The Daily Reckoning - Unconventional Methods (Mogambo Guru)

verfasst von Firmian, 11.11.2003, 21:36

-->Unconventional Methods

The Daily Reckoning

Baltimore, Maryland

Monday, 10 November 2003

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

*** Still waiting. The end may not come... but it's still
the best way to bet...

*** Jobs! Are they real? Bonds sink... as central banks
begin worrying about inflation rather than deflation...

*** West Virginia By-the-Sea... and more...

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

We're still waiting for the crack of doom.

We think we hear a creak now and then... or the occasional
twig snapping. But the real crack of doom seemed farther
away than ever on Friday as the unemployment statistics
were released. According to the latest revisions, 286,000
people were added to payrolls during the 3rd quarter, with
another 126,000 finding jobs in October.

Real jobs, we recall writing, would convince us that the
recovery was for real. Are these real jobs... or just a
statistical mirage? Or, is the appearance of jobs just a
fluke? Even dead economists bounce a bit when dropped from
a high enough point; do jobs bounce up too?

The job news was enough to convince most people.

"Bonds Sink as Jobs Data Herald Sea Change," announced
Reuters. All of a sudden, the winds shifted, and the sails
filled with the warm air of inflation. The doldrums of
deflation was yesterday's weather forecast. Now, there is
clear sailing.

"Greenspan Hints at End to Low Rates," began a New York
Times item."How long will Fed hold out?" was the question
posed by TheStreet.com.

England and Australia have already turned their ships 180
degrees; both nations recently raised rates. And now bonds
are tumbling in the U.S. in anticipation.

But we will maintain our lonely vigil... with our ears
cocked towards deflation, listening for the crack of doom.
Will it ever come? We don't know. But we bet that the risk
of it is mis-priced.

People say,"stocks will most likely go up." Why?"Because
that's what they usually do," referring to studies showing
stocks up in 3 of 4 years over the last hundred years.

Of course, they ignore the effects of inflation; in real
terms, stocks go down or nowhere about as often as they go
up. And there's no guarantee that stocks must do in the
next 100 years what they did in the last 100.

But even if it were true that stocks usually go up, it
still doesn't make buying stocks now a good bet. In order
to figure that out, you have to multiply the odds of a
stock market decline times the gravity of it. Stocks are
already near epic highs. They may climb further, but where
does that take you? Not much higher, is our guess... and
only to an even riskier level. So, even if stocks do go up,
investors don't gain much.

If stocks fall, on the other hand, investors are in big
trouble. At no time since 1999 have investors bought so
many stocks on margin. Consumers, too, have greatly
increased their debts, even throughout the slump period.
Practically everyone in the nation now needs rising asset
prices - stocks and real estate - in order to remain
solvent.

Buffett, Templeton, Soros, Rogers - and corporate insiders
- don't like the odds. But the lumpeninvestoriat, the hoi-
polloi of the investment world, seem to love them; they
keep buying.

We do not know what will happen, but it looks as though the
lumpeninvestoriat is making a bad bet. If they are right,
they gain little. If they are wrong, they lose big.

And now, here's Addison with more news:

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

-"The fact that an opinion has been widely held," wrote
über-thinker Bertrand Russell early in the 20th Century,
"is no evidence whatever that it is not utterly absurd."

- The prevailing wisdom in the financial media right now
suggests that an American consumer Hell-bent on destroying
his personal balance sheet can spend the world back to
economic health. And the"widely held opinion" as of Monday
morning Paris time - it's working!

- Let's take a step back and see what the recovery scenario
looks like: Tax cuts, rebates, cheap credit... the
government puts money in the hands of big spenders in
whatever way, shape or form they will take it. (Pay no mind
to the fact we have escalating foreign conflicts to fund.)
Slap-happy consumers then turn around and dispense the cash
with ease. Producers of goods and services need help
siphoning off their share of the free and easy money - so
they take on a few new-hires to help schlep goods from the
backroom to the floor. In this way October saw the creation
of 126,000 new jobs in the U.S..

- Hurray! Fed Governor Ben Bernanke tempered initial
enthusiasm for the job numbers last Thursday by reminding
we economic heathens that 150,000 to 200,000 schleppers per
month will have to be added to nation's payrolls for the
remainder of the calendar year - and well into the next -
before the recovery is deemed 'real.' But hey, at least
we're moving in the right direction, huh?

- We carpet weavers here at The Daily Reckoning are aware
that all things man creates are flawed, so we are
constantly on the lookout for them. Of course, this
morning, we spot an easy one. The government can't control
what Joe 'Almighty' Sixpack will spend his rebate checks
on... nor his tax cut... nor his home equity loan money. If
he wants to stock up on DVDs, an extra night out on the
town (because he deserves it!) a new, new car... so be it!

- These transactions, of course, are all tabulated in the
rising 7.2% GDP growth figures. But what happens next
quarter? Where will the next round of spending come from?
Despite the fact that 126,000 thousand jobs were created,
and more hours were worked, average income rose only one
penny to $15.46 an hour. And many of the schleppers are on
temporary contracts because employers are afraid of what we
here at the Daily Reckoning are always prepared to accept:
government statistics are hogwash! So we ask again, where
does the money come from?

- More tax cuts? Not without significant reciprocal
spending cuts. A reader recently pointed out to us that the
debt clock is back up in Times Square... and ticking away at
$19,000 a minute! With escalating foreign conflicts to
fund, there isn't a political backbone in Washington ready
to defy the spending trend.

- Further rate cuts? The minutes from the FOMC meeting last
week indicated the Fed spent a considerable amount of time
reviewing their pledge to keep rates low"for a
considerable amount of time." With central banks in England
and Australia already throwing in the towel, the courageous
fight against slowing inflation is beginning to look a
little daft.

- In fact, we have word from our colleagues in the London
office that despite rates being at a 48-year low in
England, the personal bankruptcy rate hit record highs in
September."With increasing numbers of households unable to
cope with their debt even when interest rates are so low,"
Vicky Redwood, a British economist, told Yahoo! News,"the
danger is that households have not given enough thought to
the possibility of a rise in interest rates when taking on
debt."

- We've commented on the U.S. personal bankruptcy rate ad
nauseum in these pages. Ever riskier consumers gobbling up
credit card offers and buying cars at 0% down... is an
unintended consequence of a central bank manning the levers
of the economy. In England and Australia, the policy wonks
have decided that enough is enough... and have raised rates
to try to slow the rate of borrowing. One wonders how far
behind Greenspan and Bernanke really are... and just how
costly it will be when the market gets wind they truly have
changed their definition of"a considerable amount of
time." So we ask again, where is the money for the next
wave of 'GDP growth' going to come from?

- Another not-so-unintended recipient of Fed meddling is
our old pal Mr. Market. The Dow has risen 32% since March
and the Nasdaq screamed ahead 56% - while bean counters at
S&P firms have been secretly adding up fewer and fewer
beans. Last week, Mr. Market received the 'great' economic
numbers with little fanfare. As Eric mentioned over the
weekend, the Dow closed just 9 points higher for the week
at 9810... while the Nasdaq inched up 2% to 1971.

- Still, John Q. Consumer continues to do his part - or so
it would seem. The widely held opinion that the almighty
consumer can spend his way to riches... and take the global
economy along for the ride... is alive and well. At least in
America.

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

Back in Baltimore...

*** It all seems so normal. Our travels this week took us
to New Orleans... then to Baltimore, and, this weekend, to
Toronto and Nova Scotia. Everywhere we went, people walk
upon two legs - just as they always did. They go about
their business. The bars - at least in airports - are full.

Who would suspect that there was anything seriously wrong?

And yet, a reader who manages a hedge fund sends this
warning:

"In the first quarter of 2003, total credit growth ran at a
$2.362 trillion annual rate. The rate of increase in total
debt was 7.4%. The correlating percentage increase in
nominal GDP was 3.82%. At first blush, this seems bad but
perhaps not insurmountable. Until you realize that total
debt is three times larger than GDP to begin with, so a
rate of growth twice as fast as GDP means the absolute debt
is growing six times as fast as GDP!

"It is interesting to note that the estimated market value
of all real estate plus the total equity market
capitalization of all American corporations has fallen to
the lowest percentage of all outstanding domestic debt in
the 50-year statistical record. Each dollar of debt now has
only 72 cents of collateral behind it!"

*** West Virginia By-the-Sea.

A waitress in Shelburne, Nova Scotia, wouldn't stop
talking. She told us that she had recently been fired
because she had gotten sick... and complained to the local
labor police. She also explained that her son's 4-wheeler
had been wrecked by a neighbor, so she went to the police
again.

"You seem to spend a lot of time with the police," we
noted.

When she brought the Fresh Sea-food Platter, we felt like
calling the police ourselves, for it had been a long time
since anything on the plate had had any contact with the
sea.

But we have a weak spot for lost causes, underdogs, third
world countries and out-of-season resorts. Nova Scotia was
perfect. For it was here in Shelburne that a group of
American loyalists retreated after losing the American war
for independence. And here, in November, it seems so wind-
swept, cold, and desolate that you wonder if it could ever
be in-season.

The food at the Loyalist Inn was not fresh, but it was
familiar. It was West Virginia cuisine, where quantity is
far more important than quality. After a hearty meal,
served with a bottle of Pepsi, we got in our car and drove
down the coast to a tiny island. Along the route, we took
in the sights. As in West Virginia, the scenery is
stunning. But many of the houses are eyesores. They are too
small; a lot of domestic impedimenta gets left outside -
cars, machines, refrigerators. The place is not as woefully
trashy as West Virginia, but it has the same cheap look to
it... and a style that might be called"maritime
dilapidation" as opposed to the degenerate hillbilly look.

The houses are made of wood. But there seems to be some
perverse gene that makes people want to turn to wood
substitutes, even in a place such as Nova Scotia, where
real wood is everywhere... and cheap. The older, more
dignified houses are clad in wood siding or wood shingles.
The newer ones are dressed in aluminum siding, asphalt
shingles, vinyl, plastic or some other hideous amalgam. We
noticed no improvement in design, either. Instead, the
Victorian, Greek Revival or Italianate houses of the last
century have been superceded by simple bungalows of no
particular distinction, other than the aluminum siding and
junk in the yard.

Saturday evening, we took the cable ferry at LaHave and
made our way up to Lunenburg. The roads were empty. Even
the animals must have gone south for the winter; there was
no road kill. We found Lunenburg charming and attractive,
with many fine, old houses. But the place was almost
completely deserted, as if it were anticipating a tidal
wave. We dined at a waterfront bar, the only one in town
that looked open, taking a place near the window so we
could see it coming.

"Would you like to try our Nova Scotia wine?" asked the
waitress.

"Nova Scotia wine? You mean, you can grow wine grapes this
far north?"

Well, it looked like wine. And it tasted a little like
wine, too. We ordered another glass or two and worried if
we'd be able to get on and off the ferry without running
into something.

We spent the night at a friend's house. By 8pm it might
have been the middle of the night and a bitter wind blew.
But there, in the eastern sky, was a full moon, shining on
the black sea.

What was it worth, we wondered? That view... that
moon... that night? There was no price on it... it must be
worthless. Any dunderhead on the south shore could see it
for nothing. All he had to do was to turn off his
television and stumble out his front door. How many
bothered? It was a view so cheap, you couldn't give it
away.

A quarter of an hour later, we looked out again. This time,
the moon was only half full... and we remembered that there
was to be an eclipse of the moon. We watched as the earth's
shadow charged into the moon....It was as if a terrible
battle had taken place, because the moon turned red, as if
stained by blood....and then the dark earth retreated. The
moon remained. Full, glorious, resplendent and victorious.

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

The Daily Reckoning PRESENTS: We may or may not have real
growth, dear reader, but we are certainly paying a hefty
price for it...


UNCONVENTIONAL METHODS
by the Mogambo Guru

I can't let the 7% rise in GDP, annualized, pass without
comment. To wit; how much is 7% of GDP in dollars and
cents? Well, the usual figure for GDP is ten trillion
dollars. So 7% growth in GDP is, by mathematical
imperative, a $700 billion dollar growth in GDP. The
economy, in other words, grew by $700 billion. Sounds kind
of impressive.

But, and you knew there was going to be a"but," the
federal government has borrowed and spent $600 billion in
the last year, and doofus Americans increased personal
debt, mostly mortgage refinancing, to borrow and spend at
least another $800 billion in the year. And when you add in
mortgage refinancing, then the amount borrowed and spent
easily surpasses a trillion dollars.

And let's not forget all the corporate debt that has been
floated, so that corporations could borrow and spend. And the
states and municipalities also borrowed and spent a load of
cash, too. And out of all this borrowing and spending, which
totals almost certainly near $3 trillion, the damn GDP only
expanded by $700 billion? You spend four bucks to get one buck
of growth? GDP grew at about a lousy fourth - a fourth! - of
all the money that has been borrowed and spent? So why in hell
am I supposed to get all worked up about a lousy 7%? Jeez!

What was missed by most people is, of course, the predicted
inflation, as the price index for personal consumption rose at
a 2.4% rate, which is up dramatically from 0.8% in the second
quarter. As the WSJ put it,"In addition to the climb
in... consumer prices, other familiar signposts, such as rising
commodity prices and a depreciating dollar seem to indicate
brewing inflation."

I cannot keep my eyeballs from rolling back in their sockets
whenever I hear that inflation is low. But apparently I am the
only guy in the whole freaking country that is watching the
prices of insurances, cable TV bills, telephone bills,
commodities, houses, taxes, fees, and damn near everything
else I consume going up at double-digit rates. So for YOU
maybe this is some wonderful world of low inflation, but for
me it is a whole different ball game.

And I note with a certain shudder that I am reading more and
more references to economics-forecasting people starting to
predict HYPER inflation. Not ordinary inflation. But the real
thing, the big thing, the old Reichmark thing, where it took a
wheelbarrow of money to buy a loaf of bread and caused the
absolute collapse of the German currency. It is not
inconceivable to me. Perhaps it isn't on its way yet, but it
will be soon enough.

In the meantime, debt continues to explode. Hans Sennholz, the
god-father of the Austrian school of economics here in the
USA, writes,"In just five years, total financial as well as
non-financial American debt has surged by 51 percent or $10.9
trillion to more than $32 trillion, three times the annual
Gross National Product. During the last quarter alone American
households added $397.6 billion in mortgage debt and another
$40 billion in credit card debt."

And all this at the same time as Saturday morning as I drove
to the store, and happened to hear two stock market jackasses
talking about their theory of why the economy showed such
growth in the last quarter. They were all a-tingle about the
tax cuts and the rebates, and how things are just peachy. I
didn't catch the names of those two doofuses, but that is not
important, because they are all that way.

And in case you are wondering, the gigantic increase in GDP
was the result of morons, like you and me, but not you and me,
and not nearly as good looking as us, well, you anyway,
borrowing money that they cannot pay back to buy things they
cannot afford and should not be buying. It is just that
simple.

And now that these ugly morons have spent the money, the other
doofuses in charge of businesses all decided that the one-off
increase in sales is some permanent thing, and so they
borrowed to ramp up production to meet the anticipated demand!
How in the hell we got to be the number-one superpower in the
world is beyond me, unless the rest of the world has more
idiocy per capita, or IPC, than we do. Which is truly
horrifying in itself.

There is one capita in particular upon which I am sorely
tempted to lay all the blame for everything. It belongs to a
certain gentleman who is willing to make every economic
mistake in the book if he thinks it will make the economy go.
He is, of course, none other than Mr. Ben Bernanke of the Fed
- otherwise known as Printing Press Ben.

I have been busy coming up with yet more"unconventional
methods" for Ben. Just to help him out a little. So, if you
are willing to accept horrific results down the road, then I
have a solution to the big debt problem today.

All Congress has to do is do two ridiculous things. The first
one is to order the Treasury to print up $10 trillion in cash
and simply buy up all the Treasury debt. It's a simple as
that. At the end of the day, we will have no sovereign debt.
Zero! Zip! And we will have about $3 trillion left over after
doing it! And we can use the money to fully fund Social
Security! And Medicare! And Medicaid! And full prescription-
drug benefits for everybody!

And for the private debt in this country, simply let everybody
declare a special bankruptcy, which I suggest they call
Jubilee Bankruptcy, and pass a new tax law that says you can
claim a juicy Tax Credit for every dime that went bad because
the guy you loaned it to went bankrupt in the big Jubilee! And
then Congress can just print more money to send everybody
their tax refund checks! Suddenly, no more consumer debt! We
have wiped all of the slates clean, and are ready to start
again!

I mean, if you are going to have a fiat currency, then how
come we aren't enjoying the fruits of it? If not, then what is
the point of even HAVING a fiat currency if you are not busy
having fun with it, by destroying it by printing up too much
of it? As Richard Benson of Bensons' Economic Trends says,"A
few months' growth can be purchased if the authorities are
willing to pay any price."

The 7% rise in GDP does not come at any price - it comes at an
astronomical price. And we, that is, you and me, are paying
very, very dearly for it.


Regards,

The Mogambo Guru
For the Daily Reckoning

---Mogambo Sez: The recent pullback in gold is another buying
opportunity, as the government continues printing money and
thus debasing it. This is one of the Iron Laws of Economics in
action.

Thread gesperrt

 

gesamter Thread:

• The Daily Reckoning - Unconventional Methods (Mogambo Guru) - Firmian, 11.11.2003, 21:36
  • Re: Bonner und Wiggin teilweise übersetzt, Mogambo nicht - Firmian, 11.11.2003, 21:45
    • Re: Bonner und Wiggin teilweise übersetzt / Klasse! Selber gemacht? (owT) - -- Elli --, 11.11.2003, 21:51
      • erscheint jeden Tag in Deutsch vom Investors Daily Verlag leider oft gekürzt (owT) - EM-financial, 11.11.2003, 21:59
        • @ libertaryan: Wär schön, wenn Sie das hier täglich reinstellen:-) (owT) - LenzHannover, 12.11.2003, 19:31
          • Re: kommt jetzt täglich (owT) - Firmian, 12.11.2003, 19:43
      • Re: Bonner und Wiggin teilweise übersetzt / Klasse! / @ Elli - libertaryan, 12.11.2003, 01:41
        • Re: Bonner und Wiggin teilweise übersetzt / Klasse! / @ Elli - - Elli -, 12.11.2003, 10:05