The Daily Reckoning - End Of The 100-Year Bear Market (Steve Sjuggerud)

verfasst von Firmian, 03.03.2004, 23:31

-->End Of The 100-Year Bear Market

The Daily Reckoning

London, England

Tuesday, 2 March 2004

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*** More about indeflation that you didn't particularly
want to know...

*** Dr. Copper and Professor Bond... at odds...

*** Pssst... wanna lose some money? Outsource government!
And more...

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Indeflation.

That is the word we have given to this curious creature in
front of us. Neither inflation nor deflation... indeflation
is a ghastly unnatural hybrid, with rising consumer prices
(caused by a drop in the dollar, not by economic growth) in
the middle of a long, drawn-out Japanese-style slump.

Presently copper and oil, for example, are going up -
typically, signs of inflationary pressure. Copper is at an
8-year high. And gasoline rises about 3 cents every week.
Copper is often referred to as"Dr. Copper... the metal with
a Ph.D. in economics" because it is said to predict trends.
When copper goes down, the economy follows. When it goes
up... the economy soon gets"overheated," with rising
consumer prices.

But the bond market is no dope either, and it continues to
forecast (with low and falling yields) a sluggish economy
with declining prices.

Who's right? Could it be they both are... or, that both are
heralds of this new indeflation we're worrying about?

For several years now, we have noted the way in which the
U.S. economy seemed to follow the Japanese model - with a
10-year lag. Asset prices rose on Wall Street throughout
the '90s... and peaked in January or March of 2000....just
as they had in Japan 10 years earlier. Even the 'recovery'
that we see today still looks a lot like the 'recovery' in
Japan in 1994... just before the stock market headed down
again, and the nation slipped into deflation.

Of course, America isn't Japan - in one especially potent
particular. Savings rates in Japan never fell below 10%.
And, 10 years ago, Japan was still the world's biggest
creditor. America enters its decline with savings rates
near 1%... and as the world's biggest debtor.

For most economists, this nuance is not only telling, it is
conclusive. Ben Bernanke and the Fed have already pledged
to do what they have to do to save a nation of debtors from
getting what they deserve. They've announced that they will
inflate the nation's money supply as much as necessary to
avoid Japan's 10-year-long deflationary slump. Almost
everyone takes them at their word. Besides, America can't
stand deflation, they point out.

But wanting isn't getting, we counter. Every debtor in
America may crave inflation... but that doesn't mean they
will have it.

The world is even stranger than it seems. What is said to
guarantee inflation - America's lack of savings - may be
what actually seals the deal for deflation... or this new
indeflation we have been describing.

The Japanese did not have to borrow from abroad to fund
their businesses, households or government. They 'owed it
to themselves' and could simply hunker down - even for 10
years - until the mistakes were gradually written off and
cast away.

But America depends on the kindness of strangers in order
to pay for its War on Terror, its big screen TVs... even for
drugs for its old people. The nation and its currency are
vulnerable to foreign lenders in a way Japan never was. The
dollar has lost 40% against the euro already. As kindness
becomes more costly for them, you can expect even the nice
Japanese and Chinese to turn away from it. There is no law
that says the dollar has to fall further... but with an
unresolved current account deficit of nearly 5% of GDP and
the U.S. national debt rising by about $2 billion every
business day... the dollar could still lose 50%... or
more... of its value.

A falling dollar increases prices for imports - notably oil
- and thereby increases Americans' cost of living. It has
the probable additional consequence of destroying the U.S.
economy... which lowers employment and many domestic
prices... while collapsing stock and real estate markets.
Indeflation, in other words.

Here's more news from our man on The Street:

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

Eric Fry, musing in Manhattan...

- Mr. Market doesn't care what J.P. Morgan thinks... The
prestigious Wall Street firm downgraded Intel shares to
"neutral" from"overweight," as analyst Christopher Danely
expressed concerns over subdued notebook PC demand and
product delays. But the bellwether semiconductor stock
soared anyway, leading the stock market to its biggest
rally in two weeks.

- The Dow Jones Industrials Average climbed 94 points to
10,678, while the Nasdaq jumped 28 points to 2,058. The
technology-laden Nasdaq had fallen 5.2% amid a six-week
losing streak.

- We are, of course, sympathetic to the Morgan analyst's
sense of value... or anti-value. But it's a fool's mission
to try instructing Mr. Market about value; he simply
doesn't care... and neither does the lumpeninvestoriat.

-"We assume investors will buy until it is patently clear
that they shouldn't," says UBS equity strategist Gary
Gordon. More likely, investors will buy until well beyond
the moment that it is patently clear that they
shouldn't... Isn't that what investors always do?

- Morgan's downgrade of Intel might have gained more
traction, but for an upbeat report from the Semiconductor
Industry Association yesterday morning. The SIA announced
that worldwide sales of semiconductors rose 27.4% in
January from a year earlier and are on track to grow more
than 19 percent for 2004 as a whole. Upon hearing this
wonderful news, the lumps couldn't restrain themselves;
they simply had to buy Intel shares, no matter how much
Christopher Danely disliked the stock. The Philadelphia
Semiconductor Index (SOX) jumped 2% yesterday.

- Overvalued tech stocks are not the only things that Mr.
Market doesn't care about. He also doesn't care about the
inflationary auguries issuing from the commodity pits.
Crude oil jumped 70 cents yesterday to a one-year high of
$36.86. Meanwhile, metals of all sorts soared yesterday.
Zinc jumped to a new three-year high, while platinum
rocketed to a new 24-year high of $906.10.

-"Copper rose to an eight-year high on the London Metal
Exchange," Bloomberg reports,"as inventories of the metal
dwindle because of rising demand in the U.S. and China.
Inventories in warehouses monitored by the LME, the Comex
division of the New York Mercantile Exchange and the
Shanghai Futures Exchange have fallen 22 percent this year
to 634,615 metric tons."

- Gold tagged along with the other metals, gaining $2.80 to
$399.60.

- Meanwhile, out on Main Street, folks continue to spend
money they are not earning on things they are unlikely ever
to use. Personal spending rose 0.4% in January, even though
personal incomes increased only 0.2%. The January data
continues the December trend, when personal spending
climbed 0.5%, even though incomes increased only 0.3%.

- This sort of math can become very tricky after a
while... so please don't try this at home.

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

Bill Bonner, back in London:

*** Want to lose some money? Want to buy something goofy?
How about a semiconductor stock? Fred Hickey, by way of
Barron's, reports that the industry has shown negative
growth for the past three years... and only 1% annual growth
over the past 8. Doesn't sound like a"growth" industry to
us. Still, you can buy a share of Applied Materials, for
example, at 42 times earnings, nearly 3 times its 10-year
average. Or how about KLA Tencor? Act today, and you can
still get it at 50 times earnings... twice its 10-year
average. Xilinx goes for 53 times earnings.

Better yet, sell them.

*** We're delighted by the public debate on outsourcing.
We've seen two points of view: 1) that America has to take
action to protect its jobs... and 2) that nothing needs to
be done; who wants those 'low prestige industrial jobs'
anyway. It's like a presidential debate... a battle of wits
between completely unarmed opponents... in which our fondest
hope is that they will both lose. For both points of view
are as empty-headed as the people putting them forward.

In the last 2 centuries, American and European workers have
earned much more than, say, Indian or Chinese workers only
because they have had access to more capital - physical,
intellectual, and social. They had better machines to work
with... knew how to use them... and lived in societies that
valued and protected modern economies. But now, Chinese and
Indians are getting more advanced technical degrees than
Americans. They are building more modern factories. And
while Americans take turns greeting each other at Wal-Mart,
these foreigners are developing the skills and habits
needed to operate in an extremely competitive world.

Relative to the rest of the world, American and European
wage levels are destined to go down. The only way to keep
them up would be to do the very thing Americans seem
incapable of doing - saving money, and investing it in ever
more modern factories... and more training for workers. It
would mean a major reduction in current living
standards... in order to protect those of the future.

*** Among the jobs that could easily be outsourced to India
are those in government. Most government jobs are useless
'paper pushing' anyway. And no group of people pushes paper
more uselessly than Indians. The Indian bureaucracy is
famous world over for not doing anything... slowly... and at
great expense.

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

The Daily Reckoning PRESENTS: The ghastly beast called
indeflation has peculiar tastes... but seems to have a
developed an appetite for commodities. Dr. Steve Sjuggerud
lays bare another force behind the bull market in raw
materials, below...


END OF THE 100-YEAR BEAR MARKET
By Steve Sjuggerud

"To accommodate the roughly 20 million people per year
migrating to the cities, the Chinese, in effect, have to
build a Houston, Texas, per month..."

- Ed Yardeni of Prudential, 1/21/04

John Neu's trash has made him incredibly rich. He sold 2
million tons of it to China last year...

Just beyond the Statue of Liberty, in Jersey City, he's
collecting old toasters, bed springs, old cars, you name
it."Everything including the kitchen sink," he jokes. Well
not everything, exactly... but everything that's metal.

Neu, it turns out, was the major processor of mangled steel
from the World Trade Center. It was 300,000 tons... which he
shipped around the world. More than a third of Neu's scrap
metal is sent to China... up from none five years ago.

Initially, China didn't want America's scrap. But China's
economy is growing so extraordinarily fast, it'll take it
from where it can get it. China has made John Neu a happy
man... when China joined the WTO at the end of 2001, a gross
ton of scrap steel cost $57. The price more than doubled to
$127 by the end of 2003. A few weeks ago it had soared to
$150.

In the grand scheme of things, John Neu's 2 million tons of
steel scrap is small potatoes. China's appetite for steel
right now is insatiable. China needs steel. And it needs
other commodities, too.

Quite frankly, I think commodities will turn out to be a
fantastic place to invest for the rest of this decade.
Returns in commodities should easily beat stocks and bonds
for the next five years. It happened in the 1970s, as the
table below shows, and it'll happen again...

Commodities Crush Stocks
Annual % Gain, 1970-1980

Asset Annual Gain
Oil 34.7%
Gold 31.6%
U.S. coins 27.7%
Silver 23.7%
U.S. farmland 14%
Housing 10.2%
Inflation (CPI) 7.7%
Stock prices 3.6%

What I like even more about commodities is that nobody is
interested in commodities... yet. Go to MSN's MoneyCentral,
or Yahoo's Finance page, and try to get a quote on gold or
oil, and you'll see what I mean. Nobody cares yet. Nobody
has commodities as part of their portfolio asset allocation
yet... and I love it! As Jim Rogers said in his book
Adventure Capitalist,"when Merrill Lynch starts trading
commodities again, it's time to get out."

After bottoming in late 2001, commodity prices (as measured
by the CRB Index) have soared by 40%. But don't feel like
you've missed the move in commodity prices... long-term,
commodities are the cheapest they've been in 100 years.

Right now, you've got two camps of investors out there when
it comes to commodities... those that don't want to buy
because commodity prices have fallen for 24 years, and
those who don't want to buy because commodity prices have
risen 40% in the last two. Now where's the camp that's
willing to buy? There really isn't one, yet.

What happens when commodity prices fall this dramatically
over such a period of time is predictable, says commodity
trading advisor John Di Tomasso:

"Mines are closed, exploration budgets are slashed, and new
production is discouraged. In a free market economy
production without profit cannot continue indefinitely. At
some stage prices must rise... otherwise overall production
of these raw materials will shrink, causing prices to
ultimately rise, anyway - Adam Smith's 'invisible hand'
restoring equilibrium to the marketplace."

Demand has arrived, but there's not enough supply. It's a
perfect recipe for higher commodity prices in the coming
years, until the production can match the demand.

And where has this demand come from? The answer, as John
Neu discovered while hawking his trash, is simple: China.

China is THE hot topic, again... just as it was 10 years
ago. Same story, almost exactly. Investors are just
throwing their money at China once again, and many of them
have no idea what they're buying.

To give you an idea, there are four Chinese"dot-coms"
trading on the Nasdaq with over a billion dollars in market
value each. Added up, these four companies have a market
value of about $6 billion dollars, on combined total sales
of $300 million. That means that these four companies as a
group are trading for nearly 20 times SALES... not 20 times
earnings... 20 times sales. As a point of reference, even
wildly overvalued Microsoft trades at only 8 times sales.
So these companies are almost three times as expensive as
Microsoft. Does that make any sense? To me it doesn't.

The latest big IPO of a Chinese company on the New York
Stock Exchange was China Life. A Chinese insurance company.
Talk about a dumb investment. The Chinese financial sector
is known to be corrupt and dysfunctional. I laughed out
loud when, three months after the IPO, China Life's parent
company was caught in a $650 million accounting fraud.

The worst part is, the U.S. investment banks can't tell you
how dumb an investment China Life (or the upcoming Chinese
banks) will likely be... because they're busy wooing them
for investment banking business.

I feel like I saw this movie in 1994, and I know how it
ends. Five years from now, investors will probably want
nothing to do with Chinese investments, once again. But
that's February 2009... a long way from today. For now, the
best course of action might be to follow George Soros's
advice...

I'm taking a unique approach to China. I'm recognizing the
trend"whose premise is false," as Soros said. And I'm
going to ride that trend until it is discredited.

For the moment, China is booming. And China's appetite for
raw materials and commodities (such as steel, copper, and
oil) appears insatiable. But I won't bite on the direct
China plays like the ones above, many of which will
eventually disappear.

Instead, I'm playing the China story through commodities.
When China's bust comes again (and that may not be until
the second half of this decade), chances are that
commodities won't be hurt badly. They'll participate
handsomely in China on the way up, and be just fine on the
way down, producing exceptional returns in the process.


Regards,

Steve Sjuggerud,
for the Daily Reckoning

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