The Daily Reckoning:"Howling Wolf" (mogambo talkin...)

verfasst von Firmian, 27.07.2004, 20:42

-->Howling Wolf

The Daily Reckoning

New York F***ing City, NY
(So says a t-shirt on sale on Broadway)

Monday, July 26, 2004


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

*** A teenager speaks...the French are as dumb as
Americans!

*** The bull market in cash begins...maybe...

*** The Blue Water grill...new cars for sale...but at what
price?

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

The money supply is falling...along with the Dow...and the
price of gold. Bonds and the dollar are rising.

What to make of it?

The U.S. economy is still working its way into a Japan-
style slump, is our guess. If we're right, stocks will fall
for the next 10 years. Real estate should start dropping
too...just as it did in Japan, about 4 years after the
first stock market break. More news below...

"How are we different from your French friends," asked an
American friend of Jules last night at dinner.

Jules was sure there was a difference...but he couldn't say
what it was.

"I don't know...Americans are bigger. They don't dress as
well. They drive bigger cars...but they're just as dumb as
the French."

The teenager's assessment acorn fell not far from his
Dad's.

More strange notes from strangers to a strange
land...below...after the news from Eric:

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

Eric Fry, from the corner of Wall and Broad...

-"I may not know what I'm doing, but at least I know why I
am doing it," said a frustrated hedge fund manager
recently. He was referring to the fact that his funds under
management are down for the year, even though he is
pursuing a seemingly intelligent investment strategy.
"Nothing works for more than eight minutes...This is the
most difficult investment environment I have ever
encountered."

- The guy is not alone. Every money manager who speaks
regularly with your New York editor complains that the
stock market has become a very treacherous and unforgiving
habitat for investment capital.

- The most intelligent investment strategy these days seems
to be buying and holding cash, especially the sort of cash
that bears the likenesses of dead American presidents. For
the month of July, the U.S. dollar has outperformed almost
every other conventional investment.

- Regular Daily Reckoning readers may recall the essay of
June 29th in which Dan Ferris, editor of Extreme Value,
observed,"The most unwanted asset today, the one thing
nobody seems to want to own, the one asset people can't
seem to get rid of fast enough, is...cash."

-"Every investor who really knows what he's doing is
holding a large cash position right now," Ferris wrote.
"I'm referring to some of the greatest investment minds of
our time. Warren Buffett, Staley Cates and Mason Hawkins,
Jim Gipson, Tweedy Browne, the Sequoia Fund and Alan van
den Berg."

- So far so good; since the day Ferris offered his two
cents, the dollar has outperformed both euros and gold,
while far outpacing the swooning stock market. A buyer of
dollars on June 29th is about 10% better off than a buyer
of Nasdaq stocks.

-"Staley Cates and Mason Hawkins are the co-managers of
the Longleaf Partners Fund, [whose] cash position is now at
about 25% of assets," Ferris continued."I asked Staley
Cates about this." The exchange went as follows:

- Ferris: What on earth do you do when there's nothing to
buy? Do you just sit and wait? All the value investors are
holding lots of cash.

- Cates: Yes, we just sit and wait. That's often very hard
to do, and we're not too pumped about earning pretax money
market yields. But we've made the alternative mistake (i.e.
forcing something) enough to not do it again.

- Playing defense has proven to be a good offense for
Longleaf. The cash-rich fund is about breakeven for the
year, despite the stock market's losing ways. Last week,
the S&P 500 logged its sixth straight losing week, as the
Dow sank 177 points to 9,962 and the Nasdaq dropped 34
points to hit a new low for the year at 1,849.

-"The sliding market may seem less alarming to
fundamentally driven investors because of the strong gains
in headline earnings and the appearance of otherwise benign
economic numbers," writes Barron's Michael Santoli.
"Comments from this cohort about market performance make
heavy use of the word 'despite.'"

-"They see stocks weakening 'despite' strong earnings,
historically low interest rates and manageable inflation.
Markets soured last week 'despite' Fed Chairman Greenspan's
upbeat view on economic growth and inflation. They point
out, conversely, that stocks have held near the flat line
'despite' high oil prices and ever-present political,
military and terror concerns."

-"The subtext here," says Santoli,"is that share prices,
by rights, ought to be a good deal higher if only the
market were focused on what these folks deem to be the
happy realities hiding in plain sight."

- Maybe so...or maybe stocks ought to be a good deal
lower...if not for the embedded buying reflex that the
lumpeninvestoriat developed over the course of a 20-year
bull market - a reflex that becomes unlearned only after a
lengthy and painful bear market.

- In 1981, on the eve of a two-decade bull market in
stocks, cash represented more than three quarters of all
mutual fund assets, according to the Investment Company
Institute of America. Today, this reviled asset-of-last-
resort represents only about one quarter of all mutual fund
assets.

- Hmmm...maybe the bull market in cash is just beginning.

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

Bill Bonner, still in Manhattan...

*** We had dinner with Eric on Friday night at a popular
eatery in Lower Manhattan, the Blue Water Grill. We sat
outside and were amazed by the activity of the place. The
weather was neither too hot nor too cold, which is odd for
New York. But this has been an odd summer in the East; it
has been bearable.

We are still surprised by how many foreigners there are -
at least in America's big cities. Waiters, taxi drivers,
clerks - often, we can't understand them. Our waiter on
Friday was homegrown, but he must have been practicing with
the overseas crowd. He ran through the plats du jour as if
he were reading an indictment. We couldn't tell the verbs
from the vegetables. And when he was finished, we had no
better idea what was on offer than we had from the menus in
our hands.

Still, the food was good and the company was congenial. We
all agreed that the country was going to Hell, but none was
sure which Hell it was going to. Higher
inflation...deflation...war...we don't know what to expect,
but we're sure it's on its way.

*** In the New York papers, we noticed many ads for new
cars. Not one of them told us how much vehicles actually
cost. We could pay $249 per month...or $469 per month - at
0% financing for the next 5 years. One ad even promised to
give us $6,000 cash back. But if the price of the cars was
reported, it must have been in the very small print.

Nobody saves, because nobody needs to save, we guessed.
Everything is cash flow, built on the lowest rates in 2
generations...and fullest employment in history. More than
ever before, all adults in the household have jobs.

If you can make the payment, you can buy. What will happen
when rates rise...or someone loses a job...we wait to find
out...

"As Cash Fades, America Becomes a Plastic Nation," says a
headline in the Wall Street Journal. Vending machines, the
subway, and charities now take credit cards, says the
article. Even the cops will take plastic.

"McDonald's joins pay-with-plastic trend," adds USA Today.
Apparently, taking credit cards lifts the average order
size.

*** Your Man at Fort Duquesne, Byron King, writes...

"Note the French reference...Fort Duquesne. In case you are
homesick. I've been reading more of our old French friend
from the 1830s, Alexis de Tocqueville.

"It is interesting to me to re-read AdToc. He constantly
commented on the presence and influence of religion in
American life in the 1830s.

"He describes a world that seems so...almost alien today.
Yes,"alien" is the right world. Life in America in the
1830s was nothing even close to what we have today,
courtesy of Woodrow Wilson and Frank Roosevelt and Lyndon
Johnson and Richard Millhouse. Ours is a world (yes,
literally, a world) held together by a collective belief in
the virtue and strength of the U.S. dollar, which is a
Federal Reserve Note backed entirely by the full faith and
credit of the government of the United States of America.

"Hmmm...for some strange reason, that does not make me feel
better.

"Studying de Tocqueville brings back memories to me of
reading other French philosophers of a more recent vintage,
like Rene Dubos ("So Human an Animal") and Teilhard de
Chardin ("Phenomenon of Man" and many other articles).
Their collective thesis was, to sum it up in far too few
words, that material items are not the be-all and end-all
of human existence. Spiritualism is part of a well-ordered
human society.

"Remove belief in God from our existence, diminish the role
of the Deity in earthly life, run Him out of town on a rail
so to speak, and what have you got? The experiment to prove
the thesis is, in my humble opinion, the world we see
around us. A world almost foreseen by Alexis de
Tocqueville, certainly in this paragraph...

"'If men were ever to content themselves with material
objects, it is probable that they would lose by degrees the
art of producing them; and they would enjoy them in the
end, like the brutes, without discernment and without
improvement.'"

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

The Daily Reckoning PRESENTS: More monstrous piles of
money, more mental anxieties, more derogatory remarks about
high ranking Fed officials...yes, it must be, it's Mogambo
on Monday...

HOWLING WOLF
by The Mogambo Guru


"The Chinese government is doing what they can to create a
dynamic manufacturing machine," suggests John Mauldin. This
amazing machine, which sounds like something from an Isaac
Asimov novel, creates unlimited new employment, and by
extension, unlimited internal demand. China, reckons
Mauldin, is being structured in a way that is sure to
create a true future economic powerhouse.

And to that I say,"I sure HOPE so, because if they manage
to screw up this great opportunity, then it would be de
facto evidence that they are really, really stupid, and if
there is one thing that I am desperately afraid of, it's
that the Chinese, who make up nearly a third of the
population of the world, will end up acting as stupid as
us!"

In fact, it is exactly what the American government SHOULD
be doing too, but they don't. Instead, our idiotic
government spends all their time and money growing the
bureaucracy like a cancer, and installing every idiotic
socialist, communist, and fascist entitlement program that
they can think of. And now look at us!

"In the 12 months to March 2004," quotes Mauldin,"global
reserves grew by a staggering $791 billion (equivalent to
around 7.5% U.S. GDP), a 30.3% year over year increase."

Notice the way he uses the word"staggering" to
characterize the size of the pile of money that is $791
billion. This shows how literate this guy is. As for me, I
would have been perplexed for days, fruitlessly searching
for the word that means 'to act like you have just had your
brains scrambled by a knockout punch delivered by a
professional heavyweight boxer who is in a really bad
mood.'

I will understand if you cannot comprehend how much money
that is. Your puny earthling brains were not designed to
comprehend the enormity of such money excesses. But just
between you and me - and don't let this get around - there
are only a few, exotic species in this whole sector of the
galaxy that are stupid enough to create this much money and
credit in one year, and they mostly live in Washington.

Now the music gets all spooky, and, off in the distance,
you can hear a wolf howling. The camera zooms-in for the
close-up:"Something was reported last week that hasn't
been seen since December 2001. Global liquidity fell."

Now, normally, I would launch into some long-winded and
pointless diatribe about how bad this is and then suggest
we all go out for something to eat. But as I am feeling
particularly lazy today, I will turn the microphone over to
Martin Hutchison, reading from his column"The Bear's Lair:
Life After Greenspan."

I sit back, open a fresh beer, and listen attentively as
Mr. Hutchinson begins:"Contrary to much calming media and
analyst speculation, the rise in inflation is the beginning
of a long-term trend, caused primarily by excessive money
creation over almost a decade." Needless to say, he is
referring to the inevitable inflation that monetary
insanity causes.

Hutchinson does not stop there - although I wish he would,
as my heart is now pounding like a kettledrum, boom boom
boom - but instead explains how far Greenspan is behind the
curve:"If inflation is running at 4.9 percent per annum,
or even at the 3.7 percent per annum of June's
superficially anodyne figure, then a Federal Funds rate of
1.25 percent is not the beginnings of restriction, it is
still wildly inflationary, being minus 2.5 percent or more
in real terms. Now that inflation has stirred, now in the
3.4 to 4 percent range, the neutral Federal Funds rate is
not 4 percent, but at least 6 percent."

The Aden sisters agree. These two have also been around
this economic biz long enough to see the writing on the
wall. They write:"Inflation is headed higher," although
they qualify their assessment with the soothing caveat,"It
may not become as extreme as it did in the 1970s."

Well, they have their opinion and I have mine, which is
that inflation will be worse, much, much worse, than it was
in the 1970s, if only because the outrageous level of money
creation and the sheer size and cost of the government
makes the 1970s look like a stroll on the beach.

The sisters provide this little snapshot on how prices have
been acting lately:"Last month, import prices soared at an
annual rate of 19.2%. Consumer prices had their biggest
jump in 14 years this year with the latest rise at 7.2%
annualized. This included a 55% surge in energy prices and
a near 11% gain in food prices (both annualized). Excluding
these, the popular core rate was obviously less. But since
we all eat and drive, the core rate is actually
meaningless."

"Producer prices reinforced the other inflation figures.
They too have soared faster than at any time in the last 14
years, over the past year, with the latest figures up at an
annual rate of nearly 10%. Energy and food prices surged
over 19% and 18% annualized, respectively. So who says
there's no inflation? There is, and it's soaring."

And not one of the morons at the Fed had the foresight to
realize that monstrously excessive monetary laxity would
result in price inflation. Now, belatedly, they are
starting to gradually, painfully gradually, increase
interest rates. They need to try and stem this rising price
inflation, although their efforts are ludicrously
insufficient. How does one define ludicrously insufficient?
How about:"Raising interest rates from a third of the rate
of inflation to slightly less than half the rate?"

But it is this next nugget that ought to curdle the blood
of equity investors."The May inflow of foreign funds into
the U.S. economy was also announced Friday; at $54.8
billion, down from $81.2 billion in April, it dropped for
the fourth successive month."

And since foreigners are the only ones with money these
days, attested to by the $540 billion trade deficit, it's
pretty scary when they chop their U.S. investments month
after month.

There is a disaster afoot if stocks deflate from"insanely
overpriced" to merely"overpriced," and the Fed knows it.
There's just no room to cut rates any lower and besides,
they need to be fighting inflation. It just goes to show,
the forces of nature can be delayed for a while, but they
can't be reversed. What's coming is coming, whether the Fed
likes it or not.

Bad things are going to happen. Ugh.

Regards,

The Mogambo Guru
for The Daily Reckoning

---Mogambo Sez: Things are getting so weird here lately
that I am more scared and dyspeptic than usual. You can bet
that every trick in the book is being used, and will be
used, to keep this whole thing from collapsing until after
the election in November. If they can do it, then this may
be your last chance to buy gold and silver at these prices.
And if you do not want to buy any gold and silver, then
send me the money and let ME buy some more!

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gesamter Thread:

• The Daily Reckoning:"Moralische Versuchungen" - Sorrento, 27.07.2004, 20:00
  • The Daily Reckoning:"Howling Wolf" (mogambo talkin...) - Firmian, 27.07.2004, 20:42