-->Fed Bankers At The J-Hole

The Daily Reckoning

Paris, France

Monday, 8 September 2003

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*** Phony statistics, phony recession, phony
recovery... phony boom, phony bust...

*** Stocks down... gold up $4.70...

*** Chocolate-making countries in recession... Asians grow
wary of U.S. dollars... phony productivity... phony wars...
Mogambo on Monday... and more!

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

Aw... the stock market broke its winning streak on Friday,
falling a few points.

Still, the Dow is ahead 14% for the year. The Nasdaq is up
an amazing 40%.

We know what you're thinking...

.. If this is the end of the world... is this is the
reckoning we've been warning about?

.. well, bring it on!

And yet, important things - like corrections, cancer and
war - can take a long time to get started, and can be very
hard to get rid of.

Often, they seem to begin as in a cartoon... when a
character runs off a cliff edge. For a moment, he hangs in
the air unaware. Then, he realizes that he has lost his
footing and his expression changes.

After Hitler and Stalin invaded Poland, the whole world
held its breath. France and England declared war. They were
bound by treaty to come to Poland's aid. But there was
little they could do, except check to see if their guns
worked.

At sea, U-boats took a toll on merchant vessels headed for
Britain. On October 14, 1939, Gunther Prien took his
submarine into a British naval port and sank the HMS Royal
Oak. Then, in December, the Royal Navy caught up with the
Admiral Graf Spee in Montevideo. The German captain
scuttled the ship and killed himself.

But on land, there was little action. For a while, it
looked like the whole war might just blow over. While
diplomats on both sides tried to find a peaceful solution,
the French believed their Maginot Line would protect them,
even though a French officer had shown, the year before,
that the Germans could go around it and attack through
Belgium.

Finally, the 'Phony War' ended on May 10, 1940, when the
Germans attacked France and the Low Countries. The real war
had begun.

We cannot say when the real correction will come. It seemed
to begin three years ago, when the bubble on Wall Street
blew up. But since then, a phony recession has come and
gone... followed by a phony recovery. Last week's news
brought word that unemployment rose again in August;
payrolls shrank by 93,000 workers. This leaves unemployment
at 6.1%. But it would be 7.8% if 'workforce participation'
had remained constant. Instead, many people have given up
on finding good jobs and have gone back to school, or
something else.

Just as there is something phony about the recession and
the recovery... there is also something mountebankish about
the whole boom that led up to it. As we remind readers, ad
nauseum, the boom was marked not by hard work, saving and
investment... but by hard work, no savings and little real
investment in U.S.-based industry. The Dollar Standard
system undermined the need for savings and shifted
production overseas. At home, Americans worked longer and
longer hours, for less and less real reward. In fact, the
UN reported last week that the average American actually
earns less per hour than the average Frenchman... $32 v.
$35. And after you take out taxes, health care and
education, the American might have less real, disposable
income than his typical European counterpart.

And now, along come Elizabeth Warren and Amelia Warren
Tyagi with a book entitled"The Two-Income Trap," in which
they explain what we guessed: that the wealth Americans
think they have gained in the last 30 years is largely a
fraud. Especially at the lower end of the wage scale, men's
earnings went down over the past 30 years. More and more
women entered the workforce - partly in order to keep up
family incomes. But the two-income household had more
expenses, too - including childcare, transportation, and so
forth. These additional expenses - combined with sharply
increasing costs of health care, housing and education -
have meant that the typical American family now has less
'discretionary income' today than it did in 1970.

So far, Americans are still running off cliffs -
refinancing houses, running up more and more debt, buying
stocks, bonds and real estate at outrageous prices. They
seem unaware that the ground has disappeared beneath them.

But here's Eric with today's news:

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

Monsieur Eric Fry in the financial capital of the New
World...

- Continuing a months-long trend, the economy keeps
shedding jobs as rapidly as the Dow Jones Industrial
Average adds points. Friday, the Labor Department reported
that payrolls cast off another 93,000 workers in
August... but the stock market barely blinked. The Dow added
88 points on the week to 9,503, while the Nasdaq jumped
2.6% to 1,858. The tech-heavy index is now up nearly 39%
year to date... and climbing.

-"Can you have a recovery without jobs?" Barron's Alan
Abelson wonders."It's kind of like having chocolate cake
without chocolate... All told, during the past seven months
an awesome 600,000 jobs have been lost, while something
like three million vanished in the past couple of
years... Forget the palaver about jobs being a 'lagging
indicator.' As a matter of fact, they're a very good
indicator of the real vibrancy of a recovery. And the
widening hole in jobs during the current improvement is a
disturbing anomaly."

- Perhaps the dismal jobs trend is no anomaly at all.
Perhaps the reported and anticipated GDP growth is the
actual anomaly. In other words, the economy may be able to
slap together a 'strongish' GDP report in the fourth
quarter, but that doesn't mean that the growth will be
sustainable.

- To be sure, some kind of recovery is underway. But its
strength and durability are suspect. Unfortunately, the
U.S. economy continues to labor under innumerable macro-
economic stresses, rising unemployment being but one of
them. Surging federal, state and municipal indebtedness is
another. Soaring pensions liabilities is a third. Stresses
like these do not vanish overnight... as much as Wall Street
would like to believe that they can... and will.

- But the Federal Reserve promises to combat these and all
other sorts of financial stresses by printing money. The
printing press is the weapon of choice in the Fed's
monetary arsenal (even though the Treasury Department is
actually responsible for running the presses.)
Unfortunately, the printing press is a WMD (weapon of mass
destruction) in the bond market. Bonds have been tumbling
ever since Fed governor Ben Bernanke promised to drop
dollar bills from helicopters.

- Let's take a quick look at the historical record. Bonds
have been out-performing gold for more than two decades.
But the bond/gold ration has been plummeting since June,
and recently broke below its two-decade trend line. Ned
Davis calls this development 'profoundly important.'

- We agree, and we would take this development at face
value... i.e. inflation is a looming threat.

- It's interesting to note that since the bond market
peaked on June 13th, the HUI Index of gold shares has
jumped a whopping 31%, versus a modest 4% rise in the S&P
500 itself. And the price of an ounce of the metal has
vaulted above $370. Somebody seems to want this stuff.
Despite a rising stock market and strengthening dollar, the
puckish gold price keeps hangin' in there.

- So where is the stock market going to be six months from
now?" someone recently asked your New York editor.
"I don't know," came the answer."I never know. But it's
tough to make a dollar in the stock market by guessing
about where it ought to go. Isn't investing always the
same? You try to buy the stuff that's gonna go up, and try
to sell the stuff that's gonna go down." The questioner
laughed... for some reason.

-"In other words, investing is about probabilities," your
editor continued."So I don't know where the stock market
is going in six months, I just know that owning stocks
selling for 35 times earnings is a difficult way to make
money. In the same way, back in May and June I observed
repeatedly that the bond market seemed like a high-risk
investment. Buying 10-year bonds yielding less than 4% from
a government running half-a-trillion dollar annual deficits
and soaking up more than three-quarters of the world's net
savings to fund its deficits seemed like a bad idea. It
still does."

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

Bill Bonner, back in the wine and cheese capital of the Old
World...

***"Asian Debt Withdrawal Threat to U.S. Deficit," says a
headline in the Financial Times. Apparently, it is
happening. The FT says it has detected a 'noticeable shift'
away from U.S. debt in Asia.

*** The FT also tells us that it expects all the Eurozone
is in recession. The 'chocolate-making countries,' as the
neo-cons call them, must be making less chocolate.

*** And here's an interesting note. The U.S. government
reports that pension shortfalls at U.S. companies have
risen to $80 billion. Claims made against the government's
Pension Benefit Guarantee Corporation in 2002 exceeded all
previous claims added together.

*** And Ben Bernanke is back in the news. The Fed governor
praised 'productivity-led growth,' whatever that is. The
productivity to which Bernanke, and Greenspan, refer is
mostly based on figures from the service sector. Figures
don't lie, but they have been known to stretch the truth to
such a degree that even its own mother wouldn't recognize
it. The service sector is largely composed of middle-level
managers.

How do you know if they're productive or not?

Stephen Roach notes, for example, that the numbers show
workers in the financial industry putting in an average of
35.4 hours per week. We, who work in the financial
information industry, don't know anyone who works that
little. And if we found someone in our own business putting
in those kind of hours, we would fire him. Roach recalls
that 35.6 hours was the tally 10 years ago, before the
Internet changed all our lives. Now that we're all
connected, all the time, it is almost impossible to find
anyone in the financial industry who works that little, he
says.

Implication: the productivity miracle is as phony as the
rest of the economy.

***"Bush wants $87 billion for wars," reads a headline on
CNN.com. Echoing a sentiment we remember feeling just after
9/11, the president spoke on behalf 260 million Americans
and told the world that there's"no going back."

"For 90 years we have lived with a central bank," the
honorable Ron Paul told Congress on Friday, scratching
gently on a favorite itch of ours,"with the last 32 years
absent of any restraint on money creation. The longer the
process lasts, the faster the printing presses have to run
in an effort to maintain stability. They are currently
running at record rate. It was predictable and is
understandable that our national debt is now expanding at a
record rate.

"The panicky effort of the Fed to stimulate economic growth
does produce what it considers favorable economic
reports..." Paul goes on. Then, pointing his finger
squarely at the neo-cons:"But in the footnotes, we find
that military spending - almost all of which is overseas -
was up an astounding 46%. This, of course, represents
deficit spending financed by the Federal Reserve's printing
press. In the same quarter, after-tax corporate profits
fell 3.4%. This is hardly a reassuring report on the health
of our economy and merely reflects the bankruptcy of
current economic policy."

Few people in Washington seemed remotely alarmed at the
growth of the federal government anymore. Ron Paul is... you
can read his September 5th address before congress on the
Daily Reckoning website. I recommend it:

Paper Money and Tyranny
http://www.dailyreckoning.com/body_headline.cfm?id=3416

*** A confused reader wrote to accuse us of being
'socialists.' Many pejoratives could be used to describe
your Daily Reckoning team, but few as inappropriate as
'socialists.' The socialist instinct is as remote from us
as generosity from a tax collector or dignity from a pop
star.

We are unable to get together on much of anything; we
cannot plan a rendez-vous without losing half the
group... and when we pick up our guitars and perform,
listeners complain that we all seem to be singing different
tunes.
---------------------

The Daily Reckoning PRESENTS: Fear and loathing on the Fed
trail... The Daily Reckoning's answer to Hunter S. Thompson
reports back on the recently held, Fed-sponsored meetings
in Jackson Hole, Wyoming.


FED BANKERS AT THE J-HOLE
The Mogambo Guru

Greenspan and Bernanke and all the other central bank
people and their fellow-traveler economist yahoo buddies
went to an annual meeting in Jackson Hole, Wyoming, which I
assume is where they go to be by themselves, all secret and
conspiratorial, so that they can talk, listen, and confer
with one another so as to glean ideas as to how in the hell
they can possibly come up with plausible excuses as to why
their ridiculous economic ministrations have gone so
horribly, horribly wrong.

It reminds me of the Little Rascals, with Spanky and
Alfalfa and Buckwheat, who had their"He-Man Women Haters
Club." The big difference is that Spanky and Alfalfa had to
organize plays and skits and sell goods and services to
fund their little club's activities, and they didn't have
the advantage of being able to dip into the till where they
worked, and just take a few hundreds of thousands of
dollars so that these clueless wastrel weasels could
provide themselves with a little up-scale R&R at an
exclusive ski resort.

How nice for them.

Or maybe they just want to get away and drink some beer and
have some fun, and laugh at us fellow Americans for
swallowing the ridiculous crap they say. A typical
conversation at Jackson Hole must go like this:"Well, the
people have not rebelled so far. So our original hypothesis
was correct: 'If you studiously do not teach economics in
any school, and then speak in confusing mumbo-jumbo, then
it IS possible to fool all the people all the time! This is
sooOOOoooo cool!'"

But no matter why they are there, the last thing they want
is to have outraged weirdoes, like me for instance, trying
to crash the meeting and making noise and trying to get our
pictures on TV by standing in the background of newscasters
covering the event, waving our arms and carrying on like
the pathetic weenies we are.

But, in an insightful moment that recalls 'the dog that
didn't bark' and the best of Sherlock Holmes, notice to
whom they did NOT send an invitation! Me! I even promised
that if they let me make a simple, dignified statement
concerning my objections to the current paradigm being
pursued by the Greenspan Fed, I would even take a bath and
wear shoes and everything. But, alas, no.

Then I sweetened the deal by promising that I would
peacefully turn around and go quietly home, if they let me
make a short, reasoned and polite statement. Still, no
dice. Then I offered to remain in the confines of my hotel
room in Jackson Hole, and not even go to the damn
convention hall where they we meeting. This still wasn't
good enough for them.

Then I started playing my trump cards, one by one. At the
end of what seemed like an interminable series of
negotiations, I still do not get an invitation, I still
have to stay home, and I promised to look and act normal
for 26.67 days.

In return, I get to say whatever I like in my economic
commentary, as the ever-humble Mogambo Guru, and they will
not use it against me the next time they try and put me
away for diminished mental capacity, or that other thing,
but let's not get into that right now. But they were quite
insistent that they be allowed to put in writing that they
were in no way endorsing or stipulating that what I write,
or ever wrote, could possibly be considered 'commentary,'
as it seems more like the irrational, incoherent ramblings
of a brain-damaged, drunken, drug-addicted lunatic that
seems to have never grown up for some reason probably too
yucky to contemplate. But they also agreed not to send any
agents over here to have one of their 'talks' with me,"if
you get our drift," they said, and boy, oh boy, I knew
EXACTLY what they meant.

It's all just as well, because I was lying when I said I
would behave myself, as they did not say that all those
days of acting and looking normal had to be consecutive
days! The loophole! Hahaha! Chumps! Anyway, my plan the
whole time was to sneak in.

I planned to dress in a banker's business suit, see, with a
nice conservative tie, and a nice haircut. And I have been
receiving intensive tutoring to hone my arrogant,
condescending attitude, and have new contact lenses that
make my eyes appear dull and lifeless, as anybody who
actually believes in econometric modeling is obviously
brain-dead. So I figured that looking and acting like a
real central banker would make it a cinch to actually get
to the front door.

So Plan A was to, first, hire a limo and ride to the
conference. It pulls up. Then I get out, and swagger to the
front door. Anybody who saw my sneer of contempt and my
"get out of my way, you worthless peasant trash" attitude
wouldn't dare to stand in my way as I merely walked to the
entrance like I belonged there.

Then, when the security crew guarding the door asked me for
my invitation, this was going to be my Big Mogambo Moment!
"My invitation?" I would say in a loud, rising voice that
conveyed surprise and anger at even being challenged by
such a low-life."You want to see my (pause for effect)
invitation, you little proletariat pip-squeak?" my voice
rising to Wagnerian power and volume.

Then, as the TV cameras and various passerby look up in
rapt fascination at the noisy tableaux, I would half-turn
to the crowd, grasp my groin like Michael Jackson, and yell
out,"Hey! I got your invitation right here, pal!"

Then I'd dash through the door before they had a chance to
recover from that surprising and shocking development, and
run up and down the halls laughing hysterically and yelling
obscenities, and screaming that they were all a bunch of
idiot-savants who comprehended mathematical models, big
deal, but were totally clueless about economics, and that
is why our economy bites the big one, and other obscenity-
laden things about how we are all doomed, and how the end
of the world is here, and how fractional-reserve banking
and a fiat currency are the kiss of death and blah blah
blah.

You know. The same stuff I have been screeching about for
years.

Of course, this is just the clean part of the plan that me
and my hoodlum friends came up with, and to tell you the
truth, most of the time we spent discussing Jackson Hole
activities amounted to ruminations on a wide assortment of
things you'd rather not hear about. But anyway, we cannot
resist snickering and poking at each other and laughing
about"The A-holes being in the J-Hole," which we think is
hilarious.

Down at the far end of the playground we pretend that we
are at this Jackson Hole powwow, and we have a little
pantomime where Beaver, played by Jerry Mathers, is Alan
Greenspan."Hey, Alan, old buddy! Long time, no see! How ya
doing, dude?" and then while we are shaking hands with him,
we are sticking a sign on his back that says"Kick me
hard." So we're all laughing and snickering and poking at
each other and then, of course, Miss Landers comes over and
wants to know what we are laughing about, and Lumpy and
Eddie Haskel and I keep trying not to laugh and are looking
at Beaver, and so she figures that Eddie is up to something
and hauls him off to the Principal's office.

But the best part is that this playground experiment proves
that popular demand can alter monetary policy, because
before the day was over everybody was laughing and kicking
poor Beaver, who is, as I already noted, played by Jerry
Mathers in case you forgot, and he finally broke down in
tears and he promised to alter monetary policy! And the
kicking had him promising to give us his lunch money for a
week, so you can see how this thing could really work out
swell.

I am not sure if my constant, irritating harping at the
incompetence of Alan Greenspan is the literary equivalent
of putting a"Kick me hard" sign on his back, but he did
come out and intimate that he will no longer follow the
failure-prone dictates of his ridiculous econometric
models. Of course, it was only a matter of time before he
had to eschew those econometric models, seeing as how they
are never right, and as proof all you have to do is look
around you at the USA and the world, and sooner or later
people were going to talk. No, he says that from now on he
will be using his personal judgment. I am still pondering
whether this is an improvement or not, although I quickly
realize that things can hardly get any worse.

But that is not how others would play it. For example, the
Economist magazine is certainly a class act, and I am
obviously not a class act. And that is why their magazine
is sold at real newsstands, and I have to resort to
sneaking out late at night and sticking my worthless rag
under the windshield wipers of cars parked in various
supermarket parking lots. But we both come to the same
conclusion, namely that the Fed has no idea what it is
doing. For example, in the August 23 issue of the Economist
magazine, there is a sidebar entitled"Jackson Poll" where
the reporter recounts how he asked previous grande
attendees of this Jackson Hole thing whether or not we were
in a recession (they all said no, but we were), whether or
not we would go into a recession (they all said no, but we
did) and at the top of the stock market bubble whether or
not the stock market was a bubble (and they all said no,
and it was).

Me and Wally and Lumpy and Eddie are all laughing our
little butts off at this proof of their supreme
incompetence, and we are all yelling"A-holes at the J-
Hole! A-holes at the J-hole! Hahahaha!" But the Economist
magazine, demonstrating their British penchant for
understatement, shows their superior yet subtle manner and
merely says,"Given this remarkable record, it would be
remiss not to poll our elite group once again this year -
and then bet on the exact opposite."

And then they note that all these hotshots, which I again
note for the record are spending untold hundreds of
thousands of dollars of other people's money to loll around
having a wonderful time, and this is the part that I find
so hard to believe, are still writing papers about
Ricardian Equivalence! I figure that this is another subtle
Economist magazine jab at the conferees. Ricardian
Equivalence is the preposterous idea that deficits do not
matter, and that the only thing that really matters is
production and consumption. The way they figure it works is
like this; if people started saving instead of spending
money, then the government could take up the spending
slack, and issue debt to get the money to spend, since the
core idea is that only consumption and production matter.
Either you spend, or the government spends.

Now, when it comes time to repay the debts, according to
the theory, the people will have saved up the money,
because the people see this repayment thing coming, and so
they save up their money to pay the damn anticipated taxes!

Therefore, there is a Ricardian Equivalence; in either
event, spending is done and taxes are raised!

The bottom line is that you are, and when I say"you," I
mean"us," and that includes you, but it also includes me,
which is the opposite of what is implied when I say"you,"
but I just say"you" because I want you to feel a part of
this whole thing and be a participant instead of sitting
there like a bump on a log, but you ARE, watch my lips, you
ARE going to have your taxes raised! This is the whole
freaking point. It is implicit in the definition. It's just
a matter of when!

And this is all supposed to be all okay - because, and this
is the whole freaking premise of this stupid Ricardian
Equivalence thing - they say that deficits do not matter,
and, by extension, future taxes do not matter either! They
think that people love to pay taxes! They think that
raising taxes has no effect on anything! They think that
only production and consumption matter!

This, THIS, is the kind of silly crap that they argue at
Jackson Hole! And now you get a better idea why me and my
hoodlum friends are calling them the"A-holes at the J-
hole!"

And we, meaning you AND me, since I am not going to go
through that definition of"you" again, are the guys who
they have graciously nominated to pay this higher debt one
day through the simple expedient of us sitting here like
little lumps while they levy higher taxes on us! All this
while studiously ignoring the fact that the world's
economies are erupting in flames, thanks to their own
egregious incompetence! Now you have a better idea why I
want to run off screaming"A-holes at the J-Hole!"

I would normally use this as a springboard to say very
nasty things about the Fed people and the economists who
attend the J-Hole conference, with lots of screeching and
drops of spittle flying through the air. But I want to get
back to Alan Greenspan and the Fed and the J-Hole thing,
and I am not sure how we got off the point or where we
went, but I remember that there was spittle flying, so I am
not in any hurry to go back and see what happened. But
continuing on like nothing happened, I want to demonstrate
the severe panic of Alan Greenspan and the Fed, and I can
do that by noting that Bloomberg reports that Greenspan got
up in front of his buddies and said,"The U.S. economy is
too complex to reduce monetary policy to a rule-based
model. Instead, central bankers benefit from a 'risk
management' approach to setting interest rates that allows
officials to use their own judgment in assessing the
effects of policy options."

So there you have it in a nutshell. There are no criteria
that you can use to criticize the Fed's actions, and we
have to rely on Greenspan's personal judgment. Prices
rising so high that you cannot afford to buy food? Don't
worry! Greenspan is going to use his personal judgment to
decide whether or not price inflation is good or bad for
you.

The Bloomberg report goes on to say, in their way of
shining a little illuminating light on the significance of
this:"Inflation targeting, where a central bank names a
numerical goal for inflation and tries to achieve it over a
specified period of time, is used by the Bank of England,
the European Central Bank, the Bank of New Zealand, the
Bank of Mexico, and at least a half-dozen other central
banks around the world."

In short, everybody else worries about the effects of
inflation on the citizens of their countries, as they
should, since the whole purpose of the central banks is to
insure that financial calamities don't befall the citizens,
as regards calamities like inflation. All except, I am
profoundly sorry to say, the USA. We have the horrible Alan
Greenspan, who is now officially on record as saying that
the devastating effects of inflationary prices are of no
interest to him whatsoever. You, and by this time you know
who I am talking about, are worthless peasant trash, and he
is willing to sacrifice you, and me, and everything we love
so that he can exercise awesome discretionary power in an
irresponsible manner.

But beyond the foreign central banks that don't agree with
this line of reasoning, Greenspan is also in thin domestic
company in this regard. As Bloomberg notes,"Some Fed
policy makers, including Philadelphia Fed Bank President
Anthony Santomero and St. Louis Fed Bank President William
Poole, have advocated that the U.S. central bank adopt an
inflation target as well. Fed Governor Ben Bernanke also is
an advocate of announcing inflation goals."

This is Greenspan, the worst central banker in the history
of the Fed, in the throes of absolute panic."Everybody is
wrong except me, and everybody's ideas about monetary
policy are wrong except mine. Rules? I don't need no
steenking rules!"


Regards,

The Mogambo Guru,
for The Daily Reckoning

Mogambo sez: It's September, traditionally a very, very
dangerous month for stocks. And with stocks being so
preposterously overvalued as they are, let me change my
assessment to read: It's September, traditionally a very,
very, VERY dangerous month for stocks.