- Government Economic Malfeasance / The Daily Reckoning - - Elli -, 11.08.2003, 15:26
Government Economic Malfeasance / The Daily Reckoning
-->Government Economic Malfeasance / The Daily Reckoning
Ouzilly, France
Monday, 11 August 2003
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*** So much ahead of us! Strange slump, strange recovery...
*** Insiders still getting out...
*** Still hot... Mars... dead
people... farmers... Mogambo... and more!
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We have so much to look forward to!
The real bear market in stocks hasn't happened yet. Before
it is over, stocks will sell for P/Es of 6-8... the Dow will
fall to 3,000 or so... and you'll be able to buy the entire
Dow for a single ounce of gold.
Neither has the bust in refinancing. It's begun... but it
has a long way to go. Refinancings are down sharply... but
when it is over, almost no one will refinance anything.
Nor has the total collapse of the dollar and the bond
market happened yet. Eventually, the dollar will probably
fall below 1.5 to the euro... bond yields will reach double
digits.
And the real recession is probably still ahead of us,
too...
The nation has been in a slump for 20 months, we're told.
But such an odd slump it has been. Jobs were lost. Stocks
went down; some crashed. The newspapers reported the sad
news... and commentators went around with long faces. But if
times were tough, the lumpen didn't seem to notice;
consumers just kept spending money... and debt just kept
growing.
As far as they were concerned, it was like a funeral with a
punchbowl, but no stiff; so they might as well enjoy
themselves.
Since 1994, mortgage debt doubled to $9 trillion. Total
debt almost doubled, to $32.5 trillion. And, of course,
that doesn't include the shortfall in federal
revenues... estimated at up to $44 trillion.
The big numbers don't bother us. For every debit there is a
credit on the other side of the ledger. We expect both
sides to disappear at once. And won't that be something to
see!
Not to worry, says the New York Times."Business spending
helps offset lag in refinancing," explains last Friday's
headline.
Ah... everyone, including us, has worried what would happen
when the refi boom ended. How would the consumer economy
grow when consumers run out of money?
The NY Times thinks it has the answer - the spending would
come from business. But business spending is as big a fraud
as the slump. Here's the juicy twist; you'll like this:
According to Stephen Roach, most business spending is
concentrated on buying computers and peripherals... and more
than 80% of it is not spending at all - but make-believe
spending implied by falling prices! If a company spends $10
on a gizmo that is 5 times as powerful as the one he might
have bought a few years ago, the government treats it as
though he had spent $50! Deflation produces inflation, get
it? We're sure the gods are chuckling. Falling prices in
the technology sector now lead to overstated growth
numbers!!
The inflated numbers then get factored into the nation's
GDP, which was said to rise at a 2.6% pace in the 2nd
quarter. This, by the way, was only half the rate of
typical GDP growth in a recovery. In the last 6 cyclical
recoveries, GDP was growing at a 5.4% rate at this stage.
Not only that, but 70% of the GDP growth alleged for the
2nd quarter came from increased military spending. Contrary
to popular delusion, military spending does not make people
rich. Instead, it consumes precious savings and leaves them
with pockets as empty as a congressman's head.
Who can make sense of it? And who can fail to be amused?
Not us.
And now we learn that the consumer is getting his house in
order."Credit card debt dips as consumers cut back," says
a Chicago Tribune headline.
The Fed says total consumer credit fell in June. But the
Fed doesn't include mortgage debt... so, as consumers switch
from expensive credit card debt to cheaper mortgage debt,
total debt actually rises.
But as we pointed out, every mortgagee has a mortgagor
somewhere... so it all balances out. Besides, you could wipe
off all the world's credits and debits all at once... but
what would really change? Our houses would still be there.
We'd still have our cars, our friends and most of our
favorite restaurants. So what's the problem?
Millions of people would probably go bankrupt in the
transition... thousands of businesses, too. People who
considered themselves rich would find out that they have
less real money than they thought. Foreign holders of U.S.
treasury bonds would get back pennies on the dollar, in
real terms. Americans would be less able to buy imports.
The foreigners, no longer willing to feed 'the world's
mouth,' would have to do some consuming themselves.
Do you have a problem with this, dear reader? We don't. In
fact, we look forward to it almost as we look forward to
Humpty Dumpty falling off a wall.
Heck, if we could... we'd give the egg-man a little shove
and get it over with.
Right Eric...?
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Eric Fry, checking in from Manhattan...
- In a departure from recent trends, bonds rallied last
week... while tech stocks tumbled. But neither bonds nor
stocks have gained any ground since Captain Greenspan and
the FOMC cavalry last rode to the economy's rescue on June
13th with their 13th consecutive interest rate cut. Since
that date, 10-year Treasury yields have skyrocketed from
nearly 3% to more than 4%, and the stock market has limped
along.
- But the 10-year note closed higher last week for the
first time in four weeks - its yield dipping to 4.19%. The
30-year bond also gained ground, dropping its yield to
5.23%, from 5.31% the week before. The rising bond prices
seemed to prop up the shaky Dow Jones Industrial Average,
as the blue-chip index added 37 points to 9,191. But the
leaden tech sector dragged the Nasdaq about 4% lower to
1,644.
- Despite some decent second-quarter earnings reports from
much of corporate America, the earnings reports out of the
technology sector have been conspicuously underwhelming.
Not surprisingly, therefore, few investors are rushing to
add to their holdings of richly valued tech stocks.
- Nor are corporate insiders adding to their holdings of
overvalued stocks. To the contrary, America's pinstriped
officers and directors last month bought a piddling $73
million worth of their own shares. At the same time, they
unloaded a whopping $2.4 billion worth. In other words,
insiders sold $32.21 worth of stock for every $1 worth of
stock purchased. The typical sell-buy dollar ratio is 15 to
1, according to Thomson Financial.
- Thomson's insider sell-buy index has been stuck in
historically bearish territory for three months running,
Barron's Alan Abelson reports."Over the decade, there's
been only one similar stretch," says Abelson,"and that was
in the three months from July to September 2000. In the 12
months that followed, the S&P declined a mere 28% - the
worst one-year return in the past 10 years. May not make
you bearish, but it should make you think. As we've
observed rather simple-mindedly before, no one ever sold a
stock because he thought it was going up. And we are firmly
convinced that's true of CEO's and CFO's and all the other
big O's."
-"Signs of Upbeat Economy Abound," a missive from the ISI
Group declared last week. Unfortunately, signs of a
SUSTAINABLY upbeat economy remain fairly scarce. Unless one
believes that debt-financed consumption will deliver
economic salvation, the recent economic stats don't provide
much hope of an enduring rebound.
- July retail sales rose at the fastest pace in 13 months,
as sales at stores open at least a year jumped 4.3% from
the same month in 2002. But July's strong retail sales are
going to be a tough act to follow. Notwithstanding the
nascent signs of renewed economic vitality, this economy
simply refuses to add jobs.
- Layoff announcements shot up 43% last month from the two-
and-a-half-year low set in June, according to placement
firm Challenger, Gray & Christmas. And now that interest
rates are rising, the mortgage industry will likely be
shedding jobs at a rapid clip."Inclusive of support staff
and other mortgage-related employees," Contrary Investor
estimates,"we could easily see a few hundred thousand
folks potentially jumping aboard the jobless claims ranks
if what happened in prior cycle conclusions is repeated
again."
- We've said it before and we don't mind saying it again:
consumers without jobs don't spend much money."The age-
old, or at least several-year-old, question is whether
consumers can or will do enough to prop up the economy
until the recovery takes hold," writes Andrew Kashdan of
Apogee Research."And the answer arrived at by Philip
Arestis and Elias Karakitsos of the Levy Economics
Institute will displease most people.
-"Even though real estate appreciation and frenzied
mortgage-refinancing activity have offset losses in the
equity market, the pair concludes in a recent working paper
that 'the short-term outlook remains uncertain,' while 'the
long-term one is bleak.' And as for the consensus view that
tax cuts and low interest rates will support robust
consumption until investment picks up, Arestis and
Karakitsos doubt it. They point out that, despite a rise in
real disposable income, job fears have curtailed consumer
spending growth, and household balance sheets are in
tatters, with debts continuing to rise as assets have
fallen."
- In other words, the tepid recovery on Main Street bears
faint resemblance to the robust recovery on Wall Street.
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Bill Bonner, back in Ouzilly...
*** It is still hot. We have felt sorry for the local
farmers. Working their parched land in the hot sun, we
wondered how they could stand it.
Then, last week, Patrick asked us to give him a hand.
Mounting the steps into the cabin of his big Case
International tractor, we discovered it was air-
conditioned!
"Hey, I thought you farmers were suffering out in the
heat..." said we."Now I find you're living it up. You've
got music, A/C, a cold drink... this is living..."
"I know," came the reply."When it gets real hot like this,
I don't like to leave the tractor; it's the most
comfortable place to be.
"But when anyone is looking, I take out my handkerchief and
mop my brow... I don't want to look too comfortable..."
***"Another dead person," said Damien this morning."At
4:25 this morning, Madame Bugeau died. She was 82. One more
down."
Damien seems to like precise numbers. He always tells us
the exact time at which people died.
We have not asked why. Or even how he knows. We merely note
it as a curiosity.
"Did you see Mars last night," he asked."It is closer than
it has been in 73,000 years. Better take a look; you might
not be around the next time it is this close. Heh heh..."
*** We had seen Mars last night. The red planet was redder
and brighter than we had ever seen it. At midnight, Jules
brought out his telescope for a closer look.
"Do you see it?"
"No, I can't find it. I mean, I see it over there, but I
can't find it in the telescope."
"It's right above the telephone wire."
Aiming did seem to be a problem. But it looked as though
the 15-year-old was pointing it in the direction of the
little village rather than the night sky. Normally, the
shutters are closed and the houses are buttoned up by
midnight. But in the heat, windows are left open
everywhere.
"What are you looking at," asked a suspicious father.
"Madame de Cremier," said the pubertal teen.
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The Daily Reckoning PRESENTS: The Mogambo Guru takes"a
nervous look at the things that are going to kill us"...
GOVERNMENT ECONOMIC MALFEASANCE
by the Mogambo Guru
I cannot remember the last time I read that any country was
expanding the narrowest measure of its money supply by 24%
percent in some heroic-yet-suicidal effort to keep its
currency from appreciating against the dollar and the euro.
But the Swiss are doing it right now.
The Swiss, who are relative newcomers to the area of
currency debasement and acting like idiotic, brain-damaged
children, are making up for lost time by continuing to
drive their currency into the toilet by the expedient of
printing up humongously more currency, sorta like we are
doing and the Japanese are doing and the Germans are doing
and the French are doing and the Canadians are doing and
the Chinese are doing and like every other freaking country
on the freaking planet is doing as far as I can tell. It's
just that when you line everybody up according to size,
then somebody has to be the Numero Uno on the list, and
right now the Swiss are it.
Predictably, inflation in Switzerland is rising. Last year
it was the Australians who were the poster-children for
money supply madness. Now their inflation rate is rising,
too.
And how is the USA doing as concerns the money supply?
Well, lately it seems to be cooling off, but the trend has
been running at about 7% annually, which is about 500%
faster than the economy has been growing. And, of course,
that means that inflation is sure to come tootling down the
expressway to a price tag near you. Bet on it.
And the amazing thing to me is the almost complete lack of
concern, especially when it is within recent memory that
the Gnomes of Zurich were supposedly such economic and
financial hotshots and everybody went"Ooohhh! Ahhhh!" and
nodded their heads in solemn agreement whenever the Swiss
had something to say about money.
But not anymore. It is almost like all the economic
hotshots around the globe, who can usually be counted on to
prance and preen and run their mouths about how educated
and smart they are, are completely unaware of what is going
to happen to generalized, aggregate prices in just a little
while, measured in a few days or weeks or months, as all
this huge freaking global oversupply of money works its
evil, horrible way into rising prices.
And when prices rise so high that us proletariat trash can
no longer afford to eat or pay the rent, this is typically
when the course of civilization is suddenly altered. And
perhaps that is why the ownership of guns is always under
attack by the forces of the Left, which love to remove
barriers to total government control. And if there is one
thing that the government wants to control, it is crowds of
us unthinking, uneducated, ill-tempered, bankrupt, starving
bozos, like me and you, well, maybe not you since you are
so sophisticated and wealthy, but me anyway, running around
armed to the teeth and in a very bad mood, being angry
about what the government weenies have done to us.
Taking a nervous look at the things that are going to kill
us, like the condemned prisoner who morbidly looks out of
the window of his cell to watch the scaffold being built
that will be used to hang him, we note that the Treasury is
still issuing debt at the rate of about $52 billion per
month, and therefore about five hundred bucks a month is
added to the burden of every lunchbox-toting private-sector
job-holder in the country. Five hundred bucks a month!
Each! PER MONTH!
So the recent rises in capital investment can be, I figure,
chalked up to managers and CEO's desperate for something,
and who are thus susceptible to the hypnotic siren-call of
a Fed's bullish bias, money that is extraordinarily cheap,
with foreign central banks willing to participate in the
fraud, at the same time as the Bush Administration is
gearing up one monumental swindle after another to make
sure that Dubya will be re-elected in November 2004,
although for the life of me I cannot think of a reason why
ANYONE would want to be the President for the next, oh,
fifty years, much less for the next term.
All this at the same time as a coordinated global expansion
of budget deficits, printing of excess money, granting of
excess credit, bank reserves being lowered to
insignificance, blatant lying and deceit on a monumental
scale, selling of gold by central banks, and just about
every other government economic malfeasance you can name.
So why not be bullish, too? It we don't borrow and expand,
we go bankrupt. If we DO borrow and expand, we will still
go bankrupt. So what's to lose? Which alternative course of
action is more fun and more popular?
This is the kind of scary stuff I have been thinking about,
and so I decided that I needed to get my mind on something
else, and overcoming my paralyzing paranoia with a
superhuman effort and handfuls of psychotropic medications
of every hue, I decided to try to finish up another home-
security perimeter-control project, in this case wiring a
flame-thrower into the doorbell circuit on the front door.
So I'm trying to figure out what in the hell this green
wire is for, see, and out of the corner of my eye I see,
coming up the walk, the know-nothing busy-bodies who work
in the city's code-enforcement department, who seem to know
zilch about even the basics of the theory and practice of
self-defense, and I just know that they are going to get
into another snit about this flame thrower thing. So I
quickly just tie the mysterious green wire into the first
circuit that is handy, namely the nearest hot circuit where
the electrical tape is coming unwound and I can easily see
exposed bare wires, and then I hang a sign on the doorbell
that says,"If you are from the City Building Code
Enforcement Department, or are a Swiss monetary official,
ring the bell."
Of course, at this point there is nobody locally in the
whole county who would dare to ring my doorbell, which
saves me a bundle by not having to buy any candy every
Halloween, and rumor has it that new city employees are
actually given a special in-service training about me, but
the Swiss are not so wise to the ways of Mogambo. So either
I get them, or their debasement of their currency gets
them, but in any event the Swiss will get burned.
And if the illustrious Gnomes are getting burned, you know
what's in store for us... and the Japanese and the Germans
and the French and the Canadians and the Chinese and every
other freaking country on the freaking planet as far as I
can tell.
Regards,
The Mogambo Guru
for the Daily Reckoning
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