The Daily Reckoning - The Modern-Day Poverty Syndrome (Marc Faber)

verfasst von Firmian, 14.03.2004, 23:39

-->The Modern-Day Poverty Syndrome

The Daily Reckoning

Paris, France

Thursday, 4 March 2004


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

*** Deficits don't matter... until they matter...

*** Gold down... dollar up... Dr. Copper seems confused.

*** And oh là là! The big bad wolf asks for 5 million
euros... will Suzy pay?

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

Just as there are two points of view on outsourcing - both
of them puerile - so are there two opposing perspectives on
federal deficits. On one side, neo-conservative Republicans
tell us that 'deficits don't matter.' On the other, neo-
conservative Democrats tell us that we must raise taxes
immediately to fill the gap.

It is hard to know which one to laugh at first.

It's true that 'deficits don't matter' - as long as
creditors don't seem to care. A man can run up as much debt
as he wants. It doesn't matter... until it matters. That is,
as long as he is able to go even deeper into debt, it
doesn't matter. It's a bit like a man jumping off a tall
building; it's even exhilarating... right up to the end. But
when creditors want their money back... or refuse to lend
him more money... all of a sudden, he hits the sidewalk, and
the lights go out.

There was a time when America's creditors were America's
savers. Even then, deficits mattered; but they mattered
less, because the feds could rip off our own citizens
easily. All they had to do was to stimulate a little
domestic price inflation... which undermined the value of
their bonds and savings; the lumps should have known better
anyway.

But when Americans stopped saving, the nation had to turn
to foreigners. Now, it takes nearly 80% of the entire
world's savings just to allow Americans to continue living
in the style to which they had become accustomed. The
gollywogs and krauts are probably as dumb as Americans,
especially their central bankers, but they are more mobile.
They can shift their money out of dollars into euros... or
yen... or yuan. When the foreigners decide they've had
enough... when they stop lending and sell off their U.S.
dollar assets - that is when it will matter. U.S.
government benefits will be cut whether Americans like it
or not. Standards of living will fall. Jobs will be lost.
Then, the U.S. economy will go into a long, dark night of
recession, deflation, and financial crisis.

Raise taxes? Well, yes... why wait for the foreigners to
kill the economy when we can do it ourselves? If Americans
have to pay more in taxes, they will have less to spend.
Consumer spending is 70% of the economy. When people begin
to consume less... the consumer economy goes into
reverse... and then comes the splat... and the long, dark
night.

Either way, the lights are going out. Buy candles.

And now... more news:

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

Eric Fry in the Empire State...

- Yesterday's trading action exhausted bulls and bears
alike, while satisfying neither camp. Gold tumbled, then
rallied; the dollar rallied, then tumbled; and the stock
market finished the day with a split decision: Dow up,
Nasdaq down.

- Stocks greeted the new trading day by continuing the
selloff they started on Tuesday. But the market reversed
course - as it so often does - and headed higher throughout
the afternoon. The Dow closed out the session with a 2-
point gain at 10,593, while the Nasdaq eased 6 points to
2,033. But the stock market was more"tail" than"dog"
yesterday, wagging back and forth in response to the
extremely volatile action in the foreign exchange and
commodities markets.

- The dollar, which has become as volatile as a 2000-
vintage Internet stock, rocketed nearly 2% against the euro
yesterday morning. But shortly before lunchtime in New
York, the world's currency traders seemed to conclude that
enough was enough - or more than enough. The greenback
reversed course and plummeted. By the end of the session,
the dollar had surrendered all of its earlier gains to
finish at $1.2206 per euro.

- Meanwhile, over in the metals markets, gold dropped as
much as $5.40 to $387.95 an ounce, while the dollar was in
rally mode. But once the dollar headed south, the gold
price sprinted north to finish the day with modest $1.10
loss at $392.70 an ounce.

- What does it all mean? We are neither sufficiently
brilliant nor sufficiently naïve to provide a ready answer.
We do know, however, that volatile markets - while
treacherous for short-term traders - are a long-term
investor's best friend. Short-term dips often provide
excellent investment opportunities... at least with the
benefit of hindsight.

- To wit: While sipping my triple tall cappuccino yesterday
morning in Union Square park, your New York editor
overheard a guy on a nearby bench chatting into his cell
phone."I feel so stupid," he complained,"I KNEW I should
have taken all my IRA money and bought Martha Stewart stock
while it was tanking, and just hoped for the best. I would
have made thousands."

- Alas, another buying opportunity lost... But there will be
others, and a few selling opportunities as well. Mr. Market
is a very egalitarian sort of fellow; every day he offers
both buying opportunities and selling opportunities. The
problem is that many investors confuse the two.

- And what about today? What should we make of the recent
drop in the gold price? The yellow dog has fallen $21 since
the February 18 close of $412.80. Buying opportunity or
selling opportunity? What say ye? Is gold, perhaps, the
Martha Stewart of investments - widely disdained by the
masses, but ready to have the last laugh?

- Use the recent volatility in the gold market to your
advantage, says Pierre Lassonde, president of Newmont
Mining."Don't tell me that the gold bull market is over.
It has hardly even started," Lassonde declared to the
attendees of the 2004 BMO Nesbitt Burns Global Resources
Conference in Tampa, Florida.

-"The last real gold bull market was in the 1970s,"
Lassonde explained."It went on for 9 years from 1971 to
1980. What we've had in the past 20 years are bear market
rallies. So when you read... that the average gold bull
market is 40 months and we're 36 months into it; and that's
bad... Well, you know what, they haven't seen anything until
you go back to the 1970s."

- Underpinning Lassonde's confidence in the gold rally is
his skepticism that America's fiscal imbalances can be
corrected painlessly."We haven't even started to correct
the U.S. financial imbalance of the last three years," he
explained.

-"America is currently funded through the foreign largesse
of Asian central banks, who are soaking up dollars to avoid
U.S. consumers from losing purchasing power that would dent
their appetite for imports. There is not one central bank
that needs to accumulate as many dollars as the [Asians]
have, just to keep the cycle going... It's the biggest
vendor financing take-back you've ever seen in the history
of the world."

- Lassonde predicts a"manic depressive dollar" that will
become increasingly volatile as its value erodes.

- On the supply side, Newmont's president predicts that
gold production will begin to decline."Back in the 1990s,
we had huge patches of ground being opened up in Africa,
South America and behind the iron curtain. We're in a
different stage in production [now]."

- The official Daily Reckoning conclusion: There are
probably worse investments than gold.

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

Bill Bonner, back in Paris....

***"My big wolf... don't take useless risks; the earlier
the better. Give me your instructions. Suzy"

- A personal ad in Libération

Oh là là... the War on Terror has found a new battlefield -
here in France. The whole country is being held hostage by
a mysterious, evil group called AZF, otherwise known as the
'big wolf.'

Ten thousand railway workers are now searching the tracks
for AZF's bombs. The group says it has planted 10 of them
along important railway lines. One has already been found
on the Paris-Toulouse line. Communicating with the
government - aka 'Suzy' - through personal ads in the
leftist newspaper, Libération, it demands 5 million euros
or threatens to blow up a train.

Oh dear reader... what a wicked world we live in!

*** If that weren't enough... yesterday, bonds went
down....and so did Dr. Copper, along with oil and gold.
That is the problem with indeflation; it can't seem to make
up its mind. It is indecisive... and indecipherable. The
dollar went up a bit. Gold went down a bit.

*** The LA Times says that executive insiders are selling
more stock than ever...

*** House prices rose 8.4% nationwide in 2003, says the
Chicago Tribune.

*** For more news of no importance... mortgage requests are
rising... and auto sales rose 4.8% in February...

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

The Daily Reckoning PRESENTS: As living standards in the
U.S. alter (dare we say 'improve'?) and the trappings of
the middle class grow more and more elaborate... bankruptcy
is becoming alarmingly prevalent. Could the American middle
class be disappearing?


THE MODERN-DAY POVERTY SYNDROME
by Marc Faber

I have just returned to Thailand from several trips, which
took me to the Middle East, Europe, Argentina, the U.S.,
and Japan. It struck me during my travels that there are
very few bargains at present in the various investment
markets, and that in most Western industrialized countries,
the prices, or the cost of living, are very high indeed. It
is true that for most manufactured goods prices have come
down, but the cost of the basket of goods that people have
become accustomed to, and in many cases actually require,
in order to work and to function in today's modern society
has risen considerably.

While I was growing up my family had just one car, one
television set, one radio, record player, camera,
refrigerator, toaster and cooking stove. Readers will know
what kind of arsenal of electrical appliances and
electronic gadgets today's households are littered with,
especially if they have children. My point is that, as
technology has progressed and as standards of living have
changed (I am doubtful that they have risen much in the
Western world), the cost of the basket of goods that one
requires in order to participate in this"new economy" has
vastly increased, so that, along with soaring healthcare,
education, and insurance costs, there is a very heavy
burden placed on anyone who isn't seriously rich.

In this respect I have just read a recently published book,
The Two Income Trap, by Harvard Law School professor
Elisabeth Warren and Amelia Warren Tyagi (Basic Books,
2003) who explain"why middle-class mothers and fathers are
going broke."

According to Elisabeth Warren, who conducted extensive
research on the subject:

"The families in the worst financial trouble are not the
usual suspects. They are not the very young, tempted by the
freedom of their first credit cards. They are not the
elderly, trapped by failing bodies and declining savings
accounts. And they are not a random assortment of Americans
who lack self-control to keep their spending in check.
Rather, the people who consistently rank in the worst
financial trouble are united by one surprising
characteristic. They are parents with children at home.
Having a child is now the single best predictor that a
woman will end up in financial collapse.

"Consider a few facts. Our study showed that married
couples with children are more than twice as likely to file
for bankruptcy as their childless counterparts. A divorced
woman raising a youngster is nearly three times more likely
to file for bankruptcy than her single friend who never had
children.

"Over the past generation, the signs of middle-class
distress have continued to grow, in good times and in bad,
in recessions and in booms. If those trends persist, more
than five million families with children will file for
bankruptcy by the end of this decade. This would mean that
across the country nearly one in seven families with
children would have declared itself flat broke, losers in
the great American economic game.

"Bankruptcy has become deeply entrenched in American life.
This year [Ed note: 2003], more people will end up bankrupt
than will suffer a heart attack. More adults will file for
bankruptcy than will be diagnosed with cancer. More people
will file for bankruptcy than will graduate from college.
And, in an era when traditionalists decry the demise of the
institution of marriage, Americans will file more petitions
for bankruptcy than for divorce."

According to the authors, it is not over-consumption that
is driving many middle-class families into bankruptcy, but
the lack of a safety net. Middle-class families don't
qualify for all kinds of programs that are available to the
poor. Moreover, the family safety net no longer exists for
the modern two-earner couple, which makes them"actually
more vulnerable than the traditional single-breadwinner
family."

Professor Warren explains that a generation or so ago, the
typical family consisted of the father being responsible
for the economic health of the family, while the mother
fulfilled roles such as homemaker or helpmate. The mother's
role was, in the words of the authors, the one of a
"careful guardian of what her husband brought home" and"if
her husband was laid off, fired, or otherwise left without
a paycheck, the stay-at-home mother didn't simply stand
helplessly on the sidelines as her family toppled off an
economic cliff; she looked for a job to make up some of
that lost income. Similarly, if her husband had a heart
attack and was expected to stay home for a while, she could
find work and add a new income source to help the family
stay afloat financially. A stay-at-home mother served as
the family's ultimate insurance against unemployment or
disability-insurance that had a very real economic value
even when it wasn't drawn on."

The problem with the two-income family is that it doesn't
plan its financial commitments geared to a single income by
saving the extra income that is derived by the mother.
According to Warren,"millions of two-income families used
that second income to purchase opportunities for their
children - a home in a safe neighborhood with good schools,
a comprehensive health insurance policy, two reliable cars,
preschool, and college tuition. They made long-term
commitments to ongoing expenses - and they counted on both
incomes to make ends meet."

So, when one of the members of a two-income family loses
his or her job, the safety net (the mother entering the
workforce) that was available to the single-breadwinner
family is no longer available. And once the combined income
of the two-income family collapses as a result of one
member losing his or her job,"the modern couple doesn't
have a prayer of making ends meet."

The Two Income Trap, which is, incidentally, a highly
readable book and saddening at the same time, struck a
chord with me. As I suggested above, the high and
continuously rising cost of living in the Western
industrialized countries has created something I call
modern-day poverty, or poverty in affluence, whereby a
large number of middle- and even upper-middle-class
families have very little left by the time they have paid
for their mortgages, taxes, insurance premiums, food, and
children's education. These families may have a combined
income of 70, or even 100, times that of my gardener in
Chiangmai, who earns US$150 per month (but would do the job
for US$100 per month), but, despite their relatively high
incomes, they are highly vulnerable in the event that one
member is laid off or can no longer work for whatever
reason.

While I am fully aware that those of my readers who are
either prospering in the financial sector or are seriously
wealthy don't have the financial problems that middle-class
families have, I am mentioning this"modern-day poverty"
syndrome because I simply don't buy the argument -
repeatedly advanced by economists and strategists at
investment conferences - that the U.S. consumer, or for
that matter any average consumer in the Western
industrialized countries, is in"great shape."

This should concern all of us who are fortunate to be
financially independent, because modern capitalism has
created a widening wealth inequity whereby a small sector
of our advanced Western societies is living in style, while
most families are increasingly dependent on asset inflation
(notably in real estate) which enables them to take on
additional debts in order to maintain their standard of
living. At the same time, it ought to be clear that the
poor, who don't own any assets, have become totally
disenfranchised, since with home prices continuously rising
their ability to purchase them has diminished.

The"two-income trap" is a sobering and saddening fact of
our modern society. Moreover, after having recently visited
Argentina and seen first-hand the decline of a formerly
rich country, I am deeply concerned about the economic
future of the West.

Having said that, no matter how unappealing the economy
might be, for investors and speculators, opportunities for
substantial capital gains will still present themselves
from time to time. They are simply that much harder to
identify.

Regards,


Marc Faber,
for The Daily Reckoning

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