The Daily Reckoning - One Big Ugly Thing (Mogambo Guru)

verfasst von Firmian, 26.11.2003, 19:44

-->One Big Ugly Thing

The Daily Reckoning

Paris, France

Monday, 24 November 2003

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

*** Credit booms around the world... India Today!

*** Gold still below $400... but not much, and probably not
for much longer...

***"Trade deficits haven't hurt the economy," says
Greenspan... How the Elite Educate their Children... and
more...

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

We first mistook the magazine in our hands for TIME. Its
cover story,"Life on Credit," seemed to describe America's
consumer economy.

Looking closer, we discovered that the magazine is INDIA
TODAY, published not in New York, but in New Delhi. Its
feature article describes the state of consumerism on the
subcontinent, not in the 50 states.

"Indians have never had it so good," begins the article.
"Low interest rates and easy access to cheap loans afford
them the chance to upgrade their homes, cars and lifestyle,
including that Caribbean cruise they always longed for. And
they are going for it."

They are going for it all over the world, dear reader. And
we know why.

"How did we get so lucky?" asks India Today.

"A lot of jobs are coming to India - because of the rush of
outsourcing, experts and the growth in the domestic
economy. This is creating a flow of income in the hands of
people, and people are now more willing than ever before to
borrow on the strength of income flows."

We have no study of the Indian economy. Our ignorance is
near total. But what we lack in information we are more
than ready to make up with theory. Our guess is that India
is merely another of the many nations to be touched by the
magic wand of the International Dollar Standard System.

You will recall, dear reader, that in 1971, Richard Nixon
made a daring and desperate move. After nearly two
centuries of happy marriage to a gold
standard... interrupted only briefly and regrettably, in
time of war... the president turned his back on the nation's
faithful companion and ran off with paper money. Since
then, it's been whee! and whoopee! all over the planet.
Dollars - not gold - have fluffed out banker's vaults all
the world over. Unlike gold, the quantity of dollars has no
practical upper limit. All a nation has to do is to sell
products to the U.S., and it will soon find itself with a
multitude of them.

Then, something funny happens. The dollars act as 'high
powered currency'... the foreign nation's banks put them in
reserve and lend against them....as though they were real
money. All of a sudden, the lucky country enjoys a boom.
Factories are built, wages rise, interest rates fall,
capital assets boom - it is almost too wonderful. That is
the story of the Japanese boom... and bubble. Malaysia,
Taiwan... China... India... each has its turn.

"In layman's language, it means people are getting richer,"
says India Today.

Whether they are getting richer or not, we don't know. But
when a boom begins, people begin to think they are getting
richer. They typically stop worrying about the future; they
are sure it will be bright and sunny forever.

"Good times are here to stay," adds another headline, no
tongue in cheek.

"Why shouldn't I have the small comforts of life when banks
are willing to lend?" asks Maju Sukumaran.

Wages don't often rise as fast as desire. The gap is
plugged with credit and cash flow. Instead of asking the
price of a big-ticket item, the new consumers only want to
know how much it will cost them per month. Indian retailers
have translated this to a simple figure known as EMI or
'equated monthly installments.' A new Scorpio SUV, for
example, is only 19,712 rupees per month... a Honda Hero
motorcycle is only 1,185 rupees each month... a new set of
disposable soft contact lenses is only 525 rupees per
month... and a Sony Wega Theatre can be yours for only
18,531 rupees each month for a year.

What a marvelous boom! What luck! If India is really
lucky... it may even survive...

Over to Eric for more news...

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

Eric Fry, in an even 'luckier' corner of the world...

- Wall Street's stock market stumbled for the second
straight week, as the Dow Jones Industrial Average dropped
140 points to 9,629 and the Nasdaq Composite fell 2% to
1,894. The dollar also stumbled for the second straight
week, slipping more than 1% against the euro to $1.191.

- The gold market - like a patient vulture - observes the
dollar's struggles and awaits an opportunity to feed on its
bloodied carcass. Gold dipped $2.00 for the week to $396.00
an ounce, after briefly nosing above $400 an ounce for the
first time in more than seven years.

- The yellow metal picked up an extra boost Friday, after
Barrick Gold announced it would initiate no new forward
sales of gold (a.k.a."hedges") over the next decade.
Chairman Peter Munk, addressing a gold conference in
London, called his company's hedge book,"too large in the
current environment." That's why Barrick has already
reduced its forward sales of gold to 16 million ounces from
24 million a year and a half ago... Barrick's conversion to
a non-hedger may be one more bullish indicator for the gold
price.

- Meanwhile, the schizophrenic U.S. economy continued
displaying its split personality last week. As"Mr.
Recovery," the economy produced an 18-year high in housing
starts during the month of October. But as"Mr. Slowdown,"
some of the economy's largest employers announced some very
large layoffs. AT&T Wireless, for example, announced plans
to lay off more than 10 percent of its 30,000 workers over
the next year.

- The telecom giant plans to export many of its jobs to
India. General Motors and Ford also announced similar
intentions this week. The two automakers hope to trim costs
by shifting many local jobs to workers in India and China.
As U.S. jobs paddle oversees like Cuban refugees in
reverse, what sorts of jobs will remain here at home? And
as U.S. employers shift their operations to lower-cost
foreign locales, which companies will remain to employ the
next generation of American home-buyers?

- The robust housing starts data encouraged Wall Street's
perma-bulls to remain as perma-bullish as ever. Single-
family housing starts in October were the highest on
record. Meanwhile, building permits in October surged 5.2%
over the September tally, to the highest number since
1984... But again, who will buy the ever-increasing stock of
new and existing homes?

-"Builders have been enormously confident about home
sales, and it's hard to find anything out there that points
to a significant slowdown," one Wall Street economist
gleefully remarked. We do not share this glee. That's
because we understand that a house started is not a house
sold.

- A confident builder, like a confident gambler, cannot
achieve success merely by wishing for it. Builders can
exhibit as much confidence as they like. But unless buyers
continue buying, the confidence merely sows the seeds of
the housing market's undoing. In other words, confident
builders build lots of houses, thereby helping to depress
housing prices overall.

- What a week it was for the dollar and the gold market. As
the dollar swooned toward $1.20 per euro, the gold price
kissed $400 an ounce for the first time since 1996.

-"Here's some big news," Addison reported mid-week.
"Foreign investors and central banks who have been propping
up America's credit-bubble... have begun to lose faith.
Figures released by the U.S. Treasury show net capital
inflows to the U.S. fell more than 91% in September, from
$50bn in August to $4.2bn.

-"The government took a hit, too, as foreigners bought
just $5.6bn in Treasuries, down from $25.1bn the previous
month. Drew Matus, an economist with Lehman, states the
obvious in the FT: 'It appears foreigners may have tired of
U.S. treasuries.'

-"The current account deficit that the U.S. sports with
the rest of the world requires foreigners to sink $1.5
billion into the homeland every day. What happens when
foreigners decide not to sign the checks? Well... the dollar
falls. Fast. Hard."

- And gold would rally. Fast. Hard.

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

Meanwhile... Bill Bonner, back in Paris...

*** Alan Greenspan says trade deficits haven't hurt the
U.S. economy. He doesn't mention it, but they seem to have
done wonders for the Chinese economy... and now the Indian
economy, too. Yes, trade deficits are the evidence that the
residents of Squanderville are squandering their wealth.
But as long as there is something left to squander, the
nation's top banker sees no problem. Stephen Roach warns
that the trade deficit may rise to $3 billion every working
day, by the end of 2004. [More on trade deficits below,
from the Mighty Mogambo... ]

***"UK consumers flock to the shops," says the BBC. All
over the world - especially the Anglo-Saxon world - the
Dollar Standard System encourages people to spend, spend,
spend.

*** China, by contrast, has reacted differently. In Asia,
generally, people prefer to produce, produce, produce...
The Chinese economy has become so overheated that the
government has begun to lie about it. It reports 8% growth;
independent observers think GDP is growing at a 13% or 14%
rate.

*** Gold rose on Friday, but is still trading below $400.
Should you buy now and feel like an idiot for not buying at
$350? Or not buy now, and feel like an idiot when it goes
over $500? Our guess is that you will feel like slightly
less of an idiot by buying now. The bull market in gold is
still very young. If it follows previous patterns, in a few
years... you will feel like a genius. That will be a good
time to sell.

*** Reader Byron King calls our attention to a letter from
tech stock maven Michael Murphy:

"Last year - in my November issue of Technology Investing -
I addressed the concerns of a new subscriber who had lost
89% of his retirement funds in the NASDAQ crash... and felt,
at the age of 58, he would never, ever recover.

"I pointed out that three straight doubles would get him
back to 88% of his capital. And just one more would take
him to 176%. With stock prices so depressed, I thought he'd
be likely to squeeze at least the first three doubles into
the seven years he had left before retirement."

"In essence," King explains,"if you lost a bundle in techs
in the 2000-2001 crash, you can make it all back
with... techs in the coming tech boom. And all you have to
do is buy tech-stock options that will continuously double
your money. Just do that a couple times in a row, and you
will be one rich hombre. Hey, I think that the Murph' is
onto something. If you keep doubling your money, you can
become fantastically rich. Follow this"perpetual options
strategy" for a while, and you will have so much money that
you will never be able to fold it all. Has Dr. Greenspan
heard of this technique? Adios, national debt. But,
shoot... I need some green-buck cash to fund this neat new
trick. Hey, wanna buy some gold?"

*** Poor little Edward. He has a young woman who comes over
in the afternoons to help him with his homework... and
another woman who comes in the evening to check it. After a
meeting with the headmaster, his mother is taking no
chances. She wants to be sure he does not fall behind while
she is traveling in America.

"How the Elite Educate Their Children," is a popular book
in France. It was intended as an attack on the educational
system and the attitudes of the upper classes, who push
their children to do schoolwork night and day in order to
get them into the best schools.

But for many ambitious parents, including this writer's own
wife, the book is a useful handbook. Forget the criticism;
they just want to know how to do it.

So much of what we know is not worth knowing. Among the
things not-worth-knowing is that France is a socialist
country. Education, in America, is"free" and very
expensive. Typically, the rich pay much more to educate
their children than the poor. Our son's 4 years at St.
John's College, for example, cost about $150,000 in pre-tax
earnings. Too rich to need"aid" and too dumb to lie about
it... we paid cash.

A reader may get an idea of the desperate state of this
author's finances by realizing that he has 5 more children
to put through college. In the Land of the Free, it will
cost us about three-quarters of a million dollars, pre-tax.
But in France, it would cost us very little; all we would
have to do is have children who get good grades. Then, they
would have the doors of the best schools in France open to
them... at practically no cost.

Since it is the children of the rich - those whose mothers
are at home, pushing them to do their homework - who
typically get the best grades, it is also the children of
the rich who go to the best schools and spend the most time
in them. Thus do the taxes of the middle classes subsidize
the educational system... and the children of the wealthy.

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

The Daily Reckoning PRESENTS: In an economy that reaches
for prosperity by printing and spending more and more
money, a certain side effect will inevitably throw a wrench
in the works...


ONE BIG UGLY THING
By the Mogambo Guru

"Fed governor Bernanke believes that it is the low interest
rate policy of the Fed that has laid the foundation for a
sustainable economic expansion," writes Frank Shostak, one
of the big-brained guys with an Austrian-school bent who
often shows up on the Mises.com website."The governor
argues that the low interest rate policy has been
instrumental in revitalizing household and business balance
sheets."

Now, if you are like me, and I can only pity you if you
are, then you automatically disagree with anything that Ben
Bernanke says, does, or thinks, and if I could get some
full-length shots of him perhaps I could muster up a little
criticism of his wardrobe, maybe his posture, and if his
nose was too big perhaps I could get in a few shots about
that, too. As concerns macroeconomic policy, especially
monetary policy, then in the majority of cases you have a
duty, as a thinking human being who can read, to criticize
him without pause, and you would be absolutely right to
have done so.

This is one of those times. How in the hell can Bernanke -
and I find that I am beginning to say this man's name with
a hollow monotone that signifies cold hatred and loathing -
possibly believe that balance sheets are"revitalized" by
these low interest rates,? Only a crazy person could
POSSIBLY believe that"revitalized" is defined to mean
"Being saved at the last minute from imminent destruction,
by merely postponing and intensifying the destruction."

Mr. Shostak seems to agree with me, in his own fashion, and
continues,"But how is this possible given the massive load
of debt relative to income? Moreover, how is it possible
that a sustained economic expansion can commence while
savings have almost disappeared? The so-called recovery
that we are currently observing is nothing more than a
reshuffling process of real funding from wealth-generating
activities towards wealth-consuming activities." Now, I go
far, far, farrrrrr beyond that, and say that this"so-
called recovery that we are currently observing" is nothing
more than raw government spending.

To prove my loudmouth assertion, Fred Hickey, editor of The
High Tech Strategist says,"Over the past couple of weeks,
I've listened to scores of tech company conference calls.
In nearly every case, from Cisco to Foundry to Motorola to
CDW, the story was the same - their best customer was the
U.S. government."

It has already been shown [often by Dr. Kurt Richebächer
himself in these pages] how the government uses hedonic
measurements, so that each of those dollars of sales of
technology is actually multiplied by about six times, as I
recall, so as to account for the increase in power per
dollar. So, and I love this stuff, their"best customers,"
i.e. the government, are actually SIX new"best customers,"
since each of those dollars in sales is multiplied by six.
And there was no, none, zero, zip effort, or money spent,
or time consumed, or raw materials transformed! Therefore,
the astonishing 7.2 increase in productivity pales before
the gigantic GDP gain of these technology sales to the U.S.
government, being, as they are, mere hedonic measurements,
and therefore are completely bogus. And don't"bogus" and
"Federal Reserve" seem to cleave so naturally together?

And as much as I loath Keynes and everything he stood for,
I gotta grudgingly admit that he was right about one thing:
it is NOT okay to run deficits forever. And deficits ARE
good for stimulating the economy during downturns. The
point of disagreement I have with him here is not whether
deficit spending can stimulate the economy, but whether or
not the stimulating is a good thing. I say it is not, in
general, a good thing.

For instance, the government spending borrowed money so as
to buy guns and tanks will certainly stimulate the defense
industry, and there will be the inevitable spillover
effects into the general economy that will generate some
macro-economic benefits in the aggregate, as the employees
of the defense industries cash their paychecks and buy
things and services. And the defense industry will borrow
and expand, and ramp up production, and consume goods and
services, and everybody will have a wonderful time making
money, and the economy will be permanently altered. Then,
one day, the powers-that-be will decide that they don't
need any more guns or tanks, and then the party is over,
and then what in the hell does everybody do? The whole
economy depends on making guns and tanks!

And that, in a nutshell, is the reason why I hate deficit-
spending, and much prefer that the powers-that-be just let
the country sink into a cleansing recession, so that the
waste and stupidities are washed out, including the elected
yahoos that got us into the mess to start with, the
resources are put to uses that correspond to real demand by
real people who have real money to spend, the morons who
invested in the stupidities and mal-investments are wiped
out, and everybody learns a little lesson from watching
those guys standing in the welfare lines because they
speculated on such superfluous gee-gaws and gimcracks, and
lost everything for their stupidity.

But here we are with Alan Greenspan, Ben Bernanke and all
the rest of those pompous jackasses who call themselves
"economists" - and I laugh - Hahaha! - in mirthless glee at
the sheer gall it takes for them to do that - who work at
the Federal Reserve, and who all think THEY have found a
way to make this scheme work. So, apparently it CAN be
done, even though it has never, ever worked before.

Unfortunately, all that extra money and credit will work
its way into prices, because that is where the money always
goes, as has been proved by unanimous historical precedent.
Sometimes the bulk of it goes into the prices of assets,
like now, where we witness the rise in stock prices far
beyond anything that has been seen before, or into loaning
deadbeats money to go farther into debt than they have ever
gone before, where we also witness the rise in bond prices
far beyond anything that has been seen before, or into real
estate, and we witness the rise in housing prices far
beyond anything that has ever been seen before, or into the
expansion of government and government programs, where we
witness a government that is larger than anything that has
ever been seen before, and with its attendant wealth-
redistributing programs, more and more of them, overlapping
and contradicting one another, all competing for a larger
and larger share of the economy, the ones that doom us as a
nation, that are larger and more epidemic than anything
that has ever been seen before.

You will probably notice by the way my voice has raised to
a high-decibel, piercing squeal that I am getting so angry
that I am on the verge of ripping this awful straightjacket
right off and going absolutely berserk. And the reason is
that it is this rise in prices that is always the thing,
the one thing, the big thing, the One Big Ugly Thing that
ultimately destroys the economy, any economy, that tries to
print and spend money. Ergo, the economy of the United
States IS being destroyed by the Fed, and WILL be destroyed
by the Fed and their coterie of ignorant, self-important
morons, as exemplified by the aforementioned Ben Bernanke.
Like I said, it is as simple as that.

As Exhibit A in defense of my argument, I present Jeffrey
Tucker, who reports that"Federal discretionary spending
expanded by 12.5 percent in the fiscal year that ended
Sept. 30, capping a two-year bulge that saw the government
grow by more than 27 percent."

As Exhibit B, I say take a look at the labor strikes, the
calls for higher minimum wage, the demand for prescription
drug benefits, etc. as what they are at root: Demands for
relief from prices that are always rising faster than
incomes, and has now made so many things unaffordable.

This is always the result of excess money and credit. Get
used to it, because it gets worse, a lot worse, from here
on out.


Kind regards,
The Mogambo Guru
for the Daily Reckoning

P.S. And in the end, what will happen, because it has to
happen, is that prices will rise and rise, and the poor
will end up in worse shape than they are now. And the more
extreme the level of government mandates, the more extreme
the level of misery that will be inflicted on the most
vulnerable of the society; the poor, the sick, the old, the
retired, the retarded, and the children. And it will get
worse and worse and worse, and then one day it all boils
over.


---Mogambo Sez: If you want a real good piece of investment
advice, take it from me, the Mogambo, and buy things that
are going to be a hell of a lot higher in price in the
future. Like gold. And unlike near anything else you can
name.

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gesamter Thread:

• The Daily Reckoning - One Big Ugly Thing (Mogambo Guru) - Firmian, 26.11.2003, 19:44
  • Dt. Fassung ohne Mogambo, dafür mit Bonner vom Freitag ;-) - Firmian, 26.11.2003, 19:48