-->Marriages Of Convenience / The Daily Reckoning
Ouzilly, France
Friday, 8 August 2003
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*** Good numbers... is that Recovery Island in the distance?
*** Mergers and acquisitions back. IPOs too. Recovery... or
more bubbles?
*** Indians taking jobs and buying gold... Americans don't
look so stupid... how to buy gold... and more!
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Thursday's numbers inspired hope. Retail sales,
productivity, unemployment - all looked a little better. A
white pigeon flew into Wall Street with a green twig in its
mouth. The Dow rose.
After three years at sea, economists, analysts, and
commentators think they can see Recovery Island on the
horizon. It is merely a speck... barely visible... but it is
all they need.
So far, this voyage into the unknown hasn't been that
disagreeable; it has been more like a trip on the Caribbean
Princess than on the NiĀ¤a, the Pinta, or the Santa Maria.
Passengers continued to enjoy three solid meals a day, and
a rich variety of entertainment by night.
For action lovers, there was the War Against Afghanistan
followed by the sequel, the War Against Iraq. Both big
hits.
And there were the stand-up comics... Alan Greenspan, Paul
O'Neill, John Snow, Ben Bernanke, Abby Cohen, Lou Rukeyser,
and Ed Yardeni.
We laughed and laughed.
And now here's Ed Yardeni with another side-splitter:
"The recent rebound in mergers and acquisition suggest that
business managers are starting to think more proactively
and positively about the future. If business planners are
becoming more optimistic about the future, then the
prospects for both the economy and stock market should
improve."
Ha. Ha. Get it? The punch line is that if businesses are
doing more M&A (rather than actually investing in new plant
and equipment or hiring new workers), the economy should
improve! Ha... ha... ha. We love this guy.
And so reliable! All it takes is for Ed to say something,
and you know the exact opposite has to be true. Of all the
major financial trends of the last few years, we can't
think of a single one he hasn't been wrong about.
And now he's come through again. Mergers and acquisitions
are not a sign of an improving economy... but one that is
juiced up on artificially low interest rates.
Marc Faber explains:
"A typical symptom of excessive speculation is a flurry of
takeovers and mergers, because a quicker profit can be
achieved from such activity than by building up one's own
business through large-scale investments in new
manufacturing facilities."
Yardeni and the other entertainers look out from the bow
and think they see good things. Of course, they always see
good things; and good things always happen after rate cuts,
they say. If not after the first, well, certainly after the
13th.
Here at the Daily Reckoning, we think good things always
happen, too. We look around and we do not see many good
things happening. But that is not what bothers us. What
bothers us is the lack of bad things.
Such is the soft, reflexive tissue of the human heart that
we need a spell of bad things from time to time, in order
to put the good things in the right light. A man who has
never seen an ugly woman cannot really appreciate a pretty
one; he has no point of reference. Nor can a man who has
spent his whole life in America enjoying the pseudo wealth
of the Dollar Standard period ever really understand
prosperity. He needs to live for a while in Nigeria - or
West Virginia - in order to appreciate California.
We make no secret of it, dear reader; we would like to see
some bad things happen - say, the Dow at 3,000... P/Es of
8... the dollar down 50%... the bond market wiped out! Then,
we could look out at the bulge on the horizon with greater
equanimity. After a spell on the tempest-toss'd sea, we
would be ready for Recovery Island, and could enjoy it with
a clear conscience.
As it is, we quote the title of a recent report from Andrew
Smithers and Stephen Wright:
"The Real Bear Market Hasn't Happened Yet."
We have a suspicion that what awaits across the waves is
not low-hanging fruit and bare-breasted maidens, but rocks,
reefs, whirlpools, and sandbars.
Eric?
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Eric Fry in the Big Apple...
- The Dow Jones Industrial Average put in a solid 8 hours
of work yesterday - in only 6 1/2 hours - by gaining 65
points to 9,126. But the Nasdaq slacked off for the for the
fifth straight day, slipping half a point to 1,652.
- The Dow gained its vim and vigor from the various
economic reports yesterday suggesting that the economy is
improving a bit. For starters, the Labor Department
announced that second quarter productivity (whatever that
is) rose a hardy 5.7%. Next up, initial jobless claims
dropped 3,000 to 390,000 in the latest week, marking the
lowest level since Feb. 8.
- Then the Commerce Department chimed in with the news that
sales at U.S. wholesalers rose 1.5% in June, while
inventories were unchanged. Lastly, the Federal Reserve
revealed that consumer debt actually fell last month. It
seems that the newly thrifty U.S. consumers reduced their
total indebtedness by $400 million in June to $1.76
trillion. Monthly declines in consumer credit are such a
rarity that they have occurred only three times in the past
five years.
- Meanwhile, the one notable economic item in the negative
column was the news that mortgage rates continued their
upswing, rising for the seventh straight week. Freddie Mac
said the benchmark 30-year mortgage rate hit a national
average of 6.34% in the week ending Aug. 8, a 52-week high.
- This new mortgage rate is a whopping 123 basis points
above the 5.21% rate prevailing about two months ago. So
these new (much) higher rates aren't going to be any friend
to the economy.
- Half a world away, some more good news for the precious
metals markets."One year after a crippling drought,
plentiful rains are sweeping across India - and delivering
a flood of good news for its economy," the Wall Street
Journal reports."Agriculture still sustains two-thirds of
India's billion-strong population and contributes a quarter
of its GDP, which economists predict will expand by as much
as 6.5% in the fiscal year ending next March."
- How does India's seasonal rainfall relate to gold and
silver? Just this: since a good monsoon means a strong
economy, it also means strong demand for precious metals as
a means of safeguarding household savings against the
ravages of inflation. Demand also tends to climb this time
of year because autumn in India"'tis the season" to buy
holiday gifts and wedding presents. (And what newlywed
couple wouldn't want an extra gold ingot or two to see them
through the dry years?)
-"Marketers are looking forward to the October and
November period immediately after the monsoon," says the
Journal."Packed with traditional holidays, the months are
India's equivalent of the Christmas shopping season in the
U.S. and Europe, a time for gift-giving and major
purchases."
- We Westerners might consider the Indian affinity for gold
to be a quaint anachronism. After all, we financial
sophisticates here in the world's most powerful economy
transact our business using the world's reserve currency.
So what use have we of the barbarous relic? None, is the
answer... unless, of course, the dollar's global reign comes
to an end.
-"Men and women of the world will accept the existing
monetary arrangements for what they are," says James Grant,
editor of Grant's Interest Rate Observer."They will not
waste precious time while the stock market is open trying
to dream up improvements. However, practical people most of
all will take a lively interest in the art of monetary
evolution. They will want to know where the existing system
came from and where it might lead to. We believe we have
the answers. The international gold standard (1870-1914)
begat the gold exchange standard (1922-44), which begat the
Bretton Woods demi-semi gold standard (1944-71), which
begat the dollar standard (1971 to date). The dollar
standard will end in competitive devaluations,
international recriminations and worldwide inflation.
Timing, uncertain."
- Meanwhile, off in another corner of the global monetary
house of cards, the Chinese yuan is busily fortifying
itself, in the process becoming an unwilling challenger to
dollar hegemony. Economic fundamentals suggest that the
yuan ought to be stronger. But China's eight-year policy of
fixing the yuan to the dollar suggests that the giant Asian
nation is happy to keep the yuan right where it is, thank
you.
- The Bush administration is busily goading the Chinese
government to allow its currency to strengthen by widening
its trading band against the dollar. And it seems a
reasonable bet that the Chinese will accede to such gentle
coercion, particularly because the yuan seems, in fact, to
be undervalued. When the yuan does finally break free of
its artificial restraints, it will likely climb
considerably high against the U.S. dollar.
-"I think it's time to buy Chinese yuan CDs," a
stockbroker friend declared to your New York editor
recently."I can't believe I have to resort to this sort of
thing to make a buck for my clients, but I just can't force
myself to dump my clients money into Round II of the tech
bubble... Worst case, the yuan seems highly unlikely to fall
against the dollar. So buying these things seems like a
reasonable speculation to me..."
- We would not argue with the man. But we would point out
one relevant bit of disclosure from Everbank, a company
that offers yuan-denominated accounts:"Because China is
considered an emerging market, investments in its currency
are considered HIGH RISK. For example, if the Chinese
government were to impose severe exchange controls, then
loss of all principal is possible."
- But hey, if you don't mind the risk of losing all your
money, yuan CDs seem like a pretty decent idea.
[For more information about Everbank's renminbi CDs, click
on the following link and read about Everbank's
WorldCurrency Deposit Accounts. Their new Chinese renminbi
account is third from the top:
Everbank WorldCurrency Accounts
http://www.everbank.com/main.asp?af...p;idpage=pro_wc&referID=1555
Or... even easier... you can call 1-800-926-4922 and talk to
Chuck Butler or Frank Trotter at the Everbank trading desk.
If you do, make sure you tell them Addison says
'hello'... our publisher may receive compensation if you
open an account. Cheers, Addison.]
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Bill Bonner, back in Ouzilly...
*** At least, for once, Americans don't look so stupid.
Typically, in the month of August, they stumble through
Europe's most sophisticated city as if they were crossing
the Sahara - in shorts, white running shoes, and baseball
caps - carrying bottles of water, just in case.
But now, Europe is in the midst of the worst heat wave
since 1947. Old people, who can't take the heat, are
checking into graveyards, like tourists into the Holiday
Inn. And now, crossing Paris in the midday heat really is a
little like crossing the Sahara.
"You're supposed to drink 3 liters of water a day," said a
colleague, passing on advice from the television.
"And a bottle of chilled white wine..." he added.
We decided to reverse the prescription and found it worked
quite well. We may have been hot; but we can't remember.
***"They laughed at me," added another colleague from the
worldwide Daily Reckoning headquarters in the Paris
inferno.
"I walked into the store and asked if they had any more
fans... they laughed and said there were no fans left in
Paris."
A major conceit of the New Economy was that neither
businesses nor individuals needed inventories. Whatever you
needed, or so they believed, you could get 'just in time.'
Now, people are discovering that it might have been a good
idea to keep a fan in the attic, 'just in case.'
*** In our inbox, we found a letter from another colleague
today:"My dad has been torturing me for weeks about a
matter that is all your fault.
He wants to buy some gold... GOLD! Not coins, but nice
little bricks of gold. He doesn't want to pay the extra for
the minting....he wants to pay the price you are quoting
each day. He wants to go somewhere in Baltimore preferably
to buy it. If he can't do that, is there a reliable place
that takes mail order?
"I looked in the Baltimore yellow pages and could only find
coins for sale.
"His frustration is that there is never any mention of how
to buy the stuff.
"I am presenting this question as something your DR readers
may have also asked themselves. It is very intimidating for
those not in the know. It's not something advertised in the
SUN or readily available at the local Wal-Mart."
How do you buy gold? The question comes as testament to the
investment itself; so out-of-favor is the yellow metal that
no brokers call at dinnertime urging them to buy it. And if
they choose to buy it without provocation, they are on
their own. Such is the charmed state of the nation that in
major cities, it is easier to score an ounce of illegal
'Acapulco Gold' marijuana than an ounce of the legal
variety.
When we buy gold, we buy the bullion coins. They are easy
to find... and give a reassuring feel when stacked up in a
safe place. We simply call an old friend, Bill Bradford,
also the editor of Liberty magazine, and place an order.
Bill ships the coins through the mail. No muss, no fuss.
But readers looking for other ways to"corral the gold
bull" so to speak, might want to read this helpful article
by John Myers, our man on the resource beat, posted on the
Daily Reckoning website:
How To Buy Gold
http://www.dailyreckoning.com/body_headline.cfm?id=3347
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The Daily Reckoning PRESENTS: Bill Bonner does battle with
his most formidable adversary... his wife.
MARRIAGES OF CONVENIENCE
by Bill Bonner
"The rich rule over the poor and the borrower is slave to
the lender."
- Proverbs 22:7
It began at the dinner table.
"You're not telling me that our economy is going down the
tubes because we no longer make shoes in New England?"
Some couples argue about the family budget. Others are set
off by jealousy or disappointment. But the conversation
last night was sharpened neither on the wheel of love nor
the stone of money... but trade policy.
In the battle of wits at the dinner table last night, your
editor was surprised to find a well-armed woman who sounded
like a disciple of Alan Greenspan.
"Let China make all the shoes and radios and cell phones it
wants. Who wants manufacturing, anyway? It's a low-wage,
low margin business. We're much better off evolving to a
service economy. What's wrong with that?"
"Is it important for an economy to have manufacturing?" the
Fed chairman asked aloud, just last week."There is a big
dispute on this issue. What is important is that economies
create value, and whether value is created by taking raw
materials and fabricating them into something consumers
want, or value is created by various different services
which consumers want, it presumably should not make any
significant difference, so far as standards of living are
concerned, because the income, the capability to purchase
goods is there. If there is no concern about access to
foreign producers of manufactured goods, then I think you
can argue it does not really matter whether or not you
produce them or not."
Somehow, the dispute had entered our dining room like an
addled chef with a blade in his hand.
Marriages have their ups and downs... their rough patches
and smooth highways. When a man who must win every argument
marries a woman who cannot bear to lose a single one, he is
asking for trouble. He gets it, of course. And if he has
God's light upon him, he enjoys every minute of it.
If you have been suffering through the Daily Reckoning for
a while, you may have already guessed our hidden
prejudice... our secret Major Premise... dear reader:
It is simple enough: we don't think people get what they
want or intend... but what they deserve. Usually, they get
it good and hard.
We do not pretend to know God's Own Plan for the
world... but we think a smart man conducts himself as if He
had one. Not for nothing does it say to 'love thy neighbor
(or spouse) as thyself,' even if he or she is wrong on
macro-economic issues. A man loves his wife whether she has
read his Daily Reckonings or not. It is simply a part of
the Way Things Ought To Be.
It would be more convenient for your editor to be married
to a different woman - one with no macro-economic opinions;
he could enjoy his evening meals in peace.
But convenient, calculated marriages have their drawbacks;
when they become inconvenient, they fall apart.
These are the thoughts that lurked in your editor's head as
he listened to his wife elaborate Alan Greenspan's case:
"Economies are always evolving... but not everyone has to
make shoes. Look at the Swiss, they don't have to
manufacture shoes either. But they are still very wealthy.
They offer services, like banking, to the rest of the
world."
Your editor had to win the argument. His children, his
mother and his mother-in-law were looking on; if he could
not put his wife in her place they would lose all respect
for him. Still, even when he coated his words in olive oil,
he could not seem to squeeze into the conversation.
"Trade anger grows," said a headline from Reuters earlier
in the week. And there it was... growing in our own
household:
"And you know something else," Elizabeth continued,"you
are always saying that things are going to hell in a
handcart, but they never do. America has a very dynamic,
innovative economy. It will find a way to make money...
"Besides, you believe in the division of labor... not every
country has to make shoes. Some can provide services.
Americans can perfectly well specialize in high, value-
added services... and movies... music... software..."
If America could produce enough hit songs or software
programs to pay its way in the world, your editor
countered, the nation wouldn't have a trade deficit. What's
more, it's all very well for, say, Singapore or Zurich to
specialize in financial services... but not for a nation of
280 million people.
He also pointed out that even in the service industries,
Americans have no natural monopoly nor ready advantages.
Indians can write software programs as well as Americans.
And cheaper. The same globalization trends that have
'hollowed out' U.S. manufacturing over the last 30 years
might very well do the same to the service industries in
the next 30. We read in today's news, for example, that
health care is so good and so cheap in India that Americans
are beginning to take advantage of it. Apparently, $300
million is already spent each year by Americans on health
care services in India.
"The ranks of American knowledge workers are being
systematically thinned by American corporations anxious to
outsource offshore, or to temporary visa holders, knowledge
work such as information technology and engineering,"
writes Paul Mendelsohn in a letter to Barron's."These jobs
are going the way of the blue-collar work of the past 20
years."
Meanwhile, whatever it is that Americans are using to trade
for foreign goods and services - they are not making enough
of it. About half a trillion is the annual gap... and it's
getting bigger.
"Don't worry about it," says the distaff half of the Bonner
couple,"we'll find something we can sell."
'Don't worry about it,' comes a curious echo from across
the Atlantic. Our very own analyst in London described the
relationship between America and China in symbiotic terms.
It is 'like a marriage,' he said, in which the husband
works and the wife spends. In other words, we Americans
don't even have to worry about having something to trade;
our job is to consume! We are the world's mouth; that is
our role in the world economy. As long as the relationship
works for everyone, he concluded, why should we worry about
it?
Of course, we do not worry about it. We merely make a
prediction: this marriage of convenience will not last, at
least not on the same terms.
It is not as if the U.S. gives nothing in return for
Chinese support. It bestows its favors on its trading
partner at a fixed rate against the yuan... and a floating
rate against gold. Two years ago, each dollar the Chinese
received in exchange for their labors would buy them
1/260th of an ounce of gold. Today, it buys only about
1/360th. All of a sudden, the marriage of convenience has
become 40% less convenient.
America has spread her favors so promiscuously... her
dollars are everywhere. Almost anywhere you look, you will
find a man who has had his hands on them. How much longer
will her lovers stand for it?
We wait to find out.
Bill Bonner
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