The Daily Reckoning - Fueling The Street (John Myers)

verfasst von Firmian, 28.02.2004, 11:21

-->Fueling The Street

The Daily Reckoning

Managua, Nicaragua

Wednesday, 25 February 2004

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

*** God's own plan... ruined... Dow down five days
straight...

*** Dollar short squeeze... but the bonfire of the
currencies continues... seven ways to sell the dollar...

*** Lumps piling back into mutual funds... market newbies
getting fleeced... scorn of the distaff half... and more!

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

What kind of God would make a world so simple we humans
could understand it? We ask the question just to test our
own thinking. Like lighting a match near a gas line, we
look for leaks and jump back when we find them.

We think a huge, 50-year-old, dollar-centered credit boom
in the U.S. is beginning to unwind. American assets are
just beginning a major bear market. Before it is over, debt
levels will be at half their present level. Stocks will be
less than half today's prices. Junk bonds will be
worthless. And American workers, at least those who can
find a job, will earn much less - relative to the rest of
the world - than they do now. Gold, the anti-illusion
metal, should be entering a major bull market. But what do
we know?

Yet... imagine a world so obvious, so transparent, so
predictable that every lump and numbskull could tell what
was going to happen.

You see the problem, don't you, dear reader? Everyone would
take the most advantageous positions ahead of schedule;
instead of waiting for a crash to wipe them out, for
example, an investor would sell out in advance... and move
the crash forward, long before it was 'supposed' to happen.
God's Own Plan would be ruined... corrupted by mortal
simpletons... destroyed by his own nincompoop creations. God
wouldn't be God any more. He would be just another
incompetent deity.

But what if just this sort of blow-up were part of The
Plan?

Oh, the Great Puzzler... there seems no end to the mischief
and subtle complexity.

Yesterday, for example, Alan Greenspan said that Americans
have nothing to worry about. True, they have no
savings... and job prospects aren't so hot. But not to worry
- they are getting richer thanks to rising real estate
prices.

But what if the price of every house in America suddenly
doubled, overnight? Would anyone really be even a penny
richer? Of course not. Homeowners might THINK they were
richer... and many would pay twice as much in mortgage
payments.

People lurch from one illusion to another. As more and more
people embrace the reigning illusion, they set in motion
its own destruction... like passengers rushing to one side
of a leaky boat, they soon swamp it.

Americans seem to think they need no savings. A bird in the
hand seems hardly worth bothering with... not when there are
two of them hiding in every bush. Nearly every investment
has gone up more than the cost of money. Nearly every day,
in nearly every way... things just get better and better.

Beating the bushes, they scare up birds and take a shot at
getting rich. But the more bushes they beat, the fewer
birds take wing. Dividend yields are below 2%. Residential
real estate yields not much more. Bond yields are lower
than they've been since Eisenhower was president - and bond
prices are still going up. And what is left? Even junk
bonds and emerging markets are sky high. Under the illusion
that everything rises in price forever, investors have
already bid everything up already. Where can it go from
here?

Likewise, under the illusion that they will never really
have to pay their debts, Americans have borrowed so much,
they practically guarantee the end of the credit boom
itself. Taking the most advantageous positions,
individuals, banks and businesses - and even central banks
- have borrowed so much that even at current low rates they
have a hard time keeping up with the payments. And yet,
they borrow still. Soon, they will have raced ahead to the
end of the game... where they will be unable to borrow a
single penny more.

And then, what will happen to the credit boom when there is
no more credit? Imagine a world in which Americans had to
repay their debts, instead of borrowing more. Imagine a
president who submits a budget to Congress with a provision
to pay off a half-trillion in federal debt... rather than
add that much. Imagine the economy as Americans reduce debt
to GDP levels from over 300% back to the 150% of the
Eisenhower years. Imagine the strange world where Americans
come to the conclusion that they will always have to pay
their debts... and that stocks and real estate prices always
go down... and that there are no birds in the bush worth
beating for.

That day, dear reader, will be the day to buy!

Until then, here's Addison checking to see what the lumps
are up to...

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

Addison Wiggin en route for Puerto Vallarta, site of this
week's Supper Club meeting...

-"You have those [lumps] who are under-invested,
frightened by the bear market and haven't put their money
back into stocks yet," an analyst told USAToday this
morning."They buy most days.

-"But you also have the profit-takers who have been in the
market for a while and have made large gains, particularly
in Nasdaq stocks. They are worried about a correction of
some magnitude, so they're locking in gains."

- For the past five days on Wall Street, those locking in
gains have outpaced the market newbies... and have knocked
Mr. Market on his arse. The Dow dropped 43 points, closing
down for the fifth straight day at 10,566. The Nasdaq and
S&P 500 lost 2 points apiece, closing at 1,991 and 1,139
respectively.

- The Conference Board revealed yesterday that consumers
might finally have overcome their euphoric holiday shopping
delirium, albeit a month late. In February, the consumer
confidence index came in a full 5 points below
'expectations' at 87.3... down from January's blissful 96.8.
A survey of the dullards who track this number seriously
showed the expected number to be 92.9. Our guess? Consumers
are getting a little weary of Fed professions of faith in
an improving jobs picture... and are starting to reign in
credit card spending.

- But what's this? One of the Fed governors was all but
committing political heresy yesterday in London. The Fed's
Edward Gramlich, who is also a former director of the
Congressional Budget Office, told bond traders that"fiscal
austerity is the one tried-and-true approach to dealing
with budget and trade deficits simultaneously."

-"That's bad news," opines Bloomberg's John Berry."As Fed
Chairman Alan Greenspan put it last week, there's no
constituency in this country for a balanced budget." Seems
like your wistful editors might have had the same idea at
one time or another. Rather, we suspect with a sigh,
neither consumers nor the nimrods they've elected to
Congress are going to go softly into the dying light of
credit-driven, debt-drenched consumer capitalism.

-"There are serious deflationary forces at work in the
world at large," writes our friend John Mauldin."There is
an imbalance in world trade, as the U.S. has accounted for
96% of the growth in world trade for the last few years.
Thus, foreign nations have to be willing to either not take
depreciating U.S. dollars and suffer the inevitable
slowdown in their economies, or take less for their
products in order to be able to keep their work forces
producing and economies bumping along."

- The dollar fell a penny to $1.26 overnight against the
euro... well above its historic low set last Tuesday. But in
spite of last week's retrenchment in the dollar, the
imbalances in world trade remain a cause for concern - for
anyone holding dollar assets."The odds on a dollar crisis
are high enough," explains Peter Bernstein,"to warrant
setting aside some portion of portfolio assets as a hedge
to protect the positive bets that most portfolios
contain... a dollar crisis appears to be a real possibility.
As all the necessary conditions for this catastrophe are in
place, no investor can afford to ignore risks of this
magnitude."

-"In case you were wondering," writes Chuck Butler on the
Everbank Trading desk,"This is not the end of the dollar
weakness! For anyone saying that it is, I have to ask, why
they would think that! The Current Account/Trade Deficit is
still out of hand, The Budget Deficit is growing like a
weed, yields on assets are abysmal... The U.S.
administration is in love with the weak dollar, especially
in this election year... And they have a strong willingness
to allow the markets to direct the dollar
lower... So... There you have it! Besides, trends don't end
on a dime like that!"

- Suspecting that last week's climb back to $1.25 was
classic 'short squeeze' - too many short positions, all
loaded with stop losses - Chuck says he's got his"finger
on the trigger" again."I'm not totally prepared to sound
the 'all clear' horn," says Chuck,"but the slate is clean,
so to speak, and investors can now make new trades based on
what they see the dollar doing... Hmmm... Myself? I would be
shorting it again!"

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

Bill Bonner, back in Nicaragua...

*** The price of gold shot up more than $5 yesterday.

*** Americans put $47 million into mutual funds last month
- the boom is still on!

***"Yes, I thought property in this area would rise, too,"
your editor replied to his wife as the conversation
continued.

"Well, why didn't you buy some property?"

"Hmmm... investors shouldn't invest on the basis of what
they think will happen," he explained,"but on the basis of
what should happen..."

He was about to describe how he thought investors should
position themselves... not according to their own dim view
of the future, but according to what ought to happen. A
good stock at a cheap price ought to go up. A bad one at a
high price ought to come down. (The coast of Nicaragua was
so beautiful, it ought to be more expensive, he thought to
himself... but he left it out of his argument since it
seemed to contradict his excuse.) A person might expect
stocks to rise... and still bet against them. Or, he might
think real estate prices would continue to go up... and
still not want to buy...

But he was cut off...

"Oh... don't start..." said the distaff half.

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

The Daily Reckoning PRESENTS: Greenspan's easy money
policies are creating ever more dollars - which are worth
less and less. How many can the system take... before dollar
holders decide to get out of the game?


FUELING THE STREET
by John Myers

The Street is thriving, thanks to interest rates we haven't
seen since the Kennedy administration and monetary growth
we haven't seen since Carter. And unlike other periods,
where investors accused the Fed of"taking the punch bowl
away" at the very moment the economy began to improve, this
time the central bank keeps filling it no matter how wild
the party becomes or how low the dollar falls.

The Fed's easy money policy seems to be reviving the
economy, while at the same time giving investors the
confidence and courage of fighter pilots. As the Big Board
returns to stratospheric heights, the question remains:
Will the economy provide enough lift to prevent the markets
from falling into a flat spin?

Most economists argue yes. They believe we are on the verge
of growing productivity gains that will soak up the excess
money sloshing around the economy, thereby eliminating Wall
Street's unspoken demon - future inflation.

The Wall Street consensus is that as the economy gains
steam, the plethora of borrowed money will be invested into
new capital, which will spur growth and employment. Once
this occurs, the Treasury can slow down the presses, and
after four years of cutting rates, the Fed can finally
begin to raise them. The bulls believe that rising
productivity and improved profits will make the stock
market immune to higher interest rates.

It all sounds good on paper. But I think there are two
flies in the ointment.

First, easy money has encouraged already overextended
consumers to go even deeper into debt. With so much of this
debt tied to variable rates, when interest rates go up -
which they will inevitably do - consumption could slow to a
crawl and bankruptcies could soar.

Second, excess greenbacks and poor returns on U.S. fixed
investments have caused an exodus out of dollars. You can
see this phenomenon in the dollar's plummeting value
against the euro. In the past two years, the dollar has
fallen roughly 40% against the European currency.

But the dollar has declined relative to many other major
currencies, too. The U.S. dollar index, which measures the
market value of the dollar versus the trade-weighted
average of six other currencies, currently sits at
86... down from its high of 120. Long-term support exists at
80, but I expect the dollar will break below this floor
sometime this year. If foreign investors believe likewise,
more dollars will be converted into other currencies... and
into real assets.

The reason for this is simple. If investors become bearish
on the buck, they will sell dollars. But no currency - not
even the euro - is large enough to absorb a huge influx of
capital without quickly becoming overvalued. That leaves
investors with only one other choice - real assets.

Turning to real assets is exactly what happened in the
1970s. In 1974 my brother Richard, now an oil and gas
lawyer, was an assistant to the Canadian ambassador in West
Germany. He told me that hundreds of West German investors
inquired about buying raw western Canadian farmland.

Were these investors afraid of the type of runaway
inflation their country was tortured by in the 1920s? No,
not one bit. They were worried about what they should do
with dollar assets that had been sold. They believed too
much money had gone into German marks and Swiss francs and
that alternate currencies were becoming too expensive. So
they began buying real assets. That included precious
metals and even raw Canadian farmland.

That turned out to be a smart investment. A quarter section
of land bought in southern Alberta in 1974 cost C$600. By
1980 that same quarter section could be sold for about
C$1,200. During that same period, German investors who
remained in 30-year Treasury bonds lost more than 40% of
their repatriated capital.

Thirty years later, the dollar again faces a potential vote
of no confidence by the citizens of the world. That puts
the Fed on a razor's edge. Weaken the dollar a bit, and the
central bank can help ease the massive trade deficit.
Weaken it too much, and the Fed risks a major
devaluation... a devaluation that has already begun!

I agree with analyst Paul van Eden when he says the
dollar's demise could just be starting:"The inflation of
the dollar, the debunking of the American economic miracle,
the arrogance of American Foreign Policy and, perhaps most
importantly, the detrimental impact that the War on
Terrorism is bound to have on American liberty - not to
mention the misallocation of capital and increase in debt
that go hand-in-hand with war - are all virtual guarantees
that the dollar is going to lose some of its superhero
status."

But it's not just big investors who will be moving
greenbacks into real assets. It's also billions of citizens
in the developing world who hold much of their savings in
physical dollars.

Think about it. According to the Fed, there are 665 billion
dollars in circulation. Now, there are about 285 million
Americans. If Americans owned this stockpile of dollars,
then every man, woman and child would have $2,333 in CASH,
stuffed into their wallets, purses and mattresses. Of
course, banks and retailers account for some of this money,
but you get my point.

The truth is the dollar is held by everyone, everywhere.
Princes hold it... paupers hold it... and so do communist
dictators. The dollar is the currency that everyone in the
world stashes away. There is a huge overhang of dollars
that can be converted into something else without notice.
And as the dollar continues to weaken, the world's savers
will increasingly opt to hold their savings in another type
of currency.

But as in the 1970s, currencies outside the dollar will not
be enough to absorb the exodus from the greenback. Real
assets will have to take up the slack. That's why we
believe the secular bull market in hard assets is just
getting started... and as the dollar falls, its prospects
only look brighter.


Regards,

John Myers
for the Daily Reckoning

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gesamter Thread:

• The Daily Reckoning - Fueling The Street (John Myers) - Firmian, 28.02.2004, 11:21
  • Dt. Fassung - Firmian, 28.02.2004, 11:30