Re: The Daily Reckoning - Imperial Over-Stretch Marks (Bill Bonner)

verfasst von Firmian, 14.03.2004, 23:43

-->Imperial Over-Stretch Marks

The Daily Reckoning

Paris, France

Friday, 5 March 2004

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

*** Does it matter yet? Mr. Mizoguchi will decide when the
end comes...

*** Slow news day... Dow down (or was it up?)... Gold
up... dollar up...

*** Buy a Hummer... Take out a mortgage... Have a good
weekend...

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

The half-a-trillion dollar trade deficit?
Doesn't matter.

The $1.5 billion-per-day federal deficit?
Doesn't matter.

Consumer debt-to-income levels the highest in history?
Doesn't matter.

Total debt levels at 350% of GDP?
Doesn't matter.

Jobs outsourced to India... lost to China...?
Doesn't matter.

Dollar down 25% last year?
Doesn't matter.

Gasoline rising 3 cents/gal. per week?
Doesn't matter.

Does anything matter?

Well, nothing matters... until it matters. Or, as Bill Gross
suggests, it never rains in sunny California,
either... until it pours.

Nothing matters now, according to the Financial Times,
thanks to largely to one man, Zembei Mizoguchi.

Without Zimbei... or someone like him... the dollar would
have fallen a lot more than 25%... gasoline would be much
more expensive than it is now... the U.S. wouldn't be able
to finance its trade and federal deficits, homeowners
wouldn't be able to refinance their houses, and consumers
wouldn't be able to continue borrowing and spending... and
George W. Bush would be sweating re-election far more than
he is now.

"Mr. Mizoguchi is not a campaign strategist, U.S. Federal
Reserve chairman or even an online pundit," the FT
explains. But he is the man who matters more to preserving
Americans' self-delusions than the president himself.

"He is vice-minister in Japan's Ministry of Finance..." the
report continues."Mr. Mizoguchi decides how many American
dollars Japan will buy each week. Every dollar he buys has
a direct impact on long-term interest rates in the U.S. And
long-term rates this year will go a long way towards
deciding who walks into the Oval Office next January.

"If you think this is an exaggeration, consider that, in
January alone, Mr. Mizoguchi bought a record $70bn and
poured nearly all of it into the U.S. bond market. He has
the authority to buy $100bn more this year and a bill
moving through Japan's parliament would double that figure
- more than enough to cover even the wildest estimates of
next year's U.S. budget deficit.

And that is exactly what is happening. Without Mr.
Mizoguchi, U.S. rates would have to rise sharply in search
of other buyers."

Last year, Mr. Mizoguchi spent $250 billion. His goal was
merely to keep the yen down... so Americans would continue
buying Japanese products. The effect was to coax them
further into debt and stimulate a hiring boom in China.

Of course, the debt doesn't matter now. Nor the dollar. Nor
the job losses in America. None of it matters... until Mr.
Mizoguchi decides that it should matter. Then, it will
matter a lot to a lot of people.

But not to us, dear reader. It will be the end-of-the-
world-as-we-have-known-it. But it was a fraud anyway. Good
riddance.

More thoughts... from Addison...

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

Addison Wiggin covering the day's financial news, or lack
thereof...

- Nothing much happened yesterday. The European Central
Bank left rates at 4%. The Bank of England, too, left rates
unchanged. Still, the dollar rose about a penny. Gold rose
too - 50 cents. The Dow barely budged. Nobody said anything
especially amusing or ridiculous.

- The world is waiting. Will the non-farm payroll numbers
validate the Fed's goose-and-pray stimulus strategy? Not
likely, we think.

- Here's a good example of why. We spent the better part of
last week traveling to and from Puerto Vallarta. The sleepy
little resort village in the Mexican sun is a long way from
the chilly, rain-drenched streets of Paris. But we didn't
go for the sun; we went to check out a meeting of The
Supper Club - an exclusive gathering of accredited
investors who vet venture capital deals... and occasionally
invest in them.

- One of the companies presenting a deal to SC members had
developed an innovative software package. Their proposed
platform would be able to introduce Congress' newly
approved Health Savings Accounts (HSAs) into the network of
health insurance options already out there. Their company
would lose money in their first and second years, they
said; but they would make roughly $20 million in gross
revenue by the end of the fifth year.

- Whether the financial projections were realistic or not
was the subject of much debate among the members, as you
might expect. But watch how their plan unfolds.

- The company employs six people. Three were present at the
meeting... the CEO, CFO and VP of Marketing. The first two
were straight out financial guys, quite fluent in the
language of venture capital. The third was a specialist in
all things human-resource related (We sat next to her at
dinner, so we know. If we never hear another word about
"consumer-directed health care," we will shed no tears.)

- The key IT guy, who developed the software they plan to
market, stayed back at their home office. Two other
employees do the grunt work. Six in all. But in their
financial plan - even as the company plans to grow to $21
million - they don't plan to hire a single employee. They
already outsource any kind of programming support they need
to a firm in India... and customer service is next. In other
words, the company will presumably add $20-$35 million to
GDP over the next 3-5 years, but they will not create a
single job.

- Please recall that, two weeks ago to the day, Easy Al and
the Fed's team of superhero governors came out to deliver
once again the same old sermon: jobs will come, jobs will
come! In his particular version of the homily, Greenspan
told the nation's workers they would have to be willing to
retrain at higher skill-levels to secure work, but that the
reward would be higher pay.

- The company presenting the HSA plan to the Supper Club
gives us a candid glimpse of the kind of economy Greenspan
has in mind. Each of the"employees" in the company has a
key skill that cannot be outsourced. They are primarily
actors in the"financial" economy. One of the directors
suggested they couldn't afford to outsource the
"architecture" work - the actual design of the program. But
the rest is expendable, expensable... and much, much cheaper
in the land of curry and rice.

- The story wasn't much different for the other deals on
the table, either. One company made automatic ice chains,
deployable on the fly, for large commercial trucks. Of
course, the parts are manufactured and assembled in China.
Another - a manufacturer of snowboards and bindings - had
as part of its unique selling proposition a"Made In The
USA" tag; but they share a parts outsourcer in Taiwan with
the ice chain guys. The third deal was a couple of
attorneys who'd figured out a way to make big bucks
investing in lawsuits... not exactly a labor intensive
enterprise.

- The fourth was a real estate development deal in Puerto
Vallarta itself... where the land is selling for $5,000 an
acre. Try getting that price anywhere on the coast of
California! It's not only labor that's expensive in
America; it's the very land itself.

- These companies are on the front-line of the"growth
economy." Our pedantic question for day: what happens if
you're not highly skilled in IT or financial services, and
you lose your job? One thing is for sure... your person
won't end up as a stat on the fictitious jobs list being
created by the great stimulus boom of 2003.

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

Bill Bonner, back in Paris...

*** Forget the Navigator - buy a Hummer! Sales of the beast
are down 21% over last year. GM has been forced to offer
more EZ credit terms - no money down, pay nothing at
settlement, 48 months of payments.

*** A DR reader wrote to say that he had invented the term
"indeflation" and that we should at least give him credit
for it. Instead, we return it to him; we didn't much care
for it anyway.

*** What happened? No trains blew up. The SNCF called off
its search of the rail lines. No more bombs were found. The
terrorist group, AZF, 'went silent,' say the news reports.

*** A reader comment:"Americans pride themselves on being
free, but how can we possibly be free if we have debt? We
are bound to our creditors.

"If so, what happens when the U.S. goes bust? Is the
country, the land, and the people the collateral? Could the
debtor claim us or our country? Who or what is the
collateral?

"I've heard religious prophecy claim in the end times there
will be an invasion from the 'East' and a big war.

"It occurred to me that biggest holders of U.S. dollars are
the countries in the east: China, Japan, Russia and all the
Arab oil-exporting countries.

"What if this war is just on their side and they are just
claiming their legal right?

"The US debt is often described as X [sic] amount of
dollars per man, woman and child in America - they actually
state that. If we have a social security number and are
"U.S. Citizens," we must be the surety. Is it not our
future earnings (tax receipts) that guarantee the loan?

"If this is correct, then we are slaves.

"I feel that I am both Morpheous and Neo, telling myself
that I am a slave!

"It says in the end times, anyone with the mark (Charagma -
slave number) cannot buy or sell, we are almost there now.
Without a SSN you almost cannot buy or sell, get a bank
account, a driver's license or even get work..."

*** And an update from colleague Dan Ferris:

"You may recall the message I wrote below, back in October.
That's when I first started saying that Countrywide
Financial, the #3 mortgage lender behind Washington Mutual
and Wells Fargo, was going to have some real problems,
since the refinancing boom had come to an end.

"Now, six months later, we know at least one sort of the
'problems' I was talking about, even though I didn't even
really know it at the time.

"Countrywide reported profits of $2.4 billion on $8.5
billion in revenue in 2003, an astounding performance by
any business of this size. You don't have to look very long
or hard to figure out what's wrong with these numbers.

"Countrywide reported $6.1 billion in gains from the sale
of loans and securities in 2003. Trouble is, these gains -
if you can call them that - are mostly future gains the
company expects to make from collecting mortgage payments
and tracking down deadbeats.

"Turns out that counting future profits ('servicing
revenue') is a typical practice in the mortgage business. I
suspect the inevitable abuse of that practice will be the
undoing of many a post-boom mortgage servicing firm.

"Lacking a crystal ball, the mortgage lenders must make
estimates about how much they're going to make on a given
loan. You and I normally refer to estimates as guesses.

"So it's perfectly legal to book your guesses about how
much you're going to make from a given mortgage.

"If Countrywide turns out to be world-class guessers, I'd
be all wet saying that they're looking at bad times. But
they took $1.9 billion in write-downs in the first nine
months of 2003... so, I guess they're lousy guessers.
Washington Mutual aren't much better guessers. They took
$1.1 billion worth of write-downs in the past two years,
about 18% of its $6.2 billion in mortgage assets at the
beginning of 2002.

"The Mortgage Bankers Association guesses that overall
mortgage issuance will fall nearly in half this year, to $2
trillion from last year's $3.8 trillion."

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

The Daily Reckoning PRESENTS: The Dollar Standard System -
and perhaps American preeminence - is on the way out. But
you can't say we didn't tell you so. This DR Classique was
originally aired on 14 October 2002.


IMPERIAL OVER-STRETCH MARKS
by Bill Bonner

"America remains the unrivaled leader of the world - the
big power... without which nothing good happens."

- Thomas L. Friedman, hallucinating

America is the"single surviving model of human progress,"
said George Bush the younger, to the West Point graduating
class, perhaps exaggerating just a little. He might have
conceded, if he'd thought about it, that there are elements
to the American model that might not yet have attained
perfection.

The American model of human progress, it turns out, depends
heavily on the kindness (or naïveté) of strangers: America
prints money; foreigners make products. The foreigners send
their products to the U.S.; Americans send their dollars
abroad.

Alert readers will notice the defect immediately... for what
would happen if foreigners changed their minds? Then who
will pay so that Americans can continue living beyond their
means? And who will finance the U.S. budget deficit,
expected to rise about $400 billion thanks to increased
military spending? [Ed note: This year, the budget deficit
is projected to reach $521bn... ]

The system survives as long as foreigners are willing to
accept U.S. paper assets for more tangible ones. We don't
know how long that will be, but we note that the value of
paper tends to vary inversely with the amount of it
available. No Fed chief provided so much American paper as
Alan Greenspan. In fact, as reported here on several
occasions (we keep mentioning it because we can barely
believe it) Greenspan has increased the world's supply of
dollars more than all the Fed chairmen and all the Treasury
secretaries in U.S. history.

Still, the foreigners schlep and sweat and gratefully take
surplus dollars in payment - about $1.5 billion per day.
Typically, when a nation's trade deficit rises to 5% of
GDP, something has to give. What usually gives is the
nation's currency; it goes down, making imports more
expensive and exports more attractive. So far, this has not
happened, we are told, because the dollar is no ordinary
currency - but an imperial currency, the leading brand of
the world's only remaining super, superpower. How that
protects it from the age-old cycles of over-stretch and
regret, we don't know. More likely, the dollar will
eventually do what all over-stretched currencies do,
imperial or otherwise; it will snap.

"I see one possible way out," writes Stephen Roach," a
sharp depreciation of the US dollar... a significant
depreciation of the dollar - at least 15% to 20% on trade-
weighted basis, in my view, would go a long way in cracking
the mold of US-centric global growth..."

[Ed note: Since this essay was penned, the dollar has
fallen as much as 30%, and is still 24% down. Yet there is
still a long ways to go... ]

"Oh no, I guess this means Mr. Bush will begin his war
soon," said a neighbor this weekend. She was a woman of
about 70, in a hunting get-up, with knee socks and a big
brown sweater. Her low voice, mannish hair and bright red
face was slightly comical. But she was also carrying a 44-
caliber pistol and waving it around the room."But, heck,
what's life without wars," she roared."Every so often,
maybe we need a war. I just hope the price of gas doesn't
go up."

What set off my neighbor was the news that Congress has
given the go-ahead, not by declaring war as required by the
constitution, but by passing the buck to the president;
Bush is free to attack America's enemy du jour - Iraq. How
Iraq achieved this honor is anybody's guess. But enemies
come and go... along with models of human progress.

In the 40s, Germany and Japan were our enemies and the
Soviet Union was our friend. Then, the roles reversed for
the '50s and '60s. And then, in the '70s, Iraq was our
friend and Iran was an enemy. And, of course, Cuba, North
Vietnam and North Korea... were our enemies at various
times.

But who knows? Maybe a change of government will do as much
good for Iraq in 2002 as it did for England in 1066. Today,
we write not to criticize the president's war plans... nor
Congress's pusillanimous dereliction - it may all work out
for the better, for all we know. Instead, we merely wallow
in the absurdity of it all.

The durability of Christianity, we thought to ourselves
during this Sunday's sermon, comes not just from the
enormous promise that it makes, but also from its
adaptability. Christians believe that if they can just get
God on their side, everything will work out. Even dying is
nothing to worry about;"Even unto the grave, Halleluiah"
we chant, with faith that death leads to a better life
without mortgages or election campaigns. And in the
meantime, people are free to do almost any lunatic thing
they want.

Jean Mayol de Lupe was an army chaplain in the French army
in WWII. He was wounded, held prisoner by the Germans and
eventually decorated with the same award later given to
Alan Greenspan - the Legion of Honor. Greenspan, a cynic
might say, got his"cravate" for proving that you could
inflate the currency and get away with it... Mayol de Lupe
proved that you don't have to be an analyst or a politician
to be a fool.

The 1930s were a great time to be a fool... there was a bull
market in foolishness such as the world had never seen. It
seemed as though nearly half the world was keeping company
with socialism, communism or fascism. Mayol de Lupe was
convinced that bolshevism was a great threat to
Catholicism... and that the only thing that might save it
was Hitler's national socialism. After France had
surrendered, he organized a voluntary corps of French
soldiers to go to help the Germans in their war against the
Soviet Union. Already 66 years old, he nevertheless went to
the Eastern front himself along with his troops. The priest
wore a SS Waffen uniform, ended his sermons with"in the
name of our Holy Father Pious 12th and our Führer Adolf
Hitler," and described the French volunteers' work..."what
a beautiful mystery, a wonderful tale, that our boys write
with the points of their bayonettes."

In Mayol de Lupe's eyes, the Soviet Union was the Iraq of
the hour... and Nazi Germany the world's superpower. Many in
Europe - including many in France and England - felt that
the dynamic new Germany represented the force of the
future, that it was"the only surviving model of human
progress."

And so the poor old coot stretched on the Nazi uniform and
went to war.


Your editor...
Bill Bonner

P.S. After the war, Jean Mayol de Lupe was arrested and
jailed for notorious collaboration.

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