The Daily Reckoning - Watch The Gauges! (Mogambo Guru)

verfasst von Firmian, 23.03.2004, 20:35

-->Watch The Gauges!

The Daily Reckoning

Paris, France

Monday, 22 March 2004

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

*** Prices slide on Wall Street... the downside of the credit
cycle may be at hand...

*** Frenzy in Vancouver... Big Bust in Real Estate coming, says
"The Economist"

*** The trouble with American business... Opportunity in oil?
Caesar's ancestor... and more!

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

We'll stick with our guess: the great rally is over.

On Friday, the Dow went down more than a hundred points. There
was nothing in the news to cause buyers to lose courage.
Americans are still ruining themselves. They borrow, they spend,
they refinance.

From Vancouver comes news of a 'frenzy' of buying in the real
estate market. Reports tell of 150 people lined up to buy into a
new condo development. In a single day, most of the units were
sold, bringing in $123 million to the developers.

The guardians of public financial virtue do not merely look the
other way. They are right out in front of the mob, urging
consumers and investors alike to err on the side of recklessness.
They offer them good terms - the lowest lending rates in 45 years
- and bad advice. Spend, spend, spend, they say, it only gets
better.

"Until it gets worse," they should add. The 'recovery' is a
fraud. While cheap credit vastly increases the public's debt...
and the price of all assets backed by debt... it does nothing to
increase the number of jobs or the real incomes of people who
have them. Unable to keep up with the payments, Americans are
running out of time.

This is not a problem for Americans alone. The dollar is the
reserve currency of the entire world, not just the U.S. And the
Fed is -- de facto -- the bubble-maker for the whole planet. The
Fed's low rates have underwritten a huge boom in debt all over
the globe. Assets backed by debt, especially real estate,
bubbled-up all over again. House prices, as a percentage of
personal incomes, are at the highest levels ever -- in the U.S.,
Australia, Ireland, the Netherlands, Spain and Britain.

"I wanted to buy an apartment in Paris," said our host this
weekend -- a Frenchman living in Normandy --"but have you seen
the prices? It's crazy. I'll wait until they come down... I'm not
going to get into this madness. I don't know when it will happen.
But these prices have to come down sometime. People can't afford
to pay them."

The Economist looks ahead. It thinks it sees the next big trend
in real estate. Even a slight upward bias in interest rates could
do for the average house what Al Qaeda does to Baghdad hotels.
Expect a 20% drop in prices, says the Economist. It would be the
"first global property bust in history," says its source.

It might also be the biggest financial bust in history. Property
is a bigger business than stocks. More people own property.
There's more debt leaning directly on the wobbly walls of real
estate. And more people are in danger of getting crushed when the
earth shakes and the bricks and mortar come falling down.

While there are about $30 trillion worth of stocks in the world,
the property market is estimated at about $50 trillion. Much of
it is heavily mortgaged. And in the UK, for example, rental
income often doesn't even cover mortgage payments, let alone
upkeep and other costs.

In the expansion phase of the debt cycle, debt increased... and
everything you could buy with debt was bid up. In the contraction
phase, which we think is just beginning, debt will be paid down,
downgraded, withheld, discounted, written off, blown up,
cancelled, renegotiated and worked out. What it bought -- notably
real estate -- will go down.

Stay tuned...

Meanwhile, here's Addison with more news:

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

Addison Wiggin casting an eye over the financial news...

- If you ignored Monday and Friday, last week would have been a
pretty good one for Mr. Market. Unfortunately, a man's character
is measured by the sum of his works... not just the good ones.

- On Monday and Friday the Dow, Nasdaq and S&P were down
approximately 250, 70, and 30 points, respectively. Throw in the
mid-week rally and the Dow still lost 53 points for the week to
close at 10,186. The Nasdaq lost 44 points for the week to close
at 1,940. The S&P fell 11 by session's end Friday... it closed
at 1,109. [As we write, we notice what began on Friday is
continuing this morning. The Dow has opened 150 points down...
the Nasdaq is off by 35 in early trading. Hmmmnnn... ]

- Ever the performer in tenebrous markets, gold rocketed $14 to
$412. It's now at $417! The barbaric relic now just a short spike
shy of a multi-year high. Silver, too, is threatening the $8
mark! Mining stocks, as you might expect, enjoyed a fantastic
week, many scoring 5% gains. The sector is highly volatile,
making the ennuie in the major averages seem almost... well...
even more booriing!

-"Buy the rumor, sell the news" say the old-time traders. The
rumor is that Japan is considering stopping this irksome practice
of printing yen to buy dollars. Buying the rumor, currency
traders pushed the yen up 4 to 106 against the dollar for the
week. The yen is now threatening to break important resistance
levels last seen in January. What, one wonders, will the traders
do when they hear the news?

- Well, you might think they'd sell. But despite the nation's
staggering twin deficits - the Fed's spent a whopping $96 billion
more in February than they took in tax receipts, and American's
consumed $43.1 billion more than they produced - the dollar lost
a mere cent against the euro last week, falling to $1.23. In the
meantime, net foreign investment in the US for January, it was
reported last week, totaled $92 billion... more than twice the
amount needed to finance the trade deficit.

- And, despite a large sell off at week's end, Treasury markets
finished Friday's session flat. The 10-year yields 3.75%; just
below the halfway point of the 12-month low of 3.10% and the
12-month high of 4.60%."Sooner or later," writes Stephen
LaTulippe, sounding an awful lot like a Daily Reckoning junkie,
"foreigners are going to look at the Federal balance sheet and
realize that they shouldn't loan us any more money."

- Of course, your curmudgeonly editors at the Daily Reckoning
continue to think 'sooner'... But Alan Greenspan, Treasury
Secretary John Snow, Mr. Miroguchi, central bankers, a host of
bond vigilantes, and the lumps... keep managing to push off the
inevitable until 'later'. Our simple advice, don't bet on it
forever.

- But at least there's some cause for celebration: The PPI is in!
After two months of delay, the Department of (be)Labored
Statistics finally released their January Producer Price Index
numbers. But, as Dave Lewis of Chaos-onomics remarked, with a
slight 0.6% rise"one wonders what all the fuss was about."
Unless, of course, with their swanky new computers it actually
takes longer to cook the books than it did before.

-"Is $2.50 gas on the way?" wonders the N.Y. Post."Worries
mount about soaring gasoline prices," adds MSNBC. The Economist
chimes in on cue:"Light crude is hovering around a 13-year
high..."

-"Global demand for oil shows no sign of weakening," writes our
friend Martin Spring,"yet oil reserves in the US are at their
lowest levels since 1975, while in the advanced nations as a
whole they are only enough to meet 28 days' use... The most
significant demand has been from China. Last year China accounted
for more than a third of the global increase in demand and
overtook Japan to become the world's second biggest importer
(after the US). Supply disruptions in major producers such as
Venezuela, Nigeria and Iraq have prevented a build-up of stocks
from their low levels."

"For the last 30 years," claim the authors of 'Oil Factor', a
gloomy new book about energy on the planet,"the price of oil has
been the single most important determinant of the economy and the
stock market." They also claim, reports the Economist, that the
oil price will soar above $100 a barrel 'by the end of the
decade, and possibly sooner.' Such a spike, they say, would drag
the global economy into a severe recession."

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

Bill Bonner back in Paris...

***"I'd rather buy property in Costa Rica than stocks in
France," said the Marquise. She and her husband, the Marquis, run
a Bed and Breakfast in Normandy, in a restored 17th century
chateau. They had tried to buy a small hotel in Costa Rica, but
were outbid by foolish Americans who paid too much and later
regretted it."At least, when the price goes down we can still go
there and enjoy it."

*** The Marquis sat next to Elizabeth at a lavish dinner party,
held in a grand chateau. Your editor is struck, on occasion, with
a bad case of chateau envy. On Saturday night, the syndrome hit
hard. For he found himself in such a marvelous house, he might
have shoved his own humble pile into its grand salon alone...
and had room left over for a riding stable.

Your editor is an amateur of libraries. He loves to curl up in
front of a warm fire... on a leather couch... with a glass of
whiskey at his side and a copy of, say,"Ceasar's Gaullic Wars"
in his hands. What a marvelous way to fall asleep! When we saw
the magnificent bibliotheque, his eyelids grew heavy. Along the
walls were exquisite leather-bound volumes... ancient books...
beautiful, rich, wonderful tomes. Histories, philosophies,
natural studies... on chestnut shelves installed by fine
craftsmen during the Second Empire. The shelves went all the way
to the ceiling -- about 6 meters high... accessed by a hidden
staircase that led to the mezzanine.

In the center of the wall, facing the doorway, was an
elaborately-carved wooden fireplace... with a crackling fire. And
there before the fire, on a sumptuous green leather couch - long
enough to hold your editor and two of his friends, was the heir
apparent... the little blond-haired grandson of the chatelain.
Just a baby... barely able to tottle, little Ascagne -- for that
was his name -- has big shoes to fill. Ascagne, or 'Ascanius' in
English, was the son of Aeneus. He was said to be a founder of
Rome... Julius Ceasar claimed him as an ancestor!

***"The trouble with American business," the Marquis opined to
Elizabeth,"is that it is so selfish. Managers are only
interested in how they can make more money for themselves. They
don't care about anybody or anything else."

Elizabeth reported this conversation the next day. It is the sort
of opinion one hears often in Europe. American business is
ruthless, cutthroat... only interested in profits. Elizabeth
protested. She tried to explain that 'selfishness' is the driving
force of capitalism... and that the lust for profits forces
business to pursue goals that actually benefit the consumer more
than the businessmen. The baker does not get up at 4am to warm
his ovens just for the love of his countrymen... or so that they
might have full stomachs when they go off to work. No, he does it
for his own reasons - which end up putting bread on everyone's
table, including his own.

But the Frenchman was right. There is something a bit decadent,
shortsighted and corrupt about modern American capitalism. The
trouble is, we think, that there are not enough real capitalists.
Business still serves the interests of consumers. But it rewards
corporate managers too well; they take advantage of today's naïve
little capitalists. Buffett wouldn't stand for it. Yet, the
little shareholders have no power and no clue.

They pay their company managers as if they were rock stars...
when anyone with any real business experience knows that most of
what they do is either irrelevant, unproductive or harmful. The
corporate chieftain's job could be outsourced to an Indian as
easily as any other, but who's going to suggest it? Top
executives sit on each other's boards... they award each other
pay packages that would make a maharajah blush... and often know
little or nothing of the business they're supposed to be in. They
cannot invest the company's money for long-term projects. They
don't really have any ideas for the long-term. And they know that
the lumpeninvestors wouldn't much appreciate it if they did. So,
they merely try to maximize current profits -- and put as much
into their own pockets as possible.

*** Yesterday was the 100th anniversary of W.R. Grace's death.
Now, there was a capitalist. He ran away from school in
Queenstown, Ireland, at the age of 14 and worked his way to New
York on a sailing vessel. After a stink in Peru, he clerked in a
trading company and gradually built the business that became W.R.
Grace... made a fortune... and became mayor of New York.
Your editor bought shares in W.R. Grace about 3 years ago -- just
weeks before the company declared bankruptcy.

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

The Daily Reckoning PRESENTS: Mogambo on Monday! The PPI is
rising... oil, gas and energy costs are pushing multiyear
highs... is something brewing? The Mogambo Guru takes a reading
of the gauges, and shouts: INFLATION!!!

WATCH THE GAUGES!
By the Mogambo Guru

The most unsettling news of the past week, to me, is that
Treasury Secretary John Snow has apparently requested a meeting
with all 12 Fed governors. The Treasury Secretary and all of the
Fed governors in the same room... at the same time. This cannot
be good.

What will they discuss, one wonders...

Perhaps it has something to do with foreign central banks who
gobbled up another $8 billion of U.S. debt last week and stashed
it at the Fed. Are the chickens coming home to roost? Or maybe it
has something to do with the fact that Fannie Mae has more than
$900 billion of debt, more debt than either of the British or
French governments. Perhaps estimates by the Bank for
International Settlements - that global derivatives now total
$208 trillion, roughly 700% of global GDP - have Snow on edge.

Or maybe the fact that the stock market is now so over valued,
more than any other point in US history, is causing some concern.
Or the meeting may have something to do with inflation. It is
roaring like an unchecked bush fire - and that means US bonds,
which are paying negative real interest rates, are now so
overvalued that there is no way that anyone holding American debt
can possibly SEE value, even standing on tiptoes and using the
Hubble telescope.

Whatever the case... John Snow and the 12 dwarves from the Fed
are going to meet. And something is going to be done. My
prediction: whatever they do will be so horrible that future
historians are going to have a field day with it. Trust me on
this one.

The part that is so tragic is that everybody knows the end result
of this kind of money-madness excess. Nobody even disputes it.
Nobody even tries to hide the truth, because the history of the
world is littered with the inescapable evidence. You will end up
with, and you might want to write this down, because it will soon
seem very important to you, high and ruinous price inflation
caused by high and ruinous monetary inflation.

Robert Prechter still sees deflation on the cards, and points to
the action in the money supply, which, when I look at the chart,
is one of three possible scenarios: 1) slowing, 2) lacking in
marked advance, or 3) stagnating, which are all de facto proof of
monetary deflation. So, classically, we have less money chasing
more goods, and prices should fall.

But not all prices will fall under deflation, just as some prices
do not rise during inflation. I can easily see why houses,
stocks, bonds, and collectibles, and other such things would go
down in price - because demand will fall. And because they are
being supported at these lofty prices by the rampant monetary
goosing by the Fed, these prices would seemingly fall a long way
if demand faltered.

On the other hand, I can also see inflation on the cards. We are
a nation that imports a lot of the stuff it consumes, and a
falling dollar equates to the rising price of imports, ceteris
paribus. I am thinking specifically of oil, which has gone up
dramatically in price, oh and food as well, and since we are
talking about it, just about everything else.

"The stagflationary 1970's provide an important precedent in
recent American financial history," opines Bill Fox,
"particularly since I believe the decade ahead will echo the
1970's, only worse."

"This type of inflation typically means an expansion of the money
supply and bank credit ahead of gains from productivity and asset
growth. More money and credit chasing fewer goods and services
typically means higher prices over the long run." This is the
kind of inflation that we have been subjected to by Greenspan and
the Fed for as long as I can remember, and I ain't no Spring
chicken.

Inflation destroys consumer purchasing power. The creation of
money and credit does not create prosperity, any more than a
counterfeiting ring would. It's a form of taxation on the
consumer."Stimulus spending typically creates the short-term
illusion of prosperity at the long-term price of distorting the
economy and debauching the currency."

Fox has also looked at the historical record and notes that
"Price inflation may also remain initially muted because excess
liquidity can first find its way into stock, real estate, or bond
asset bubbles. It may experience a prolonged delay in running up
commodity and consumer prices."

Well, take a look around! Sound familiar? This excess liquidity
has already found its way into stock, real estate and bond
prices. And now it's finding its way into commodity prices, too,
although the government wonks who are supposed to be looking at
this kind of thing are all asleep, or lying, or both.

"The magnitude of America's trade deficits and indebtedness
suggest that the US will eventually wind up with double-digit
interest rates and hyperinflation." Check out that"hyper" in
"hyperinflation." Scary stuff indeed.

"This is the kind of environment where gold often outshines all
other asset classes," Fox concludes."This is the overall
underlying environment I believe we have been in since the Nasdaq
top in March 2000, and it could last for many more years." So,
and this is the important point, a guy who has been careful to
look at the historical precedents figures that the bull market in
gold could last for many more years... very interesting.

But it's not just cranky newsletter editors who've taken notice
of the trend. Cranky financial journalists are on the case, too.
"For the second straight month a forecasting outfit called
Economic Cycle Research Institute said its inflation gauges have
risen," John Crudele of the NY Post observes."Federal Reserve
Chairman Greenspan keeps close tabs on ECRI's numbers - first
because he trusts them and, second, because the organization was
founded by one of Greenspan's beloved former professors. And, I'm
told, ECRI will start worrying about inflationary pressures - and
convey that concern to the Fed - if there is a jump in this
month's numbers, which will be reported in early April."

So this ECRI bunch says its"inflation gauges" have, and let me
check to make sure of the correct word,"risen." In other words,
there has been a rise, which I derive from the root word"risen,"
that has been detected by some monitoring sensors equipped with
readout functions, otherwise known as"gauges." And these
aforementioned"gauges" have, thus,"risen."

Yet, and you gotta admire their patient courage, as they are
waiting and worrying, and Alan Greenspan and the Fed are walking
around unaware! They do not know of the gauges! The ECRI did not
tell them, and are waiting instead 'til next month.' The poor
Fed! Rushing towards the waterfall on the log, and completely
oblivious to any peril! But listen to the soundtrack, trumpets
blaring and kettledrums pounding, it's ominous!

Mr. Crudele goes on to say"The most worrisome thing is that the
inflation is occurring even though the U.S. economy is showing
only modest growth and very little job creation." This I
interpret, as far as I can make out, to mean that if the prices
of things go up, but there are fewer people with jobs who are
thus able to BUY the things, then it is"worrisome?" You're damn
right it worrisome!

Crudele has also taken a look at the budget deficit."If the
government didn't have its own accounting method and had to
record costs like businesses do, the deficit would probably be
more than $750 billion. For one year." And this ignores the
gigantic wad of accumulated deficits from years gone by, which
is, using Official Public Debt as a minimum, now over seven
freaking trillion dollars (SFTD).

"These sort of numbers will be a big problem for the financial
markets when they start paying attention," he says.

There are many intelligent people who are predicting a long, long
and a painful, painful economic recovery, because it's not just
the house that is flooded. It is the whole damn neighborhood,
stretching to the horizon in every direction, because it was the
dam that burst.

"For many people," Mr. Prechter continues,"the single biggest
financial shock and surprise over the next decade will be the
revelation that the Fed has never really known what on earth it
was doing. Make sure that you avoid the disillusion and financial
devastation that will afflict those who harbor a misguided faith
in the world's central bankers and the idea that they can manage
our money, our credit or our economy." Bravo!

"The ultimate consequences, will be more severe and more
confounding that the consequences of the 1929-1932 crash."

Regards,


Mogambo Guru,
for The Daily Reckoning

P.S. While Mr. Prechter has been fairly bearish on gold, in
Conquer the Crash, he also said that:"If gold were to move above
$400 per ounce, I would probably be convinced that a major low
had passed." Next time I see him, I will ask him if he is
convinced that the"major low had passed." In the meantime, you
can use the MoGu as a rough proxy, who says:"Gold will almost
certainly never be cheaper in dollars than it is RFN."

Mogambo Sez: Things are seriously amiss, and getting more amisser
by the hour. You should be scared. You should be buying gold, and
silver, and commodities, because that is what the future will
look like very soon.

Thread gesperrt

 

gesamter Thread:

• The Daily Reckoning - Watch The Gauges! (Mogambo Guru) - Firmian, 23.03.2004, 20:35
  • Dt. Fassung - Firmian, 23.03.2004, 20:40
    • Schön, dass ich das wieder HIER ohne Werbeblöcke lesen kann - Danke und Gruss! (o.Text) - Tofir, 23.03.2004, 21:41
      • Re: @Tofir - Firmian, 23.03.2004, 22:24
    • Juhu, endlich wieder Gute-Nacht-Lektüre! Danke. (o.Text) - Pulpo, 23.03.2004, 22:22
      • Re: Ooooops, scheint nicht recht aufgefallen zu sein. - Firmian, 23.03.2004, 22:29
      • Re: Juhu, endlich wieder Gute-Nacht-Lektüre! Danke. (o.Text) - etoile, 23.03.2004, 22:44