-->Decline Of The Old Order

The Daily Reckoning

Paris, France

Wednesday, 22 October 2003

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*** Our work grows easier -- there a fewer silly ideas to make
fun of...

*** People giving money away... is it wrong to take it?

*** Nobel Prize winner says no recovery. It's Greenspan's fault,
says Stiglitz. Royal battles... and more!

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It is almost like a vacation here at the Daily Reckoning
headquarters. We still come to office early in the morning and
leave late at time... but our work has grown easier.

Our labor consists of ridiculing the conceits and foolish ideas
in the investment media. Though stocks are selling near all-time
highs, pundits, economists and analysts have ceased trying to
explain it with comic hypotheses. Gone are the absurdities of
the late '90s... that the Dow will go to 36,000....that the
Information Age will make us all rich....that Greenspan won't
permit a bear market or a recession. All that is left is the
illusion of productivity and growth....and the bedrock belief
that God shines his light upon stocks, the dollar, and the
American system of consumer capitalism.

Why a dollar's worth of earnings in America should be worth more
than a dollar's worth in other countries is never explained. And
why should a dollar's worth of earnings be worth more today than
it was in 1990....1980 or 1970 or 1960? No one even tries to
offer an explanation. That's just the way it is. Period.

Not that we know anything different, but we have observed that
when people come to believe they bask in God's special light,
they begin to do odd things. They give away their money, for
example. We recall that religious zealots gave away their farms
and houses in the early 19th century, during what was called 'the
Great Awakening.'. Moved by a prophesy, they gathered on
hilltops and roofs, expecting to be taken up to heaven all at
once.

In today's world's, people are no less credulous. The prophets
of CNBC have told them that a 'recovery' is here....and that
'stocks always go up in the long run.' And so they give their
money away, trusting that they will soon be sunning themselves in
paradise, or Florida.

Back in the late '90s, investors gave their money away to dot.com
hustlers. Today, they give it away to tech companies trading at
40 times earnings... if they have earnings at all.

"Tech companies never have free cash flow, never make any money
and have competitors all over the place," explained Seth Klarman
in Grant's Interest Rate Observer."So, I think they'll be some
carnage there..."

Foreign central banks are giving away money too -- by buying
Bush-era U.S. treasury bonds at Eisenhower-era rates. With the
U.S. budget deficit rising to 5% of GDP....and the current
account deficit approaching 6%,, who can doubt that buying
T-bonds (by foreigners, especially) is a form self-sacrifice?

"A situation like this which has emerged over the past few years
implies an increasing financial vulnerability of the United
States," explains Antony P. Mueller."If the busying spree by
foreign central banks should stop or even reverse, the impact
would affect the dollar exchange rate, the treasury market and
the domestic price level with the consequences of a sinking
dollar, a sharp rise of domestic interest rates and an increased
inflation rate. It is highly unlikely that the American economy
would prove resilient enough to withstand such a triple blow."
See Antony's article on the Daily Reckoning website:

The End Of Dollar Supremacy?
http://www.dailyreckoning.com/body_headline.cfm?id=3497

Who else is giving away money? Sellers of gold? Buyers of the
dollar?

But what of us? Is it wrong for us to take advantage of these
poor pilgrims? Is it immoral for us to take these naifs'
money....by selling them tech shares or Treasury bonds?

Au contraire, we feel we must be doing God's own work. Bearing no
false witness and holding no gun to their heads, we help separate
fools from their money. Besides, only God knows who is the
fool... and only in time will He tell.

Over to you, Addison, for more news:

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Addison Wiggin, ridiculing the pundits from about 6 feet away...


- Nothing but good news from the great River-Of-No-Returns,
Amazon.com last night. After the close of the stock market in New
York, Amazon reported a 'small' profit for the third quarter. We
quaffed the announcement with satisfaction, noting that the third
was the same quarter our book Financial Reckoning Day debuted at
Bezo's store, and surely it's brisk sales help to tip the scales
from 'minuscule' to 'small' small. (As always, we're eager to
help... )

- It's a shame, though, we had grown used to calling it the
River-Of-No-Returns. Looks like we may have to knock it off, eh?
Wait... what's this? Maybe we won't.

- Even with annual sales in the vicinity of $4 billion this year,
Scott Rothbort from Lake View Asset Management, by way of
USAToday, says Amazon is not likely to"post a full year's worth
of profit anytime soon." Yesterday, we Dailyreckoneers, were in
awe to discover, having bothered to take a look, that Amazon's
shares had skyrocketed from a $6 low to a 52-week high of nearly
$60 - a 900% gain. Yet, to the casual onlooker the still have no
clear plan for profits.

-"Amazon is wildly overvalued," says Rothbort. You don't say...
"River-Of-No-Returns" it is! Amazon's share price fell 2% on the
news.

- Marketwide, the rally kept on a steamin' forward... even if
supplies of coal appear to be running low. The Nasdaq and the S&P
both posted gains of 15 and 2 points, respectively. The Dow being
the only exception. The grand old iron horse of Wall Street
slowed... and eventually through the throttle in reverse for a
30 point loss to 9747.

-"Congratulations on the brisk sales of the book," writes a
reader."Unfortunately, if it climbs any higher in the charts, my
contrarian discipline will require me to discount everything it
says." We note with satisfaction that sales have been rather
steady, both on Amazon (you're welcome, Jeffrey) and at bn.com.
We're told there is a table top display at a Borders in Lower
Manhattan... in fact, the book is now widely available at
Borders and brick and mortar bookstores across the country.

- Another reader, who identifies himself as a private futures and
stocks trader, calls attention to a fact that has made us
somewhat un-easy about the book ourselves."I have read 421 books
in the last 11 years," he writes"And since 1996, I have read 59
books about economics and investing, a couple written back in the
mid and late-1800s.

-"Of all those books, I just completed what I view as the most
important book I have ever read about economics, investing and
the most likely future of the US and world economies. Important
in the sense, and on a personal level, that it will likely make a
big difference in my own family's financial survival and future
progress.

-"If I could change one thing about the book," [ahhh, we knew
there would be a catch]"it would be the title. [Financial
Reckoning Day] sounds as if it is an emotional effort to
sensationalize the U.S. and world economic problems of the last 3
years. It is nothing of the kind.

-"It is a serious, thorough and thoughtful history and analysis
of economic, political and military history and most importantly,
human behavior since the French Revolution. It dissects and
analyzes the Japanese economy since 1980, enlightens and
clarifies the actions of Alan Greenspan since 1987 and specifies
in detail the coming 'deleveraging of America.' It is well
written, and even humorous at times. More importantly, Bonner and
Wiggin's effort will, in my opinion, be proved all too accurate."

- One of the major themes, of course, is the deleveraging of
America, our trader friend refers to above. We recall, a few
weeks back, attending a luncheon in London offered by the folks
at Arbor Research, with their hotshot analyst Jim Bianco. Our
friend and colleague, Dan Denning put the question to Jim:"What
would happen if the credit quality of US government debt were to
be downgraded?" citing as possible causes, the Treasury's
exposure to derivatives risk at the behest of Fannie Mae and
Freddie Mac.

-"It would never happen," came Bianco's reply,"That would mean
the end of the modern financial system." The answer was, of
course, both matter-of-fact and shocking all at once. While,
Bianco didn't see the possibility, Denning got to work figuring
out how he could judge the quality of US debt versus that of the
banana republic kind.

- Using a calculation he calls the BED Spread, Denning notes that
the Morgan Stanley Government Income Trust - a trust containing a
basket of US government debt, such as Treasuries and Fannie and
Freddie bonds - has converged with a similar basket of emerging
market debt, each of the last three times he's made the
calculation. In short, the yield on debt issued by Uncle Sam is
rising, meaning the market believes it's becoming more risky,
while yields on emerging market debt are falling... or becoming
less risky. (More from Denning and the Bed Spread... in
tomorrow's guest essay. Look for it... )

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Bill Bonner back in Paris, fresh off the Eurostar from London...


*** We quote from London's MoneyWeek, edited by our new friend
Merryn Somerset Webb:

"There will be no robust recovery, [according to Nobel-prize
winning economist Joseph Stiglitz], and much of the fault lies
with Alan Greenspan, the chairman of the Federal Reserve...."

"'More jobs have been lost under Bush than since Herbert Hoover
and the Great Depression,' Stiglitz told The Observer. 'In the
private sector more money has been wasted though misallocation of
capital in the stockmarket bubble than the government could ever
manage.' Neither the recent tax cut, nor the increase in military
spending, will give the US economy the stimulus it needs.

"The trade deficit has the underlying problem of what will happen
when foreigners decide to stop funding the US deficit..."

Then, what will Mr. Greenspan do? More rate cuts? More
liquidity? More talk of productivity increases and New Eras?

No, it will be time for Mr. Greenspan to express his regrets,
blame the Chinese and retire....

*** 'Royals at War!' screams a London tabloid headline this
morning. The battle rages, according to press reports, over the
latest revelations brought to us from a former butler to Princess
Diana. This war has been going on for a long time, we note. But
the British never seem to get tired of it. In the latest news,
letters from Prince Philip tell us that he thought his son was
mad. Only a 'crazy man,' he wrote to Diana, 'would leave you for
Camilla.'

*** Here's a sad item."Man who survived Iraq is gunned down in
LA" says a TIMES headline."With an annual murder rate of about
653 -- up 11.1% on 2001 -- the sprawling slums of Los Angeles are
arguably as dangerous a place to live for young Americans as
Baghdad. The murder rate is 4 times the national average and
double that of Bogota, the Colombian capital."

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The Daily Reckoning PRESENTS: Our favorite British historian puts
today's macro-political and economic puzzle in historical
perspective.


DECLINE OF THE OLD ORDER
by William Rees-Mogg

Early in the 20th century there was much fashionable concern in
Europe about the decline of the West. Many observers thought that
the European lead in 19th century manufacturing would prove to
have been a temporary advantage, that Europe was suffering from
long-term social decadence, and that Asia would become the
dominant continent by sheer weight of numbers.

This fear was particularly widespread in Germany, where it not
only related to the massive populations of India and China, but
also to Russia, the Asian country that already had a European
presence. Some at least of the Kaiser's advisors at the start of
the First World War thought that they were fighting a pre-emptive
campaign. If they did not destroy Russia while they could, Russia
would simply become too strong for them.

Most Europeans also took a racist view of the Asian populations
and, as with all racism, there was fear mixed in with the feeling
of racial superiority. In 1914, everybody feared populations to
the east of them. The Russians feared the"Mongol Hordes" and the
Japanese, who had defeated Russia in the War of 1905, the first
war in which an Asian power proved to have technological
superiority over a European country. It has to be admitted that
the Russian navy in 1905 was astonishingly incompetent, shooting
up some British trawlers in the Dogger Bank incident before
traveling around the world to be sunk by the Japanese at Port
Arthur.

The Germans and the Austro-Hungarian Empire feared the Slav
populations of Russia and the Balkans. That fear led the
Austrians to want to take the excuse to crush Serbia in 1914. The
French and British feared the Germans. Only the Americans were
too far away across the Atlantic to fear anybody in particular.

We all know that Asia did not come to dominate the world of the
20th century. There was a decline of the West, in that Europe
started two World Wars and was a major victim of both of them.
But the rising power turned out not to be Asia but the United
States, which became the leading world power during the Second
World War, replacing the British Empire, and the leading
technological power even earlier, from the rise of the twin
giants, electricity and the automobile.

To the historian of 500 years' time, there may well seem to have
been a nearly continuous period of English speaking world
leadership, which will probably be dated from the Seven Years'
War, when France lost Canada and India and failed to crush the
rising power of Russia under Frederick the Great. The British
period lasted from 1759 to 1914 -- despite the separation from
the American colonies after 1776. The baton was passed between
1914 and 1945, and the United States has carried the baton since
1945. The combined period of English speaking hegemony has been
about 250 years, and all forecasts of the decline of American
power have thus far proved premature.

In the first half of the 20th century, Asia notably failed to
take advantage of the decline of Europe, though between 1900 and
1945 Europe manifestly did decline. Between 1945 and the present
day, Europe has recovered to a certain degree, but there is
absolutely no sign of Europe regaining the relative position of
1900. The European Union is a big economy but has high costs,
middle-rank technology -- most of Europe's exports are of
products invented before 1900 -- and very limited defense
capacity. Yet Asia, like Europe, has so far been developing under
the ultimate security of the U.S. defense umbrella.

Russia proved that the communist model, though quite efficient at
the task of fighting the Second World War, was not sufficiently
variable or competitive to be economically viable in peacetime.
China made the same mistake. The Japanese invasion cost China one
generation of development, and the victory of Chairman Mao and
the Communist Revolution cost another. China is still 50 years
behind where she should have been if development had not been
interrupted.

Japan's great mistake was Pearl Harbor, and it set back Japanese
development, which was well ahead of the Chinese before 1900, by
a generation. For these reasons the major Asian powers, as well
as India, which had adopted a relatively benign form of British
Social Democracy, failed to take advantage of the opportunity
that was presented by Europe's acts of powerful
self-destruction.

However, both demography and arithmetic are on Asia's side, as
they always were. The combined population of China, India, Russia
and Japan, the big four of Asian powers, amount to about 2.6
billion people, close to half the world's population. The
combined population of the European Union and the United States,
even if Canada and Mexico are added in, comes to less than a
billion. The North Atlantic powers have a population that is not
more than a third of the Asian four. The European population is
relatively elderly, and birth rates in Europe are extremely low.
These are factors of decline. For the next 30 years at least, the
major Asian countries will have much lower costs than the North
Atlantic group, though at some still-distant point, they will
catch up, as Japan has already done.

The educational standards of the brightest and best students in
the Asian countries are extremely high. China has always believed
in educating an elite -- the Mandarin class in the old China --
and that policy has been followed again. These Chinese students
are privileged, extremely well taught, and strongly motivated.
The top 10% of Chinese high school students are probably well
ahead of their U.S. or European counterparts. The same may be
seen in other Asian countries, as it would most notably be in
some small countries like Singapore. All four of the big
countries have developed a substantial middle class that is still
growing in number, and, as in Western democracy, governments have
to be able to satisfy the wants of these middle class people, as
consumers as well as citizens. Only China is still a directed
society, and the conditions on which the Chinese Communist Party
holds power are those of performance. Only so long as they
satisfy the Chinese people will they be able to remain in
office.

The next 50 years will see the great Asian advance, unless it is
interrupted by political divisions, war, or other disasters. The
Chinese economy will be generally comparable to the United States
by 2050. Japan, which is a more advanced economy, is the major
external investor in the development of Chinese industry. The
Chinese economy will grow about twice as fast as the American.
India will take longer but is already a major exporter of IT
services.

Inside Asia the growth potential will probably be led by China,
with India second and Russia and Japan third. In global
competition, the order will be Asia first, America second, Europe
third.

Unless Europe can find a way to become more competitive, which is
proving very difficult on the continent, European living
standards may actually decline from high costs, fixed
regulations, and an ageing population. Asia is a major area of
investment opportunity. The United States is likely to keep the
technological and defense lead.

Best regards,


William Rees-Mogg
for The Daily Reckoning