one.

As the boom of the late '90s continued, reports Dr. Kurt
Richebächer,"the rise in indebtedness gathered ever
greater speed in relation to economic activity... In 1999,
nominal GDP growth of $509 billion compared to aggregate
financial and non-financial debt growth of $2.208 billion.
For each dollar added to GDP there were 4.3 dollars added
to outstanding debt."

"There is something healthy," Grant's quotes Mike Brosnan,
an official at the Office of Comptroller of the Currency,
"... about having a little downturn. It reminds you that the
world is a risky place."

Thanks to the work of the world's central bankers - saving
the system from the Japanese bust... LTCM... the Asian
currency meltdown... and Y2k... the world has become an even
more risky place.


Your servant,

Bill Bonner

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• The Daily Reckoning - The Trouble With The Whole World (Bill Bonner) - Firmian, 31.10.2003, 18:19