The Daily Reckoning - The Currency Chain Gang (William Rees-Mogg)

verfasst von Firmian, 13.01.2004, 22:02

-->The Currency Chain Gang

The Daily Reckoning

London, England

Monday, 12 January 2004


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

*** Erring on the side of recklessness... eliminating full-
time employees...

*** Wages down... what will the lumpen spend? The China
Bubble...

*** Fan mail... Let them eat democrats! And more!

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

Erring on the side of recklessness.

Who can know how long this stock market rally will last? Or
whether employment will really pick up or not? Or, when the
Chinese will stop lending?

But Americans have decided to go ahead - as if everything
will turn out all right, no matter what. The thought
occurred to us when reading the latest employment reports.

It is still a"jobless recovery" as near as we can
figure... or even a jobless non-recovery. We suspect it will
soon be a jobless bust... but hold that thought for a
minute; today we're not making predictions, we're merely
marveling at the extraordinary optimism of American
investors.

While investors are optimistic to the point of
recklessness... people who actually know something tend to
be more cautious. While the little guys buy appalling
stocks at outrageous prices, the real pros - Soros,
Buffett, Templeton, Rogers, Grantham et al - head for the
exits. And now we find our friend Marc Faber saying that
business managers are currently 4 times as likely to sell
their stock as buy it.

And when managers hire new employees, again they show
timidity, not temerity; they are more likely than ever
before to pick up 'temporary' workers, rather than full-
time ones.

Faber quotes Jose Rasco of Merrill Lynch:

"... The temporary worker is the marginal worker and is the
first in the door. If demand remains strong, then companies
can hire those workers on a full-time basis. If that's the
case, then maybe we will see a traditional recovery led by
job creation and income generation. Or, conversely, the
rise in temporary workers could be a sign that employers
are beginning to apply accounting principles to human
resource departments. Instead of hiring someone on a full-
time basis, corporations may be moving their labor risks
from being a fixed cost to a variable cost. Rather than
bringing someone on board and paying them a full-time
salary and benefits, companies can keep them as temp/flex
workers whose workload can be adjusted with the vagaries in
demand. With companies lacking pricing power, and input
prices rising... what can a company do to expand margins?
The answer is obvious. The easiest way to boost corporate
profitability is by lowering its biggest fixed cost:
labor!"

You may be shocked to discover this, dear reader: in
America's consumption-led economy, real wages are actually
going down. The rush of money into stocks over the last 15
months has not come from increased earnings... but from
increased debt. Lower rates encouraged consumers to re-
mortgage their homes. Mortgage debt rose... but so did other
consumer debt.

Where then did the money go?

"... It seems that only a small part of it was spent,"
concludes economist Gerard Minack."Yes, the household
sector is still running a cash flow deficit (spending more
on consumer and capital items than it receives in cash
flow), so the shortfall had to be financed. That cash
shortfall was $113 billion in the year to June. But that is
relatively small compared to the increase in borrowing. As
it turns out, it seems that much of the Fed-facilitated
borrowing has gone into Wall Street."

The household sector became the biggest buyer of stocks in
the first half of last year - buying $416 billion of them,
despite the fact that real incomes were falling.

Real wages have gone down over the last 10 years. But the
cost of labor still goes up - because health insurance
premiums and other costs have been rising at double-digit
rates.

This is very bad news for the American proletariat. Even
though he gets less money, his employer is still under
pressure to get rid of him!

And here we have another little wrinkle in the fabric of
modern, degenerate American capitalism. Corporate managers
have no loyalty, neither to their shareholders nor to their
workers. They pay themselves extravagantly, sell their own
stocks short... and treat employees like inventory. The idea
seems to be to cut costs on everything but themselves... to
hire the cheapest employees possible, just in time, in
order to meet short-term objectives.

Nobody holds anything in stock anymore. No excess food in
the pantry. No excess products on the shelves... no excess
money in the bank, no excess employees on the payroll.
Inventory is an expense item. Erring on the side of
recklessness, Americans live hand to mouth... paycheck to
paycheck... as if nothing will ever go wrong.

"NO ONE is making long-term investments," writes Hirschel
Abelson after surveying the dozens of companies in which
his fund invests. Neither in equipment, nor in people. Of
course, this is no way to build an economy or make people
rich. In the modern, globalized economy, if an American is
to continue earning 10 times as much as a Indian, he has to
produce 10 times as much. Which means, the society in which
he lives has to invest massive amounts of money in new
equipment and training. Instead, corporate America seems to
care only about cutting expenses to make the next quarter's
numbers... and its own stock options.

The approach is not only reckless... it is hopeless.

"... We are at the point where peak efficiency has begun to
take hold and sources for further cost-reduction are
becoming harder to recognize," Abelson continues.

Eventually, business managers run out of costs to cut. Then
what?

Over to Addison for the news:

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

Addison Wiggin in Paris...

- Just as we were getting used to bashing Paul O'Neill for
toeing the party line, the man up and got himself fired for
failing to do so. Now we're dangerously close to becoming
fans... if not for his views, then certainly for his
gumption.

- Then again, Mr. O'Neill could just be trying to sell
copies of his new tell-all book,"The Price Of Loyalty." In
any case, O'Neill told viewers of the CBS rag 60 Minutes
last night that removing Saddam Hussein was a top priority
of Bush the younger upon taking possession of the White
House. O'Neill saw no convincing evidence of Weapons of
Mass Destruction during his tenure. Furthermore, he was
told by the Vice President that Reagan proved that
"deficits don't matter."

- What a relief it must be for the president to have the
docile Mr. Snow as a Treasury Secretary instead, huh? In
contrast to turncoat O'Neill, Snow is still among the
faithful - even going so far as to cheer on the president's
audacious new space plan. After all, every president worth
his salt needs a space plan. Why not a ridiculous and
completely insane one? Why Snow, rather than a NASA
official, was talking up the plan to build a colony on the
Moon and send Americans to Mars remains a bit of a mystery,
however.

- But then again, Snow is a"can do" optimist. Exactly the
guy Bush needs to get the job done. He's just as confident
the U.S. can put a man on Mars and cut the deficit in half
while doing it... as he is that they can jumpstart consumer
capitalism in the deserts of Iraq... that he talk the
Chinese out of their desire to hollow out the American
manufacturing sector and sell dirt-cheap gee-gaws... and
that the American consumer, going bankrupt at an historic
pace, will miraculously provide the necessary 'stimulus' to
end the 'jobless' part of the Great Jobless Recovery of
2003. Ho hum... all in a day's work.

- We here at the Daily Reckoning are fairly confident that
as long as John Snow says these things in public, he will
be able to keep his office at the Treasury. Heck, even if
the plan doesn't work 100%... even if the rest of it goes
south... Snow will at least find himself on the short list
for a luxury suite on the moon, far, far away from the toil
and trouble that will undoubtedly come from cleaning up the
mess they leave down here on the earth.

- Meanwhile, back to reality. Friday's new job numbers make
the mission to Mars the more plausible of Mr. Snow's two
speech subjects. Far from the 200,000 new jobs he was
expecting in December, what Snow got instead was the
discount version of the report. An anemic 1,000 new jobs
were created in December. In fact, only 144,000 jobs were
created in the whole of the fourth quarter."That bad piece
of jobs data makes me wonder," wrote Everbank's Chuck
Butler this morning,"how long the 'exceptionally strong'
labor productivity story can continue."

-"How long" has become a familiar refrain around these
parts. We ask the question so often, our wives have begun
ask tune in with us.

- In the face of continued job weakness, we lamented on
Friday (although admittedly a bit confused by reports on
the subject), we noted that personal debt is being relied
upon by as diverse organizations as the American Banking
Association and the American Bankruptcy Institute to bring
the economy back from the brink of recession.

- How long can that trend continue? Well here's a
disturbing and tiresome clue from our friend John Mauldin:
"Consumer short-term debt... is approaching a historical
turning point. Having risen at an abnormally fast rate for
ten years, it must soon adjust itself to the nation's
capacity for going into hock... which is not limitless.
Whether the rate of growth in consumer debt will slow down
is no longer the question... it must slow down."

- Surprise: That quote was taken from the March 1956 issue
of Fortune magazine. Other sources throughout the years
have made similar comments, which were all obviously wrong.
"How long?" Mauldin asks."My guess is [financial reckoning
day] will not be this year... there is still some room left
on the credit card."

- Perhaps reserving seats now for the next shuttle to Mars
is not such a bad idea.

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

Bill Bonner, back in England...

*** Why bother to stockpile labor? China has millions of
laborers:"Other Asian lands ran out of unemployed people
as they developed and had to shift to more sophisticated
output to accommodate increasingly expensive labor," writes
Gary Shilling.

"China has not. Almost half of its 320 million farmers are
not needed to work the land, by the reckoning of the
Ministry of Agriculture. There are around 80 million
redundant workers in government and government enterprises,
not to mention the 100 million squatting in the coastal
regions, looking for work, and also the soon-to-be-
employable youth - a quarter of the Chinese are under age
15. So China has 500 million potential new workers.

"How long could China maintain 8% annual economic growth
before exhausting this huge pool of unemployed? About 30
years, assuming 4% annual productivity growth - no great
feat for a developing country that can adopt modern
technology. Also, the growing Chinese middle class promises
strong domestic demand, which will reduce dependence on
exports and lead to greater imports. Maybe one day each of
those 1.3 billion Chinese will drink one can of Pepsi.

"But if you are awed by China's current and potential
power, think twice. Recall the awe over Japan during its
1980s bubble days. Remember how we were all going to be
sweeping up around Japanese computers? My contrarian
forecast in 1988 was that Japan's bubble was about to
break. I feel the same way now about China."

"... China's two recent growth engines are highly
vulnerable. First are exports. Official data show that from
1997 to 2001 exports averaged 21% of GDP but accounted for
48% of GDP growth. And most of those exports go directly or
indirectly to the U.S.. American consumers have ended their
20-year borrowing-and-spending binge and are embarking on a
saving spree... So the outlook for Chinese exports is
glum..."

*** We flatter ourselves with more fan mail:"I am an
active reader of the Daily Reckoning," begins one letter.
"Whenever I am getting too pleased with the upward movement
of the stock market and my 'greedy' inclinations, a dose of
your column puts some reality on the picture. As a daily
reader, I am quite clear on your point of view of the
current situation and the dire consequences you paint for
the future.

"Rather than repeating the same story on a daily basis, I
would ask that you occasionally present a constructive
investment strategy that could help me, a naïve investor,
increase the possibility of economic survival if your
prophecies come true. If the objective of your analysis is
to make me want to subscriber to the various newsletter
advertisements interspersed with your invective against the
system then I would be most disappointed."

***"Yup! Your critics are right!," says another."They
would have made a ton of money investing in the absolute
wreck of the market! Of course you told them to buy gold
(stocks coins and bullion) and instead of a ten-month run
they would have celebrated two anniversaries of undeserved
success by now. With a little thought they could have cake
walked from March 2000 until the present but that's another
story. You guys are what you say you are; a well run, easy-
to-read journal that costs nothing.

"Your contrarian view is the most powerful antidote to the
moronic positivism we get in the mainstream media. The
individual who wished you were more positive (06/01) and
wanted you to talk up alternate energy or some such thing
really needs to look more closely at himself and the world
he lives in. There are very real barriers preventing the
accomplishment of 'good' things in this world. You touch on
many of them in your work and there are many many more.
Your role (to me) is to shine a light on the intellectual
corruption and self interest that passes for reasoning
amongst the most powerful in our society. Please keep up
the good work. You are a true rarity."

*** Another do-gooder gone bad. That is what we make of
press accounts of Armin Meiwes' prosecution.

Poor Meiwes thought he had a solution to the problems of
poverty and overpopulation. He was no doubt discussing his
program with Bernard Brandes just before the two cut off
Brandes' most private part and ate it. Then, wouldn't you
know it, Brandes died, either as a result of blood loss
from the butchering or as a consequence of the fact that
Meiwes slit his throat. And now the British press has made
a big stink about it, branding Meiwes the 'Cannibal of
Rotenburg.' But Meiwes is not merely a pervert; he's an
activist.

"We could solve the problem of over-population and famine
at a stroke," said he, according to the testimony in The
Times of London."The third world is really ripe for
eating."

But wait, a fellow omnivore thought he saw a flaw in
Meiwes' utopia:"If we make cannibalism into the norm, then
everyone will start eating each other and there will be
nobody left."

"That's why I'm not keen on eating women," Meiwes replied.

It seemed never to have occurred to either of them
that... just perhaps... not everyone would want to be eaten.
Here at the Daily Reckoning, for example, we got through
all last week without anyone being eaten... or even
expressing a desire to be eaten. But of course, we're
contrarians.

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

The Daily Reckoning PRESENTS: The U.S. dollar and the
Chinese renminbi remain joined at the hip... but for how
long?


THE CURRENCY CHAIN GANG
By William Rees-Mogg

The boom on Wall Street in 2003 was not irrational, but it
could draw investors into a trap. The boom itself is a
recovery from the declines of the previous three years. The
market has not broken through its 1999 and 2000 highs, and
it is unlikely to do so in the coming months, though I
expect Wall Street to continue to be quite bullish through
the election in November.

The market has been reacting to the renewed growth in the
U.S. economy and the strong rise in corporate profits. In
the third quarter 2003, the U.S. economy grew at around 9%
annualized, an unexpected rate of growth for a mature
economy. In the same quarter, corporate profits rose by 30%
and broke through the $1 trillion barrier for the first
time.

I find in the last few weeks that I have regularly been
referring to"trillions." When I entered journalism, we
counted in"millions"; the inflation of the 1970s taught us
to think in"billions"; the 21st century is teaching us to
think in"trillions." I wonder who the first"trillionaire"
will be. So far as I know, no individual has yet reached
the $100 billion mark, though Bill Gates may have done so
at the top of the Internet boom.

I did not expect so strong a performance from the U.S.
economy, and I am still uncertain about the underlying
causes. We do, however, know that it was led by U.S.
consumption. It was not savings or exports that did it, nor
was it a higher inflow of foreign funds. Foreigners have
become nervous of the dollar. I am nervous of this boom in
consumption, since it has been financed by a boom in debt,
based on the huge borrowings from Japan and China. The
prosperity of the United States in 2003 has not been the
product of U.S. earnings but of borrowing the earnings of
Asian countries.

The world trade and currency relationships reflect this
tension, and have been following exactly the forecasts we
have been making. On this, your editors and I have the same
analysis. It is not an analysis of any single currency, of
the dollar, the euro, the yen, the pound, or the renminbi,
but of the unsustainable relationships between them. We
also treat gold as another currency and use movements of
the gold price as a very significant indicator of the
underlying balance of the market. Gold has broken through
$400 per ounce and seems set to go much higher. Analysts
regard $500 as only the next step.

In the last month, our current forecasts have all been on
track. The dollar has continued to fall against all the
other currencies except the Chinese renminbi, which is tied
to it. This has largely corrected the overvaluation of the
dollar, but has not corrected the trade deficit of the
United States, which currently runs at $500 billion, or
half a trillion dollars. It has also produced an acute
undervaluation of the renminbi, which is reinforced by
China's extremely low labor costs.

The yen has risen closer to the 100 yen-to-the-dollar
relationship. In order to maintain export competitiveness,
the Japanese have continued to buy dollars on a massive
scale. The U.S. trade deficit with Japan is therefore
recirculated and used to finance the U.S. deficit.

Britain and Europe are on the receiving end of this
movement of the dollar. The euro has risen to its highest
level ever. The pound, which has a different trading
pattern to the euro, has fallen against the euro but risen
by more than 20% against the dollar. The result is that
European exports, which already had high costs, have ceased
to be competitive, particularly with the exports of Asia.

Germany is sometimes referred to as"the engine of Europe,"
but the German economy is sick and has fallen back to zero
growth. Germany is a manufacturing and exporting country,
and German manufacturers are not competitive in world
markets. In the whole Eurozone, youth unemployment is one-
sixth, a social disaster.

Even China is not free from problems. An undervalued
currency is obviously helpful as a way of undercutting
one's neighbors and promoting exports. China has tens of
millions of workers to introduce into its expanding modern
economy. But an undervalued currency introduces
inflationary pressures, and China is beginning to suffer
from them.

At some point, the renminbi will have to be revalued
against the dollar, or floated. Floating would be much the
better solution. The present situation, in which the dollar
and the renminbi are tied together, but all the other major
currencies are floating, is illogical and damaging for all
of them. President Abraham Lincoln said that one cannot
have"two nations - one slave and one free." It would be
equally true to say that the world cannot have two sets of
currencies, one floating and one fixed. That is
particularly true when the fixed currency is the most
competitive on Earth.

The dollar will not be able to settle down to a more stable
rate so long as it is fixed to the renminbi. Nor will the
euro return to a more competitive level. At present the
United States and China are like two fugitives from a chain
gang, tied together at the ankle. It may, however, be
difficult to cut off their fetters until the U.S.
presidential election is out of the way.


Regards,

William Rees-Mogg
for The Daily Reckoning

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gesamter Thread:

• The Daily Reckoning - The Currency Chain Gang (William Rees-Mogg) - Firmian, 13.01.2004, 22:02
  • Dt. Fassung vom Investor-Verlag - Firmian, 13.01.2004, 22:05
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