-->Vipers, And Thieves, Too
The Daily Reckoning
Paris, France
Tuesday, 24 June 2003
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*** Inflate or Die...here comes the Fed's 13th rate cut
*** Stocks fall...bullish sentiments 'off the
moon'...Maximus down again...
*** Will any of us have a smile on our lips 10 years from
now? More on the Great Inflation...Henry's
party...and...well...whatever...
"Inflate or Die," says Richard Russell, summing up the
Fed's choices.
"The Fed will cut rates until there are no rates left to
cut," we recall writing a couple of years ago. That was
when most people still believed Alan Greenspan could cure
lepers and make the blind see. Had he not done the
impossible - make the dollar go up against gold for two
decades? Was he not making Americans rich? With the Nasdaq
rising 80% in a single year, all they had to do was to put
their money into the stock market and they could retire at
40 - even if they were already 39!
And the famous 'Greenspan Put' seemed to guarantee that
these happy times would continue forever. For at the first
sign of trouble, the Fed chief would cut rates...and soon,
it would be boomtime once again.
Trouble came on the scene with the new millennium and,
beginning in early January 2001, the aforementioned Fed
chief took his put and shoved it into the market. Rates
were hacked almost every month...and then a 12th
time...from 6% down to 1.25%...which leaves not a lot of
rates left to cut.
Did the economy come back to life? Not exactly; but the
easier money kept many losing positions, bad investments,
and marginal enterprises alive. Those who needed to borrow
to pay their bills found it cheaper to do so...so both
consumers and businesses went deeper into debt in order to
keep up appearances.
Did the stock market revive? No, but the bubbly gases
created by the Fed intoxicated millions of homeowners. The
poor lumps practically fainted at the opportunity to
mortgage more of their homes at lower rates. Yes, they
owned less of their own homes than ever before. Yes, they
were deeper in debt than at any time in history. And yes,
they were losing their jobs. But what could go wrong?
Lower interest rates also created a sort of bubble in the
U.S. bond market. Yes, the borrower was the biggest debtor
in the world...and yes, he also controlled the value of the
currency in which the bonds were denominated...and yes, he
had promised to make that currency less valuable in the
future...even targeting a rate of depreciation very near to
the actual bond yields. But what could go wrong?
As the Fed prepares its 13th rate cut - expected to be
announced this week - we note a few of yesterday's
headlines:
Mortgage default and foreclosure rates are hitting new
records...
Joblessness in Michigan has climbed to 6.7%...
And"Bond prices may be in for a long tumble," says USA
Today.
But Alan Greenspan has no fear...no shame...and no clue. If
he does not cut rates now, he will cut them later. Because
he cannot raise them. The economy is light-headed with
credit, debt and easy money. What can the Fed do but offer
more - of which we already have too much?
It is, indeed,"inflate or die."
Probably both.
Eric...?
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Mr. Fry with a word or two from the Street...
- The Dow finished 128 points lower yesterday at 9,073,
while the Nasdaq dropped more than 2% to 1,611. The Dow and
S&P have both retreated about 3% from the highs they set
last Tuesday.
-"It's about time!" said an annoyed Jay Shartsis to your
New York editor yesterday. Shartsis, a battle-hardened
options trader and part-time Barron's columnist, explained
that a major stock market selloff is overdue.
-"The bullish sentiment readings are off the roof!" says
Shartsis."In fact, they're off the moon! We're getting the
kinds of VERY extreme bullish sentiment readings that you
would normally see at the tail-end of a 20-year bull
market, NOT what you would expect to see at the end of a
three-month rally...This is nuts!"
- In other words, investors are embracing the current rally
as if it were a bona-fide bull market, rather than the
latest in a serious of ill-fated bear-market rallies. They
are downright giddy about the stock market's prospects,
which is not a healthy sign. Rampant investor optimism is
often a precursor to a severe sell-off.
-"And the other thing I'm seeing," says Shartsis,"is a
rapid diminution of the 'new highs' list. They're way down
from the peak June 6 reading," he points out."New highs on
the NYSE yesterday came in at 60!...That's down sharply
from the peak of 581 new highs recorded on June 6."
-"Look at this!" said Shartsis, as he led your New York
editor to disheveled pile of newspapers and stock research
reports. Picking up one of the newspapers, Shartsis
continued,"Ya see this? New highs contracted all
week...415 last Monday, 386 on Tuesday, 210 on Wednesday,
167 on Thursday, and finally, only 94 new highs on Friday.
This is terribly interesting...and instructive...This very
rapid diminution of new highs, EVEN WHILE STOCKS ARE
RALLYING, is extremely bearish!"
- Shartsis also notes the alarming number of"buying
climaxes."...Hmmm...Sounds pretty titillating. But
actually, these climaxes aren't as delicious as they sound.
A buying climax occurs when a stock makes a new 52-week
high during the week, but then finishes with a loss. These
"reversals," as stock technicians refer to them, often
presage falling share prices.
-"So what are you supposed to do with all this bearish
information? Aren't you supposed to sell a market like
this?" Shartsis asked rhetorically."Everything I'm seeing
says to sell this market...
-"I'm not in this for the money anymore," said Shartsis
with a sinister grin, referring to his large bearish bets
on the stock market."I'm in it for revenge." The crew here
at the Daily Reckoning seeks no revenge, other than the
'revenge' of living well. But we suspect that living well
requires making good choices, like not diving into the late
stages of a bear market rally.
- After Shartsis concluded his tirade, your NY editor
strolled into the corner office adjoining Shartsis' trading
desk for a brief chat with Robert Tracy of Apogee Research.
"What's up, Robert?" he asked the gimlet-eyed analyst.
-"Well, we've got Maximus down again," said Robert,
referring to one of his recent short-sale recommendations.
"Maybe stocks are in a new bull market (although I doubt
it), but tax revenues are definitely in a bear market, and
that's bad news for Maximus. Check this out..."
- Robert held out an Apogee report detailing the 'whys' and
'wherefores' of selling short Maximus, a company that
relies greatly upon government contracts to generate its
revenues and earnings. Sadly for Maximus, government tax
receipts are falling.
- As Apogee's research explained:"An April report from the
National Association of State Budget Officers (NASBO)
states, 'Because state revenue growth generally lags behind
the end of a recession by as much as 12 to 18 months, state
fiscal woes are expected to continue in fiscal 2003 and
fiscal 2004.' And on April 24 the National Conference of
State Legislators (NCSL) said that, 'with only two months
left in most fiscal years [which end on June 30], states
must still close a $21.5 billion budget gap in order to
comply with their balanced budget requirement.' The NCSL
report went on to second NASBO's projected scenario: 'The
situation is not much brighter for fiscal year 2004. As
states craft their budgets for the next fiscal year,
estimates show 41 states facing a cumulative budget gap of
$78.4 billion. Thirty-seven of those states reported a gap
in excess of 5% of their general fund, while 19 of those
exceed 10%.'"
-"These are some pretty scary statistics," says Robert.
"State governments are cutting spending left and
right...and Maximus (MMS) is standing right in the line of
fire...Maximus' income statement is already showing the
strain of nationwide fiscal austerity, and I don't see this
situation improving any time soon."
- [Ed note: For more from Apogee Research, follow the link
below to check out Apogee's latest report:
http://www.agora-inc.com/reports/APG/YourMoney/ ]
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William Bonner, back in Paris...
***"Dear Editor," begins a polite and perceptive letter,
"I agree with much of the analysis in The Daily Reckoning,
and I enjoy reading it. But I was taken aback by the
comment in the Dec. 20 issue that 'even though the dollar
is doomed, you, dear reader, are not. You can still do what
the Chinese government is doing - build up your own stock
of real money, gold - and watch the whole sorry spectacle
with a song in your heart and a trace of a smile on your
lips.'
"Much as I would like to believe that we can insulate
ourselves from the coming economic and social catastrophe,
my common sense tells me not to count on it.
"As one of those unfortunates who has to work for a living,
much of my investment capital is tied up in 401K and IRA
accounts. The former has no provision for buying gold, gold
stocks, or gold funds. Although I can and have done that in
the latter account, the fact is that whatever I accumulate
there is only as safe as the brokerage that administers the
account. When the U.S. dollar, U.S. stocks, and U.S. bonds
hit the skids, my bet is that more than a few banks and
brokerage houses will be doing the same. What happens to
our 401Ks and IRAs then?
"Of course I have bought some gold coins, but the fact is
that like most people, I simply do not have enough ready
capital to buy the type of physical gold stash that would
see me through a real depression. And that, dear editor,
leaves aside the issue of whether the government will let
us keep private stashes of gold once the brown stuff really
hits the fan.
"Moreover, buying gold is an economic hedge. What will
protect us from the political fallout of the economic and
social crisis? The U.S. government is already using its
military power in the pursuit of economic advantage, and is
trying to destroy democratic rights in the name of national
security.
"History tells us that we can expect a rise in racism,
xenophobia, and militarism as the economic crisis develops.
I, for one, believe that John Ashcroft wouldn't hesitate at
all to set up concentration camps for opponents of the
government if he thought he could get away with it.
"I can understand the temptation to ridicule those who do
not see the coming crisis that seems so apparent -
especially those in positions of authority and those who
presume to instruct the rest of us on economic policy and
investing - and I do enjoy some of the snide and snotty
asides in the Daily Reckoning. But I really doubt that any
of us is going to end up with a smile on our lips 10 years
from now."
Editor's comment: He may be right. But that is what
separates us from so many of our comrades...here at the
Daily Reckoning, we are such optimists!
*** Another reader, from Germany, sends a further
description of the Great Inflation in Germany of 1919-'23:
"The ongoing inflation disrupted the supply situation of
the people. Wages and salaries were not able to compete
with rising prices for goods and services. Wages in real
terms declined to around 40% compared to the pre-war level;
the German middle class literally went into the poorhouse.
Cash and assets melted away. Savings of generations were
destroyed completely. Fixed income became worthless. The
loss of purchasing power caused huge declines in real
estate. You could buy houses in real estate emergency sales
for a bargain.
"The chaotic monetary system made regular business behavior
next to impossible. Daily wage payments became the rule.
Everyone tried to exchange cash as fast as possible into
real values. Stores opened and closed according to the
publication dates for current rates of exchange. In
restaurants, bills could double during the meal. Criminals
went for the golden teeth of their victims. After Services,
priests put out laundry baskets in front of the church
instead of collecting money."
Original description in German:
http://www.dhm.de/lemo/html/weimar/innenpolitik/inflation/
"Best regards from Frankfurt..."
*** And finally...we return to home and hearth...Henry
celebrated his 13th birthday on Sunday; his actual birthday
falls in July, but Henry wanted to invite his friends over
for a party before they all left town for the summer.
The group of 8 boys was quietly playing a video game in the
living room when Henry's father came upon the scene.
Entering the room, the boys - neatly dressed, every one of
them - rose to greet him. Each extended his hand and
introduced himself, looking the old man in the eye and
smiling.
"What a well-behaved bunch of boys," he remarked to his
wife.
"Yes, they are no trouble at all," she replied."They're a
real pleasure to have around."
After the video game, the boys were served dinner. But it
was not a boisterous dinner of pizza and coke. Instead,
Henry and his mother had planned a proper meal, beginning
with an appetizer of paté de tête de cochon on
lettuce...followed by veal cutlets in a wine
sauce...followed by birthday cake and ice cream.
The boys sat at the table and conversed pleasantly. The
'culture of the moron' was nowhere to be seen.
But the culture of the 13-year-old was not entirely
missing. Later, coming into the dining room to remove the
plates, your editor found two boys on the balcony,
preparing to drop a water balloon on the head of a
neighbor.
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The Daily Reckoning PRESENTS: A return to the scene of the
crime...
VIPERS, AND THIEVES, TOO
by Addison Wiggin
The world waits, breath bated, for word from behind closed
doors at the Fed...will they give the people what they
want? Will they cut rates yet again? Will 13 be the lucky
number?
Pant. Gasp. Whispers from the crowd. Will the recovery
never begin?
"History shows that countries who save and invest grow and
prosper..." writes the Adventure Capitalist, Jim Rogers, in
a foreword he's penned for our book ("Financial Reckoning
Day" - due out in September)"...while the others
deteriorate and collapse."
"Artificially low interest rates and rapid credit creation
policies set by Alan Greenspan and the Federal Reserve
caused the bubble in U.S. stocks of the late '90s," Rogers
continues."Now, policies being pursued at the Fed are
making the bubble worse. They are changing it from a stock
market bubble to a consumption and housing bubble.
"When those bubbles burst, it's going to be worse than the
stock market bubble, because there are a lot more people
that are involved in consumption and housing. When all
these people find out that house prices don't go up
forever, with very high credit card debt, there are going
to be a lot of angry people.
"No one, of course, wants to hear it. They want the quick
fix. They want to buy the stock and watch it go up 25%
because that's what happened last year, and that's what
they say on TV. They want another interest rate cut,
because they've heard that that's what will make the
economy boom..."
A 'quick fix' is just what we expect the Fed will offer up.
If we were betting men, which we are not, then we might
even put a wad down on a 50-basis-point cut...dropping the
Fed funds rate to 0.75%, or 600 points closer to 'almost
free' than when the Fed began this charade 29 months ago.
Throughout its history, the Fed has been capable of doing
only one thing: destroying the currency it was purportedly
chartered to protect. But your humble editors claim no
authorship of that observation...
Two weeks ago, we looked at the legendary tirade of Louis
McFadden (see:"Vipers and Thieves" The Daily Reckoning, 11
June 2003).
The scene was 1932, at height of the unemployment boom
during the Great Depression."The House was debating a bill
which would expand the types of securities the Federal
Reserve could trade when conducting monetary policy," we
recall our citation of economic historian Edward Flaherty.
"McFadden used this opportunity to launch a twenty-five
minute tirade against the Federal Reserve, and in so doing,
became a legendary champion amongst conspiracy theorists."
McFadden described the Fed as"one of the most corrupt
institutions the world has ever known"...an"evil
institution that has impoverished and ruined the people of
the United States; has bankrupted itself, and has
practically bankrupted our Government." It has done this
through defects of the law under which it operates, through
the maladministration of that law by the Federal Reserve
Board and through the corrupt practices of the moneyed
vultures who control it." We followed up with an attempt by
Flaherty to discredit McFadden's harangue.
As is the custom among Daily Reckoning readers, our
presentation of Flaherty's rebuttal met with more than a
little chagrin."Flaherty's analysis is a bit of a non-
sequitur," one astute reader shot back,"McFadden's point,
if not explicitly stated, is that the government would
never have incurred any debt in the first place if it had
not been duped into giving the power of money creation over
to the private interests, who are vipers and thieves."
Given the fact that we've just experienced the fastest
descent from"surplus" to"deficit" in the nation's
history, McFadden's observations seem as relevant today as
they did 70 years ago.
"Edward Flaherty's rebuttal of Congressman McFadden's
speech does not come close to addressing the charges,"
another equally, if not more, astute reader chimed in.
"McFadden did not say they make too much profit. The profit
at the Fed is not the problem. The problem is they have
deliberately destroyed the currency..."
The latest Fed incarnation - the Greenspan-Bernanke-McTeer
triumvirate - has been openly lamenting declining rates of
inflation...and are on the verge of giving the price level
another 'coup de whiskey'. But to what end?
"NO serious student of the economy any longer doubts," our
friend (sic) at the New York Post, Christopher Byron
observes,"Mr. Greenspan's cheap-money policy of the 1990s
led directly to the stock market bubble that popped in the
spring of 2000, pushing stocks and the economy into a
downturn from which they have yet to recover."
One wonders what Greenspan and co. actually discuss behind
closed doors at the FOMC meeting. Surely, there must be at
least some remnants of"Greenspan, the Randian goldbug"
buried deep within Alan's sparsely populated cranium. Yet,
as Byron notes,"Mr. Behind-The-Curve" keeps trying to
regulate the economy, after the fact, with lame and
misguided rate cuts. In the process, he and the other Fed
governors have created"the greatest decade of volatility
and uncertainty the stock market has known" since...well,
since McFadden was all ticked off at another set of Fed
ninnies during the Great Depression.
And now, as a follow-up act,"instead of giving the economy
a sustainable overall boost," Byron writes,"the Fed's
increasingly cheap money keeps pouring into just two
sectors - the housing and home mortgage refinance markets -
and it is creating what is shaping up as one of the most
spectacular sector bubbles in history."
"Meanwhile," Byron continues (forgive me if I quote Mr.
Byron at length, but as usual, he hits the nail on the
head)"his rhetorical waltzing has become utterly
shameless, as he intones, in that ponderous way he has
perfected, that the housing market has not swelled into a
bubble - because, when it pops, the result won't be a
'negative' for the economy but the disappearance of a
'positive'. Oh, puhleeze, Mr. Greenspan, do you take the
whole world for fools?
"It is the speculative bubble in the housing market, fueled
by lower and lower mortgage rates, that is alone propping
up the economy, and everyone knows it. In this summer of
2003, the national pastime is no longer baseball or going
to the beach - it's going to the bank to refinance the
mortgage. The amount of money being leeched from the
national balance sheet and poured into consumption by this
process is simply staggering."
The Mortgage Bankers Association released their data last
week showing that nearly all the profits being banked
through mortgages are now coming from cash-out refinancings
(the practice of refinancing your home for more than it's
worth, so you can afford to make payments on your SUV and
meet the minimum monthly requirement on your 8 credit
cards!). The Federal Reserve's own numbers reveal that cash
from refinancing accounted for nearly $700 billion of
consumer spending last year.
Banking stocks"from the S&L and commercial banking sectors
to mortgage banking, finance and homebuilding, have been
pumped up with hype, hope and hot air from Greenspan's
failed policy of trying to manage the economy by playing
catch up with interest rates."
Who knows WHEN this bubble will go the way of the Nasdaq.
But one thing is certain: nature abhors disequilibrium.
This generation of Fed governors has not only upheld the
honorable Fed tradition of destroying the value of the
currency they were chartered to preserve...but they've also
gone where no Fed has yet dared tread: they've engineered a
scheme to aid and abet the nation's homeowners in stripping
their homes of equity. A scheme which is threatening to
melt down and destroy them all.
Cheers,
Addison Wiggin
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