-->Capitalism Drooping
The Daily Reckoning
Paris, France
Thursday, 19 June 2003
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*** Where are we? Nazflation!
*** Advisors bullish...gold down sharply...dollar up...An
echo bubble...
*** China might float. Dollar might sink.
Where are we? We mean, where are we economically, of
course.
Physically, we are right here in our office in Paris on a
cloudy day. And metaphorically?
Do you really want to know where we are metaphorically,
dear reader? Of course not, but we will tell you anyway.
Here. We are out on this rock with our arm stuck in a
contradiction; we expect both inflation and deflation."You
can't have it both ways," say readers. Either inflation
destroys bonds or deflation destroys stocks, they say.
"They'll both be destroyed," is our bet.
We are in the 32nd year of the Dollar Standard. Look in the
vaults of the world's central banks. What do you find? We
don't know, but we've been told that 75% of their reserves
are in the form of 'dollars.' What's a dollar? Well...it is
what it is...a piece of paper that can be exchanged for
other things.
When the dollar standard began in 1971, a dollar could be
exchanged for 1/34th of an ounce of gold. It was precisely
because many people - especially the French - thought this
was too good a trade to pass up that the U.S. government
decided to put a stop to it. Henceforth, said the Nixon
administration, effectively defaulting on its obligations
by devaluing the dollar, the dollar is only worth whatever
it will buy in the open market.
That announcement set off alarm bells all over the world.
Investors began to wonder what they could get for their
dollars. The Fed had a printing press back then, too; the
Fed, of course, offered the world enough dollars to keep
the wheels of the economy turning...but investors worried
that they Fed might overdo it. Sure, easy money could make
the wheels spin, but they might eventually come off! By
1980, a dollar brought only 1/840th of an ounce of gold.
Investors expected to get even less in the future.
Mr. Market never sets up an expectation without also
setting in motion the means of disappointment. Along came
Paul Volcker, who tightened bank lending rules, stiffened
up interest rates, knocked down inflation rates and thus
built the foundation for the Great Boom that lasted the
next two decades.
We think the Great Boom ended in 2000, when the stock
market finally topped out. The following year, the dollar
topped out, too. In the summer of 2001, a dollar bought
1/260th of an ounce of gold. Now, 2 years later, it buys
only 1/360th of an ounce.
But what do we know? Yesterday, gold fell $6 in price as
the dollar rose. Now that the Fed really is putting on the
speed, investors seem not to notice. Their expectations are
at an epic high. Whee! Most believe the Great Boom will
continue racing along forever. The percentage of bearish
investment advisors is at its lowest point in 16 years.
Gold has been the best investment of the last 2 years...but
who believes it will continue?
Instead, Fund managers and the lumpeninvestoriat lend money
to the U.S. government as if it were the best credit risk
in the world...and buy stocks as if they had read
tomorrow's newspapers and saw higher prices.
And here at the Daily Reckoning, we don't know quite what
to think. That stocks are no bargain seems obvious. That
U.S. Treasury bonds are a 'reward-free risk' seems clear
enough, too. That such extraordinary confidence (what could
be lending to the world's biggest debtor - who openly
promises to devalue his currency...at the lowest yields in
50 years - but an exhibition of extreme, almost lunatic
confidence?) should eventually give way to fear and
loathing also seems not only self-evident, but actually
simpatico. It is the way the world works: day turns to
night, good yields to bad, exceptional is replaced by
mediocre; Volcker is replaced by Greenspan...tight money is
followed by loose money...and then the wheels come off!
But when and how?
More below...meanwhile, Eric Fry with the news from Wall
Street:
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Eric Fry in Manhattan...
-"Nazflation" continues!...Yesterday, the Nasdaq Composite
gained half a percent to 1,677 - another new one-year high.
Meanwhile, the Dow slipped 29 points to 9,294. Government
bonds slipped for a third straight session, as the 10-year
Treasury note's yield soared to 3.36% from 3.17% on Monday.
Apparently, bond investors are having second thoughts about
the imminent threat of deflation.
- Tuesday's CPI data - by showing a hefty 0.3% jump in
consumer prices, excluding energy - offered a tantalizing
morsel of inflation...
- Ahhhh!...How sweet it is!...That first delicious taste of
a new inflationary trend! Like most sinful little
pleasures, inflation is not a healthy indulgence. But for
now...mmm...it is a welcome delight, or so most stock
market pundits seem to believe. Inflation is welcome
because - unlike that Puritanical deflation - it makes debt
repayment easier, boosts home prices and fluffs up
corporate profits. It is all pleasure and no pain...sort
of.
- The pain arrives a little later, of course, when a dollar
bill buys fewer goods and services that it does today, and
when savings are"inflated away" to be worth much less than
the nation's savers anticipated. But stock-buyers do not
seem to worry about any of this. Rather, they trust the
Federal Reserve Chairman when he tells them that inflation
is a good thing, and that the evils of deflation must be
vanquished at any cost.
- The lumpeninvestoriat aren't worrying about much of
anything these days, except the risk of not owning common
stocks. As a result, an impressive"echo-bubble" in the
stock market has been swelling larger and larger, right
before our eyes. Like its predecessor, the epic stock
market bubble of the 1990s, the echo-bubble features more
speculation than substance...Negligible earnings growth and
nosebleed evaluations are no impediment to rising share
prices.
- And like its predecessor, the echo-bubble is powered by
the Fed's easy money campaign. The implicit 'threat' of
receiving an invisible 1% yield from CDs or money market
accounts is chasing investors out of cash assets into
riskier assets, like long-dated bonds and common stocks.
This Fed-inspired casino mentality has been driving the
stock market from MERELY expensive levels to VERY expensive
levels.
- It is fueling"Nazflation," as Michael Belkin puts it.
The Nasdaq Composite is up 25% this year - that is
Nazflation of about 56% annulized."Negative real interest
rates are forcing investors out the risk spectrum," says
Belkin, editor of the Belkin Report."Treasury bills and
money market funds yield 1%. U.S. CPI inflation is more
than twice that level. That is a powerful incentive to move
into higher-yielding debt (junk) and lottery tickets
(Nasdaq stocks). If we sound skeptical about the process,
that is correct...We disagree with the Fed's policies, but
we don't run the asylum. If the Fed wants to push investors
out the risk spectrum and inflate another mini-bubble, it
certainly has the power."
- The Fed's"power," of course, is nothing more than the
public's collective eagerness to buy expensive stocks. Were
it not for investor infatuation with stocks-for-the-long-
haul, the Fed would be powerless to incite speculation. But
the Fed can, and does, incite speculation. In fact, it is
doing so right now. However, the tech rally may soon run
out of steam.
-"Despite the recent good times, the situation for tech
bulls is dire," writes Fred Hickey, editor of the High Tech
Strategist."The cables and turnbuckles and epoxy that have
been holding up these monstrously overpriced tech stocks
are fraying and breaking. When it becomes clear that the
second-half recovery won't occur and that the second-half
earnings surge is a pipe dream, there will be a panic among
bullish investors that will end in ruin for many of
them...Then we'll hear wishful comments about the fallen
bull market for tech stocks similar to those made by seven-
year old Nicholas Niles at the foot of New Hampshire's Old
Man of the Mountain: 'If only there were magic stuff that
could make it hitch back up there.'"
- Also, like its predecessor, the echo-bubble is equally
vulnerable to the pinprick of economic reality. Like the
epic bubble market of the 1990s, the echo-bubble will - we
fear - end badly for many investors. Why not book your
profits and take the summer off?
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Bill Bonner, back in Paris...
*** We have no doubt that the economy is in capable hands
and that everything gets better every day, in every way.
Still, the U.S. Treasury secretary says it might be hard to
find a job."Job outlook weak in CA," adds the LA TIMES.
"Prospects for jobs low in Michigan," joins the Detroit
Free Press.
*** China, believes Marshall Auerback, has the power to
shut down the U.S. economy...the way the IMF pulled the
plug on Argentina. We reported Auerback's thoughts
yesterday. The subject must have been on the U.S. Treasury
secretary's mind the same day. In today's news, we find
this headline in the Washington Post:"China may float
currency, says Snow."
We turn back to Auerback for elaboration:"When they make
the break from the dollar tie, it is highly conceivable
they will have stockpiled a huge amount of gold to back
their unit (which may also explain why the Chinese
government has been so reticent to provide full disclosure
on its official sector purchases of gold over the past decade). Once they feel they have those in order, then they
make a play toward becoming the Asian region's reserve
currency and ultimately the world's preferred currency.
"The notion of the remnimbi-based Asian currency union may
seem far-fetched today, but so too did the idea of a
European currency union, but 15 years ago. In many
respects, an Asian monetary union predicated on the RMB
would face considerably less difficult obstacles than the
euro. In contrast to"Euroland", an Asian currency union
predicated on the RMB would start with the presence of one
dominant country, China (both economically and culturally),
thereby facilitating the adoption of an existing currency,
as opposed to the creation of a new one and the concurrent
abolition of a multiplicity of national currencies. There
is also a huge Chinese Diaspora in the emerging Asian
countries; consequently, many of the traditional linguistic
and historical barriers that pertain in the EU do not apply
to anywhere near the same degree in Asia. There is a
common, cultural Confucian ethic throughout the region.
There is also a natural predisposition toward saving,
making the region the largest repository of global
reserves. If such reserves are backed by a large chunk of
gold holdings (now being perversely leased or sold by
countless Western central banks), then the notion of China
at the epicentre of an Asian monetary union becomes
eminently more credible.
"What this means in relation to America is that the latter,
like Argentina circa 2001, no longer controls its own
economic destiny. In the case of the United States, the
Sword of Damocles is not the IMF, but China. The death
knell for the U.S. economy may well be when the Chinese
elect to float their currency because at that stage, many
of the other Asian central banks (with the possible
exception of Japan) may well find yet another compelling
alternative to the U.S. greenback, thereby sending the
latter into free fall, creating untold damage to the U.S.
credit system. American policymakers, who persistently call
for the Chinese remnimbi to be floated, ought to be careful
what they wish for. It could well be the precipitating
event for the final denouement in this extraordinary period
of financial history."
*** The bell may indeed be tolling for the U.S. economy -
but is its music reminiscent of the bandoneĀ¢ns of
Argentina...or the kotos of Japan? Our own Addison Wiggin,
managing editor of the Daily Reckoning, will be speaking on
the subject at the upcoming Agora Wealth Symposium in
August. He'll also be giving out complimentary advance
copies of the book he's written with Bill Bonner:
"Financial Reckoning Day: Surviving The Soft Depression of
The 21st Century" (John Wiley & Sons).
If you'd like to meet Addison - together with your New York
editor, Eric Fry, and a host of leading investment analysts
from the far reaches of the Agora clan - you can still sign
up for an early bird discount. But you'll have to
hurry...they won't be available for long...
See: The Agora Wealth Symposium
http://www.agora-inc.com/AGW03/home.cfm?code=14
August 13-17, 2003
The Fairmount, San Francisco
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The Daily Reckoning PRESENTS: A DR Classique originally
broadcast 04 June 2002.
CAPITALISM DROOPING
by Bill Bonner
"A man gains no wisdom before he is dealt his winters in
this world...
"Is it any wonder my heart grows weary,
As I think about the proud warriors and the mead halls that
once knew them...
And how, day by day, all the earth ages, drooping unto
death..."
- The Wanderer
The dollar and the U.S. empire are on the edge of
greatness, we think. But on which side?
The thought occurred to us during a moment of reflection at
Dulles Airport. The sun had just peeked up over the main
terminal. Birds sang in the trees. A bright, warm spring
day began in the nation's capitol.
"Morning in America," we recall, was the theme of the first
Reagan term. The Great Communicator planted the supply-side
seeds...and the whole country seemed to bloom. American
capitalism was in a bull market. For the next two decades,
investors harvested the rich rewards.
Success is self-correcting, we observe. Every bull
eventually finds its bear. Every bubble eventually finds
its pin. And every empire eventually finds its Vandals.
Technology and science may march ahead...but markets,
politics and love affairs make little forward progress.
Instead, they turn in cycles of big-hearted confidence
followed by dreary moments of despair...punctuated at both
extremes by episodes of such absurd hyperbole that an
observer can only yuck or gasp.
Collectively, people do not go from darkness to light...
but race from one myth to another, we notice. They believe
in the Divine Right of Kings and then roll over to the
Sublime Right of Democracy...They put their lives in the
hands of the church in one epoch...and then trust their
government in the next. In one era, an Empire is thought
eternal; in the next it is the Nation-State. After bouncing
off the cushion of Faith in the Middle Ages...they head
directly for the opposite side of the table, where they
bump into the Illusion of Reason.
In 1998, it may have been self-evident that American
Capitalism was the wave of the future; when the future
arrived, the proposition looked much less sure."For the
past two decades," writes Matthew Lynn, a Bloomberg
columnist,"the economic news coming out of the U.S. has
been almost invariably upbeat. Now the pendulum has swung.
"The dollar's dominance over currency markets is slipping.
The trade deficit is starting to spook economists. The
stock market shows no sign of recovering. And the funeral
pyre of bruised and tattered corporate reputations grows
higher by the day: Now even Vice President Dick Cheney's
former company is being investigated for cooking the
books."
"Capitalism began a major uptrend in the Carter term, when
people were least expecting it," adds Jim Grant."And it
has begun a major downtrend in the administration of George
W. Bush, again taking the country by surprise."
Here at the Daily Reckoning, we don't trust ourselves with
predictions. We are not necessarily wise; just wary. We
don't know what the future holds. But we know we can't make
money thinking what everyone else thinks...or believing in
every myth that catches the public's eye. So, we look for
the uncrowded side of the trade...and sometimes find
ourselves all alone.
American capitalism has been on nearly everyone's wish list
for the last 20 years. Not that we think there is anything
necessarily wrong with it. But it has looked over-bought
for several years. We squint and try to imagine the other
side of the trade...what it would look like if it were
over-sold.
In the early '90s, bookstores removed titles lauding
Japanese business practices and replaced them with books in
which American tycoons played the lead roles. Soon,
American businessmen were everyone's heroes. Even in the
most despoiled and backward swamp or jungle...you could
find people who admired Bill Gates, Jack Welch or Jeff
Bezos.
But now, many of those American business heroes are in
disgrace.
"Enron Corp., Arthur Andersen and Henry Blodget..." Matthew
Lynn explains,"Between them they have managed to make much
of the corporate and economic achievements of the last
decade look fake. The model American company that pulled
off a couple of mergers a week, pushed forward funny-
looking numbers by 30 percent a quarter, all hyped by
breathless analysts and supported by a board paid in share
options by the million no longer looks nearly as attractive
as it did a year ago."
And then, says Lynn, there is the"breaking of the
technological dream. The story of U.S. economic leadership
was largely the story of the rise and rise of the
microchip. Computing was a completely American industry.
While that industry was still powering forward, so was the
U.S.
"Technology is still going to be hugely influential for
years to come, but it has started to move away from the
entrepreneurs and innovators. In this decade, technology
will be about better design and cheaper prices - and
refining technologies so they are cheaper and look better
has usually been what European and Asian companies do
better than American companies."
Lynn also mentions the failure of U.S. policy leadership.
After preaching free markets and free trade for two
decades, George W. Bush has set a strange example - like a
Baptist swilling beer from the pulpit. [Former] Secretary
of the Treasury Paul O'Neill is currently touring Africa
with a rock singer from Ireland with only a single name,
Bono. Africans may still enjoy a concert, but after steel
tariffs and welfare payments to farmers, we wonder how many
will sit still for a lecture from sanctimonious American
policy-setters? Instead, they are likely to follow Mr.
Bush's example...doing even more damage to globalized
American businesses.
Would it surprise you, dear reader, if investors' hearts
turn weary...as one by one, the proud suits of America,
Inc., disappear from the boardrooms that knew them...
..and a new group of books appears on the shelves - such
as"Wealth and Democracy," by Kevin Phillips, in which the
author argues that whatever awful thing happens to the
titans of American business - they've got it coming...or
"The World We're In," in which English author Bill Hutton
maintains that the European model of capitalism is superior
to the U.S. version...
..and foreign investors decide that they could get by with
just a little less of their money in U.S. financial
assets...
..and foreign central bankers come to think that they have
more than enough U.S. dollars in their vaults...
..and hour by hour...the day grows older...finally
drooping into evening?
Regards,
Bill Bonner
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