The Daily Reckoning - Waterloo (Bill Bonner)

verfasst von Firmian, 21.06.2004, 11:25

-->The Daily Reckoning

Paris, France

Friday, 18 June 2004

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

*** 'Nothing' will keep the good times rolling... Greenspan
wriggles...

*** Anecdotes from the top of the housing market...

*** World rice shortage! Waterloo... a great day... and more!

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

Another wonderful day of nothing.

Except for one disturbing bit of news (more about that in a
moment), nothing happened.

No movement in the Dow. The dollar remains where it has
been for months. Nothing much happening in the gold market;
the price of gold rose $4.30 yesterday, but is no higher
than it was last week.

In real estate too, it is business as usual. People keep
buying and selling houses to each other... and the builders
keep building more of them, as if demand were
inexhaustible. Building permits are at a record high.

Nothing is what people want. As long as nothing continues,
their houses become more valuable. In Orange County,
California, the median house now goes for more than half a
million dollars. You may earn $40,000 per year. You may
already owe thousands of dollars on your credit cards...
and have a huge mortgage. After bills and expenses,
you may not have a dime in your pocket. But with a house
like that, why not live a little?

Besides, everything is as it should be. The Asians produce,
we consume. The Asians save, we spend. The Asians export,
we import. The Asians lend, we borrow.

'This symbiotic relationship has gone on for a long time,'
wrote an inquiring Daily Reckoning sufferer. 'Why would it
have to come to an end now?'

But the relationship may not be as symbiotic as it is
parasitic. U.S consumers have become like a giant leech,
sucking up 80% of the world's savings. At some point, we
keep warning, the foreigners are going to want to dump on a
little salt to get rid of us.

Not if Alan Greenspan can stop it, though. He's determined
that nothing should happen to disturb the fantasy world in
which we live. A week ago, he warned that he would do what
was necessary to control inflation. Then, when May's
figures came out this week, it looked like the Maestro was
trussed up in his own words. The CPI rose at a 7% annual
rate in May; surely the Fed chairman would have to make
good on his word and raise interest rates significantly.

But no. This week, Alan Greenspan wiggled free. Yes, the
CPI was rising, but when you strip out food and fuel, the
'core' rate was only increasing at 2.4% annually. There
would be no need, he assured the world, to raise interest
rates in a serious way. Money and credit would continue to
be made available by the Fed... at a lower rate than even
the 'core' inflation... for the foreseeable future and
possibly forever.

Ah ha! Nothing will happen. Nothing will change. Nothing
will keep the good times from rolling along.

But what's this? Today's press reports explain that
Producer Prices rose 0.8% in May... or at nearly a 10%
annual rate! Not to worry, again the 'core' rate is much
lower. Those enterprises that need neither energy nor food
find their costs up only 0.3% in May.

Nothing continues... at least for now...

Over to Baltimore, for more news from Addison...

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

Addison Wiggin, from Charm City...

- Today we ask the question - has the bubble popped? We are
not referring to stocks this time, or even bonds. Today, we
delve into the murky world of real estate.

- Of course, we don't know the answer. Your editors are
nothing but humble observers. We enjoy the absurdity. Like
little birds picking fleas of the elephants back, we enjoy
the ride, and take in the view. And when there are no more
fleas, we flit over to the next elephant.

- But as you will be all too well aware, dear reader, we
have opinions too - and we are not afraid to brandish
them... even where they are not welcome. Today, we arrive at
our opinion - not through"hard analysis" as some readers
would prefer - but by way of anecdote. Three of them in
fact:

Anecdote #1 takes place on I-95."This is classic," begins
James Boric, reporting back to HQ,"I took a cab ride up to
Towson - to the Heritage Honda dealer on York Road. It was
about a 20-minute drive - mainly because the cabby drove at
47 miles an hour on the highway. Several times I encouraged
him to speed up. I was in a hurry."

-"But he didn't seem to care," continues our roving
reporter,"he just wanted to talk about real estate and his
landlord (or ex-landlord, I should say): 'Yeah, I just
moved out of my old apartment in Baltimore City... mainly
because my old lady wanted to move out to the country. But
it was a dump. The floors wee rotting. And it
smelled... like sewage. I wouldn't rent that hole again if
it was $100 cheaper a month. No sir.'"

-"'You know,' he went on, 'the guy who bought the
apartment complex paid $280,000 for it. Can you believe
that? When interest rates start to rise (and you know they
will - you're in the business to know that) that place
won't sell for $140,000! I mean, seriously, that bastard
won't get half what he paid for it. And you know what, he
wanted to raise rent from $400 to $700 a month. What a
joke.'"

-"As I sat there and listened to this guy go on and on,"
James went on,"I realized one thing: we are at the top of
the real estate bubble. Even my cab driver knows it."

- Anecdote #2 takes us across the country... to California,
the epicenter of the bubble, perhaps. Today's little story
comes courtesy of a West Coast correspondent, Peter
Schiff...

-"Recently, I visited a house that was advertised for rent
in the Orange County Register," writes Peter."The house
was approximately 15 years old, 2,600 square feet in size,
and located on a 10,000 square foot lot in a gated
community called Coto De Gaza, about 30-40 minutes inland
from the Pacific Coast. They wanted $3,900 per month in
rent."

-"There was nothing particularly special about this
place... sure, it had a nice view of the hills, but there
was no swimming pool, Jacuzzi, upgraded flooring, elaborate
stonework or even an in-built barbeque. This was just a
typical middle-class residence. When I arrived, the real-
estate agent, who was representing the owner, greeted me.
This is a guy who needs to be fired..."

- Anecdote #3 is much closer to home, so close in fact,
that we think we can hear the hissing sound of escaping
air... anecdote #3 comes from right next door.

- The two-bedroom house next to ours would be suitable for
a retired couple perhaps. It's an elegant waterfront
property with two decks and a self-contained garage."Kind
of swanky," was the description we heard from another nosy
neighbor. On April 5, we enquired about the price tag when
we noticed the house was on the market, and were quoted
$850,000 by the agent. Would the reader care to guess what
quote we were given yesterday when we bumped into the same
estate agent on our way to work?

- $1 million perhaps? Or even $1.1 million, given this
region's torrid sellers' market? Not even close... in just
10 weeks, this property has DECLINED in value... by $90k or
nearly 11%. It's now on the market for $759,000. Is this a
sign that the market is beginning to collapse...? Could be.
And what are the real dangers?

- One danger is that ARM applications continue to break
records. April witnessed the greatest number of ARM
applications ever recorded in a single month, while the
last week of May laid claim to the most weekly
applications. At the end of May, ARMs routinely made up
over one-third of all weekly mortgage applications...

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

Bill Bonner, back in Paris...

*** Why do energy and food make such a difference to the
CPI? We are told that it is because terrorists are blowing
up oil pipelines. Oil is up sharply... but perhaps, not
permanently. But there is another reason. India announced
that its oil consumption rose in May by 10%. India, China,
and other Asian producers buy food and fuel. They sell
autos and refrigerators... and many of the other components
of the CPI.

That is the current effect of globalization, dear reader.
We now compete with the whole world for primary
commodities, such as oil. Nor does the supply of cheap
labor help much in dropping prices. Oil, for example, is a
capital-intensive industry... not labor intensive.

But the output from Asian factories is labor intensive. As
more and more of the world's factory output shifts to Asia,
low wage rates bring down prices on finished goods.

If American consumers stopped buying, finished goods would
go into freefall. Construction of new factories and
infrastructure would slow or even come to a halt. Primary
commodities would fall too.

But what's this? Copper and many other raw materials are
falling in price. Copper is often referred to as the 'metal
with a Ph.D. in economics.' It's used in everything. So,
when demand for it goes down... it signals a decline in
economic activity. Copper sold for $1.37 a pound in early
March. Now it is less than $1.20.

And what's this? The world's biggest seller of goods from
Asia is Wal-Mart. 'China's factory outlet' it is sometimes
called. Wal-Mart shares seem to have peaked out.

Are consumers finally... really... actually... honest-to-
god... slowing down their spending?

*** Pao Mo? Go long rice!

A week ago, our small-cap-cum-India sleuth James Boric,
after touching down in Mumbai, reported that the price of
rice was skyrocketing in India because of rising demand in
China. And now comes word from the Vietnamese News Agency
that Thailand is suffering the same fate. We are sending
our wayward world traveler, Dan Denning, to Thailand to
find out.

Dan will arrive in Bangkok on Monday and be moving onto Koh
Samui later in the week. Apart from investigating the
impending global rice shortage, he is open to meeting with
local economists, bankers, analysts, politicians,
entrepreneurs, businessmen, ex-pats, in-pats, wayward
travelers, taxi-drivers, smugglers, thieves, pickpockets,
harlots, street urchins... and even readers of the Daily
Reckoning. Got any ideas? Send an email to Tom Dyson
(tom@dailyreckoning.com) and he'll get you set up.

*** What a glorious day!

Today is the anniversary of the Battle of Waterloo in
1815... and of Winston Churchill's"Finest Hour" speech.

If the empire should last 1000 years, said
Churchill... people would still look back and say 'this was
our finest hour.'

It was a fine hour for the British. Valiantly did they
resist the Nazis. But the empire dissolved anyway... it
survived only a few years after the destruction of Hitler's
1000-year Reich.

*** Meanwhile, our own sad and inglorious war continues. We
have not criticized the War against Iraq for a long time.
The news reports did it for us. And what can you expect? It
has been a sordid affair from the beginning, invented by
fools and sold to the public with lies.

"We cannot guarantee victory," said George Washington."But
we can deserve it." We wonder what America deserves now?

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

The Daily Reckoning PRESENTS: Throughout history we see
heroes. But we don't know if they were smart, virtuous or
just lucky. Bill wonders where Greenspan's luck will take
him...


WATERLOO
by Bill Bonner

"Give me lucky generals," Bonaparte used to say. The
emperor did not trust skill, or training, or brains. He
didn't really know why some generals won and some seemed to
lose. He chose the lucky ones. But on this day, 189 years
ago, their luck ran out. Grouchy had not kept the Prussians
back. Ney had failed to take Quatre-Bras. D'Erlon never
quite got into the fight.

Arthur Wellesley, Duke of Wellington, retired from the
battlefield on the 18th of June 1815 as a great hero. He
fought the greatest military genius of his time - Napoleon
Bonaparte - and won. Never beaten by the French, Wellington
then became the head of allied forces occupying France. He
was generous, organizing loans to the get the nation back
on its feet. Then, he returned to Britain in 1818 and
became Prime Minister in 1828.

"It was a damned close thing," he recalled of the battle.
Mistakes were made. Communications were missed. The weather
complicated things. It might have gone either way. But in
the end, it went Wellington's way... and Napoleon was
beaten.

Luck favored the Allies. It rained. Bonaparte had to wait
for the ground to dry before launching his attack, giving
his opponents time to get into defensive position... and
time for the Prussians to come closer.

Looking through the long lens of history, we see heroes.
Vercingetorix, Washington, Wellington, Jackson. We don't
know if they were smart, virtuous... or just lucky. Looking
at today's wars up close, would-be heroes often turn into
villains, blunderers, and scalawags. We see too much.

But money is our beat here at the Daily Reckoning. So we
turn away from war to finance... where the stakes are lower
and the characters are funnier.

The present chairman of the Federal Reserve is the most
famous bureaucrat since Pontius Pilate. He is also probably
the luckiest.

And like Pilate, he merely gave the mob what it wanted. Not
blood this time, but bubbles.

Alan Greenspan came to the Fed when a very long cycle of
falling interest rates and falling inflation was just
beginning. For the 38 years until 1981, bonds had been in a
bear market that peaked out with average yields on
Treasuries over 14%. Paul Volcker had already done the hard
work; he had slugged the inflation monster so hard it
remained asleep for the next 2 decades. When Greenspan came
to the Fed, inflation was out cold... interest rates were
falling... and bonds were going up. All he had to do was
nothing. Most likely, the great trend would continue
throughout his tenure in office. The last bull market in
bonds had lasted 26 years. It began in 1920 and continued
through the '29 crash, through the Great Depression,
through WWII until it finally came to an end in 1945 with a
Treasury yield below 2%.

Greenspan might have been a hero - just by being lucky. But
there seems to be some failing, some pernicious gene that
drives the lucky to acts of self-destruction.

Bonaparte could have stayed on Elbe... written his memoires
and enjoyed a satisfactory retirement. Greenspan could have
done nothing.

Instead, each over-reached.

Mr. Greenspan cannot be blamed for Japan's bubble of the
late '90s - even though it happened during his watch. Nor
is he the real culprit behind the LTCM blowup or the
technology bubble in America in '98-2000.

But surely he, more than any other human being, is
responsible for America's current real estate bubble, its
consumer debt bubble, and even China's capital spending
bubble.

A predecessor, William McChesney Martin, once remarked that
the real job of the Fed was to"take the punch bowl away"
before the party got out of control. It would have been
easy; just follow the rules - take the punch bowl away.
Volcker had done it; the mob burned him in effigy on the
capitol steps, but he retired with dignity. When he speaks
in public, people do not snigger behind his back.

Yet Mr. Greenspan did not remove the punch; he spiked it
with the high-proof gin of easy credit. Each time the
former gold-bug faced a problem, he eased over to the
punchbowl and dumped more in, until Americans were wobbling
under the influence of the lowest interest rates in 45
years... and a 1% key Fed lending rate for only the second
time in history.

According to the central bankers' code, Greenspan has
committed neither sin nor crime. He is seen as a paragon of
virtue, not vice. Yet, as Talleyrand once remarked to
Napoleon,"Sire, worse than a crime, you have committed an
error."

The Fed chairman's error was to offer more credit on easier
terms to people who already had too much - including
consumers, business, and the government.

During Greenspan's reign at the Fed more new money and
credit has been created than under all the rest of the Fed
chiefs combined. Consumer debt rose to its highest level in
history... the ratio of debt to income also higher than it
has ever been. The effect was not only to inspire bubbles
all over the world - but to make Americans poorer.

"A taste of the looming fiscal disaster is provided by the
fact that, in the space of just one year, the trustees [of
the Federal Hospital Insurance and Federal Supplementary
Medical Insurance Trust Funds] have moved up the expected
date of 'asset exhaustion,' writes James Grant. What he
refers to is commonly known as Medicare. And 'asset
exhaustion' is another way of saying 'going bust.'

Senator Joseph Liebermann summarizes:"the entire U.S.
government is going broke."

Mr. Greenspan's error seems to be catching up to him. In
the West, the armies of inflation are approaching. The CPI
is advancing at a 7% annual rate... came a dispatch last
week. This week, the PPI - producer prices - are moving up
at a 10% rate (also annualized from May figures.)

In the East, the forces of worldwide deflation are stalking
him too. Mortgage rates are going up; consumers are backing
off. Asian factories continue to spill out goods. Wal-Mart
keeps offering, every day, lower prices than the day
before. Oil, gold, copper, and bond yields - all seem to
have peaked out.

Our man is caught in a giant pincers movement, his bubbles
could be pricked any day. He has no room to maneuver. He
cannot cut rates much further; there is little left to cut.
Nor can he increase them - to do that would be to bring
crashing down the entire proud tower of debt he built up.

The day Mr. Greenspan's luck runs out cannot be far off.

Regards,


Bill Bonner
for The Daily Reckoning

Thread gesperrt

 

gesamter Thread:

• The Daily Reckoning - Waterloo (Bill Bonner) - Firmian, 21.06.2004, 11:25
  • The Daily Reckoning-Deutsche Fassung - Sorrento, 21.06.2004, 22:31