-->Can Do Money

The Daily Reckoning

Paris, France

Friday, 25 April 2003

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

*** Trenton...takes!

*** Dow sinks...The S&P 500 at 151?!?...Cash on the
sidelines...

*** National savings...California almost broke...Amazon...
SARS update...and more!

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"Trenton Makes, the World Takes"

We haven't seen it in a couple of years, but we suppose the
sign is still there. We would see it every time we took the
Amtrak from Baltimore to New York.

But the sign is a relic...it sits upon Trenton, NJ, like
the yellowed photo of a 1939 Fair Queen on an old lady's
dressing table. We can imagine that the old girl was once
thriving and full of life...but it almost brings a tear to
our eye to think about it.

Trenton is not entirely derelict, but she has seen better
days - when America's factories belched smoke and America's
'can do' entrepreneurs bussed and scurried to make things
the rest of the world wanted to buy.

No more. Now comes a report that"mountains of empty
shipping containers" are piling up in New Jersey's ports.
The Newark-Elizabeth complex, for example, the East Coast's
largest terminal, unloaded 1.6 million containers last year
- full of goods coming in from overseas. It shipped out
only 688,000 containers with good made in America. The two
obvious consequences: thousands of containers stacked up
all over the Garden State...and a huge trade deficit for
the nation. To those might be added two more not-so-
obvious-but-nevertheless-inevitable consequences: the
Americans who used to make things lose purchasing
power...and so does the money that they used to receive for
working.

The manufacturing sector has been in decline for years in
the U.S. No matter, the U.S. will become a 'service'
economy, say the economists. But how will people pay for
services if they have nothing to sell? Will we all take in
each other's laundry...or mow each other's lawns? How will
this give us the wherewithal to buy from people far away,
whose lawns we cannot mow?

Jobless claims rose higher in the latest week. The numbers
for the previous week were revised higher, too. There are
also fewer help wanted ads, says the Conference Board.

The Fed's Beige Book of regional trends tells us that
despite record refinancings, consumers are spending less
money. Chain store sales, for example, are rising at only
about 1% - less than the rate of inflation.

Is it any wonder? When consumers do have jobs and do spend,
the money goes overseas. About $8 trillion of it now bulges
in the pockets of foreigners. That mass of money lost about
20% of its value in the last 12 months - at least against
the euro.

Here at the Daily Reckoning, of course, we still love
Trenton and her money. But foreign beaus may be losing
interest.

Eric...?

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

Mr. Fry, reporting from Wall Street...

- Stocks sank yesterday like a"snitch" in cement
goulashes. The Dow fell 73 points to 8,422 and the Nasdaq
dropped half a percent to 1,459. Still, the results could
have been worse. The Dow slipped more than 100 points
during the morning, before recovering somewhat in the
afternoon. Clearly, the dip-buyers are back.

- Is bullishness back in style? Or are investors - like a
grounded teenager - merely exhausted by inactivity? For
months, the lumpeninvestoriat has been squirreling away its
cash. Accordingly, cash levels in bond funds and money
market funds have been soaring, while the national savings
rate has been trending higher.

- But after a while, all this saving and non-consuming
becomes downright boring. So who can blame investors for
wanting to break out their wallets and buy an expensive
tech stock or two. That said, the mounting pile of cash on
the sidelines might not come flooding into the stock market
any time soon.

-"$4.7 Trillion Of Cash is sitting On The Sidelines,"
writes Paul Kasriel, Director of Economic Research at
Northern Trust."Might It Stay There?" The answer is yes,
according to Kasriel. Although he concedes that this
sideline 'cash' is"potential high-octane fuel for a stock
market rally," he nevertheless suspects that"the retail
investing public wants to hold more cash (defined as
household deposits plus money market mutual fund shares
[MMMFs]). In the fourth quarter of last year, deposits plus
MMMFs were 10.6% of total household assets. Although up
from a post-WWII low of 8.2% in 1999:Q4, this latest
percentage is still very low in a post-war context...The
average"cash" holdings as a percentage of total household
assets were 12.7% from 1952 through 1999. So, households
still have some distance to travel until their portfolios
hold an average allocation of"cash".

- Net-net, says Kasriel,"All of this sideline 'cash' is
unlikely to be the catalyst for a stock market rally."
[Ed note. Paul Kasriel is a regular contributor to Apogee
Research. For investment recommendations from Wall Street's
'secret think tank' please click here:
http://www.agora-inc.com/reports/APG/ToSeeMore/ ]

- Morgan Stanley's Stephen Roach asserts that our national
savings rate is much less than meets the eye."Sure, the
U.S. personal saving rate has now moved up to 4.0% - well
off the rock-bottom level of 0.3% hit in October 2001 but
still only about half the 9.0% pre-bubble average that
prevailed over the 1970-94 interval," says Roach."[But]
the modest rebound in personal saving has been [offset] by
a massive reversal in the government's saving position, as
the federal government's budget has swung from a surplus of
2.3% of GDP in early 2000 to a deficit of 2.3% in late
2002. As seen though the lens of the national saving rate -
the combined saving of households, businesses, and the
government sector - the United States is in terrible shape.
America's net national saving rate - which also subtracts
the depreciation charges associated with the replacement of
worn-out capital - fell to an all-time low of 1.3% in the
second half of 2002; by way of comparison, this same metric
averaged about 5% in the 1990s and considerably higher in
recent years...

-"Lacking in such domestically-generated saving," Roach
goes on,"America has no choice other than to import
surplus saving from abroad and run a massive current
account deficit in order to attract such capital. But
that's not all. As the U.S. federal budget now plunges far
deeper into deficit - reflecting the combined impacts of a
weak economy, war and postwar spending commitments, and
ill-timed multi-year tax cuts - America's net national
saving can fall only further."

- But at least the lumpeninvestoriat has a bit of cash on
hand, even if the lumps in government do not. The Golden
State, for example, doesn't seem to have an ounce of gold
left in its coffers...nor even a wooden nickel."California
could completely run out of money soon," KFWB News reports.
"Financial conditions are such that the state controller
could begin the budget process by issuing 'IOU's' to
vendors doing business with the state."

- As the saying goes,"I'd rather owe it to you than steal
it from you."

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

Bill Bonner back in Paris...

***"What is so worrisome at this point," writes Richard
Russell in the Dow Theory Letters,"is that great bull
markets tend to beget great bear markets and 'great
values'. Here's what I'm talking about. At the 1949 bear
market bottom, the S&P was selling at 5.4 times earnings
(and those were honest earnings) while providing a dividend
yield of 7.6%."

The Mogambo Guru helps us apply the math:"Take Mr.
Russell's figures, and let's assume that the earnings of
the S&P 500 are entirely honest. To have a bottom in this
2001-2003 bear market equivalent to stocks in 1949, the S&P
500 would have to fall to 151! For a dividend yield of
7.6%, using current yields, the S&P 500 would have to fall
to 217."

(Want more Mogambo? Click here: Looking Down The Barrel)
http://www.dailyreckoning.com/body_headline.cfm?id=3114

*** Our old friend, Amazon.com, is back in the news. The
river-of-no-returns stock rose 75% last year...and is up
another 35% so far this year. Is AMZN a great stock to own,
or what?

'Or what' is our choice. The company is in"make-believe
land," writes Bill Fleckenstein. It lost $149 million last
year...39 cents per share. If the cost of stock options had
been included, it would have lost 60 cents a share. Plus,
or rather minus, Amazon still has more than $2 billion in
debt.

And yet, investors now gladly pay 79 times anticipated"pro
forma" earnings (which can be anything the company wants
them to be) for AMZN...just like old times. Yes, just like
1999 - when investors had not a care in the world...and as
little sense.

***"Yesterday, I was at Hong Kong Airport en route to
Tokyo," writes Daily Reckoning friend and contributor Bill
Thompson."A real ghost town and quite bizarre. SARS is
real and underrated in its impact on psychology and
economics."

Yesterday, the World Bank seemed to agree. It issued a
warning - not a health warning, for that is not its beat,
but an economic warning.

The OECD knocked down its GDP growth projections. The
Eurozone is expected to grow only 1% this year, not the
1.8% previously forecast. The U.S., says the OECD, should
increase 2.3%, not the 2.6% formerly anticipated.

But if SARS is not brought under control, the only growth
industry may be the companies that make face masks.

*** The Nikkei Dow fell to a new low of 7785.

*** Gold rose $3.40.

*** Don't worry. Be happy. Buy gold. And a face mask.

The Daily Reckoning PRESENTS: Bill Bonner musing over the
many ways in which the world has changed!


"CAN DO" MONEY
by Bill Bonner

"As long as you're pumping out money at a faster rate than
demand for money is rising, you're going to stimulate
spending. I think it would be kind of fun to fight
deflation, actually."

Robert"Let's hold hands an buy an SUV" McTeer


Robert McTeer must be something of an amateur magician. His
idea of a good time, we guess from his remark from
February, is creating money out of thin air.

We are not particularly shocked by this. For it has long
been apparent that central bankers everywhere - McTeer is
president of the Dallas Fed - must like inflating the
currency, during working hours at any rate. We are pleased
to see that Mr. McTeer enjoys his work.

What is shocking and new is that he would say so. Clipping
coins used to be something bankers did when no one was
looking, like going to the bathroom or sneaking into porno
shops. John Law - when he still had his wits about him -
threatened his subordinates with death...if they printed
money without proper backing. He may not have had any
particular interest in protecting the public's money. But
he knew what was good for him...and if the public ever
caught on to the fact that his bank's currency had nothing
of value behind it, he would be ruined.

But now, it really must be a new era - of sorts. McTeer and
Bernanke openly discuss the methods they intend to use to
make sure the dollar does not rise in value. And the capo
di tutti capi of central bankers, who is not coincidentally
responsible for creating more money out of thin air than
any central banker who ever lived - Alan Greenspan - has
just been offered a new term at the head of the Fed. At 77
years, all he has to do is to keep breathing...and keep
inflating...and he is assured employment.

Fed officials, from Greenspan on down, have made it clear
that they will do"whatever is necessary" to avoid a Japan-
style deflationary slump, including interfering with
interest rates on both ends of the yield curve. If setting
very short-term rates does not do the job, the Fed will
distort the long rates too."If asset prices don't adjust
sufficiently to stimulate spending," explained Vincent
Reinhart, of the Fed's Open Market Committee,"then open
market purchases of long-term Treasurys in sizable
quantities can more term premiums lower."

Here we yield to James Grant for a translation:"We take
that to mean," writes Grant,"that if stock prices (or
house prices, or other prices yet to be named) don't do
what they're supposed to do, the Fed will cap the yields of
longer-dated Treasurys in a bid to depreciate the value of
the dollar."

And now one further translation:

"The Fed will keep interest rates low - no matter what it
takes."

Meanwhile, half a world away, another government employee
brings the same spirit of optimism and determination to the
sands of Mesopotamia. Jay Garner, proconsul, says he will
stay"as long as necessary" in order to prevent things from
regressing to their natural state in Iraq, while his boss,
George Bush, affirms that his administration will do
"whatever it takes" to bring peace and prosperity to the
desert tribes.

In today's letter, we offer no critique of either
department - Defense nor Treasury. We merely marvel at the
'can-do' spirit that animates them...in the same way we
once admired Evil Knievel for bouncing over the Snake River
Canyon on a motorcycle. It was madness, but it was
entertaining.

Here in Europe, people do not so much marvel as sneer.
Where Americans see benefits, Europeans see problems...
risks...dangers...complications. What if the whole Middle
East is de-stabilized, they ask? What if more terrorists
are incited to action...what if the Americans target us
next?!

How the world has changed!

"We had our period of madness too," Sylvie explained during
our French lesson."Oh là là...if you had lived through that
period...1914 through 1945...you wouldn't want to do that
again."

Sylvie might have gone further. She might have gone back
centuries. Every problem...every difference...every border
in Europe seemed to lead to war. Catholic or protestant...
German or French...Fascist or Communist...no difference was
so slight as not to be worth fighting over. It was the
period of Machtpolitik...when Europe was strong militarily
and every problem was thought to yield to the force of
arms. For hundreds of years, armies marched in
Europe...getting bigger and bigger, more and more deadly.
Then, in the 20th century, Europe's wars seemed to reach a
level of such deadliness that it must have felt terminal.

In 1914...and then again in 1939...the Europeans marched
readily into battle...each nation sure of itself, with a
'can do' attitude. Americans, meanwhile, hesitated. Not
getting involved in foreign wars was thought to be a
national virtue. Protected by two oceans, America's
military was relatively weak. And so, the nation favored
negotiation...hesitation...discussion. In WWI and again in
WWII, Americans waited years - until the major combatants
had already exhausted themselves, said critics - before
getting involved.

During those years...indeed, since the beginnings of the
republic...American can-doism was largely focused on
commerce, religion and other civil pursuits. Europeans
marched...but Americans worked. And American factories from
Trenton to San Diego profited by selling shoes, oil,
guns...everything the Europeans wanted to buy.

But now it is the Americans who put their faith in
machtpolitik and the Europeans - protected by an ocean of
U.S. military expenditures - who sell them things.
"Negotiate," say the Europeans...rely on the UN...talk...
trade. The Europeans no longer have faith in 'can do'
foreign policies; they barely have any foreign policies at
all.

People learn more from defeat than from victory, we
believe. Americans' military interventions have been,
largely, successful. Europeans' have been mostly
disastrous.

Likewise, too many devaluations...too many 'new'
currencies...and too much inflation have squelched the
Europeans' can-do spirit in central banking. France has had
two currencies and a one 100-to-1 devaluation since WWII.
In the '20s, Germany suffered an inflation so severe that a
thousand marks in the morning were almost worthless by the
day's end. They do not want to do that again.

While the Fed cut rates 12 times - by 525 basis points -
since the beginning of the slump, the European central bank
has merely jiggled its rates up and down very cautiously.
On the first of January 1999, the best ECB lending rate was
3%. Now it is 2.5%.

While the Fed program is aggressive, activist, and forward
looking, the European central banker reacts slowly and
deliberately, as if were less sure of himself...and more
modest. And where Alan Greenspan is known throughout the
world - a greater celebrity than Michael Jackson - who can
cite the name of the ECB's chief, let alone identify him in
a police lineup? Wim Duisenberg is almost a nonentity.

But his currency is rising.


Bill Bonner