The Daily Reckoning - Treacherous Myopia (Mogambo Guru)

verfasst von Firmian, 15.03.2004, 18:17

-->Treacherous Myopia

The Daily Reckoning

Paris, France

Monday, the Ides of March 2004


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

*** Dow bounced Friday... after a bad week...

*** Looking for a job - look in India!

*** ARMs at record 3.41%..."fashionable" bearishness on the
dollar... buy your groceries with gold... and more!

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

The Dow lost 467 points in 4 days last week... then, in the
final day of the week, rebounded 111 points. This is not
the first time we've said so, and may not be the
last... but, now, we think the top is in for the Great Bear
Market Rally of 2002-2004. Mr. Bear is back... almost
exactly 4 years after he began mauling the Nasdaq in mid-
March 2002.

Why should stock prices fall? Two reasons, one emotional
and one rational. Remember, people buy stocks at the
beginning of a bull market for the right reasons - because
stocks are cheap. At the end of the bull market, they buy
them for the wrong reasons - because 'everyone knows you
can make a lot of money by buying stocks.' But what
'everyone knows' is based on recent history. At the top of
a bull market, investors do not recall that, when it
started, everyone knew that you couldn't make any money
buying stocks. It is only after a long period of rising
prices that people come to believe you can make money by
buying stocks... no matter how pricey they've become.

On the left side of the brain, investors calculate how much
they can make from a stock and measure that against how
much they might lose. When stocks are very expensive, as
they are now... the figures don't look good. It would take
years of spectacular growth in sales and profits to justify
today's prices. Where would this growth come from, the
rational mind might ask?

Last week, a Seattle paper tells us that adjustable rate
mortgages hit a new record low at 3.41%. Americans and
their government are already spending far more than they
can afford... and borrowing it at the lowest interest rates
in half a century. What tinder is left to fire up a
spending boom? Real incomes are flat or falling. Good jobs
are hard to find. How will Americans find additional
purchasing power?

Over on the right side of the brain, clouds are gathering.
No particular reason for it... except that that is what
happens after a long, happy period. Some contrary
instinct... some malign impulse... draws us to doom. Maybe,
after 20 years of sunshine, it just has to rain. Things
have been too good for too long. Maybe the organs that
produce optimistic juices are exhausted. Maybe we have
brought it on ourselves, borrowing from tomorrow's
contentment for so long... when the time comes, there is
none left.

We don't know how it works. But there's no reason for the
same dollar's worth of earnings to be worth $5 one year and
$30 two decades later - except that the right side of the
brain puts a different spin on it. The brain turns things
around and around... and doesn't stop until we're so dizzy
we fall down.

That is what happened in March of 2000. The Nasdaq
collapsed and the Dow tumbled. Since then, people have
tried to 'recover.' Propped up by artificially low interest
rates, tax cuts, and public spending... they've managed to
stand on two feet and totter along for the last 18 months.
But now the right side of the brain has begun spinning the
news in the opposite direction. A dervish of negativity has
started to swirl. And it is not likely to
stop... until... sometime in the far, gloomy future... stocks
once again trade for 5 times earnings... and you can buy the
entire Dow for little more than a single ounce of gold.

But while we're waiting... here's Addison with more news:

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

Addison Wiggin writing in Paris...

-"You know... Bush, Bin Laden... they play their games," our
fellow passenger began, obviously eager to make a comment,
"but it is the civilians who must pay the price."

- The subject, of course, was the bombings last week in
Madrid. The scene? We were making our way back to Paris
from Charles de Gaulle airport by train. The French
security officials didn't want the trains near the airport,
so they herded us into a bus and shipped us out into the
banlieue - the less-than-scenic suburbs of the City of
Light - where we later met up with the commuter train. The
train was then held up at two more stations for fear of
'suspicious packages.' Châtelet, the largest train station
in the network, was a surreal wasteland as we trundled
through. The usual gaggle of commuters in business suits
and bums in beer-stained rags was replaced by a solitary
team of police dogs...

-"Spanish, Palestinians, Israelis... it doesn't matter.
Most people could care less about the politics; they want
to work and raise their families. But now they die. And
those of us who are left live in fear." Well, we weren't
going to argue with him. But neither did his angst seem to
warrant any further comment. So we just smiled... and said
"bon courage" as we left.

- It's a cold world, dear reader. And like a campaigning
politician, Mr. Market appears to pay no heed. The Dow
rallied 112 points on Friday to 10,240; an"especially
heartening" rally given the circumstances. But, it lost 355
points for the week, revealing among other things how
little the skirmishes in the Forever War affect the
markets. Thursday's sell-off of 168 points was but a part
of a larger reversal, namely, the end of Great Reflation
rally of 2003. The blasts in Madrid merely mopped up the
remainder of any gains the indexes had seen 2004.

-"The market is extremely sensitive," a trader in Boston
told USAToday,"and these stories can ruin your day in a
hurry.""I think we're probably in for a bumpy road," said
another analyst. The Nasdaq and S&P each tacked on small
gains Friday, but ended the week down over 3% a piece.

- The"bumpy road" in the markets is just what the Fed will
be trying to ignore when the FOMC meets tomorrow. Since
January, Greenspan has been gloating that the Fed's
strategy to treat the 'symptoms' of the bubble and not the
bubble directly is a success. [Then again, see Mogambo's
critique, below... ] Of course, as we've pointed out so many
times we've even begun to annoy the proprietors of the
patisserie downstairs, the one symptom the Fed is
completely impotent to do anything about is: jobs.

- Despite all the back-slapping at the Fed, less Americans
who want to work are doing so than have in a decade.
'Offshoring,' of course, gets all the blame. In an election
year, it's easy to point fingers. But as our friend John
Mauldin points out, of 2.7 million jobs lost since the
recession ended, only 300,000 have gone to employers
overseas. That's only 11%. The other 89% have been lost to
the 'structural' shift of an economy almost entirely
dependant on consumer spending... and increases in
Greenspan's vaunted 'productivity miracle.'

- Still, a quick review of today's headlines is all you
need to see where the NEW jobs are being created - at wages
for which Americans wouldn't even allow their dogs to work.
"China's growth spurs demand for oil," says the Financial
Times."China's economic engine needs power," reports the
New York Times."China's need for metal keeps U.S. scrap
dealers scrounging," says the Times again. For some.61
cents an hour, these raw materials are getting processed
into goods routinely shipped to a Wally World near you.
Then... apparently... when you're finished with them... back
they go to China.

- In a sign of the times, last year China became the first
country ever to import more than a $1 billion of scrap.
Demand for scrap steel is so high, the price has soared to
more than $300 per ton, compared with $156 three months ago
and $77 a year before that. Overall, exports of steel scrap
have doubled since 2000 to nearly 12 million tons. China
imports nearly 30% of the total.

-"We send everything to China," one scrap dealer told the
NYTimes."They will use chisels, hammers, hand tools and
whatever to break it apart and sort it out." Then what
happens? Well, the cycle continues."The faucets from China
are coming into the United States at less than the metal
value that we would have to pay," laments Joe Mayer,
president of the Copper and Brass Fabricators Council.

- We can't help but wonder. Is there any phrase the Fed can
change in their press release tomorrow that will
effectively stem the flow of production to China? Right
now, investors are only to happy to use their all-but-free
money to speculate on overpriced stocks and particle-board
houses.

- Meanwhile, the Chinese are even refining the nation's
garbage into products destined once again for the never-
sated yaw at the pit of the its consumerist belly...

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

Bill Bonner, back in Paris..

*** The Labor Department says the number of people with
college degrees who have been out of work 6 months or more
has risen 300% (the report we read did not say over what
period of time). American firms are hiring... but not in the
U.S. IBM is hiring in Calcutta, but not in White Plains. GM
is hiring in Bangalore, but not in Detroit. What's a man to
do?

Robert Dunn, a 55-year-old American information technology
specialist, is looking for work - in India. According to
the CNN report, more and more Americans are following their
jobs overseas. Indian firms find Americans very useful for
managing relations with their U.S. customers.

*** Gold is stuck around $400. It went down last week to
$395. It could, of course, be an entirely new era in human
history... in which people have figured out how to
successfully manage paper currencies, credit risk, and
inflation. Now, a man can buy a derivative contract on
almost anything. He can protect himself against the decline
of the dollar... the collapse of the bond market... a rise in
the price of oil - almost anything - without burying gold
coins in his back yard.

But what protection has he that the man on the other side
of the transaction will be able to pay up? The total of
derivative contracts is thought to be as much as $70 to
$100 trillion. The total value of all America's stocks and
real estate is only about $50 trillion. What would happen
to all this 'wealth' in a real crisis? In the last Great
Depression, more than 10,000 banks in the U.S. went belly-
up. Today's 'banks' are the institutions offering mutual
funds and mortgage-backed derivatives. How many of them
will survive?

*** Everyone believes the dollar has further to fall. This
consensus opinion disturbed us for a while. For, it seemed
to us that the dollar would fall, too. Yet, we knew that
things everyone expects rarely come to pass.

But then,"it's not real bearishness on the dollar,"
colleague Dan Denning explained."People are just
fashionably bearish. They say the dollar is going
down... but they don't really believe it."

What has been even more remarkable than the near-universal
agreement that the dollar was headed down was the near-
universal complacency about it. Most people even think it
will be good for the U.S. economy. There, we think, is
where the consensus will be wrong. The dollar will not
surprise people by going down. It will surprise people by
falling on their heads. Economists will rub their noggins
and say they expected it. But it will crush the life out of
stocks and bonds.

*** This, from South African correspondent, Evan Pickworth:

"For 2,630 years, gold was used as money. A recent decision
by Durban Roodepoort Deep could see gold returning as a
medium of exchange, albeit in a non-conventional sense. Let
me explain...

"It's events like 9/11 and the weakening in the U.S. dollar
and the rising deficit in the U.S., and the recent massive
drop in employment outlooks, that highlight just why people
will be buying gold for another 2,630 years.

"Individuals are realizing they would rather own real money
than depreciating paper issued by bankrupt governments.

"Individuals are becoming increasingly disgruntled with the
huge inflationary pressures they've faced ever since
Reserve Banks and governments started printing worthless
paper money.

"You see, the endlessly increasing money supply (inflation)
we have experienced in modern times decreases the
purchasing power of money. Consumer prices that had risen a
meager 13% in 114 years since the founding of America,
soared 1,500% in the ensuing 90 years!

"The mastermind behind the printing of paper money is the
Federal Reserve. This institution was born in 1913 with
purely this devious purpose in mind and since then bankers
have never run short of lendable funds. In return, the
politicians were granted access to an unending supply of
loans.

"But now Durban Deep has set the chain in motion for us to
be able to buy things like groceries with our gold
holdings, and hopefully be freed from the chains of
depreciating paper money. They bought a 1.4% strategic
stake in U.S.-based gold marketing website, GoldMoney.com.

"The aim is to enable investors to be able to walk up to a
teller and hand over their gold cards with payment being
effected directly from their gold accounts, which reflects
the amount of gold you hold. It will simply work like a
debit card.

"It will become a very real way of storing your wealth in
the future (the debit card facility is not available yet
but is expected to be soon)."

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

The Daily Reckoning PRESENTS: Why was the Great Depression
so Great? Because the Fed did not implement the policies it
has today, argues Ben Bernanke. Below, the great Mogambo
tells Mr. Bernanke he needs to get his glasses
checked... unless he is purposely avoiding seeing the truth.


TREACHEROUS MYOPIA
By the Mogambo Guru

Today we come to Federal Reserve Governor Ben Bernanke, who
thinks he is smarter than everybody. This arrogance
probably comes from the fact that he was the top dog in the
economics department of Princeton, where he was molded by
years of him being able to run his fat mouth without
anybody having the guts to tell him that he was full of
crap. Perhaps because he took the wise precaution of
assembling his department out of his own coterie of
lackeys, hangers-on and yes-men.

I cast these rude aspersions on him because this guy, this
Bernanke person, actually said, in a speech entitled
"Money, Gold and the Great Depression" to Washington & Lee
students a mere two weeks ago, that he thinks that the
Depression of 1930's was the result of having a gold
standard! Hahaha! This guy is too much! The Depression was
caused by the gold standard! Hahaha!

Let's let Mr. Bernanke set the scene in Bernanke-world.
"Some [have] argued, for example, that overinvestment and
overbuilding had taken place during the ebullient 1920s,
leading to a crash when the returns on those investments
proved to be less than expected." You can tell by the way
Bernanke says this that he does not believe that
overinvestment and overbuilding are even possible. But when
you look at the data, sure enough, there was a lot of
rampant speculation and borrowing all through the '20's,
all facilitated by the Federal Reserve acting like the
morons that they are and providing the money with which to
engage in that kind of activity.

And the Fed, even today, almost eighty years later, still
does not believe that there is such a thing as overbuilding
or overinvestment, although they DO recognize that there is
excess productive capacity everywhere, which is, according
to them, NOT overbuilding or overinvestment, but is
something else entirely, although they won't say what it
is. And where did all this productive overcapacity come
from? Same as today! From the Fed and the miracle of fiat
currencies in a fractional banking system run amok!

Then Bernanke goes on to announce, in that"I'm so smart
and you're so stupid" way people have when they belabor the
obvious,"Another once-popular theory was that a chronic
problem of 'under-consumption' - the inability of
households to purchase enough goods and services to utilize
the economy's productive capacity - had precipitated the
slump." So we are right back to the same ridiculous Fed-
speak: the economy was suffering because people weren't
buying enough stuff!

And why didn't people buy stuff? Hey! Easy one! I figure
that this is my big chance to show off how smart I am, so
without waiting to be called upon, I happily jump to my
feet and announce"For the same reason that ALL people
don't buy things they want: They didn't have the money!"

And then Bernanke also laments that they didn't buy things
on credit, either. Which the Fed is urging people to do
right now, which translates into those old-timers not going
into debt when they didn't have any money, but us new-
timers ARE going into debt when we don't have any money?
And the lesson is - and notice how I am all scrunched up
over my little desk, pencil poised, ready to write down the
pearl of wisdom that is about to be dropped into my lap -
that if they had borrowed the money, see, just like people
are doing nowadays, then the Great Depression would have
been, and notice by the way my voice quivers in anxious
anticipation, avoided completely?

I swallow - gulp! - and can only manage to say"Wow!" You
mean that a big-shot at the Federal Reserve is saying that
it IS possible to achieve prosperity, and get out of an
impending depression, by going into ever-more debt? You
mean, I can buy lotsa neat stuff, and a real nice house,
with a big 'ol wad of equity in the stock market, and a
bulging 401(k), and jet-skis, and a second home, and fancy
cars, and more, if I keep borrowing until I die? You never
have to pay money back?

But Bernanke doesn't go on to tell you WHY people were not
borrowing like mad to buy SUV's and the like in the late
20's and all the '30's. But I, the MoGu, will give you
three, count' em three, very good reasons why people did
not go into crushing debt to buy SUV's in the late 20's and
all the 1930's: They didn't buy them because 1) they didn't
have the money, and 2) SUV's weren't invented yet, but even
if they HAD been invented, they STILL wouldn't have had the
money to buy them, and 3), they were smarter than we were,
and everybody knew back then that you couldn't have an
economy that was predicated on everybody and everything
going farther and farther into debt. The whole idea seemed
ludicrous. And it is.

Then Bernanke drops what he thinks is some big bombshell or
something."However, in 1963, Milton Friedman and Anna J.
Schwartz transformed the debate about the Great Depression.
That year saw the publication of their now-classic book, A
Monetary History of the United States, 1867-1960. Friedman
and Schwartz argued that 'the [economic] contraction is in
fact a tragic testimonial to the importance of monetary
forces' (Friedman and Schwartz, 1963, p. 300)."

This ignores the fact that Friedman himself has
subsequently admitted the errors in his strictly monetarist
theory. But this does not deter Bernanke one iota. Maybe he
ain't heard the news, or something. So if you personally
know Milton Friedman, tell him to call Ben at the Fed, as
he is seriously behind in his reading, and would probably
appreciate being brought up to date. Obviously nobody at
his old alma mater is going to tell him.

Bernanke does go on to admit that taxes were raised, but
like all good collectivist yahoos, he doesn't think high
taxes have any deleterious effect of economies, so he
doesn't linger there. He goes on to say that the reason
things went downhill is that the Fed raised interest rates.
He asks:"Why then did the Federal Reserve raise interest
rates in 1928? The principal reason was the Fed's ongoing
concern about speculation on Wall Street. Fed policymakers
drew a sharp distinction between 'productive' (that is,
good) and 'speculative' (bad) uses of credit, and they were
concerned that bank lending to brokers and investors was
fueling a speculative wave in the stock market. When the
Fed's attempts to persuade banks not to lend for
speculative purposes proved ineffective, Fed officials
decided to dissuade lending directly by raising the policy
interest rate." Ergo, the current Greenspan-Fed rationale
for not trying to prick an asset bubble, but merely dealing
with the aftermath.

Now we start getting into the really weird stuff. Bernanke
admits that"the gold standard appeared to be highly
successful from about 1870 to the beginning of World War I
in 1914. During the so-called 'classical' gold standard
period, international trade and capital flows expanded
markedly, and central banks experienced relatively few
problems ensuring that their currencies retained their
legal value." So it worked well! So something happened, he
says, between 1914 and the Depression.

He does not admit, however, that the newly formed Federal
Reserve system, in operation for fifteen short years, had
anything to do with subsequent calamitous economic events.
The simultaneous appearance of these two things were, I
suppose, merely a, you know, huge coincidence or something.

He extrapolates to announce:"Perhaps the most fascinating
discovery arising from researchers' broader international
focus is that the extent to which a country adhered to the
gold standard and the severity of its depression were
closely linked. In particular, the longer that a country
remained committed to gold, the deeper its depression and
the later its recovery." I agree that this is probably
true. Economic distress is the downside of the requirements
that gold places on an economy, which dictate that you NOT
get into an economic mess to start with, because there is
no way out. And a gold standard prevents you from doing the
excessive monetary expansion thing to get inflation
cooking, which is supposed to bail out the debtors. In that
regard, thank God for America being on the gold standard,
or the Great Depression would have been much worse than it
was!

But - and I guess this is the lesson to be learned,
according to Bernanke - countries wherein you could just
fire up the printing presses must have gone on to achieve
lasting prosperity, like the Weimar Republic in Germany or
something. Hahahaha!

Then Bernanke asks the Big Question:"What caused the
Depression?" Well, he figures that it is deflation, which
is confusing cause and effect."Deflation, like inflation,
tends to be closely linked to changes in the national money
supply. While the fact that money, prices, and output all
declined rapidly in the early years of the Depression is
undeniable, the interpretation of that fact has been the
subject of much controversy." Not to me, it hasn't.

Then he gets back to the discredited monetarist approach.
"Friedman and Schwartz emphasized at least four major
errors by U.S. monetary policymakers. The Fed's first grave
mistake, in their view, was the tightening of monetary
policy that began in the spring of 1928 and continued until
the stock market crash of October 1929 (see Hamilton, 1987,
or Bernanke, 2002a, for further discussion)." Note how he
uses himself as a reference!

"The gist of the Friedman and Schwartz argument is that,
for a variety of reasons, monetary policy was unnecessarily
tight, both before the Depression began and during its most
dramatic downward phase. Friedman and Schwartz concluded
therefore that they had found the smoking gun, evidence
that much of the severity of the Great Depression could be
attributed to monetary forces."

This flies in the face of an article by Frank Shostak
entitled,"Does a Falling Money Stock Cause Economic
Depression?" who writes,"However, a close examination of
the historical data shows that contrary to Friedman, the
Fed was extremely loose and pumped reserves into the system
in its attempt to revive the economy (on this see Murray
Rothbard's 'America's Great Depression'). The extent of
monetary injections is depicted by changes in the Fed's
holdings of U.S. government securities. Thus on January
1930 these holdings stood at $485 million. By December 1933
they had jumped to $2,432 million - an increase of 401%.
Moreover, the average yearly rate of monetary injections by
the Fed during this period stood at 98%."

So the Fed was NOT stingy in pumping up the money stock, as
alleged by Bernanke. Mr. Shostak goes on to say, as I go on
to say, as all thinking people go on to say, that earlier
Fed excesses were, in fact, responsible for the Great
Depression."In addition to this, at some stages monetary
injections were massive. For instance, the yearly rate of
growth of government securities holdings by the Fed jumped
from 19.7% in April 1924 to 608% by November 1924." In half
a year!

This bit of evidence garners support for the brilliant
Austrian school of economics insight that, as Mr. Shostak
puts it,"Contrary to popular thinking, depressions are not
caused by tight monetary policies, but are rather the
result of previous loose monetary policies."

In this case, the damnable Fed had spent the entire 20's
goosing up money and credit at a breathtaking pace that was
unheralded in American history. A fact ignored by Mr.
Bernanke, who wants us to focus on the RESPONSE to the
crash and depression, NOT what caused it. And why is he so
myopic about that? Because that is what he is doing right
now! He goosing up money and credit, just like in the 20's!
This very minute!

Bernanke, however, goes on to give us more evidence of his
profound ignorance:"The finding that leaving the gold
standard was the key to recovery from the Great Depression
was certainly confirmed by the U.S. experience. One of the
first actions of President Roosevelt was to eliminate the
constraint on U.S. monetary policy created by the gold
standard, first by allowing the dollar to float and then by
resetting its value at a significantly lower level." In
other words, he says devaluing the currency, hopefully not
to worthlessness, but just this side of worthlessness, is a
"good" thing!

So Robert Rubin and all the other Treasury Secretaries up
till now were wrong when they professed a desire for a
strong dollar, that was supposed to be"in the best
interests of America"? Get Rubin on the phone! I'll bet he
wants to hear this!

Currency devaluation might have been thinkable in
1930... but then again, we did not have a current account
balance that is today, even as we speak, over $541 billion
a year! 5% of GDP! A devalued currency is NEVER a good
thing to a nation that imports things. It is a BAD thing to
have a devalued currency if you are a nation that imports
things. We import a lot of things.

By this time Japan, which has been following this
ridiculous Bernanke policy prescription for fourteen years
in a row, should be roaring. It is not. Bernanke does not
explain why. And, in a similar vein, the United States
economy should be roaring along, too, given the record-
setting levels of monetary and fiscal stimulus that have
been pounded into the economy, especially for the last
three years. Three years!

Likewise, the U.S. economy is not roaring at all. The
lessons Bernanke"learned" from the Great Depression have
not resulted in his leading us into greener pastures along
with his fellow partner in crime, Greenspan. Instead, we
are sinking farther and farther into the stinking swamp
that is shown on your maps as the area with the skull-and-
crossbones, labeled"Kiss your debt-besotted butts
goodbye."


Regards,

The Mogambo Guru
for The Daily Reckoning

Mogambo Sez: In a nutshell, hopefully figuratively and not
literally, we are going to be economically killed, and we
are going to be killed because we are stupid, and we
deserve to die. History is very cruel to stupid countries
full of stupid people doing stupid things.

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gesamter Thread:

• The Daily Reckoning - Treacherous Myopia (Mogambo Guru) - Firmian, 15.03.2004, 18:17
  • Dt. Fassung - Firmian, 16.03.2004, 22:07