The Daily Reckoning - Make It Stop Hurting! (Gary North)

verfasst von Firmian, 16.03.2004, 20:38

-->Make It Stop Hurting!

The Daily Reckoning

On the train again... to London

Tuesday, 16 March 2004


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

*** If character is fate... what is in store for America?

*** The Dow turns down... consumer confidence drops... bear
market rally is over...

*** Confessions... how to take advantage of free money... and
more!

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

The U.S. stock market seems to have rolled over into Phase
II of the Great Bear Market we've been worrying you about
for the past 5 years.

The Dow lost nearly 500 points in the last 6 days of
trading (based on the numbers at 4pm yesterday). Hardly
anyone noticed.

The national character was well prepared for Phase I. It
was blasé, insouciant... congenitally relaxed. The thought
occurred to us on the metro last night as we entered a loud
car full of slouching American teenagers on a class trip.
The woman sitting across from us had once been pretty. But
she had not bothered to put on make-up. She wore what
looked like an exercise outfit... ready to absorb the sweat
from her pudgy body as she made her way around Paris. She
must have been a teacher or an accompanying parent. But she
carried herself like one of her charges - lazily, stupidly,
casually. On another bench was a young man who had not
bothered to tie his shoes or comb his hair.

In America, no one notices. Everyone is as relaxed as
jello. The French are uptight by comparison; here, there is
a residual respect for culture, class and style. The
British, by contrast, tend to vulgarity, hooliganism or
self-conscious anti-culture - at least, that is the
impression you get from reading the newspapers, going to an
art show or walking down Oxford Street. Americans used to
be known for their vulgarity. But it was a naïve,
energetic, baroque vulgarity... innocent and almost
attractive. Now, Americans are too soft and limp to be
vulgar. They go along with anything... for they can't be
bothered to think about it.

Like... whatever...

On the train this morning, en route to London, a fat young
man in a T-shirt sat down across the aisle with a skinny
woman at his side. He took off his shoes and put his smelly
feet up on the seat. When he opened his mouth we discovered
that he, too, was one of us... an American... a slob. We
studied him at length. Did he have any idea of how
repulsive he seemed, we wondered? Oh no... he began stroking
and kissing the grumpy-looking French woman, who must have
been his wife. Yech... And then, she reached under his T-
shirt to rub his back. Uh oh... they looked deeply into each
other's eyes... they must have been newlyweds, or else they
were both blind... they embraced... We thought we might be
getting sick.

These are our own people. We want to think well of them.
Besides, what possible difference does it make what people
look like, or how they dress? And yet, as Aristotle might
have said had he thought of it, in the breath of our
national character we smell, faintly, our decaying national
fate.

Four years into the 21st century, the Great Bear Market
Americans are so at ease with themselves and life in
general... so deeply asleep to the rigors of life... that
they have nearly lost consciousness. Back in the '70s, the
national current account deficit rose to nearly 1% of GDP.
Economists were alarmed. The dollar fell. Stocks fell. The
nation was so strapped and the dollar so weak that the
Carter Administration planned to borrow $10 billion in
foreign currency to tide itself over. By the time the
period was over, you could have earned 15% interest yield
from a U.S. Treasury bond. A typical stock - which you
could have bought at an average of 6 times earnings - would
have paid dividends of more than 5%.

Today, the current account deficit is above 5% and
economists see no problem. For the moment, the U.S.
government still borrows in a currency it alone controls.
And foreign central banks still seem so happy to lend that
over the last 3 months, their holdings of U.S. government
securities rose at more than 50% annual rate to more than
$1 trillion.

Stocks, real estate, employment, interest rates, government
spending... all the things we count upon to maintain our fat
and happy lives depend on foreigners... who may be less
relaxed that we are. The Japanese alone spent nearly $70
billion of their own money in the month of January trying
to keep alive Americans' fantasy economy. Even this was not
enough; the dollar fell anyway. In the same month, Japanese
finance minister Sadakazu Tanigaki said right out loud that
he thought Japan might be overdoing it. Maybe Japan would
be better served with other assets in its central vault
other than just U.S. Treasury bonds he suggested.

The menace to Americans' way of life went - like so many
other threats - unmentioned in the Land of the Free Lunch.
And today, the International Herald Tribune was again
silent on what the Dow's latest downturn might portend.
Once in motion, a stock market continues to fall until it
falls too much. It only comes to a halt at levels that make
stocks not only decent deals... but attractive ones. A
currency, too, falls not to a point of equilibrium... but
far beyond. There, once again, it is out of balance with
the rest of the world, but this time, in the opposite
sense.

In Phase I, the retreat was orderly and calm. But Phase II
may be less calm and more disturbing. It may even unsettle
Americans from their carefree reverie...

Over to Eric for more news...

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

Eric Fry on the scene in New York...

- Terrorism claimed another victim Monday... The S&P 500's
gain for 2004. Last week, the terrorist bombings in Madrid
knocked the Dow and the Nasdaq into the red for the year.
But the S&P still clung tenaciously to its 1% gain... until
yesterday.

- The U.S. stock market resumed its slide Monday, as word
surfaced that al-Qaida became the lead suspect in last
week's horrific bombings. Also weighing on stocks was the
Socialist party's upset victory in Spain's general election
over the weekend."The Socialist victory deals a blow to
President Bush's global support for the war in Iraq," CBS
Marketwatch explains,"as the prime minister-elect promises
to bring Spain's troops home from Iraq by the end of June."

- In Monday's trading, the Dow fell 137 points to 10,102,
while the Nasdaq tumbled 2.3% to 1,939. The stock market's
selloff spooked investors into the gold market, where the
safe-haven metal jumped $4.00 to $399.60 an ounce.

- Despite the ever-present threat of terrorism - or maybe
BECAUSE of the ever-present threat of terrorism - Americans
continue to"live for today." They continue to borrow money
they don't really have to buy things they probably don't
need. Meanwhile, the Chairman of the Federal Reserve urges
the populace,"Borrow, spend and be merry, for tomorrow we
die!"... or something like that. The same guy who once
cautioned against"irrational exuberance" now advocates
reckless consumption... based on interest rate speculation.

- Greenspan is urging Americans to swap out of their
"expensive" fix-rate mortgages into"inexpensive" floating
rate mortgages. Never mind that rising rates would make
this a very expensive trade."Alan Greenspan, mater of
muffled speech," writes Jim Grant, editor of Grant's
Interest Rate Observer,"issued a clarion call [recently]
to the nation's homeowners. 'Float,' he advised them, in so
many words."

- It's true: two weeks ago, Greenspan remarked before the
Credit Union Nation Association in Washington,"Recent
research within the Federal Reserve suggests that
homeowners might have saved tens of thousands of dollars
had they held adjustable-rate mortgages during the past
decade, though this would not have been the case, of
course, had interest rates trended sharply upward."

- To which Grant's quips:"To be sure. And recent research
conducted by this office suggests that many investors might
have earned tens of thousands of dollars had they bought
the Nasdaq Composite in early 1991 and sold about 10 years
later (though they would have lost money, of course, had
the stock market gone down instead of up)."

- While Greenspan urges the lumpeninvestoriat to extract
and spend every last cent of equity"locked up" in their
homes, America's Big-3 automakers entice the lumps to
borrow as much money as possible in order to buy cars they
can't really afford.

-"Thanks to ultra-low interest rates and lengthening auto-
loan maturities, Americans in rising numbers owe more on
their cars than their cars are worth," Jim Grant observes.
"In vehicular lingo, they are 'upside down.'

-"'About 30% of all customers walk into showrooms upside
down, according to one estimate,' reports the Feb. 16
Automotive News. 'And that means that the nation's
multiyear string of strong auto sales is being propped up
increasingly by longer loans and staggering consumer debt.'

-"The data shows that, since 1984, household debt as a
percentage of household net worth has climbed to 29.4% from
22.7%," Grant continues,"while the maturity of the average
new-car loan has jumped to 61.3 months from 46.3 months. As
recently as 2001, new-car buyers borrowed, on average, for
just 55 months... Automotive News, quoting the Consumer
Banker's Association, reports that banks last year crossed
a kind of prudential Rubicon, financing 100.9% of the
invoice price of cars and trucks. In 1997, there were
lending a mere 89%.

-"When one is upside down, what does the world look like?"
asks Grant."Automotive News reported on the case of a
certain Grand Prairie, Texas, Chevrolet dealership, which
'signed a customer last month to a $46,911 loan over 96
months, $18,136 over the invoice price of a Chevrolet
suburban.' Why? Because the consumer owed more on the
trade-in than it was worth; the excess of debt over equity
was rolled into the loan...

"Wowing Gov. [Ben] Bernanke, and sustaining the U.S.
economy, North American vehicle sales have averaged about
17 million a year for the past four years. Owing to
rebates, low interest rates and E-Z finance terms, car and
truck sales scarcely pulled back even during the nine-month
recession of 2001-2. Thanks be to the consumer to borrow,
the creditors to lend - and foreign central banks that
helped to make it all possible."

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

Bill Bonner, back on the train...

*** We reported adjustable rate mortgages of 3.71% recently
- a new record. But the word from Grant's Interest Rate
Observer, which Eric cites above, is that even lower rates
have been observed. A $1 million house in Atlanta was
recently advertised for sale with an interest-only mortgage
on which the monthly payments were only $2,291.67. This
works out to a rate of 2.25%.

*** We are tempted to borrow. Lenders are giving money
away. The day will come when 2.25% mortgages look like
Amazon.com at $400 - a gift from the market gods. The smart
thing to do was not to buy Amazon at the offer price... but
to sell it. Better yet, start your own Amazon and sell
shares to the public. Investors were giving away money. But
instead of spending the money on a goofy dot.com of your
own... the thing to do was simply to save it. After the
crash, you could have bought one of the dot.com survivors.

But how to take advantage of today's lenders - who seem
bent on giving away their money? Take it? Maybe. But don't
forget: don't spend it.

*** Train travel isn't as easy as it used to be. Suspicious
packages interrupted our journey this morning... we spent an
hour outside Brixton waiting for the bomb squad to disarm
someone's dirty laundry.

*** From our unpaid correspondent in Pittsburgh, Byron
King, a confession:

"Did I ever tell you that I ran for U.S. Congress back in
1992? I probably did not mention it. I usually do not bring
it up in polite company. It is just not all that important
to me, in retrospect. I even left it out of my Harvard 20th
and 25th reunion class report because it seemed so
unremarkable. But, yes. Nolo contendere. That was me on the
campaign trail, my otherwise good name on the election
ballot for Pennsylvania 14th District.

"Back in 1992, nobody was going to run against the long-
term incumbent liberal Democrat who represented Pittsburgh.
I was talking with someone from the Republican Party, and I
said 'He's going to run unopposed? What is this, East
Germany?' So the Republican bubba called my bluff and said,
'Why don't you run?' Me? Hey, I never ran for any political
office in my life, not even high school class treasurer. Me
and my big mouth... Next thing I knew, I was the candidate.
Campaigned 'on the issues,' of course. Raised a bunch of
money. Received a bunch of votes on election day. Did not
win the election, but I met my wife along the way. That was
the best part.

"One of the most important things about running for office
was that I ran. In a sense, win or lose, you win by
running, and not necessarily by winning. Heck, if I had
won, I would have had to break the bad news to everyone
that their federal government is broke, has to cut spending
and shrink the nanny state, and that people have to save,
invest and work harder to grow the economy. Who wants to
hear that kind of noise from their politicians?"

[Ed note: Gary North, calling for a return to saving and
nanny-state shrinkage, doesn't hesitate to make"that kind
of noise"... see his guest essay, below.]

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

The Daily Reckoning PRESENTS: From the world's largest
creditors, Americans have become the world's most
profligate spendthrifts. Worse, they're now dependent on
the nanny state - and the central bank's printing presses -
for funding."This story is not going to end well for most
people," predicts Gary North, below...


MAKE IT STOP HURTING!
by Gary North

Americans live in a fantasy world. This fantasy world is
going to be destroyed by economic forces that are already
well established.

It is easy for readers to think,"He's talking about the
other guy." Maybe I am, but if you are doing essentially
what the other guy is doing, then I'm talking about you.

Americans no longer save. They spend. You have read this
over and over, but has it registered? Really? What
percentage of your after-tax income do you save each month?
Do you have an automatic thrift plan with your employer? Do
you ever touch the money?

Unfortunately, saving does not come naturally for most
people; it must be learned. A young man doesn't emotionally
know that if he doesn't save for his old age, he will be in
dire straits. Children are not future-oriented. Present-
orientation is one of the primary marks of a child.
Children are also not independent; others make their
decisions for them. That is the primary mark of a child.

Americans today are a nation of children. We can see this
in their savings habits. We can also see it in their voting
habits.

In recessions, the rate of thrift rises. People get scared.
They worry about losing their jobs. They recognize that
they are vulnerable. Like the overweight person who finds
that his clothes are too tight and who thinks,"I must
start dieting today," so is the spendthrift in a recession.
He can no longer put off a savings program, he thinks. He
must begin saving. So, he does.

But, like the overweight person who loses 20 pounds and
whose clothes again fit, the saver is tempted to go off his
budgetary diet. The money seems good. The job seems safe.
He stops saving.

You can chart recession years by looking at the sharp
increase in the national savings rate. You can also mark
the period of the recovery. The savings rate drops.

In the most recent recession of 2001, the savings rate
never went over 4%. In previous recessions, it has gone
over 8%. Today, it has fallen back into the 1% to 2% range.
The recession has had no lasting effect on people's
willingness to sacrifice present enjoyment for the sake of
future security and income.

From the point of view of the return on savings, I can
hardly blame the American public. The Federal Reserve
System pumped in so much money in 2001 that it drove the
short-term interest rate from over 6% to about 1%.
Meanwhile, the rate of price increases was over 2%. After
income taxes and the decline of purchasing power, a person
with a passbook savings account or money market fund went
in the hole. He had a negative return on his money. That
means that his sacrifice of present enjoyment of spending
the money left him poorer. Then why save?

Here's why. When someone loses the willingness to save,
this affects his outlook regarding the future. He
consciously decides that the payoff of self-denial today is
a losing proposition. He concludes that the system is
rigged against him in his capacity as a saver. He is
correct: the system really is rigged in favor of the
spender and the debtor.

When a recession hits, Keynesian policies of deficit
financing are adopted by the Federal government. The
central bank starts buying government debt with newly
created fiat money. The government and the central bank
adopt policies that are disastrous for individuals to
adopt: reduced saving, more spending, more borrowing.

The public is so utterly ill informed today - as ill
informed as Keynesian economists - that people mimic the
state. They spend. They take on consumer debt. In the 2001
recession, they bought homes and new cars. This, we are
assured by government economists, was a good thing. The
consumer did not falter. The consumer spent the country
into prosperity.

This is the essence of the Keynesian economic solution to
recession: spend yourself (and the nation) into prosperity.
Keynesians apply this principle to government spending
because they believe that consumers are slackers when it
comes to spending during a recession. There is insufficient
demand. Demand - spending - is the key to recovery... not
thrift (a negative), not reduced wage rates (a negative),
but spending. So, the government must pick up the slack. It
must also encourage the public to follow the leader.

This is a child's universe. The child falls down and
scrapes his knee. He runs to his mother to get her to make
the pain go away. His mother will fix it! Two minutes
before he fell down, he may have resented his dependence on
his mother. He wanted to be a big boy. But when big boys
fall down, they don't run to their mothers... and so he
finds he is not ready to be a big boy after all.

Americans have bought the Keynesian party line. They
believe that self-discipline is not the way to success.
They believe in the state as mother. So, we live under the
watchful eye of the nanny state. That is what most
Americans want. They vote for politicians who refuse to cut
back on government spending. The state grows ever larger,
and so do its promises.

We have again seen the rate of thrift fall to about 1%. We
have seen the Federal government's percentage of the
economy rise to 25%. These phenomena are the result of the
same mind-set. As surely as the determination to save is
related to the determination to become independent
economically, so is the determination to take on consumer
debt to buy depreciating assets linked to the determination
to find someone else to solve life's economic problems.
"Make it stop hurting!"

When the economy falls down and goes un-boom, the voters
run to the government."It hurts. Make it better." What
snookums needs is a cotton swab drenched in alcohol."This
is going to hurt." Response:"No! Don't!" The child wants
the hurt to go away now. He doesn't want what is necessary
to solve his problem - his real problem. He doesn't know
anything about infection. He knows only that his knee hurts
and he wants mommy to make it stop hurting.

In politics, however, mommy has to be re-elected at regular
intervals. Mommy is not secure in her high office. So, she
promises never to use that nasty old alcohol. She will kiss
the wound and make it well. In doing so, she will increase
the risk of infection.

Ever since John Maynard Keynes persuaded politicians that
what they wanted to do - increase spending without raising
taxes, and therefore increase the national deficit - is
economically sound policy, the politicians have become
incorrigible spendthrifts. They want to be re-elected, and
a slack economy is their own scraped knee. So, they run to
the central bank."Kiss it and make the pain go away." The
central bank obliges. It creates money. The supply of money
goes up. This tends to lower the price of money - the
interest rate - in the recession phase. The result: the
destruction of a positive economic return for savers, after
taxes and price inflation.

Keynes taught that what is rational for the individual
during a recession - increased thrift - is bad for the
economy as a whole. To cut expenses personally is self-
defeating nationally, says the Keynesian, even if he calls
himself a supply-side economist, a monetarist, or an
Austrian economist. If his argument is that thrift and
cost-cutting are good for the individual but bad for the
economy, he is a Keynesian. He is denying the heart of free
market economics, from Adam Smith to the present. He is
saying that rational individual self-interest not only
fails to coordinate the economy, it is bad for the economy.

This is the child's universe. The West has become dependent
on government to provide fiat money. If the world's central
banks were ever to stop creating money, the malinvestments
which their low interest rate policies have created would
be exposed by the capital markets as misused capital... and
the capital markets would fall like a stone.

The West is now in its second childhood. It refuses to do
what is necessary to grow up: reduce taxes, increase
thrift, pay off the national debt, and stop creating new
money. This can be done, but it won't be done. To do it
would hurt."Make it stop hurting!"

Meanwhile, the nanny state continues to look for injuries
to kiss. The voters need to tell the state exactly what it
can kiss... but they never do.

This story is not going to end well for most people. I hope
it ends well for you.


Regards,

Gary North
for The Daily Reckoning

Thread gesperrt

 

gesamter Thread:

• The Daily Reckoning - Make It Stop Hurting! (Gary North) - Firmian, 16.03.2004, 20:38
  • Hallo Firmian - Euklid, 16.03.2004, 21:28
    • ReHi Euklid ;-) - Firmian, 16.03.2004, 22:03
      • Re: ReHi Euklid ;-) - Firmian, 16.03.2004, 22:11
        • Hi Firmian - Euklid, 16.03.2004, 22:41
  • Dt. Fassung - Firmian, 18.03.2004, 01:44