Re: The Daily Reckoning - Pulling Out The Rug (Kurt Richebächer)

verfasst von Firmian, 14.03.2004, 23:53

-->Pulling Out The Rug

The Daily Reckoning

Paris, France

Tuesday, 9 March 2004

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

*** The Baby Boomers' economy... signs that housing may
crack...

*** Intel down... Buffett out...

*** Gold... Bollywood... and more!

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

It is the great circle of life, dear reader.

People start off with nothing; they work hard, save their
money, and gradually - if they are in the right time and
the right place - they get rich. Then, they get older. As
they acquire a taste for silks and SUVs, their attention
shifts from making money to spending it. Their economy
changes with them... switching from steel mills and the
smell of diesel fuel to shopping malls that sell Diesel
jeans.

Then come the lies and illusions. They are rich, they come
to believe, not because they (or their parents) worked hard
and saved their money, but because they have some special
gift that guarantees they will be lucky forever. Let
someone else do the hard work of making things, they tell
each other... we're so smart, we don't have to schlep and
save anymore - we can borrow and innovate!

Finally, the lies give way in a bear market of falling
asset prices... recession... and collapsing living
standards... studded with entertaining lawsuits,
bankruptcies, work-outs, and Martha Stewart-type show
trials.

No people were in a better place or a better time than
America after WWII. The baby boomers were delivered into
Eden itself. They had barely to stand on two legs and the
low-hanging fruit fell into their mouths. For not only did
they have the world's most advanced factories... they owned
most of the world's gold. And every day, they got richer,
because they sold more things to the rest of the world than
they bought from it.

But they also had the astonishingly good fortune to control
the world's money. In 1971, Richard Nixon cut the link
between the dollar and gold. From then on, America could
pay its debts in a currency of whatever value it chose.
This was a stroke of luck so puissant it must have caused
brain damage, for they began to believe the most incredible
things: that they could spend their way to wealth... that
the rest of the world would lend them money forever, and
never ask for it back... that 'things' no longer mattered in
the modern, globalized economy... and that their new post-
modern economy was based on 'information and innovation.'

By the time the oldest baby boomers were in their mid- and
late-30s, the U.S. economy was already rolling over from
being focused on production to concentrating on consumer
spending.

By the time they were 42 years old, Alan Greenspan was
already at the Fed, and their nation crossed the threshold
from its position as net-creditor for the rest of the world
to net-debtor status. Instead of building
factories... America was building malls and condos.

By the time these same boomers reached their 50s, the
country was putting up new retail space at a rate 5 times
greater than the increase in population.

Now, the most decrepit of the baby boomers are nearing
60... and what's this? After a long summer in the sun... the
boomers are facing some cold winter arithmetic.

Currently, they are more likely to go bankrupt than get
divorced. Their homes went up about 10% last year. But the
Fed says total debt in the U.S. went up at about the same
rate - 10%, the fastest growth in 15 years.

And if they lose their jobs, they are likely to wait 20.3
weeks before getting a new one - the longest in 20 years.
The average length of joblessness is not far from the
record of 20.8 weeks - set in 1948, before most baby
boomers were born. But the worst is yet to come.

"Recovery Built on Retirees' Backs," begins an article in
TheStreet.com. A boomer couple retiring in 2011 are
expected to cost taxpayers $700,000 in Social Security and
Medicare. The Bush administration estimates the cost of
Medicare alone at $10 trillion over 75 years. But economist
Laurence Kotlikoff says current estimates are much too low.
The real shortfall between Social Security and Medicare
obligations and expected revenues is more like $51
trillion. This leaves only two choices: either raise taxes
immediately 69%... or cut benefits 45%.

Either way, the boomers are more likely to get what they
deserve than what they expect.

In the meantime, here's boomer Eric Fry in Boomtown, USA:

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

Eric Fry from New York City...

-"Intel Inside"... that was the stock market's biggest
problem yesterday. Intel, which represents 6% of the Nasdaq
Composite Index, skidded 4.3% to a five-month low of
$27.70. The entire stock market followed along. The Nasdaq
Composite Index closed at the session low, down 39 points
to 2,009, while the Dow fell 66 points to 10,529.

- The stock market's weakness chased investors into the
bond market, where the yield on the benchmark 10-year
Treasury note dropped to 3.77% - an eight-month low.

- Meanwhile, the dollar and gold both took a breather from
their recent volatile trading action. The dollar dipped
slightly against the euro, while gold eased 70 cents to
$400.90 an ounce.

- Despite the Nasdaq's 7% drop over the last 6 weeks, the
stock market is still too pricey to entice America's
savviest investor. Warren Buffett, in his annual letter to
the shareholders of Berkshire Hathaway, had nothing good to
say about U.S. stocks... or about the currency in which they
trade: the U.S. dollar.

-"Yesterday's weeds are today being priced as flowers,"
lamented Mr. Buffett."I made a big mistake in not selling
several of our larger holdings during 'The Great Bubble.'
If these stocks are fully priced now, you may wonder what I
was thinking four years ago when their intrinsic value was
lower and their prices far higher. So do I."

- Mr. Buffett, who amassed his billions by buying stocks
whenever they are cheap and amassing cash whenever they are
not, is now amassing cash inside Berkshire Hathaway.
Berkshire's coffers swelled by $23 billion in 2003 - taking
its total cash pile to a record-breaking $36 billion. And
Buffett is diversifying much of that cash into foreign
currencies.

- Buffett, who owns more dollars than any other human being
besides Bill Gates, is becoming increasingly concerned
about the future purchasing power of those dollars. The
American investment guru-turned-macro-trader warns that the
U.S. is deluging the world with dollars to fund its huge
trade deficit, the consequences of which could be
"troublesome," reaching far beyond the currency markets.

- As a result, Buffett is plowing Berkshire's massive cash
horde into foreign currencies. The foreign exchange
purchases, made in five different currencies, represented
Buffett's biggest investment in the last two years. Buffett
started betting against the dollar in 2002. Since then, the
greenback had lost about one third of its value against the
euro.

-"Our capital is under-utilized now," says Mr. Buffett.
"It's a painful condition to be in - but not as painful as
doing something stupid." Hmmm... if Buffett is under-
utilizing Berkshire's capital, aren't most folks OVER-
utilizing their capital... (and the capital of others)?
Aren't most folks spending every available cent buying
stocks that Warren Buffet wouldn't touch with a barge pole?

- In a world where most mutual fund managers and
professional investors live by the credo,"Use it or lose
it," Buffett suspects that investors who use their cash
buying today's overpriced stocks are very likely to lose
it. The last time that Buffett"underutilized" his capital,
the stock market was only one year away from crashing.

- Cash may not be the very best thing to put in an
investment portfolio, but it might turn out to be a whole
lot better than putting"Intel inside."

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

Bill Bonner, back in Paris...

*** Gold is right at our target buying point - $400. We
don't need to remind readers that God does not tell us his
Whole Plan. It could be that He has some way of making the
dollar go up against gold...

It is true, also, that Americans are likely to be desperate
for dollars in the years ahead. Once Zembei Mizoguchi
decides to pull the plug, interest rates in the U.S. will
pop up - as the dollar collapses on world currency markets.
Still, Americans will need dollars to pay their mortgages,
their credit card bills, and their bankruptcy lawyers. In a
declining economy - with falling asset prices - dollars
could be hard to come by.
We cannot know what will happen. We buy gold and keep our
fingers crossed...

*** We are continuing our detailed market research into
India...

This weekend, we watched two more movies from Bollywood and
didn't quite know what to make of them. As near as we can
tell so far, all Pakistanis are stupid and evil. And all
Indians are ready to kill almost anyone, anytime, for
almost any reason. In fact, in one film the citizens of two
villages begin killing each other for no reason at all.

Additionally, we discovered that when Indians are not
killing, they are singing and dancing. We have seen them
singing and dancing before killing other people... and after
killing other people. We await the film in which they sing
and dance while killing other people at the same time.

*** Our tango lessons have fallen by the wayside. We left
town. Then Elise, our instructor, left town. But recently
we found that Democratic presidential candidate John Kerry
also likes the tango. We think we may have to give it up
for good.

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

The Daily Reckoning PRESENTS: In the wake of last Friday's
jobs report, can anyone yet claim that the U.S."recovery"
is self-sustaining? On the contrary, Dr. Richebächer sees a
"variety of accidents" in store for the market... and chief
among them, a dollar rout.


PULLING OUT THE RUG
by Kurt Richebächer

Apparently, the consensus economists are still convinced
that the growth acceleration in the second half of 2003,
and above all a sharp rise in profits, have laid the
foundation for sustainable growth. In particular,
sustainable growth with sufficient creation of employment.

We disagree.

But we must admit that our own assessment is prejudiced by
the postulate of the Austrian school, that"the thing which
is needed to secure healthy economic growth is the most
speedy and complete return both of demand and production to
its sustainable long-term pattern, as determined by
voluntary consumer saving and spending."

Friedrich Hayek said in 1931:"If the proportion as
determined by the voluntary decisions of individuals is
distorted by the creation of artificial demand, it must
mean that part of the available resources is again led into
the wrong direction and a definite and lasting adjustment
is again postponed. And even if the absorption of the
unemployed resources were to be quickened in this way, it
would only mean that the seed would already be sown for new
disturbances and new crises."

We think this precisely describes what has been happening
and continues to happen in the United States. The Greenspan
Fed has discovered a new, amazingly easy and quick way to
create higher consumer spending virtually from thin air -
by way of so-called wealth creation through asset bubbles.
It began with the stock market bubble, to be followed by
bubbles in bonds, house prices and mortgage refinancing.

Measured by real GDP growth, it seems a successful policy.
But measured by employment and income growth, it is an
outright disaster. The so-called"wealth effects" are not
for real, neither for the economy as a whole nor for the
individual asset owners. The reality in the long run is
only the horrendous mountain of debts that consumers,
corporations and financial institutions have piled up.

Given the general euphoria about the U.S. economy and its
recovery, there appears to be a general apprehension in the
markets that the Federal Reserve will be forced to raise
interest rates in the foreseeable future. The Fed is
clearly anxious to dispel any such fears - and this, in our
view, is for a compelling reason. U.S. economic and
financial stability have become inexorably dependent on the
existence of a steep yield curve allowing and fostering
unlimited carry trade in long-term bonds. Any major rise at
its short or long end would shatter this artificial
stability and send the economy and financial system
crashing.

Considering all the imbalances impairing U.S. economic
growth, we are unable to see the sustained, strong
recovery. A closer look at the recent economic data [and
last Friday's jobs report] confirms this skepticism.
Possibly, if not probably, economic growth has already
peaked. For us, the question rather is when general
disappointment will gain the upper hand.

That, of course, is sure to soothe the bond market,
allowing moreover the Fed to maintain low interest rates.
But it will conjure up another, even greater risk at the
currency front. It will pull the rug out from under the
dollar.

In our view, the U.S. trade deficit is big enough to cause
a true tailspin of the dollar against all currencies. So
far, two things have prevented this threatening dollar
collapse: the gargantuan dollar purchases by Asian central
banks and the still rather positive perception around the
world of the U.S. economy. In our view, few people realize
its true weakness and vulnerability.

There is widespread hope that the falling dollar will go a
long way to lower the U.S. trade deficit. It takes a lot of
wishful thinking to believe that. Its persistent growth has
various reasons. One of them is that the gap between
exports and imports has simply become too big to be
reversible. Last year, exports amounted to $1,018.6 billion
and imports to $1,507.9 billion. Just to prevent a further
rise of the deficit, exports would have to rise 50% faster
than imports.

Principally, the trade flows of a country are exposed to
three major influences: first, relative prices and the
exchange rate; second, relative demand conditions; and
third, relative supply conditions.

Empirical experience suggests that exchange rate changes by
themselves have very little effect on trade flows. One
obvious reason is that Asian as well as European exporters
readily adjust their prices to maintain their market
shares.

For years, the United States has been top in the world with
its domestic demand growth propelled by the loosest
monetary policy in the world. For sure, lacking demand
growth in the rest of the world has played a role in
boosting the U.S. trade deficit. Yet what matters most for
the trade balance is not U.S. growth in relation to other
countries, but U.S. demand growth in relation to U.S.
capacity and capital-stock growth. In essence, such a
deficit indicates an equivalent excess of domestic spending
over domestic output.

More precisely, the U.S. trade deficit reflects gross
overspending on consumption on the demand side and a
grossly unbalanced investment structure on the supply side.
There was gross underinvestment in manufacturing versus
gross overinvestment in retail, finance and high-tech.

Our assumption is that there is no intention or will on the
American side to correct any of these maladjustments. Given
their enormous size, it is a Herculean task, too Herculean,
in fact, to be seriously addressed.

Principally, American policymakers and economists take only
two economic problems seriously: high rates of inflation;
and, in particular, slow growth and rising unemployment.
They could not care less about the dollar. The low
inflation rate is the excuse for more of the same extreme
monetary looseness.

There is quite a variety of accidents waiting to happen in
the markets, but the most predictable and biggest risk is a
dollar crisis. In addition to the gargantuan trade deficit,
looming in the background are existing foreign holdings of
dollar assets in the amount of $9 trillion.

As explained, the tremendous vulnerability of the U.S. bond
market due to its underlying heavy leveraging prohibits any
defense of the dollar through tightening.

Instead, the plunging dollar will pull the rug out from
under the bond and the stock markets.


Regards,

Kurt Richebächer
for The Daily Reckoning

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