The Daily Reckoning - Impoverishment: Then And Now (Fred Sheehan)

verfasst von Firmian, 13.08.2004, 19:36

-->Impoverishment: Then And Now

The Daily Reckoning

Las Vegas, Nevada

Thursday, August 12, 2004

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*** Japanese central bankers are idiots...Buffett's wager!

*** Weapons of mass delusion...marvelous monetary machinations...

*** Fear and Loathing in Las Vegas...the Bonners have arrived!


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Gold is still over $400. Stocks bounced yesterday...but the Dow is still
below 10,000...and probably breaking down. At least that's our guess.

The poor consumer has run out of money, out of time and out of luck. New
jobs are few. Real incomes are falling. Tax refunds have been spent. And
now interest rates are going up.

To make matters worse, he has more debt than ever before. At the previous
peak, credit market debt rose to over 250% of GDP. Now, it is over 300%.
What choice does the poor consumer have, except to take a break...stop
spending and pay off some debts?

This is exactly what he should do. He's getting deeper and deeper into
debt each month. He needs to stop making things worse for himself...he
needs to save himself - if he still can.

But this is the opposite of what the Bush administration or the Greenspan
Fed wants him to do. A sluggish economy could cost Bush a second term. And
Alan Greenspan knows better than almost anyone that a slowdown could be
hard to stop. Japan tried to turn its slump around for 14 years. Only now
does it appear to be coming out of it.

Oh, we forgot...Japanese central bankers are idiots.

But we'll give you a prediction you can take to the bank: In the years
ahead, American central bankers will turn out to be idiots too.

There is the smart money...and the dumb money. But Warren Buffett's money
must be a genius. And now comes news that Buffett has increased his
holdings of non-U.S. money to $19 billion. Until the last few years,
Buffett had never before bet against the dollar. And no one ever bet
more.

We're betting he's right.

As an aside, Addison reports that things are getting underway in
Vancouver. The Supper Club finished yesterday, and the first salvos of the
symposium have already been fired. Our man on the scene Addison Wiggin
talked all about it with Tom Jeffries on GoldRadio.fm. Tune in...

Eric, what's the news from New York?

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

-"Weapons of Mass Delusion' continue to beset the American investor. The
most potent of these financial WMDs is the delusion that the economy has
embarked upon a"sustainable" recovery - the corollary delusion being that
share prices had embarked upon a"sustainable" advance.

- Now that an inconveniently contrary reality has exploded these twin
WMDs, the lumpeninvestoriat is nursing a battalion of badly wounded
portfolios. Yesterday, the lumps took more shrapnel, as the Nasdaq tumbled
26 points, to 1,782, and the Dow dropped 6 points, to 9,938. Conditions
have become so treacherous in the financial markets that friendly fire
from the gold market is also claiming victims. Yesterday, the safe-haven
metal fell $4.40, to $397.90, wounding many stock market refugees.

- Greenspan’s marvelous monetary machinations are proving to be much less
marvelous down on the economic battlefield than Wall Street strategists
had confidently proclaimed. His mighty little interest rate that once
inspired heroic stock buying and courageous acts of consumer spending now
seems like a monetary BB gun. His interest rate can neither lead a stock
market charge nor ward off the forces of inevitable economic slowdowns. As
such, investors find themselves defenseless against the assault of
cyclical economic forces.

- Tuesday, the Fed declared,"The economy...appears poised to resume a
stronger pace of expansion going forward." For a fleeting moment,
investors believed the story. For a fleeting moment, they embraced the
Fed's latest WMD as gospel truth and charged into the market to push share
prices sharply higher. Come Wednesday morning, however, the Fed’s hopeful
message had been obliterated by salvos from the technology front. Cisco
Systems’ head honcho, John Chambers, warned,"Most of the CEOs I talk with
view the economy as growing at a modest level and are a little more
cautious than they were a quarter ago."

- Truth prevailed over delusion, pushing share prices lower. The Dow
pulled back more than 100 points Wednesday morning, and the Nasdaq more
than 45 points, before stabilizing midmorning and regaining lost ground
during the final hours of trading.

- What next? Should investors retreat now, with only modest causalities,
or charge ahead into the fray, knowing that they face a formidable battery
of rising oil prices and slumping corporate profits?

- We don't know what's next, but we can imagine one possible scenario: The
mutual fund-toting foot soldiers lose their morale and turn tail. They
tire of the daily, weekly and monthly losses that they are enduring...and,
eventually, they sell their tired, huddled masses of mutual fund shares.
Their selling begets more selling and, before you know it, a real-life
bear market ensues...then one day in the distant future, the only folks
stepping in to buy stocks are the ones who sold their stocks in February
2000 - the Warren Buffet’s of 2020.

-"Why would anyone want to own stocks right now?" one hedge fund
professional quizzed your New York editor yesterday."There's just no
reason to own 'em right now...unless you think the war in Iraq will end
tomorrow, that oil is heading to $35 a barrel and that President Bush's
popularity will jump about 30 points in next week’s poll...

-"This is a time to stand aside and let the fools rush in...have you seen
the Intel chart? It looks like death." Happily, your editor has no
firsthand experience with death, and therefore lacks a frame of reference
by which to assess Intel’s price chart. But it’s true that Intel’s price
chart is as terrifying as Hieronymus Bosch’s Hell.

- At this point, most investors would be happy to reside in a kind of
stock market purgatory, where share prices do not rise, but neither do
they fall...Unfortunately, the lumps may not get so lucky, if the oil
market maintains its surprising strength. The price of crude oil, which
has touched intraday record highs on eight of the last nine days, gained
28 cents yesterday, to $44.80, despite a"major announcement" (according
to CNBC) from the Saudis in which the oil-rich country promised to pump
more oil.

- Oil traders yawned at the minor announcement...A major announcement
would have been something like,"Saudis Buy Yukos, Promise to Satisfy Tax
Debts." Now THAT would have caused a stir in the oil-trading pits.

-"Multiple threats to supply around the world," warns oil analyst John
Kilduff of Fimat USA,"while not producing apocalyptic contractions in
supply yet, have produced in participants' minds the potential doomsday
scenario that might occur if all these threats came to fruition."

- Remember when the world was"awash in oil"...one more Weapon of Mass
Delusion destroyed.

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

Bill Bonner, with more thoughts from the road...

***"Isn't the Earth going into another warm period?" asked Henry after
his mother improved him with the knowledge of a Permian-era hot spell.

"Where did you hear that?" his father wanted to know.

"That's what I learned in school. People are using so many cars...it's
heating up the world. And the North Pole is going to melt down."

"Bolshie claptrap..."

Global warming is just a hypothesis. Yet it is taught in school as though
it were fact.

"What we know from the geological record," Elizabeth explained,"is that
the Earth goes through periods of heating up and then periods of cooling
off. No one knows why..."

What we also know is that you can make a buck in America by shaking down
big companies with preposterous lawsuits.

"The attorneys general (AGs) of eight states - California,
Connecticut, Iowa, New Jersey, New York, Rhode Island, Vermont and
Wisconsin - filed a lawsuit last month against five large electric
utilities," says an e-mail from The Independent Institute.

"The AGs' argument is not that these utilities, which operate 174 power
plants, are producing toxic substances or are in violation of the Clean
Air Act...the AGs are prosecuting the utilities for emitting a substance
that their power plants are actually designed and legally permitted to
emit - nontoxic, odorless, colorless carbon dioxide.

"The AGs' main argument (apart from the breathtaking claim that the
provision of energy is, somehow, a 'nuisance') is that CO2 contributes to
'greenhouse warming,'" write Independent Institute research fellows
Michael I. Krauss and S. Fred Singer in an Op-Ed published in the August 3
edition of The Wall Street Journal.

Yet, say Krauss and Singer:"Two recent studies from the Universities of
Rochester and Virginia demonstrate that the global warming claim is not
supported by observational evidence."

***"This is amazing," said Henry, as we entered the Venetian."It's too
bad we have to go back to France. It's so boring there..."

We have been traveling in the United States for five weeks. This was the
first time one of the children made a comment like this. Generally, they
have been critical...or blasé.

"You're snobs, the whole bunch of you," Jules had charged. Throughout the
trip, we have all complained about the food, the architecture, the
newspapers, the people, the way they talk, they way they act, the way they
dress...

"It's not snobbishness," his mother explained."We're just critical and
demanding. I guess some of that we picked up in Europe. But snobbishness
is when you feel you're superior to other people, often for no good
reason. Being critical is different. It's making distinctions that help
you improve. Separating good from bad...right from wrong...and so on. If
the winemakers didn't have a critical judgment...all the wine would taste
terrible. That's true of the food...and everything else. That's why there
is such good food and wine in France, because the French are so critical
and demanding..."

We got our room keys and found our way to the 11th floor. After a long
time, a small porter arrived with a big pile of our luggage.

"They don't usually put people back here," he began. We were at the end of
a long corridor, where we had two rooms - one for the adults, another for
the children.

"Why not?"

"People complain about the long walk down out here...it's so far from the
elevator.

"So they usually put Chinese people here; they never complain. Never."

"Oh?"

"Yeah, the Chinese are good. They spend money. Never say a word. But you
put Americans out here and they're liable to say something...you know,
make some comment or call the front desk and ask for another room.
Especially if they're rich. You know, it's people with a lot of money who
squawk the most. You put a poor guy out here and he's just happy to be
here. But you put in some rich people - especially Jewish people...I
probably shouldn't say that..."

He probably shouldn't have said any of that, because it made us feel like
schmucks for accepting a room that no one else wanted. But though we are
critical, it hadn't occurred to us to dislike the room.

"What about the French?" we asked mischievously.

"Oh...them...well...they're all right. But if they don't like something,
they'll tell you. And they don't tip very much. None of the Europeans tip
well. The middle-aged guys coming here with their girlfriends...from L.A.,
usually...they're the big tippers. Showing off, I guess."

"Hey, this is better than the real thing," Henry continued. We were
walking along the Grand Canal and had arrived in St. Mark's. There are no
pigeons. No trash."

"And no Italians," Jules added.

"I like Las Vegas," was Elizabeth's judgment."It's lively, quirky and
entertaining. What I don't care for are all the slot machines. They're
tacky."

Las Vegas without slots would be like a bar without alcohol or a brothel
without women; what would be the point?

Later that night, we went out to dinner at Delmonico - an austere, noisy
restaurant in the hotel.

"Hi, my name is Naomi. I'll be taking care of you tonight. Along with me
will be Robert and Tyrell, who will help with your orders..."

After the waiter, wine steward, manager, busboy, window washer and
insurance agent were all introduced, we settled down to big hunks of meat
as if we were Dobermans.

"It's funny how the hotel [the Venetian] puts a thin veneer of culture
over a very seedy, lowbrow business. They must have spent a fortune to
create this ersatz Venice. And they've done a good job of it. Look at the
details; they're really rather impressive. They've even painted the
ceilings to look like paintings by Titian or Raphael. But the guests don't
look like they have a clue. They don't come here for culture; they come to
gamble and have a good time. You wonder why the hotel bothered with such
an elaborate facade."

People do not come to Las Vegas to improve themselves, in other words. Au
contraire, most are lucky to leave in as good shape - financially and
morally - as they arrived. Elizabeth did not say it, but the expression
"pearls before swine" must have crossed her mind.

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The Daily Reckoning PRESENTS: Erstwhile Strategic Investment contributor,
Marc Faber, introduced this writer as supremely elegant and insightful.
Here is the second extract from Fred Sheehan’s complete work, which, by
the way, is posted at our site. (A must-read...if you can stomach it!)


IMPOVERISHMENT: THEN AND NOW
by Fred Sheehan

The methodical impoverishment of the American people, particularly those
who are living on the edge, has been one of the few U.S. government
success stories. Flooding the world with dollar bills to support a
moribund economy has performed as all such operations begin. The flows
have not been channeled towards productive enterprise, but towards
speculation, and the speculation is not always by choice.

Statistics may show that 80-year-olds are buying and speculating like the
baby boomers, but they are caught in the pitiable condition of not being
able to live on 1% interest; the disincentive to save has been
energetically promoted with a short-term yield of microscopic content.

A previous 1% rate era was ripe for the leadership of a madman; the 1930s
could have been far worse in America.

With 6 million jobless one year after the crash and 1 million unemployed
walking the streets of New York by 1932, it is surprising that no fascist
or communist uprising took root. Franklin Roosevelt deserves credit, but
at the cost of some highhanded populist measures. Whether his means were
necessary is not a matter to debate here; it is the precedent we can study
and the sort of nonsense that goes mainstream when in extremis. My guide
here is James P. Warburg (son of Paul Warburg), who wrote The Money Muddle
in 1934, after he had resigned as President Roosevelt’s chief economic
adviser.

Warburg wrote of the immediate pressure FDR confronted from the Committee
for the Nation. This mix of industrial leaders and college professors
wanted" no, demanded" that the dollar-gold exchange rate be recklessly
devalued. These successors to the Committee of Public Safety held rallies
in Madison Square Garden and allied themselves with the arch-propagandist
Father Charles Coughlin, the"Radio Priest," who, in rebutting the Sound
Money Committee,"in less than half an hour of blazing oratory...undid
months of hard work by the opposition".

Whether or not this cabal complained that precious metals were only found
in the secondary arts, the tendencies are similar. Roosevelt decided that
he must act before Eleanor wrote a newspaper column demanding his
resignation. Well, no - just checking to see if you’re still paying
attention.

Returning to fact, all banks were shut for four days; the government
decided which could reopen, according to rules the administration defined;
the Thomas Amendment"gave the president practically unlimited power to
inflate the currency by printing greenbacks"; FDR repudiated the gold
clause of U.S. government securities. This rescinded the right for the
bearer to redeem Treasury securities in gold (TIPS rescinded today?); the
Banking Act guaranteed deposits by the government; to accomplish this, all
banks were forced to sell preferred stock or capital notes to the U.S.
government (to fund the government’s entrée into the banking business);
legislation was proposed to create a Federal Monetary Authority and
"completely kill the Federal Reserve System" which would"put the power to
create money under purely political control"; and all persons were
required to deliver to the treasurer of the United States"any and all
gold coin, gold bullion, and gold certificates."

Warburg recalls his Oval Office debates and admits that the inflationists
had the better arguments. Mirabeau could have taught him that. So could
Greenspan. When a plan of action was required, Warburg’s contingent did
not have one.

"We admitted that we had...no program...suited to the immediate business
needs...and we doubted whether there could be any monetary cure for
troubles that we believed were not monetary in nature." This was no way to
convince the president at a time when Sen. Thomas pronounced that his
amendment would"transfer that $200 billion in the hands of persons who
now have it [Thomas planned to first confiscate bank deposits - ed. note],
who did not buy it, who did not earn it, who do not deserve it, who must
not retain it, back to the other side, the debtor class of the Republic,
the people who owe the mass debts of the nation." These malefactors of
greed included 67 million holders of life insurance policies and 44
million savings depositors. It is interesting to think that this populist
appeal to self-pity and greed was coincident to Goebbels’ propagandist
synthesis distilled at Nuremberg. All we know is the outcome that
occurred; there are many other routes the Great Depression may have
followed.

Looking ahead, words of our wise board of governors and those of the Bush
(or Kerry) administration will boomerang on the promoters. I predict -
knowing full well the chairman’s invincibility despite his incoherency -
that the Federal Reserve Board will be lynched, figuratively speaking,
although, to cover the waterfront of historical precedents, a fair number
of the advocates for assignat inflation in the French Assembly went to the
guillotine. There will be no getting around the fact that the Fed promoted
overconsumption on credit that the homeowner could never repay. You might
argue that it was the consumer who decided to borrow and spend, but just
as safe banks were nationalized along with bad banks in the 1930s, I’m
afraid that those who have acted responsibly will win no good citizen
awards. Recalling English Hitler historian Alan Bullock:"The unique
quality of economic catastrophe [is] reaching down and touching every
single member of the community in a way in which no political event can."

But let’s forget about truth, since the inversion of the truth already
predominates. Evidence of encouragement"by those guys" to commit
financial suicide is ubiquitous. My favorite call to arms was the
workmanship of Federal Reserve Governor Bob McTeer, who urged all
Americans to"join hands and buy a new SUV." And so they did, and continue
to spend more than they earn. The chairman was well aware that consumer
spending was the catalyst for the great boom. In 1999, he averred:"While
discussions of consumer spending often continue to emphasize current
income from labor and capital as the primary sources of funds, during the
1990s, capital gains, which reflect the valuation of future incomes, have
taken on a more prominent role in driving our economy."

He gave such testimony with a straight face, but inflating assets are the
artificial stimulant to an artificial boom. The chairman knew the score.
In a May 8, 2000, Wall Street Journal critique of his evolving
rationalizing of the stock market, we read:"The buzzword inside the Fed
[in 1999] became the ‘wealth effect’ - how riches generated by stocks and
real estate were changing the psychology of investors, leading them to
spend more of their wages and salaries and putting a smaller portion in
savings."

Alas:"Legislators are as powerless to abrogate moral and economic laws as
they are to abrogate physical laws. They cannot convert wrong into
right...."

The chairman testified in Congress on February 11, 2004,"‘[We] at this
stage are not overly concerned that there are debt burdens which are very
difficult for the American public to handle.’ Mr. Greenspan’s view is that
the household balance sheets are ‘in good shape,’ and perhaps stronger
than ever, because the value of people’s houses and stock portfolios have
risen faster than their debts." And people believe this stuff.

Federal Reserve governor Donald Kohn held forth with a more explicit
description of the master plan:"Under the influence of increased wealth
and low borrowing costs, households have bought more and larger houses and
cars, have taken on more debt, and generally have spent more than would
have been the case if interest rates had been higher...[These are] by and
large the intended and logical consequences of the Federal Reserve’s
effort to reduce economic slack through low interest rates." A job well
done, I must say.

Just as only"few in number" harbored the same foreboding of Morand,
Fitzgerald and White, the masses will need the explicit crash to
illuminate their world. Then, we must consider the possibility of the
capstone to inflationary destruction: the Napoleon precedent. The
strongmen who took the scepter and crown before can all be adequately
described by their talents as extolled by Goebbels.

Janet Maslin, in The New York Times, wrote a review of Dude, Where’s My
Country? by one Michael Moore. Moore identifies himself as the perfect
political candidate. Maslin remains aloof. She writes:"When ‘we, the
people’ enters the vocabulary of someone who likes giving marching orders,
watch out." Moore has"a penchant for demagoguery, someone who thinks that
the present political structure needs ‘to be brought down and removed and
replaced with a whole new system that we control.’"

Moore adopts the voice of God in one chapter and invites the reader to
join Mike’s Militia in another. He gives out instructions as"your
commander in chief". Maslin concludes,"Mr. Moore has marshaled an often
impassioned political bluster...[into] a bumper sticker that doubles as a
book."

Mr. Moore strikes me as more a twerp than a leader of the people, but his
book remained on The New York Times best-seller list for several weeks.
His acrimonious agitprop has been succeeded by several other angry books
(I premise this from reading summary descriptions) from authors who want
to hang President Bush, or, by those who want to hang those who want to
hang President Bush. Among the top 15 books are those by Messrs. Clarke,
Hughes, Dean, Hannity, Franken, Unger, Phillips and Suskind. This seems an
unusual concentration of hatred that is being gobbled up by a restive
public.

As much as this Michael Moore seems an odd People’s Choice, Alan Greenspan
is an equally improbable leader, though Walter Bagehot may have explained
the phenomenon. In Lombard Street (1873), Bagehot anticipated such a
creature:"A permanent Governor of the Bank of England would be one of the
greatest men in England. He would be a little ‘monarch’ in the City.... He
would be the personal embodiment of the Bank of England; he would be
constantly clothed with an almost indefinite prestige. Everybody in
business would bow down before him [because]...a day might come when his
favor might mean prosperity, and his distrust might mean ruin...practical
men would be apt to say that it was better than the Prime Ministership,
for it would have greater jurisdiction over that which practical men most
covet - money."

Greenspan is Bagehot’s icon - is the moment of the iconoclasts at hand?
"Practical men" now extends to"every single member of the community" who
will look elsewhere for leadership, far afield from those whom they so
innocently, indolently and irresponsibly trusted.


Regards,

Fred Sheehan
for The Daily Reckoning

Editor's Note: This essay was taken from
Marc Faber's Gloom, Doom and Boom Report
http://www.gloomdoomboom.com

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gesamter Thread:

• The Daily Reckoning - Impoverishment: Then And Now (Fred Sheehan) - Firmian, 13.08.2004, 19:36
  • Re: The Daily Reckoning - germanisch - Firmian, 14.08.2004, 08:57