The Daily Reckoning - Something Wicked This Way Comes (Bill Bonner)

verfasst von Firmian, 19.03.2004, 22:05

-->Something Wicked This Way Comes

The Daily Reckoning

Paris, France

Friday, 19 March 2004

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*** Oh là là... Mr. Mizoguchi... why hast thou forsaken us?

*** Gold up... dollar down... stocks muddle through...

*** Why Men Love Bitches... and other myths...

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

Mr. Mizoguchi has gotten tired of wasting Japanese money
on American debt. At least, that's the guessing from Wall
Street this morning. [Eric elaborates, below... ]

So the dollar fell, gold rose and the stock market muddled
through. It was a GUDD day, in other words. And our guess
is that it marks the beginning of Phase II of the Great
Bear Market in both stocks and the dollar. The Dow will
fight to stay above 10,000... and then give way... maybe
dropping down to 5,000 or 6,000. Gold rose more than $4
yesterday... taking it already up to $411. It will probably
go to $500 before this phase is over. And the dollar... at
about $1.23 to the euro today... will probably drop to
about $1.50.

But this is just guesswork - barely worth the paper it's
not printed on. Still, we offer these guesses in the
spirit of calculating a widow's assets. If the breadwinner
gets hit by a beer truck, she needs to know what she'll
have left to live on.

No one knows when the beer truck is coming. So you have to
make some guesses. And that means not merely looking at
what you think will happen... but what it would mean if you
were wrong. The most likely thing to happen is... nothing.
That's what usually happens; things just muddle along in
their own sloppy way. Ninety percent of investors and
consumer households in America are counting on it: stocks
will continue to go up, more or less... real estate will
continue rising... and people will continue to refinance
their houses and buy more and more things on credit.

That this cannot go on forever doesn't seem to worry
anyone; the end of the world never seems to come along
when you think it should.

But betting on 'muddle through' is not always a good
wager. Blaise Pascal figured that the cost of being wrong
about eternal damnation far exceeded the price of faith.
Perhaps he would not be able to covet his neighbor's wife
or eat fish on Friday... but he didn't especially like
fish... and his neighbor's wife wasn't all that fetching
anyway.

Neither are the gains you might anticipate from the
extension of the credit bubble. If things continue as they
have for the last year and a half... a typical
lumpeninvestor could expect a few dollars of profit in his
stocks... a 10% gain, on paper, in his house... a bigger
SUV... a few more household gadgets... and a deeper hole of
debt to toss them in. That's the upside in all its tawdry
glory.

On the other side of the bet are the losses you might
suffer when it comes to an end. Imagine that interest
rates are forced up by foreign lenders' unwillingness to
lend. Imagine that adjustable rate mortgages suddenly look
like bad deals... and millions of people have trouble
keeping up with payments... driving down house prices by
20% to 30%... [More on this below, too... ]

Imagine that stocks lose a quarter to a half of their
value. Imagine that the job picture doesn't improve... but
gets much worse. Imagine that Alan 'Bubbles' Greenspan is
disgraced as a debt-mongering scoundrel, and that crowds
gather under a tree in front of the Treasury building in
Washington, with a rope in their hands and revenge on
their minds. A quarter of a century ago, you could get a
15% yield on U.S. government paper... and a mob burned an
effigy of Paul Volcker on the steps of the capitol.
Imagine that.

"Muddle through" may still be the most likely outcome most
of the time... but sometimes, it is a bad bet.

Over to Eric, with more news:

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

Eric Fry, reporting from the Street of Dreams...

- The stock market took a breather yesterday, as the Dow
dipped 5 points to 10,296 and the Nasdaq dropped 14 points
to 1,962. Meanwhile, the dollar tumbled and gold soared.
The monetary metal, which gained $4.00 to $411.35, drew
its strength from the dollar's weakness.

- The greenback slumped another 1.1% against the euro to
$1.238, which must have brought self-satisfied smiles to
the faces of Alan Greenspan, Treasury Secretary Snow and
all the other dollar-debasement advocates. A strong
currency - like a"submissive wife" - is a concept that
the modern mind holds in contempt. In place of these long-
standing ideals, now weak currencies and submissive
husbands have become the norm.

-"Hmmm... maybe I should read this," said your New York
editor's girlfriend while browsing in a bookstore
recently. She had chanced upon a copy of"Why Men Love
Bitches." Intrigued by the title, she picked up the
book...

-"No, it's not true, it is definitely not true," we
insisted."Please trust me on this one. I think the author
has embarked on an irresponsible mission, like teaching
kids how to try drugs, or teaching Republicans how to wage
wars... Please don't buy this book. I love you because
you're NOT a bitch. Really, I'm sure about this."

-"Well, I don't know," she replied with a wry grin."I
need to think about this... Maybe I should be a bitch."

-"Well, if you have to think about it," your editor
reasoned,"then you're not really a bitch, just a pale
imitation... and who wants to be a pale imitation? I think
you should just stick to what you do well - being kind to
me." She smiled again:"Maybe I'll come back here
tomorrow..."

- Returning to the topic at hand... whatever became of the
quest for a strong currency? Once upon a time, every
country on the globe desired a strong currency, and every
country envied the U.S. dollar as the"gold standard" of
strong currencies. Indeed, the world's premiere monetary
brand was convertible into gold until 1971.

- But those days are long gone. Today, frailty is chic and
some countries will spend billions of dollars to contrive
an appropriately weak exchange rate for their money.

- Japan's central bank sold a staggering $95 billion worth
of yen in the first two months of this year in a vain
attempt to weaken it. Unfortunately, the yen weakened only
1% against the dollar during that timeframe... and today,
the yen is STRONGER than when the sales began on January
1st.

- Yet all along, the campaign to weaken the yen has faced
stiff resistance from the counter-campaign to weaken the
dollar, not to mention the various rearguard actions -
like the campaign to weaken the Yuan, the campaign to
weaken the Brazilian real, the campaign to weaken the
euro...

- The poor Japanese; they've exhausted themselves by
banging their collective head against a monetary brick
wall. A massive current account deficit is what you want
when you're trying to debase your currency. Japan's $100
billion foreign exchange intervention has been no match
for America's half-a-trillion dollar current account
deficit. That's why weakness is the path of least
resistance for the U.S. dollar. It's also why the
Japanese, temporarily, are refraining from currency
intervention and allowing the yen to strengthen.

- When rumors of Japan's policy shift surfaced on Monday,
the yen soared immediately. It has continued soaring since
then - gaining more than 3% from last Friday.

- If the Japanese cease meddling in the forex markets, the
dollar will have to fend for itself. The outcome, we
predict, would not be pretty. Imagine the toughest French
boxer alone in the ring against Mike Tyson...

-"Tokyo could lose its reason for intervening if Japan's
economic recovery really takes off," the New York Times
explains,"with more consumption and capital spending
shifting some of the burden off exports. There are already
signs that may be happening."

- The Japanese government, in its monthly economic report
released Monday, said spending by consumers was 'picking
up.' On the same day, a report showed that sales at
department stores in the Tokyo area rose in February for
the first time in more than two years. Meantime, Japan has
just reported 6.4% GDP growth figures for the quarter
ended December... its best performance since the Nikkei
began its 14-year collapse and real estate turned sour in
1990.

- If the Japanese cease buying dollars, the U.S. Treasury
market might also have to fend for itself. Imagine the
toughest boxer from Liechtenstein versus Mike
Tyson..."Japan has accumulated the largest foreign-
currency reserves in the world at $777 billion," the New
York Times notes,"much of it invested in United States
government debt. Japanese investors accounted for about
half the purchases of United States Treasury securities
last year."

- Obviously, if the Japanese ceased buying dollars, they
might also cease spending dollars on things like U.S.
Treasury notes. Without Japan's"artificial bid" in the
Treasury market, where would interest rates go? Much
higher, would be our guess.

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

Back in Paris...

*** The Japanese are no longer backing the U.S. credit
market. What does it mean?"What I think is going to
happen," explained colleague Dan Denning a few days ago,
"is that prices on anything that is backed by debt are
going to go down. That's what a debt-deflation is all
about. Houses, stocks, corporate bonds... and trillions of
dollars worth of debt-backed derivatives - are going to
fall. They've been bid up by debt, not by genuine yields
or purchasing power. And now they're bound to become
cheaper as the debt behind them is marked down and
withdrawn.

"On the other hand," notes Dan,"the prices of primary
materials - gold, oil, platinum, copper, commodities of
all sorts - are going up. Because they are not backed by
debt. Instead, they are bought up, in competitive markets,
all over the world. As the dollar goes down, the price -
in dollars - goes up. Demand will go down, somewhat, as
Americans pull in their belts. But there is a huge new
demand coming from Asia."

*** Since we are guessing about all sorts of things, we
will take a further gazelle-like leap into the unknown.
Modern communications and sophisticated derivatives were
supposed to destroy the monetary use of gold. Who needed
to hold an inert metal when you could protect yourself
from any financial trend - even the collapse of the dollar
- with a few clicks on a keyboard.

But every click from one paper asset to another... or from
one derivative position into another... carries its own
risks and uncertainties. Most people, businessmen or
consumers, would prefer not to speculate with their own
money. They would prefer to know that it had a fixed value
that they could depend upon.

Instead of destroying gold as money, modern information
technology is likely to destroy paper as money. Because
now, it is as easy to quote a price in units of gold as it
is in dollars or euros.

How long will it be before people get tired of
speculating... and stipulate prices in terms of gold, or a
new gold-backed currency? How long will it be before the
'legal tender' laws become irrelevant, with long term
contracts that adjust prices - at the stroke of a keyboard
- to this new gold standard?

*** A DR reader writes:"You often allude to the
lumpeninvestorate and one can't help but think you are
referring to middle America when you do. At least that's
what I've always thought. I'm fast coming to the
conclusion that the lumpeninvestorate includes about 99.5%
of the public. Let me explain...

"We bank with a small five year old bank, one of many that
have formed over the last five or ten years I've been
told. Today the bank had lunch for their board members,
some of their key shareholders, and a few key customers.
Twenty five people in all, most of whom are supposedly
"sophisticated" Reg' D investors.

"The President of the bank gave a very upbeat assessment
of the economy and the future. He asked for comments and
questions. All in all it was a very upbeat talk. In fact,
I couldn't help but feel great about the future.
Eventually, I got around to my version of belching.

"I began by saying I had some concerns about the economy,
particularly the trade deficit, the budget deficit, and
the falling dollar. I asked if anyone else had any
concerns about the economy and the future. Complete
silence ensued. After an awkward moment the President said
he had concerns at the macro level, also, but he did not
think it would affect the micro level. Several people
nodded in agreement and the upbeat conversation continued
on."

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

The Daily Reckoning PRESENTS: What does it mean when the
least absurd policy position comes from the White House?
That every other position must be fraudulent, delusional,
or dumb...


SOMETHING WICKED THIS WAY COMES, Part I
by Bill Bonner

Rev. Al Sharpton is clean. He is not an economist. He is
against outsourcing. That those qualifications did not
cinch the democratic nomination for the man disappointed
many people.

That he has not been outsourced himself disappoints many
others. For surely a crackpot fakir could be found in
India who is ready to make a public spectacle of himself
at half the price. For that matter, all of Washington
could be outsourced to the banks of the Ganges at a
fraction of the price... but no one has yet suggested it.

Joined by Dennis Kucinich and Ralph Nader, Sharpton
believes the U.S. should disavow free trade altogether. As
long as we are members of the Word Trade Organization,
explained Kucinich in a debate last week, we cannot
"protect the jobs... this is the reason why we have
outsourcing going on right now. We can't tax it. We can't
put tariffs on it."

To be non-partisan about it, all the candidates' positions
on outsourcing seem absurd or preposterous. There are
those who want to stop it. And those who see no problem
with it.

Everywhere we look is an opinion that is fraudulent,
delusional, or dumb. Mr. Kerry refers to"Benedict Arnold
CEOs" as if an executive who tries to lower labor costs is
committing an act of treason. Rumor has it he is
considering eliminating the foreign tax credit, which
gives U.S. companies operating overseas the right to
offset their U.S. taxes against the tax they pay - on the
same income - overseas. If removed, hardly any U.S.
company could afford to do business outside the U.S. In
France, for example, a U.S. company would pay more than
70% of its earnings in taxes.

One of the least absurd policy positions comes,
astonishingly, from the White House, where President Bush
believes that better primary education is the solution to
the outsourcing menace. If Americans could spell better,
and add and subtract correctly, they would be better
prepared for jobs at Walmart, we presume. Alan 'Bubbles'
Greenspan supported this view in recent remarks:"The
capacity of workers, after being displaced, to find a new
job that will eventually provide nearly comparable pay
most often depends on the general knowledge of the worker
and the ability of that individual to learn new skills,"
he said. And if they can't find work at the wages they
demand, he seemed to want to add... it's their own damned
fault.

The most popular view of outsourcing, among economists at
least, is the Alfred E. Newman,"what, me worry?"
approach. Don't fret, they say. We'll think of
something... we always have. We're masters of innovation,
after all.

Many economists - including Alan Greenspan himself -
maintain that the lack of jobs is a sign of something good
happening... like the putrid smell of a garbage
pile... indicating that the little microbial recyclers are
doing their job."Productivity," they say,"accounts for
most job losses, not outsourcing."

We can't seem to get a grip on the logic of it. Nor can we
remember a time when productivity actually threw people
out of work - except in individual industries at special
moments. The invention of moveable type, the steam engine,
electricity, telephones, gasoline motors, jet planes,
post-it notes, screw-off caps on wine bottles - each
increased productivity.

But did they cause generalized unemployment? Nope.
Instead, increased productivity freed up resources for new
projects... which sopped up workers almost immediately, at
higher labor rates! We don't see that happening this time.
Why? Greenspan does not even seem to ask the question. He
finds the 'productivity' idea useful, so he sticks with
it.

"Over the long sweep of American generations and waves of
economic change," continued Greenspan the other day,"we
simply have not experienced a net drain of jobs to
advancing technology or to other nations." Could something
be different this time? Could this be a kind of 'new era'
in American economic history? The answer we give is
'yes'... but we will give it in a future essay. Here, our
burden is must more modest... and our proof comes more
readily to hand. For here, we argue only that America's
leading economic policy makers are either rascals or
numbskulls.

Major tops in the credit cycle seem to correspond with
major bottoms in political economy, we conclude. From high
offices all over the nation come the explanations,
excuses, rationales, and obiter dicta; we don't know
whether they are corrupt or merely stupid. But when the
guardians of the public financial mores begin urging
people to acts of recklessness, we cannot help but notice.
Buy more, says one Fed governor. Borrow more, says
another. Don't worry about debt, interest rates or the
loss of jobs, says the captain of them all. It is as
though the National Council of Bishops had come out with a
public statement urging wife swapping. The experience may
not be unpleasant, but it is unseemly of them to say so.

"Go out and buy an SUV," urged Fed governor McTeer. We
learned recently that 17 million people heeded his called,
each year, for the last 4 years. Automotive News reports
an estimate that nearly a third of people who walk into
showrooms are now"upside down," owing more on their
current vehicle than it is worth.

McTeer, Greenspan et al helped this binge and other
borrowing by lowering interest rates down to Eisenhower-
era levels. Even the mainstream media is beginning to
catch on to the fact that E-Z credit is not always a
blessing.

"Alan Greenspan is essentially lending money at a loss,"
began a surprising editorial in today's International
Herald Tribune."This cannot go on indefinitely, and it
should not go on much longer... It increased corporate
profits and prompted consumers to refinance their
mortgages and to spend their way into plenty of other
debt... Many homeowners, and consumers in general, are
borrowing recklessly, betting that rising housing prices
and easy credit are here to stay... Americans may be in for
a rude shock when the real estate market levels offs, and
when millions discover that the adjustable rates of their
mortgages and other loans can be adjusted upward."

Directly and indirectly, many will have Greenspan to
thank. The Fed chairman has an uncanny way of arriving at
ideas... just at the exact moment when they can be of most
benefit to his superiors - and his own career. To
Greenspan the conservative economist, the stock market
looked 'irrationally exuberant' in the mid-'90s, until a
member of Congress pointed out to him that he would be
better off keeping his mouth shut. A gold bug in the
'70s... now Greenspan has become the biggest purveyor of
paper money the world has ever seen. Similarly, large
federal deficits seemed at odds with his creed... until it
suited him to think otherwise.

And now, as the debts and deficits mount up, Greenspan
undergoes another intellectual metamorphosis. An article
in the N.Y. Times explains:

"Many mainstream economists are worried about these
trends, but Alan Greenspan, arguably the most powerful and
influential economist in the land, is not as concerned.

"In speeches and testimony, Mr. Greenspan, chairman of the
Federal Reserve Board, is piecing together a theory about
debt that departs from traditional views and even from
fears he has himself expressed in the past.

"In the 1990's, Mr. Greenspan implored President Bill
Clinton to lower the budget deficit and tacitly condoned
tax increases in doing so. Today, with the deficit heading
toward a record of $500 billion, he warns more
emphatically about the risks of raising taxes than about
shortfalls over the next few years.

"Mr. Greenspan's thesis, which is not accepted by all
traditional economists, is that increases in personal
wealth and the growing sophistication of financial markets
have allowed Americans - individually and as a nation - to
borrow much more today than might have seemed manageable
20 years ago."

And here, dear reader, is the money paragraph:

"This view is good news for President Bush's re-election
prospects. It increases the likelihood that the Federal
Reserve will keep short-term interest rates low. And it
could defuse Democratic criticism that the White House has
added greatly to the nation's record indebtedness."

Out of convenience, rather than ideology, Mr. Greenspan
has come to see goodness in all manner of credit. Lately,
he has praised lending to 'subprime' borrowers... and
applauded homeowners for switching to adjustable rate
mortgages. Debt levels have risen from $54,000 for the
average family in 1990 to $79,000 last year. Mortgage
foreclosure rates, personal bankruptcies and credit card
delinquencies have been rising steadily and are at record
levels.

But none of this seems to bother the chief of America's
central bank.


Bill Bonner
The Daily Reckoning

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gesamter Thread:

• The Daily Reckoning - Something Wicked This Way Comes (Bill Bonner) - Firmian, 19.03.2004, 22:05
  • Danke, ich liebe das... - Clarius, 19.03.2004, 22:14
    • Re: Danke, ich liebe das... - Firmian, 19.03.2004, 22:55
      • Re: Danke, ich liebe das... - Firmian, 19.03.2004, 22:58
  • DR - Dt. Fassung - Firmian, 23.03.2004, 20:32
    • @Firmian - weitergeleitete Mail angekommen? (o.Text) - wheely, 23.03.2004, 22:26
      • Re: Yes Sir! - Firmian, 23.03.2004, 22:38
        • Re: Yes Sir! - bei mir nicht - wheely, 23.03.2004, 22:41