-->Pray For Dawn

The Daily Reckoning

Paris, France

Friday, 18 July 2003

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*** A hunch... the recession may be over, but it ain't
finished...

*** Tech wreck... Nokia down 20%, Dow to 3,000?

*** Is it January or February... IT Rules!... and more!

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We have a hunch, dear reader.

It is just a hunch, though. Perhaps not as worthless as a
CIA briefing, but still, we give fair warning: we don't get
tomorrow's paper any sooner than Alan Greenspan.

Yesterday, the National Bureau of Economic Research said
the recession that began in March of 2001 ended in November
of the same year. But it was unlike any recession the world
has ever seen. Like a hanging, there was the rope of
negative GDP growth... and the gallows of falling
employment... and the fresh-dug grave of excessive debt. But
when it was over, there was no dead man to put in it.

Instead, consumers had just kept digging deeper holes for
themselves. Debt rose - when everybody knows debt is
supposed to go down in recession. They bought more SUVs and
houses and boatloads of shiny new stuff from China. And by
the end of the recession, they had more things than they
had ever had before, and owed more money to more people
than ever before, too.

This is not the way it is supposed to work, dear reader.
Any recession worthy of the name is supposed to reduce
consumer spending and debt. And it's supposed to leave the
consumer with 'pent-up demand' for the things he didn't buy
while he was cutting back. It was this pent-up buying
pressure that was supposed to lead the nation out of
recession to 'recovery.'

"No decent recession, no decent recovery," we recall
guessing two years ago. Since, we have seen a recovery as
bizarre as the recession. No plume of smoke belches from
the nation's factories. No overtime pay increases the
purchasing power of its employees. Nor does any pent-up
desire increase their ardor.

Jobless claims are still over 400,000 per week. Corporate
profits are still weak. Yesterday, for example, GM
announced a 30% decline in profits in the 2nd quarter.
Consumers still dig deeper and deeper graves for
themselves, while buying and selling houses to each other.

And yet, few people bother to ask what is going wrong. Most
accept the fact that the recovery is underway... and thanks
to the easy money policies of the Fed, all will soon be
well. Almost no one believes that there is a serious
problem with the Dollar Standard system.

But here is our hunch: the recession may be over, but it is
not finished. The current rally is drawing to an end. The
Nasdaq lost 3% yesterday, with Nokia down 20%.

Meanwhile, the dollar's rise seems to have stalled at $1.11
to the euro... and the price of gold seems to have bottomed
out at $343.

Our advice (no better than our hunch, we remind you): use
this opportunity to unload dollar-based assets. Buy gold
and the euro.

Here's Eric with more news:

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

Eric Fry in New York...

- A tech wreck on Wall Street yesterday caused serious
injury to the major stock averages. Stocks fell for a third
straight day, as IBM, Nokia and a bevy of other technology
companies reported disappointing earnings. The tech-heavy
Nasdaq dropped nearly 3% to 1,698 and the Dow dipped 44
points to 9,051.

- Meanwhile, the bond market resumed its skid after a one-
day reprieve. A batch of mildly favorable economic reports,
while failing to inspire the stock buyers, seemed to
inspire the bond sellers. The 10-year Treasury note slipped
10/32, as its yield inched up towards the 4% level at
3.96%. Gold for August delivery climbed by $1.10 to close
at $344.30 an ounce.

- The Philly Fed business activity index climbed to 8.3 in
July from 4.0 in June - the index's best showing since
January. Maybe business activity is picking up in
Philadelphia, but it is still pretty sluggish up in Armonk,
New York, the home of IBM headquarters. Big Blue's chief
financial officer, John Joyce, cautioned investors that
business is"good, but not robust," and that many of its
customers are delaying major technology purchases.
Outside the tech sector, General Motors reported a
bittersweet quarter. The sweet part was that the company
handily beat the consensus earnings estimate.
Unfortunately, however, General Motors can't seem to make a
buck selling cars anymore.

- The automaker posted a second-quarter profit that topped
expectations, but only because its booming finance unit
produced a record result. For the quarter, GM reported
overall earnings of $901 million, as the profits from its
worldwide automotive operations collapsed by nearly $1
billion to a mere $140 million. By contrast, profit from
the finance division almost doubled to $834 million.
Astonishingly, therefore, GM's finance arm generated nearly
all of the company's entire net profit for the quarter.
"How much money did GM's mortgage operations kick down to
the bottom line?" your New York editor asked Apogee
Research's Robert Tracy.

-"You're not gonna believe it," Tracy replied."GM's
mortgage operations produced a breathtaking $415 million in
net profits, or about three times more than the profit from
the company's vast, worldwide auto operations. Another way
of looking at it," Tracy explained,"is that mortgage
financing produced nearly half of GM's entire net profit."

-"So what happens to this so-called car company," your New
York editor inquired,"when interest rates rise and the
mortgage refinance market dries up?"

-"The so-called car company makes a lot less money," Tracy
replied,"unless it can start making money selling cars
again."

- So if the New Economy companies are seeing little sign of
economic growth and the old economy companies are changing
themselves into banks-in-disguise in order to make a
dollar, what hope is there for a stock market that is
selling for more than 30 times earnings? What new financial
phenomenon will emerge to carry share prices to the next
new plateau of ever-more-ridiculous valuations?

- Or, to phrase the question differently, what financial
phenomenon could prevent the stock market from succumbing
to the forces of economic gravity? Surely the bulls could
provide a hopeful answer. We cannot.

- Based on its dividend yield, the stock market is at least
two times overvalued. Currently, stocks yield about 1.6%.
By contrast, at the market top in 1966, the dividend yield
averaged 3.39%. And stocks were about two and a half times
higher than the last bear market bottom in 1974, when it
averaged about 4.5%.

- The Dow Jones Industrial Average must decline below 3,000
to get its dividend yield back to the levels of 1974 and
1982. But that could never happen... right?

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

Bill Bonner, back in Paris...

*** The bond market may or may not have peaked. Helmo
Preuss, from South Africa, offers this guess:

"The long-term picture is clear... The only question is
when - not if - the bond market vigilantes lead the way in
demanding that Treasuries be priced based both on their
longer-term inflation and other risks. Can the point we're
at be compared to January, 1999, when a Nasdaq that already
was priced to absurdity became even much more so, albeit
temporarily? Is the bond market more like January, 2000,
when the momentum was still fairly in tact but when the
fundamentals were more clearly beginning to change? Is
this March, 2000, when wild swings up and down marked the
final peak for tech stocks, followed by a new bear market?
I say it's February."

*** Little by little, the family reassembles. Henry returns
from Brittany this afternoon. Jules came back from the U.S.
after spending some time working in the headquarters in
Baltimore. He reported on the state of the information
economy:

"I worked a little with the IT [information technology]
crew...

"Dad, I don't know if you know this, but those guys run the
whole business."

"Uh oh..."

"They control everything. You write the Daily Reckoning,
but it doesn't go anywhere unless they send it out. And
they're processing millions of messages every day. And they
can get into anyone's computer... I mean anybody who works
there... and watch what they're doing..."

"Uh oh..."

"And people are always trying to hack into the system...
thousands of times..."

"Why would anyone want to hack into our computers?"

"They try to use our system to send out their spam mail...
that's all I could make out..."

"Uh oh..."

*** Another reader writes to complain about our gloomy
outlook:

"Bill, The history of life on Earth has been one dreadful
experience after another. Men have been killing each other
since the beginning. One crisis after another has been met,
played-out and, somehow, America has evolved into a
remarkable place! Is there no hope for us? The Soviet Union
and the Cold War ended without a shot being fired. The
European Recovery Program after WWII was a watershed in
world history and has resulted in peace between Germany and
France for the first time in history!

The European Union has become an economic power and there
is peace between antagonists there. More Americans are
living better than in any time in our history. Is there
nothing that will cheer you! If we only look for
perfection, we are destined to always be frustrated. Have a
great day!!!"

*** We have a great day, every day here at the Daily
Reckoning headquarters. We enjoy fretting; it is true. But
we have a profound faith that things will work out, not
necessarily the way people hope they will, but as they
should.

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The Daily Reckoning PRESENTS: Bill Bonner, praying...


PRAY FOR DAWN
by Bill Bonner

"We pray for those who cannot leave on vacation because of
their work..."

an actual prayer
from last Sunday's
service at St. Marcial in Lathus

(No, we are not making this up... )


Amid the prayers for relief from life's many sufferings and
hardships... for the dead and dying... and for those left
behind... came this curious supplication for those who
travail under such a heavy burden that they are unable to
take the usual 4-week summer holiday. Hardly a Sunday
passes without a reminder of those unfortunates who cannot
find work in high-unemployment France; this was the first
time we were asked to feel the pain of those who had too
much of it.

But how deliciously this tattered old ball turns! No sooner
have we become accustomed to the dark night of some evil
than the first rays of dawn begin to shine upon it... and we
see it as a virtue. What could be worse than not being able
to take a month off in the summer, we ask ourselves at
midnight? At noon comes the answer: a life of full-time
leisure.

Who deserves our prayers, we asked ourselves: the man who,
in the dead of night, is as outraged at having no
vacation... or the one who is desperate for work in the
morning?

Or, and here we stopped dead in our tracks when we thought
of it, is it the modern realist, who sees neither the black
of night nor the brightness of day, but only the gray of
not caring one way or the other?

A sane man knows the earth turns. He knows that in almost
all things - stock markets, politics, nature - there is an
observable tendency to revert to the mean. This causes him
to temper his enthusiasms. Stocks at 200 times earnings may
be attractive in the festive candlelight of evening; he
reckons that they may be less fetching in the bright sun of
the following day.

If he is an optimist, he welcomes the opportunity to enjoy
the night, knowing that he will enjoy the day too, if he
leaves before breakfast. If he is a real pessimist, on the
other hand, he regards the whole affair as a waste of
time... turns gray and blows his brains out.

Both French and Americans believe themselves exceptional.
That they are different, we do not deny. Au contraire, we
enjoy the differences daily. But that they are also very
much the same is also true; neither can make the world
stand still.

"The role of the state," said Jean-Luc Lagardère, before he
died recently,"has been fundamental since the 17th century
[in France], something I greatly admire."

"When we organized our state," adds Charles Pasqua, a
former Gaullist minister,"we were bold enough to imagine
that it was a model not only for France, but for the whole
world."

The French were so proud of their 'civilization,' they
offered it to the rest of the world. Unbelievably, taking
the 'mission civilisatrice' to its African colonies, the
children of dark tribes learned about"our ancestors, the
Gauls."

The centralized welfare state took a big leap forward in
France in the 1930s under Léon Blum... and in America under
Franklin Roosevelt in the same period.

And now, a kind of heady, vainglorious, feeblemindedness
has taken hold in Washington. Led by the neo-cons,
Americans see themselves as gods... as masters of the
universe who intend to remake the world in their own image.

"Western Europe is literally a dying continent,
demographically and spiritually," says Father Richard
Neuhaus, a catholic theologian with friends in the White
House,"whereas in America, people are energetic, vibrant,
filled with technical expertise, whistles and bells."

Washington has become, like Paris and Rome before it, the
place where all roads lead.

The city"is full of foreign lobbies wanting something from
America," explained former National Security Agency
director Lt. Gen. William Odom."Why would you want to
lobby Chirac - to change the kind of cheese or something?"

While the French worry about cheese and vacations,
Americans dream of world conquest.

The neo-cons want to make America into not just a Great
Power, but a"spectacular state." And who stops to count
the cost, when such greatness is at hand? Netting expected
receipts against anticipated expenses, researchers found a
hole of $44 trillion - or nearly half a million dollars for
every family in the nation. But so what, it is only money!
And money is meant to serve the spectacular state... as are
its citizen/soldiers. Heck, in such a country, even God is
a servant of the state. Elite neo-cons do not pray to God
(except to offer an example to the lumpenvoters); they
command Him. Such a country is no longer a nation under
God, explains neo-con intellectual Michael Ledeen, but over
Him:

"Dying for one's country doesn't come naturally," says he,
perhaps cribbing from Osama bin Laden."Modern armies,
raised from the populace, must be inspired, motivated,
indoctrinated. Religion is central to the military
enterprise, for men are more likely to risk their lives is
they believe they will be rewarded forever after for
serving their country."

Communism collapsed in Russia. But it was hardly a victory
for American liberty. No social welfare programs were
cancelled in the U.S. or Western Europe. Instead, they
expanded... and now the nation rushes towards its own
rendezvous with the Spectacular Socialist State... following
in the footsteps of the French!

"The so-called conservative revolution of the past two
decades," writes our favorite member of Congress, Ron Paul
of Texas,"has given us massive growth in government size,
spending and regulation. Deficits are exploding and the
national debt is now rising at greater than half-trillion
dollars per year. Taxes do not go down - even if we vote to
lower them. They can't, as long as spending is increased,
since all spending must be paid for one way or
another... believers in limited government are now shunned
or laughed at... Government is bigger than ever, and future
commitments are overwhelming... The country is broke, but no
one in Washington seems to notice or care."

Oooh... how the world turns. When the sane man looks ahead,
his face turns gray as he sees the spectacular state making
a super spectacle of itself.

Already, an American feels freer, which is to say more
American, in Paris, France than in Paris, Texas. He can
smoke where he wants to. He can drive faster. He can wear a
green sarong and bathroom slippers down main street without
anyone hassling him (though perhaps he can do that in
Paris, Texas, too - we don't know anyone who has tried!)

"And guess what," said our sarong-modeling analyst, Dan
Denning,"when you add in state, local, and federal
taxes... there is really not much difference between overall
tax rates in Europe than in America. In fact, depending on
your circumstances, you can pay less in taxes in Europe."

Not only that, but getting into tax trouble is less
threatening. Most tax cases are handled as civil matters.
It is very rare for a person to go to jail for tax fraud.
In general, only one Frenchman goes to jail for every 10
Americans.

And last week, our calculator revealed another wart on the
derrière of America's spectacular state - one the size of
Rhode Island. Dividing per-capita GDP by the number of
hours worked per person, we discovered that the average
American's hourly productivity is lower than that of his
French counterpart!

Oh, what shame... what humiliation... what embarrassment.

Will we ever be able to hold our heads up again? For now we
discover that the American super-duper consumer economy
fails the critical materialist test - the same one that
proved fatal to the Soviets: it just doesn't deliver the
goods. Americans work night and day - 400 hours more per
year than the average Frenchman - to try to keep up, but
they do not grow rich. Instead, they go into debt. So far,
the dollar standard system casts such an eclipse-like
shadow over all the earth they hardly notice. They spend
and think themselves wealthy. But the world turns. And day
by day, that rosy-fingered dawn creeps towards them...

A man might be pessimistic about all this. Or he might not.
Harder times are coming. But better ones too.

Bill Bonner

P.S."The modern-day, limited-government movement has been
co-opted," says Ron Paul."The conservatives have failed in
their effort to shrink the size of government. There has
not been, nor will there soon be, a conservative revolution
in Washington. Political party control of the federal
government has changed, but the inexorable growth in the
size and scope of government has continued unabated. The
liberal arguments for limited government in personal
affairs and foreign military adventurism were never
seriously considered as part of this revolution.

"Since the change of the political party in charge has not
made a difference, who's really in charge?

"If the particular party in power makes little difference,
whose policy is it that permits expanded government
programs, increased spending, huge deficits, nation
building and the pervasive invasion of our privacy, with
fewer Fourth Amendment protections than ever before?"

Ron Paul's speech before Congress last Wednesday is a must
read...

See:"Neo-conned"
http://www.agora-inc.com/reports/901SIOAB/RonSpeech/