The Daily Reckoning - Corrupted Thinking In A Money Culture (Kurt Richebächer)

verfasst von Firmian, 28.01.2004, 21:05

-->Corrupted Thinking In A Money Culture

The Daily Reckoning

Paris, France

Tuesday, 27 January 2004


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*** When everything is make believe... what do you believe?

*** $1.9 trillion in deficits ahead... dumb money... stupid
money... and money so imbecilic it ought be put to sleep...

*** Stocks soar... gold slumps....Mozart's birthday... the
Seige of Leningrad... and more!

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

When everything is make believe... you don't know what to
believe.

Americans pretend to get rich by mortgaging their houses
and spending the money. Their government pretends to
protect future generations by running up huge debts that
they will have to pay. The Fed pretends to rescue a debt-
soaked economy by splashing on more credit! The Chinese
pretend to build their economy with the largest vendor-
financing scheme in history - lending more to their
American customers than they can ever hope to get back.

In a perfect world, people know nothing... and they know it.
But on today's conceited ball, people know less than
nothing... and think they know everything. They have more
information than ever before... but it is phony information,
based not on reality, but on pretense.

We refer to a great many things... almost anything, in fact.
But here at the Daily Reckoning, we turn our attention to
the economy: it is a dismal calling, we know, but we have
to earn a living.

What triggered this reflection was a particularly lame
editorial in today's International Herald Tribune in which
NYTimes columnist Bob Herbert worries that"Outsourcing
jobs is a threat to the U.S. economy."

He quotes Craig Barrett, CEO of Intel:"The big change
today from what's happened over the last 30 years is that
is no longer just low-cost labor that you are looking at.
It's well-educated labor that can do effectively any job
that can be done in the United States."

Mr. Herbert thinks he has identified a problem. Like every
earnest editorialist, he urges action."We can grapple with
this problem now, and try to develop workable solutions. Or
we can ignore this fire in the basement of the national
economy until it rages out of our control."

The NYTimes began grappling with this problem two weeks
ago, when a tag-team of Senator Charles Schumer and former
Wall Street Journal editorialist Paul Craig Roberts wrote
an op-ed piece on the subject. The two wrasslers were all
for fighting it out in a free marketplace... as long as we
were winning. Their point was that the advantage seems to
have shifted to the Indians and Chinese. They, too, wanted
someone to do something about it.

Thanks to Greenspan and Bush, plenty of jobs were being
created, they noted, but they were jobs in Guandong
Province, China and Bangalore, India, to use a couple of
examples out of thin air.

What neither Greenspan, Bush, Roberts, Schumer or Herbert
know is anything. How many jobs would be outsourced if
America had to settle its accounts in real money? How many
foreigners would find employment in overseas factories if
the Fed had not cut rates and lured Americans into a
spending spree? What is the net effect on U.S. prosperity
of cheaper imports... do lower costs offset lower earnings?
Why is it better for an American to earn $25 per hour than
25 Indians to earn $1 each; why do Americans deserve more?
What will happen when the whole fraudulent system blows
up... and Americans are left with debts they can't pay... and
foreigners are left with mountains of products and no one
to sell them to?

As always... we wait to find out...

Over to Eric... with more news:

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

Eric Fry in the wilds of Manhattan...

- Sometimes, the most obvious trade is also the most
profitable trade... (until it isn't). American stocks are
rising almost every day - so what could be more obvious
than buying more of them before they go up again tomorrow?

- The"dumb money," taking note of the obvious, does the
obvious thing: it buys stocks. Of course, it roils the
"smart money" when the"dumb money" adds to its winnings
day after day. But sometimes, this can't be
helped... sometimes the dumb money prospers, no matter how
much their prosperity irks hyper-analytical contrarians and
perma-bears.

- Thus does the dumb money add to its pile of dumb money.
(Occasionally, the pile grows to such a spectacular size
that it becomes"stupid money.") Meanwhile, during times
like these, the"smart money" watches its supreme
intelligence reside in an ever-smaller stack of dollar
bills. Occasionally, during the stock market's most manic
phases, the smartest members of the smart money contingent
can become so destitute that they can scarcely afford to
buy a paperback copy of Graham and Dodd's"The Intelligent
Investor."

- Today, stocks are going up... and they keep going up, no
matter how many admiring fans they attract along the way.
Sentiment indicators be damned; the more that investors
love stocks, the more stocks soar. The lumpeninvestoriat's
ardor for equities has been sufficient to power all the
major stock market indices to new multi-month highs.
Yesterday, the Dow and Nasdaq both soared to fresh two-and-
a-half-year highs. The blue-chip Dow jumped 134 points to
10,703, while the tech-powered Nasdaq soared 30 points to
2,154.

- Meanwhile, the dollar drafted behind the advancing stock
market, gaining altitude steadily throughout the day. By
the end of the New York trading session, the greenback had
gained about three quarters of a percent to $1.247 per
euro. But the rallying U.S. dollar and stock market seemed
to sap enthusiasm for bonds and gold. Treasury prices
slumped, pushing the 10-year yield up to 4.13% from 4.07%
last Friday. Gold dipped $1.30 to $406.70 an ounce.

- Returning to the stock market, exactly how passionately
does the lumpeninvestoriat love its common stocks?
Professional options trader, Jay Shartsis, provides a
partial answer.

-"Well, they finally did it," Shartsis says with
amazement."The NYSE daily new lows list fell to absolute
zero last Friday. Of course, new lows have been running
next to nothing for the past six months now.

-"I'm looking at a chart of the 10-day new highs versus
new lows for the combined NYSE and Nasdaq, which goes back
to 1992," he continues."What is truly remarkable about
this chart is that through the 'roaring '90s,' there were
always a fair number of new lows. Even after 1995, when the
mania went into high gear, there were always a few hundred
new lows on a 10-day basis, with some sharp market
corrections that sent the 10-day new low figure over 3000.
How long can this go on?"

- Turning his attention to another once-reliable sentiment
indicator, Shartsis notes,"Smaller traders haven't been
this optimistic since 2000. Option volume surged last week
- reported to be 40% greater than any week in the past few
years. Forget about a 5% correction; the last time the
market had a 3% correction was nearly four months ago. Last
Friday, January option expiration day, the equity put/call
ratio for the four listed option exchanges combined dropped
to a 0.31, its lowest reading (lots of calls) in more than
three years."

- The mutual-fund-buying lumps may be even more exuberant
than their option-buying counterparts. The Vanguard Group,
America's second-largest mutual fund company, reports that
it must hire hundreds of workers to handle a phone-call
glut at its three customer service centers. The surging
call volumes have left Vanguard customers waiting on hold
for an average of 6.7 minutes, according to Boston-based
researcher Dalbar Inc. The average wait for fund companies
is 58 seconds...

- Of course, when you really think about it, is 6.7 minutes
too long to wait for professional money management?

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

Bill Bonner, back in Paris...

***"Money continues to pour into this market," says the
Street.com. Where's the money coming from? Real earnings
are going down.

People are practically being forced into speculating in
stocks. Savers cannot afford to leave their money in CDs.
The interest they earn is less than the increase in the
cost of housing and energy. So, they go into junk bonds and
junk stocks - desperate for a decent return on their money.
Fools rush in...

*** Howard Dean says he is troubled by Greenspan's
"willingness to bend in political winds." Is he kidding? We
do not approve of vulgarity, but if even a junior senator
from a small state breaks wind anywhere in the continental
48, the Fed chief is practically blown over.

*** America needs honest political labels, we conclude. The
terms"Republican" and"Democrat,""liberal" and
"conservative," have almost no meaning worth trying to look
up. George W. Bush is the biggest spender on military and
social programs the U.S. has ever seen. Yet, the media make
believe that he is a 'conservative.' His agenda has nothing
in common with traditional, modest conservatism. It is a
radical program of Guns and Butter that will add $1.9
trillion to federal debt over the next 10 years.

The neo-conservatives tell us that all this spending will
make the nation safer and freer. We are 'rising to the
tasks of history,' says the president. If only future
generations, who will be shackled to the ball and chain of
Bush's deficits for decades to come, would appreciate our
sacrifices on their behalf!

*** Today, we pause for a moment to celebrate Mozart's
birthday... and to commemorate the lifting of the siege of
Leningrad in 1944.

Hitler and Stalin had agreed to take Poland and carve it up
between them. Two years later, Hitler attacked the Soviet
Union itself. Hitler's sorry war strategy called for
attacks to the north, east and south all at the same time.
Within two months, Leningrad (now known as St. Petersburg)
was surrounded. Almost three million Russians were trapped
in the city, with no access to food or fuel.

The winter of 1942 was especially hard. Temperatures
dropped. There was little heat, little food... and even
water was scarce. When the siege was finally broken on
January 27, 1944, a half million people had died.

What a difference 60 years makes! It is as if these events
took place on a different planet... or among a different
species. Who would believe that this happened during the
lifetime of many people reading this message... among
civilized Westerners? Now, of course, we grapple with our
problems before it is too late. We find"workable
solutions." And things always work out for the better.

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

The Daily Reckoning PRESENTS: Through stocks and bonds to
housing and mortgages, the unparalleled U.S. credit machine
keeps chugging along, spinning illusions...


CORRUPTED THINKING IN A MONEY CULTURE
By Kurt Richebächer

It is the general view that the U.S. economy has outperformed
the rest of the world in the past several years. Judging by
real GDP growth rates, this is true. Yet the reason why is
obvious, easily explained, and disastrous in its
consequences: the U.S. credit machine has no parallel in the
world. It is geared to accommodate absolutely unlimited
credit for two purposes - consumption and financial
speculation.

There has developed a tremendous and growing imbalance
between the huge amount of credit that goes into these two
uses and the minimal amount that goes into productive
investment. Instead of moving to rein in these excesses and
imbalances, the Greenspan Fed has clearly opted to sustain
and foster them.

Today it is customary to measure economic strength by
simply comparing recent real GDP growth rates. It always
becomes fashionable when U.S economic growth is higher than
in Europe.

From a long-term perspective, however, economic policy and
economic growth are about physical resource allocation,
that is, available tangible capital stock and labor. How
much of the current production is devoted to consumption
and how much to capital investment? Looking for economic
health and strength, generations of economists have focused
on two economic aggregates: savings and investment, in
particular net savings and net investment.

It used to be a truism among economists of all schools of
thought that the growth of an economy's tangible capital
stock was the key determinant of increased productivity and
subsequently of good, high-paying jobs. And it also used to
be a truism for economists that from a macroeconomic
perspective, tangible capital investment into factories,
production equipment, and commercial and residential
building represents the one and only genuine wealth
creation.

But in America's new money culture, policymakers and
economists make no difference between wealth created
through saving and investment in the real economy and
wealth created in the markets through asset bubbles,
engendered by extremely loose money and credit.

In 1996, an article in Foreign Policy entitled"Securities:
The New Wealth Machine," explained how securitization - the
issuance of high-quality bonds and stocks - has become the
most powerful engine of wealth creation in today's world
economy. Whereas societies used to accumulate wealth only
slowly, they can now do so quickly and directly, and"the new
approach requires that a state find ways to increase the
market value of its productive assets." In such a strategy,
"an economic policy that aims to achieve growth by wealth
creation therefore does not attempt to increase the
production of goods and services, except as a secondary
objective."

This a perfect description of the corrupted economic
thinking that is today ruling in America not only in
corporations and the financial markets, but even among
policymakers, elevating wealth-creation, that is, bubble-
creation, to the ultimate of wisdom in the policy of
economic growth.

There can be no question that the rapid sequence of asset
bubbles - stocks, bonds, housing - that the United States
has seen in the past few years were crucial in stimulating
economic growth. Considering, though, its tremendously
lopsided effect on consumer spending and the associated
consumer-borrowing orgy, we are unable to regard this as a
reasonable and sustainable policy. It works in the short
run from the demand side, but it has come at heavy
structural costs.

With these remarks, we wanted to make one thing perfectly
clear. It is not profits, savings and investment that drive
U.S. economic growth. It is America's unparalleled credit
machine, and that alone, which makes all the difference in
economic growth and wealth creation between America and the
rest of the world.

In the consensus view, the U.S. economy is breaking out of
its anemic growth pattern. A few signs of accelerating
economic growth have led to this forecast, in particular
the 8.2% spurt of real GDP growth in the third quarter of
2003 and within it sharply higher investment technology
spending, up 22%; surging profits, and also surging early
indicators, among them in particular the November ISM
survey for manufacturing. Various indicators are at their
strongest in 20 years.

We strongly disagree with this assessment. The growth spurt
in the third quarter was exceptional, due to a one-off
splurge in tax rebates and a burst in the mortgage
refinancing wave. As to investment spending, what
essentially matters is the change in total nonresidential
investment, and that continues to show virtual stagnation.
The widely hailed surge in IT investment came
overwhelmingly from the hedonic pricing of computers, which
has been abolished. Recent profits reports have indeed been
impressive, but their success is vastly different between
sectors and not as straightforward as the official numbers
imply.

Yet our disbelief in the U.S. economy's breakout from its
protracted sluggishness has one main reason: All the
economic growth of the past two years, anemic as it was, is
traceable to a seemingly endless array of asset and
borrowing bubbles. Quoting analyst Stephen Roach,"the Fed,
in effect, has become a serial bubble blower" - first the
stock market bubble; then the bond bubble; then the housing
bubble and the associated mortgage refinancing bubble. As a
result, consumer spending has been surging well in excess of
disposable income for years.

The idea was that sustained and rising consumer spending
would in due time stimulate investment spending. It has
grossly failed to do that. Our assumption rather is that
consumer spending will slow as the asset and consumer
borrowing bubble are sure to fade. Seeing no big investment
recovery, we expect a surprisingly weak U.S. economy in
2004.


Regards,

Kurt Richebächer
For the Daily Reckoning

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