Re: The Daily Reckoning - Debt And Dying (Bill Bonner)

verfasst von Firmian, 15.03.2004, 00:01

-->Debt And Dying

The Daily Reckoning

On the train again... back to Paris

Friday, 12 March 2004


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

*** Long lines, tight security on the Eurostar...

*** Stocks get hit... by Madrid explosions... or has the bear
market resumed?

*** Debt and Dying... and more...

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

Never have we seen such long lines and tight security on
the Eurostar. Luggage was searched... travelers
frisked... passengers eyed each other suspiciously,
wondering who might want to blow it up.

"I might as well have taken an airplane," said an American
standing in line in front of us.

The proximate cause of all this security was, of course,
the bomb blasts in Madrid.

"It is being called Europe's 9/11," said newscasters on
British TV this morning.

We doubt that the event will rank with the destruction of
the Twin Towers in history books, but like 9/11, it is
almost certain to raise terrorists' stock beyond book
value.

European stocks fell... yesterday morning, followed by Wall
Street in the afternoon. American analysts attributed the
decline to"fears of more terrorist incidents." Perhaps,
but we warn readers that the Dow was already headed
down... and has much, much further to go before it gets to
where we think it is going to go.

The 'recovery' was a fraud, we keep saying. The Feds
splashed enough money and credit around to stimulate
consumer borrowing and spending."You give me a trillion
dollars to spend, and I'll show you a good time too," as
Buffett put it. This activity looked like 'growth.' But it
was actually no more than a temporary acceleration on the
road to ruin.

As in Japan 10 years ago... the rally seems to have stalled,
topped out... and now has rolled over. Mr. Bear is back... or
at least, that is how it appears today. Yet, investors,
analysts, and economists are bullish... almost to a man.
They are sure the good times are here to stay - forever.
Were it not for terrorists, they will tell each other,
everything would be okay.

In finance, as in politics, terrorists are overrated. They
are deadly, but not serious.

Over to Addison with more news:

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

Addison Wiggin, in the City of Light...

- Here's a freaky little stat. The blasts in Madrid
happened 911 days after 9/11... Coincidence?

- Whatever the case, Mr. Market didn't like the odds. In
early trading yesterday, while most of the world seemed to
suspect the terror attack was the work of Basque
separatists, the Dow trended sideways... waiting. Then at
roughly 3pm New York time, the London-based al-Quds al-
Arabi received a letter reading:"This is part of settling
old scores with Spain the crusader, and America's ally in
its war against Islam."

- The Dow then set its sights southward and never
recovered. The blue-chip index closed out the session 169
points lower at 10,128. The S&P 500 lost 17 points, and the
Nasdaq was down 21 points. Stocks fell all across Asia and
Europe... Paris was down by 3.1%, Frankfurt 3.5%... and they
were down over 2% in London.

- Surprisingly, after a brief spike to $403 in Hong Kong
overnight, gold lost $1.50 to $398.50. But another
traditional"safe haven" did get a boost yesterday - the
Swiss franc. It leapt nearly 2% versus the dollar, and hit
4-week highs against sterling and the euro.

- The deaths in Madrid mark the one-year anniversary of the
reflation bull market of 2003-2004, but it's clear the
rally was already straining under its own weight. Following
two straight 160+ losses in a row, the Dow is now down 3.1%
for the year and nearly 6% from its high on February 11th.
The Dow's recent dip marks the first 5% correction for a
major index in 244 trading sessions.

- You might have expected yesterday's bombs to rip a hole
in the euro, too. But instead, it jumped 0.5 cents to
$1.22. Dollar weakness is more prevalent than ever. Why?
Well, isn't it obvious? It is to Dan Denning, who has
recently quit the rainy climes of Paris for the equally
soggy environs of London.

-"The monthly e-mail bulletin from the U.S. Treasury
reveals quite a surprise," Dan blurted out to our
colleagues in the London office this morning."Of course,
as you might expect, the U.S. government ran a deficit
again in February, but it's the magnitude that's
surprising... $96 billion! That's billion with a 'B' - in
one month! A short one at that. I believe that's the
largest single monthly government deficit in the history of
the Republic..."

- Data junkie that he is, Dan can't help but note:"$15.2
billion of the total went directly to interest on existing
public debt. In other words, 8% of the government's outlays
were just to pay lenders. Meanwhile, total spending for the
first five months of this fiscal year, compared to the
first five of last year, has grown 4.2% from $898 billion
to $937 billion. The deficit is up 16.4% year-on-year."

- Everbank's Chuck Butler, our guru on the euro-dollar
trade, pointed out, too, that the Lehman Bros. currency
desk put out a report this morning saying that"it's time
to sell the dollar vs. the euro, and that the dollar's
current rally isn't justified..."

-"Good!" writes Chuck,"That's the kind of message I want
the markets to hear... Now if the other Big Boys could get
their collective soap boxes out, to sing from the same song
sheet, we could have something!"

-"If you had access to no data other than a graph of U.S.
Treasury yields," Bloomberg's Caroline Baum wrote
yesterday,"you'd think the U.S. economy was in big
trouble." But it's not just the massive spending habit of
the U.S. government Dan Denning refers to above.

-"Never has job growth lagged economic growth to the
degree it's lagging now," says Baum. Of the supposed 21,000
jobs created last month, not a single one came from the
private sector. It was the first month since August that no
jobs were created outside the government. Last Friday's job
report set off an explosive rally in bonds that lasted
through Monday and Tuesday. Friday's gain itself was the
largest one-day gain in 13 years. Bond investors, rightly
so, fear that the continuing effluence of bad news from the
jobs front means the"economy will roll over in coming
months." Yesterday's attack in Madrid only exacerbates
those fears...

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

Bill Bonner, arrived in Paris and off the train...

*** If we are right... if we have begun the next phase of
the Great Bear Market of 2000-??... we would not be
surprised if, this time, we see some panic selling. You
will recall that the first phase was marked by calm. Paper
profits in the Nasdaq were wiped out... huge losses were
taken in the Dow... but who really cared? It was just a
temporary setback on the way to wealth. Americans still
believed that average people - with no knowledge of
specific stocks or specific companies - could get rich
simply by"being in the market for the long haul." All they
had to do was to get into a good mutual fund. The geniuses
at the mutual fund would take care of everything else.

This next phase should challenge this comfy view. People
now know that stocks can go down substantially... and take
years to come back. This time, they may not want to wait.

Gustave le Bon explains how panics develop:

"The precise moment at which a great belief is doomed is
easily recognizable; it is the moment when its value begins
to be called into question. Every general belief being
little else than fiction, it can only survive on the
condition that is be not be subjected to
examination....Finally, when the belief has completely lost
its force, all that rested upon it is soon involved in
ruin."

At some point in the next few years, people will begin
asking questions. Was putting all our retirement money in
stocks really such a good idea? What if this bear market
lasts longer than we expect? What do we know about the
stock market? What if the whole idea is a fraud... what do
we really know about the silicon chip business... what
business do we have putting our money in it?

When the questions get asked, the answers are not likely to
be reassuring.

*** Dan Dorfman:"What's cheap? Over the past several
decades, the average stock has sold for about 15 times
earnings, 1.7 times book value (corporate net worth) and
0.9 times revenue. Today, the average stock sells for about
23 times earnings, 3.4 times book value and 1.4 times
revenue. Those are pricey multiples by historical
standards."

*** After a day in Germany and a day in London, we are back
in Paris, dear reader. For a few hours, that is... tonight,
we go to the countryside for the weekend.

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

The Daily Reckoning PRESENTS: Why London gangsters should
always pay their debts... as John Q. Public should, too. Mr.
Bonner weighs in with"life after debt," below...


DEBT AND DYING
By Bill Bonner

"Tony was such a kind man, he had a big heart. He shone
like gold."
- Lou

We went, as usual, to the obituaries this morning... and
found them crackling with good humor and good advice.

Obsequies for gangster Tony Lambrianou must have been
entertaining. The East End hoods and mobsters gathered -
dressed in dark glasses, black leather coats, and heavy
gold jewelry - and watched the hearse go by."On the roof
was perched a huge, ungainly floral boxing ring in vivid
red, white and blue and a card-board cut-out of Elvis
Presley,' explained the press reports.

But the affair was a bit of a disappointment to
journalists. The scribblers were hoping for some glamour.
In the past, gangsters were real celebrities... and brought
out the stars. Judy Garland, Sonny Liston and Lord Boothby
used to hobnob with the London underworld. Now, many of
these stars of stage and crime are dead or washed up.
Today, the world's attention focuses on terrorists; old-
fashioned hoodlums go to their graves like an accountant to
the Laundromat. Nobody cares. The local shops remained
opened, says the article in the Daily Telegraph. In the old
days, they would have closed out of respect for the fallen
crime boss. And people would have lined the route of the
funeral cortege and doffed their caps as the dead man went
by. Yesterday, hardly anyone noticed.

Tony was remembered as a 'gentleman' and a 'good man' in
the bouquets. The papers recalled that in 1969, he and his
brother Chris lent a hand to their pals, the Kray brothers.
The frères Lambrianou carried off the body of Jack"The
Hat" McVitie, after the Kray boys had gone to work on him
with a carving knife. But what fine thanks you get when you
help a friend; Tony and Chris were grabbed by the Bobbies
and got 15 years in the hoosegow.

What attracted our interest was how 'The Hat' came to be in
such trouble in the first place. Apparently, 'The Hat' had
lost his head... and failed to settle his accounts as
gangland honor required. The Krays - unschooled in modern
banking's loan workout procedures - had their own way of
dealing with deadbeat debtors.

Henchman Tony, dead suddenly at 61, will not come back this
time. He'll have to settle his own accounts, and good luck
to him.

Meanwhile, in another part of town, the Lewis family
continues to grieve over their man, Stephen. Like 'The
Hat,' Stephen might be considered a victim of EZ credit.
The average man in Britain has far less debt than the
average American. He is said to have only two credit cards
with about $1400 on each one. But Stephen Lewis managed to
run up bills equal to 3 times his annual income. At the
time of his death at 37, he owed 71,913 pounds - over
$100,000 - on 19 credit cards.

He is described as a"vibrant, popular man who was such a
lovely personality." But for all his vibrations, he
couldn't seem to get in tune with the modern credit
industry. He took it all too seriously, in our opinion.
Rather than stiff his foolish creditors like everyone else;
the poor man killed himself last July. He must have thought
he had to pay it back; someone should have explained. But
now his pretty widow is in the papers, suggesting that the
credit industry ought not make it possible for people to
dig such deep holes for themselves.

"The credit boom of recent years has brought great
advantages to many individuals and families, and helped to
raise standards of living," sympathized the Citizens Advice
Bureau,"but it is also taking a huge toll on the those who
have found themselves on the wrong side of the very narrow
dividing line between successfully managing credit
commitments and plunging into serious debt."

"We have become a debt-laden people," added the Daily
Telegraph in editorial comment."Unsecured borrowing on
credit cards and personal loans averages 4,400 pounds per
person. The average new mortgage is about 100,000 pounds.
In short, debt is darkening a great many lives."

Well, so far debt is probably brightening more lives than
it darkens. As long as interest rates are low and
falling... and asset values do not fall... the lights should
remain on for most people. It's when the juice stops
flowing that the trouble begins. That's when you wish you
hadn't borrowed so much... and feel faintly like blowing
your brains out.

But at the Lambrianou funeral, Tony's surviving sibling
looked on the bright side. He warmed hearts with this
remembrance of how the two brothers-in-crime felt as they
were on their way to prison:

"We were going away for a long, long time. We were in the
darkness and we began to comprehend what was happening. You
find something there in that darkness; there is a life
there. There is always hope, a future."

Fear not, dear reader, there is life... even after debt.


Bill Bonner
The Daily Reckoning

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