The Daily Reckoning - Great Expectations (Bill Bonner)

verfasst von Firmian, 10.12.2003, 22:19

-->Great Expectations

The Daily Reckoning

Baltimore, Maryland

Tuesday, 9 December 2003


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

*** Looking for what ought not to be... the dollar
tumbles...

*** The recession never did its work... $1.5 billion a day
needed...

*** Ivanhoe... thank God for the Chinese... euro-snobs... and
more!
---------------------

You do not make money when thing are as they ought to be.
You make money when things are as they ought not to be.
Properly priced stocks, for example, are no more enticing
than a woman of sure virtue. It's the mispriced stock and
the uncertain woman that offers hope of a really good time.
And with certain women, and certain stocks, at certain
times... you practically can't miss.

As longtime Daily Reckoning sufferers know, we are
connoisseurs of madness and gourmets of absurdity. When
stocks are absurdly priced, it is a reasonable bet that
they will be less absurd sometime in the future. And when
the world goes mad... it is almost certain that it will come
to its senses, sooner or later.

The trouble is, prices can get even more absurd... and the
world can get even madder... and stay that way longer... than
you can imagine.

Surely it is mad for Americans to think that they can grow
rich by spending money. But that is what most believe, and
a delusion the Feds encourage.

And surely it is mad for the Chinese to think they can
build their economy by selling things to people who can't
pay for them. But that is what the Chinese seem to think.

And American economists now believe they have made a
decision to almost write off their hundreds of billions
worth of U.S. dollar assets. Don't worry, they say; the
Chinese have no choice but to continue lending to Americans
- it is the only way they can keep their economy growing.
After all, they are building factories... they are learning
trades... they are producing things - is not that the only
measure of wealth?

Alas, just as Americans can only make believe they are
rich... by spending money they don't have... the Chinese can
only make believe they are growing their economy. Yes,
factories go up everywhere... but they are destined to meet
a demand that doesn't really exist.

But both the Chinese and the Americans still believe... they
still have faith in the future. Things always get better,
don't they?

"The Nasdaq-crash from three years ago never really caused
investors to turn bearish," explains a letter from Steve
Puetz."Before the crash, investors believed that stocks
always go up in the long-run. And when Internet and
technology stocks collapsed, and non-technology stocks
suffered a milder bear market, investors simply viewed the
sell-off as another buying opportunity.

"During the bear market, many investors were simply holding
back and waiting for a sign that the bottom was in place.
So when the stock market began moving higher last spring,
many hesitant investors began jumping on the bull market
bandwagon. As the market continued moving higher, it
converted more and more fence-sitters. During the past few
months, virtually any remaining skepticism has disappeared,
and a consensus formed that a new bull market has begun,
and the economy is on its way to a normal cyclical
recovery. [Ain't that the truth... we just cordially parted
ways with our publicist for Financial Reckoning Day, and
she is returning a portion of her retainer because no media
- neither print, radio, nor TV - want to hear our
"reckoning day" message.]

"Never in history has a market bubble:

* endured for such a long period of time, and
* consumed tens of trillions of dollars of debt,
* while credit quality sank so low.

"For nearly twenty years, the Federal Reserve has been
fighting recession at the slightest hint of a downturn. The
reason the Fed has been quick to fight recession is because
the U.S. financial system is too weak to handle a serious
economic downturn. Before 1982, the Federal Reserve
frequently engineered recessions to cool off the economy.
But no more.

"While most people may think that monetary stimulus by a
central bank is a good thing, there is a huge downside to
this type of activity. By halting recessions prematurely,
inefficient and over-leveraged businesses are allowed to
stay in business. By allowing over-leveraged operators to
stay in business, and then flooding the economy with even
more credit, the average credit quality within the economy
sinks to ever-lower levels.

"In an attempt to avert a serious recession, the Federal
Reserve embarked upon a super-easy monetary policy during
the past two years. As a sign of its resolve, the Fed
pushed short-term interest rates all the way down to the 1%
area. That's the lowest that short-term rates have been in
over fifty years. In the past, 1% interest rates have only
been seen during the depths of depression.

"Certainly, the United States economy has never seen near-
record low interest rates at a time when retail sales and
housing construction where near all-time highs! This
unusual combination has only come about because of repeated
efforts to halt recessions time-after-time over a twenty-
year period."

This absurdity will come to an end someday, Mr. Puetz
assures us.

When? When the Chinese and other creditors come to their
senses and stop lending. That is already happening. Every
day, America must borrow another $1.5 billion in order to
maintain her current levels of spending... or the dollar
will fall.

Well, the dollar is falling. Yesterday, it hit yet another
new all-time low against the euro... and an 11-year low
against the British pound. Europeans invested a net of
about $28 billion a month in U.S. dollar assets, during the
first 8 months of the year. But in September the number
went negative - by $400 million. The end must be coming...

Here's Eric with more news:

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

Eric Fry in New York...

- Due to the unseasonably heavy snowstorm in New York last
weekend, your North American correspondent found himself
temporarily snowbound. So he did what he had to do... He
girded himself for the harsh elements, grabbed his
trustiest snow shovel and trudged out into the swirling
snowstorm. After 30 minutes of shoveling, he had cleared a
nice path from the house to the hot tub. His back was now
aching... But isn't that what a hot tub is for?

- Later that day, your editor soaked his aching back in the
hot tub, while the snowflakes drifted down from the heavens
like so many discarded dollar bills... The beleaguered buck
can't seem to"catch a bid," as the traders say. No one
buys dollars anymore, except foreign tourists and central
banks. Yesterday, the greenback tumbled for the fourth day
in five, hitting another record low against the euro of
$1.222.

- But the stock market enjoyed itself yesterday, despite
the dollar's misery. The Dow advanced 103 points to 9,965,
a mere 35 points away from 10,000, while the Nasdaq added
half a percent to 1,949.

- So swiftly is the dollar declining that few investors
dare to sell gold. Even though many stock market
technicians say that gold is"overbought," who dares to
sell the precious metal when the dollar is so overwrought?
Yesterday, gold slipped a couple of dollars during the
morning, but then recouped its losses to gain 20 cents on
the day to $407.50 an ounce.

- In the gold market,"buy-the-dips" has replaced"sell the
blips." Every time the metal falls a few dollars, eager
buyers start showing up. The gold market has not known such
steady, bullish buying for a long, long time. Ever since
the gold price topped out above $800 an ounce 23 years ago,
the gold market has doled out far more agony than ecstasy.
But the new millennium has been very kind to gold
investors... and to investors in almost all other
commodities. The steady drop of the U.S. dollar and the
steady rise of our national indebtedness has rekindled a
keen interest in the ancient monetary metal.

- But while gold is grabbing the headlines, base metals are
grabbing the biggest profits. The gold price has jumped a
hefty 40% over the last two years, but the nickel price has
nearly tripled and has reached its highest level since May
1989. If we didn't know any better, we'd say that a new
inflationary trend is underway. Alan Greenspan, Ben
Bernanke and the other fellas at the FOMC promised us
they'd do whatever it took to combat deflation... and so it
has come to pass. Deflation is vanquished... and the U.S.
dollar is in the M.A.S.H. unit, an incidental victim of
friendly fire.

-"The Federal Reserve is planting the seeds for future
inflation," says Steve Forbes of Forbes magazine."The
symptoms of an oncoming inflation are abundantly clear.
Commodity prices have soared. The best barometer of
monetary disturbance, gold, is now reaching $400 an ounce,
the highest level since 1996... Greenspan & Co. have ample
opportunity in the weeks ahead to reverse course and get
our monetary ship on an even keel. The longer the central
bank waits, though, the messier and more costly the cleanup
will be... Other countries are not ignoring the incipient
storm clouds. The Australians recently raised interest
rates. So did the Brits."

- Helping to fuel our new inflation is a very old national
tendency: buying things we don't need with money we don't
have. At the Federal level, the Bush Administration is
throwing money around like Democrats in Republican
clothing."President Bush and the Republican-led Congress
are spending money at a rate not seen since World War II,"
the Christian Science Monitor reports."The lasting fiscal
legacy of the Bush administration will include a historic
rise in domestic spending that could affect everything from
consumer interest rates to a fiscal landscape that could
force epic tax increases in future.

-"Much of the $2.2 trillion that Washington is expected to
spend in fiscal year 2004 is for mandatory spending on
Social Security and Medicare," the Monitor continues."But
so-called discretionary spending has also increased some 22
percent during the Bush presidency, from $734 billion in
2002 to $873 billion in 2004."

- President Bush is not the only American to borrow money
he can't repay in order to buy things no one needs... or
wants. Almost every month, American households set new
records for indebtedness. And yet, most folks think the
economy is booming. What's wrong with this picture?

-"Particularly worrisome," says Morgan Stanley's Stephen
Roach,"are the ever-mounting imbalances of a U.S.-centric
world. Nowhere are they more evident than in our forecast
of America's gaping current-account deficit, a shortfall
that we estimate will rise to an astonishing 5.8% of GDP in
2005. Not only is that a record for the U.S., but in dollar
terms - $710 billion - it is a record for the world,
requiring foreign investors to provide America with nearly
$3 billion of capital inflows every business day by 2005.
America's current-account deficit is a by-product of what I
view as two of the world economy's most unsustainable
trends - a saving-short, overly indebted U.S. that is
living well beyond its means, and the inability or
unwillingness of the rest of the world to stimulate
domestic demand."

- The gold bull market may take a breather, but we have a
hunch it isn't over yet.

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

Bill Bonner back in Baltimore...

*** Ivanhoe Energy is in the news. It's the little mining
company that has investors so excited. It is said to have a
huge deposit of copper and gold - in Mongolia. So Bob
Friedland, chief promoter, has spun the company as a China
Play! In May, you could have bought a share of the company
for 50 cents. Now, it will cost you $4.35... or 75 times
revenues. Note to insiders: don't forget to sell.

*** The U.S. has a national savings rate of 0.6%. Any
increases in spending - whether for the war in Iraq,
Medicare, or bribe money - has to come from foreigners. The
Europeans have caught on to the scam and are not sending
the U.S. any more money. Only the Asians are
left... especially the Chinese. Who would have guessed that
America would one day depend on communists to pay for its
wars and its drugs? Thank God for the Chinese... Thank God
they're so thickheaded.

***"The greatest story of the last 25 years has been the
political revival and economic development of China,"
writes our friend William Rees-Mogg in the latest issue of
Strategic Investment."It is a story of which the West is
still only vaguely aware. Yet China over the next 25 years
will change the whole world economy and dominate the
eastern half of the continent of Asia. This development
will be so huge that no global investment decisions can be
made without taking it into account.

"The U.S. balance of trade? A question of China. The price
of oil? A question of China. The European automobile
industry? A question of China. General Motors? A question
of China. The U.S. budget deficit? A question of China. The
market for Microsoft? A question of China. The price of
gold? A question of China.

"We have been living in a restricted global world, inside
the confines of the advanced industrial economies. If one
could calculate the interaction of the American, European,
and Japanese economies, one could pretty well identify the
trends of the future. Now one has to take the Chinese
factor into all one's forecasts. It is the new variable in
every equation; it is already the one that changes most
rapidly, and it will soon become the biggest."

*** The Bank of International Settlements say OPEC is
moving its money out of dollars. Perhaps you should, too.
[We're putting the finishing touches on a"Special
Reckoning" report designed to show you how to protect your
assets should the declining dollar become an all-out rout.
The report -"Bonfire Of The Currencies: 7 Ways To Sell The
Dollar" - will be available in a few days.]

*** It is a beautiful morning here in Baltimore. Cold
weather has driven the bums out of the park... and snow has
covered their beer cans and needles.

*** Your editor felt as though he should move his family
back to America as soon as possible; he is in danger of
becoming a euro-snob. Leaving the Air France flight in
Boston, he made his way through the snow to a different
terminal. There he encountered a scene entirely unlike the
one he had left at Charles de Gaulle airport. Instead of
the polite, coldly well-mannered, attractive agents at Air
France, he found himself confronted by people who might
otherwise be flipping burgers... or doing smash-and-grab
from parked cars.

"Relax..." advised the agent."The flight is an hour or an
hour and a half late. The weather has slowed up the entire
system on the East Coast. So get comfortable..."

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

The Daily Reckoning PRESENTS: Making room for 'Ought' - and
debunking the perfection of mass markets along the way -
Bill Bonner follows the trail of the gold market. This DR
Classique was originally broadcast on January 9, 2003, and
served as the inspiration for Chapter 9 of Financial
Reckoning Day, a NY Times Business Bestseller.


GREAT EXPECTATIONS
by Bill Bonner


"Truth, like gold, is to be obtained not by its growth, but
by washing away from it all that is not gold."
-- Leo Tolstoy

We wander. And we wonder. Whither gold, we ask? We have
already given you our conclusion. We don't know if gold
will go up or not, but it ought to do so.

Today, we take another look at 'ought' - and hope to
discover more of life's secrets.

If 'Ought' were a person, it would not be a bartender or a
good-hearted whore. Ought is not the kind of word you would
want to hang out with on a Saturday night... or relax with
at home - for it would always be reminding you to take out
the trash or fix the garage door.

If it were a Latin noun, Ought would be feminine, but more
like a wife than a mistress. For Ought is judgmental... a
nag, a scold. Even the sound of it is sharp... it comes up
from the throat like a dagger and heads right for soft
tissue, remembering the location of weak spots and raw
nerves for many years.

Ought is neither a good-time girl nor boom-time companion,
but more like the I-told-you-so who hands you aspirin on
Sunday morning... tells you what a fool you were... and warns
you what will happen if you keep it up."You get what you
deserve," she reminds you.

A man who lets himself be bossed around by Ought is no man
at all, in our opinion. He is a dullard, a wimp, and a
wuss... a logical, rational, reasonable lump. Thankfully,
most men, most of the time, will not readily submit.
Instead, they do not what they ought to do, but what they
want to do. Stirred up by mob sentiments or private
desires, they make fools of themselves regularly. Besides,
they can't help themselves.

Of course, Ms. Ought is right; they get what they deserve.
But sometimes it is worth it.

Modern economists no longer believe in 'ought'. They don't
appreciate her moral tone and try to ignore her. To them,
the economy is a giant machine with no soul, no heart... no
right and no wrong. It is just a matter of mastering the
knobs and levers.

The nature of the economists' trade has changed completely
in the last 200 years. Had he handed out business cards,
Adam Smith's would have borne the professional inscription:
Moral Philosopher, not Economist. Smith saw God's
'invisible hand' in the workings of the marketplace. Trying
to understand how it worked, he looked for the 'Oughts'
everywhere. Everywhere and always people get what they
deserve, Smith might have said. And if not... they ought to!

Today, the 'Ought to' school of economics has few students
and fewer teachers. Only here at the Daily Reckoning is the
flame still alive, flickering. Most economists consider it
only one step removed from sorcery.

"Call it the overinvestment theory of recessions of
'liquidationism,' or just call it the 'hangover theory,'"
Paul Krugman begins his critique of the 'Ought to' school.
"It is the idea that slumps are the price we pay for booms,
that the suffering the economy experiences during a
recession is a necessary punishment for the excesses of the
previous expansion...

"The hangover theory is perversely seductive - not because
it offers and easy way out, but because it doesn't," he
continues in his December 1998 attack."It turns the
wiggles on our charts into a morality play, a tale of
hubris and downfall...

"Powerful as these seductions may be, they must be
resisted, for the hangover theory is disastrously
wrongheaded..." he concludes.

In Krugman's mechanistic world, there is no room for Ought.
If the monetary grease monkeys of the Great Depression of
the '30s or of Japan of the '90s failed to get their
machines working, it was not because there are any
invisible hands at work or any nagging moral principles to
be reckoned with... but because they failed to turn the
right screws!

It is completely incomprehensible to him that there may be
no screws left to turn... or that the mechanics might
inevitably turn the wrong screws as they play out their
roles in the morality spectacle.

Krugman is hardly alone. As the 20th century developed,
mass democracy and mass markets gradually took the Ought
out of both politics and markets. In the 19th century, a
man would go bust and his friends and relatives would look
upon it as a personal, moral failing. They would presume
that he did something he oughtn't have. He gambled. He
drank. He spent. He must have done something.

But as economies collectivized, the risk of failure was
removed from the individual and spread among the group. If
a man went broke in the '30s, it wasn't his fault; he could
blame the Crash and Depression. If people were poor, it
wasn't their fault; it was society's fault for it had
failed to provide jobs. If investors lost money, that too
was no longer their own faults... but the fault of the
Fed... or the government. If consumers spent too much
money... whose fault was it? The Fed had set rates too
low... or something.

In every case, the masses recognized no personal failing.
Instead, the failure was collective and technical... the
mechanics had failed to turn the right screws. Ought had
disappeared.

In politics, the masses recognized no higher authority than
the will of the sacred majority. No matter what lame or
abominable thing they decided to do, how could it be
'wrong'?

Likewise, in markets, economists won a Nobel Prize for
pointing out that mass markets could never be wrong. The
Perfect Market Hypothesis demonstrated that the judgment of
millions of investors and spenders must always be correct.

The whole method of modern economics shifted from exploring
what a man ought to do... to statistical analysis."There is
more than a germ of truth in the suggestion that, in a
society where statisticians thrive, liberty and
individuality are likely to be emasculated," wrote M.J.
Moroney in his 'Fact From Figures' book.

"Historically," Moroney explains,"statistics is no more
than 'State Arithmetic,' a system by which differences
between individuals are eliminated by the taking of an
average. It has been used - indeed, still is used - to
enable rulers to know just how far they may safely go in
picking the pockets of their subjects."

Economists attached sensors to various parts of the great
machine as if they were running diagnostics on an auto
engine. Depending upon the information, they twisted up
interest rates... or suggested opening up the throttle to
let in more new money.

Of course, it was absurd. Had not the perfect market
already set rates exactly where they needed to be?

The day before yesterday, the gold market judged a price
for an ounce of the metal at $347. Yesterday, the masses
set the price $7 higher [and today - eleven months later -
the price stands at $408]. What will it be tomorrow? We
don't know. But we note, ominously, that even though modern
economists take the moral 'ought' out of their
calculations, they cannot take the moral hazard out of
the market.

The masses, the lumpeninvestoriat, scarcely notice - but
the more economists and investors ignore the ought... the
more the hazard grows.


Bill Bonner

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gesamter Thread:

• The Daily Reckoning - Great Expectations (Bill Bonner) - Firmian, 10.12.2003, 22:19
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