The Daily Reckoning - Something Wicked This Way Comes, Part II (Bonner)

verfasst von Firmian, 27.03.2004, 09:30

-->Something Wicked This Way Comes, Part II

The Daily Reckoning

Paris, France

Friday, 26 March 2004


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

*** Dow up... but the world turns...

*** Japan booms...? A new era for the price of oil...

*** Poor Jamie... here's a stock tip... and more!

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

"Asia trade boom boosts Japan, Inc.," says the BBC.

"Japan's trade surplus highest in 5 years," says the
Financial Times.

"If we're wrong, it wouldn't be the first time," says our
own London colleague, MoneyWeek magazine editor Merryn
Somerset-Webb, just back from Tokyo,"but it looks like
Japan is finally recovering."

The world turns.

When Japan's stock market blew up 14 years ago... at first,
the world's financial experts could not believe it. Japan
was still the 'miracle economy.' It might suffer a
temporary setback, they thought, but it had been a long
time since they had stopped doubting that Japan would
always be at the forefront of the world's economic
progress.

But instead of miraculously gathering themselves up and
retaking their places as financial geniuses... the Japanese
seemed more and more maladroit. While America boomed and
bubbled, the miracle economy fell into a deflationary
funk... and nobody in Japan seemed able to do anything about
it. They cut rates... they increased government
spending... they did all the things that Americans would do
10 years later.

And for a while, it looked like they would succeed. Then,
stocks fell apart and things got much worse. In just a bit
more than a decade, Japanese stocks and real estate lost
about 75% of their value... and Japan's policymakers went
from being the world's greatest geniuses to its biggest
incompetents.

But now, finally, the 'miracle economy' looks as though it
is about to stage a rather ordinary comeback... the kind of
recovery you expect after a long period of slump and
sluggishness. The sun has finally begun to rise on Nippon.

Meanwhile, on the other side of the globe... the news is
still good. The 'house party' continues - with more homes
sold, old and new, last month than the month before.
Durable orders rose in February. Jobless claims got no
worse. And, yesterday, the dollar actually went up.

We don't know whether it was the news, the weather, or just
the random luck of things... but stocks rose sharply
yesterday, with the Dow up 170 points."All is well,"
Americans tell each other."Nothing ever happens. All will
always be well... forever and ever... amen."

The U.S. economy has been in so illuminated for so
long... and Japan in such black shadow... people can hardly
imagine that the light might change. But the earth
turns... and the meek inherit it.

Curiously, stocks, real estate, employment, interest rates,
government spending - all the things Americans count upon
to maintain their fat and happy lives - depend on
foreigners, especially the Japanese. The Bank of Japan
alone spent nearly $70 billion of their own money in the
month of January trying to keep alive Americans' fantasy
economy. This amount was preceded by more than $250 billion
the year before... and another $20 or so billion after. Even
this was not enough; the dollar fell anyway.

Last week, the Wall Street Journal reported that the
Japanese were finding better uses for their money then
buying U.S. paper. The rumor caused the dollar to fall (and
the yen to rise) even more. Most likely the trend will
continue. Japan will keep more of its money for itself.
America - deprived of cheap foreign financing - will fall
into a long slump, a continuation of the bear market that
began in January of 2000.

We could be wrong, of course. Ninety percent of investors
and consumer households in America bet that we are. They've
run up record levels of debt... and count on low rates to
keep the money flowing. But if the foreigners stop lending
to Americans, lending rates won't be low for long.
Borrowers will squeeze the market for every last
penny... rates will rise all over the globe... and an
unaccustomed darkness will creep across the United States.

Whether these things will happen or not, we don't know. And
whether Japan pulls itself together or not won't matter to
most readers. But whether the U.S. falls apart matters so
much, readers are advised to brace themselves... almost as
if it were a sure thing.

*** Stocks were the unquestioned stars of yesterday's
market performance. The Nasdaq accompanied its blue-chip
cousin to higher territory yesterday, adding 57 points to
its tally. To the lumpen's delight, the S&P also went up 18
points.

Currencies, in the meantime, rested in the wings. The euro
lay where it fell on Wednesday, trading unchanged against
the dollar and the yen. But Sterling took a surprise
hit... on news that Bank of England Gov. Mervyn King said
the strong pound was making"life difficult" for Britain's
exporters.

*** Oil cooled for a second day - May crude lost $1.50 to
stand at $35.51.

But the prospects for the summer car trip we were planning
still look grim. For the third day in a row, reports the
AAA, gas prices in the U.S. hit an all-time high: the
average price for a gallon of regular is now $1.742 at the
pump.

"We are in a new era for the price of oil," Phil Flynn of
Alaron Trading tells us."I believe that $40 a barrel will
be the new line in the sand." In the meantime, Mr. Flynn
told CBSMarketwatch, the current national average of $1.74
a gallon for gas could easily surpass $2 by summer.

Our friend Lord Rees-Mogg thinks he has found the culprit
behind higher oil prices: China.

"The motorization of China," writes the peer,"is already
pushing up the price of oil, now around $37.50 a barrel. It
is likely to go further and create a world oil shortage.

"China changes everything. It changes the outlook for the
world oil price, and therefore the forecasts for inflation.
It changes the future of technology; it could eventually
mean the end of the hundred-year reign of the internal
combustion engine, and its replacement by fuel-cell
technology...

"Everything happens faster than one expects. The world is
being changed before our eyes..."

*** Poor Jamie Olis. The former Dynegy financial VP got a
24-year sentence for his part in defrauding investors. He
should have killed someone instead; he would have gotten
out sooner.

*** It's all a bit weird, isn't it? If you bought a corner
dry-cleaning shop, and then discovered the guy had lied
about how much money the store brought in, you might sue to
get your money back. The guy might even pay a fine... but
you wouldn't expect to put him behind bars, would you? It's
just money, after all.

But everything's a federal case now. Every prosecutor seems
to be running for higher office. And everyone faces jail
time.

*** What's so great about democracy? An email received from
a source we cannot recall.

"The Founders gave the old steel tip to a 'tyrant' who took
only three percent of their income. Today, federal, state
and local governments take 50 percent of our income. Bring
back King George III and 47 percent of my money! He wasn't
the nicest guy in town, but - in addition to not raping us
on taxes ­ he did not force us to attend and subsidize his
state indoctrination centers (read public schools) or tell
us what we could or could not put in our bodies [as the FDA
does every day]."

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

The Daily Reckoning PRESENTS: Bill Bonner takes on the
great nabobs of positivism... and dares to reveal what they
fear to expose.


SOMETHING WICKED THIS WAY COMES, PART II
by Bill Bonner

"Bush isn't so smart, showing off his economic program in
Ohio. He should go to places where his plan really created
employment. India, Thailand or China..."

- Jay Leno


This week, we continued our research into the world's next
big thing: we had dinner in an Indian restaurant, on
Charlotte Street in London.

The friendly waitress explained that she was from the
Kerala province... in South India.

"And I am going back there," she said."India is
booming...."

She served us many spicy dishes; they were edible, but
unspeakably piquant... and left us in a restless state for
the entire night. Tossing and turning, we had visions of
millions and millions of dark-haired, dark-skinned
workers... toiling night and day... studying calculus and
memorizing the periodic tables... taking apart computers and
reassembling them... writing code and answering phones...

Alan"Bubbles" Greenspan, George W. Bush and all the great
nabobs of positivism assure us that there is nothing to
fear. Our favorite columnist, Thomas L. Friedman of the
NYTimes, explained that"the next big thing almost always
comes out of America....[because]... America allows you to
explore your own mind." Friedman's oeuvre rests on a few
key illusions. He believes the world would be a better
place if America were more aggressive about"empowering
women" and"building democracies." He also thinks that
technical innovations give America a permanent advantage.
Americans are always innovating... always figuring thing
out. Heck, we even invented outsourcing, says Friedman:

"This is America's real edge. Sure Bangalore has a lot of
engineering schools, but the local government is rife with
corruption; half the city has no sidewalks; there are
constant electricity blackouts; the rivers are choked with
pollution; the public school system is dysfunctional;
beggars dart in and out of the traffic..." and so forth.

We would probably like the place - except for the
engineering schools, Bangalore must be just like Baltimore.

Innovation is supposed to create new businesses, new
technology, new industry... and new jobs. Last we heard, a
busload of unemployed whiners was making its way across the
U.S. to try to get a little media attention to the
outsourcing issue - as if there were not already enough.
"We would be happy to be retrained for new jobs," said one
of the complainers,"but what new jobs?"

By this stage of a 'recovery,' say economists who keep an
eye on this sort of thing, the U.S. economy should have
created 2-3 million more jobs than we have today. In the
month of February, for example, American innovators created
barely one-tenth as many jobs as 'normal' - that is, only
21,000 rather than 200,000. But as Jay Leno tells his
viewers, the missing jobs didn't disappear. They just
turned up in Bangalore, rather than Boston where they were
supposed to be.

This does not worry Republican economists. Like used
clothing and old school buses, yesterday's jobs get
exported to poor countries... while shiny new ones are
created in America. What new ones? We don't know, but they
assure us that America is so innovative, it will think of
something. Always has, explained Greenspan in his recent
Congressional testimony.

"This time may be different..." said colleague Dan Denning
last week."Never before, since the beginning of the
industrial revolution 300 years ago, have there been so
many people outside the Western world ready, willing, and
able to compete with us. Never before have they had so much
money. While Americans spend all their money - and then
some... the average Chinese worker saves more than 20% of
everything he earns."

There are more engineers in Bangalore, India, than there
are in California, U.S.A. They work well... and cheaply,
taking home an average annual pay of about $6,000. And they
seem to be just as innovative as their American
counterparts. The software for DVDs was developed in
Bangalore, not in Silicon Valley, says the French
newspaper, Libération. In the 7 short years of its
existence, the Philips research center in Bangalore alone
has come up with 1500 new inventions.

Foreign workers have been cutting into American salaries
for many years. Assembly line workers in Taiwan, Mexico and
other labor hellholes have undermined factory wage growth
in the U.S. Over the last 30 years, real hourly earnings on
the shop floor have actually gone down.

No one particularly cared - because America's economy was
shifting to service and consumption anyway. Factory workers
were out of fashion and out of luck.

But the consumption binge has run its course. Americans
have little left to spend. And now the foreigners are
lending them money... and taking the service jobs that were
once thought immune from overseas assault. And now, in
today's news, we read in the Houston Chronicle that the
lawyers are worried; even law firms are outsourcing routine
legal work to India.

These trends may not worry Democrat economists any more
than they trouble the Republicans... but it's an election
year, so they can't pass up an opportunity to swindle the
voters and get their names in the paper. Pandering to the
lumpenmasses, the Democrats offer to"do something" to
"protect American jobs." What they would do would be either
futile or destructive, but that is to be expected.

John Kerry's"Jobs for America Bill," for example, does a
little of both. It would require employers to give notice
before they outsourced anything. Other proposals limit the
ability of U.S. companies to take advantage of less
expensive foreign labor... or limit the ease with which
consumers could benefit from lower prices. No serious
economist would suggest such things, without at least
having his fingers crossed behind his back.

There are a lot of dopey things said to voters with the
cameras running. But no one is going to look the American
worker in the face and tell him that he earns too much
money for what he does. A politician might as well pour
gasoline over his head and light a match; the media would
scorch him in a matter of minutes... his career in politics
would be in cinders... and he'd have to go out and get an
honest job.

We do not like to disappoint readers. But we are not
running for anything. And if by some misfortune we were
elected to public office... we would immediately confess
that we had spent a drug-crazed night with a Russian
prostitute... and demand a recount. So, we offer this little
reflection on outsourcing with nothing at risk but our
reputation... which is to say, we have little to lose.

For many, many years Americans have had the easy ground in
the international labor market. The playing field was
tilted in their favor by the skills, capital,
infrastructure, institutions and habits built up over many
generations. They will still have an advantage for many
years... but the playing field gets leveler every day.


Regards,

Bill Bonner
The Daily Reckoning

P.S."What's different this time," continued Dan Denning,
"is that these huge economies - principally India and China
- are on the rise, whether we like it or not."

"By the middle of this century," begins a letter from our
friend Martin Spring,"Russia's living standards will be
some 40 percent higher than America's are today, China's
will have reached the same level as Japan's today, Brazil's
will be about the same as Britain's today. Indians will
have about the same incomes as Italians have today.

"That's the forecast of a research study by the investment
bank Goldman Sachs based on the assumption that the
emerging economies maintain 'growth-supportive' policies.

Here are some of its other conclusions:

* The four largest emerging economies, which the bank calls
the BRICs - Brazil, Russia, China and India - could within
40 years become larger in combination than the world's six
biggest economies today, the"G6" - America, Japan,
Germany, Britain, France and Italy.

Currently they are less than 15 percent of the size of the
G6. In U.S. dollar terms, China could overtake Germany in
the next four years, Japan by 2015 and the U.S. by 2039.
India's economy could be larger than all but the U.S. and
China in 30 years.

* Over the next five years China's GDP per head is expected
to grow at an average of 11.2 percent a year, Russia's by
10.3 percent, India's by 7.5 percent and Brazil's by 6.3
percent. The equivalent projections for today's giants are
just 1.7 per cent for the U.S., 0.9 per cent for Japan, 2
percent for Germany, 1.9 percent for Britain and 1.5
percent for France.

* However, because today's developed economies will
continue to grow, their living standards will be very much
higher by mid-century. Americans' GDP per head is expected
to rise from $38,700 to $83,700, Britain's from $26,000 to
$59,000, Germany's from $23,100 to $49,000 and Japan's from
$34,300 to $66,800.

* India's economy has the potential to show the fastest
growth over the next 30 and 50 years because its population
is expected to continue growing. It"has the potential to
raise its U.S. dollar income per capita in 2050 to 35 times
current levels".

* However Russia's GDP per head is expected to grow faster
because its population is expected to shrink.

* South Africa, although it won't qualify as a giant, is
likely to see its economy grow from $83 billion in 2000 to
nearly $1.2 trillion by the middle of the century.

* About two-thirds of the BRICs' increase in dollar GDP
will come from high real growth, driven by productivity and
population increases, and the rest from currency
appreciation. Their real exchange rates are expected to
grow at an average rate of 2.5 per cent a year."

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gesamter Thread:

• The Daily Reckoning - Something Wicked This Way Comes, Part II (Bonner) - Firmian, 27.03.2004, 09:30
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