-->The Tragic Death Of Curtis Moberly

The Daily Reckoning

Ouzilly, France

Thursday, 30 October 2003

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*** Illegal currency manipulation!

*** Dow up... gold up... bonds up... First Freddie, now
Fannie... a 'dollar accident' in the making?

*** Greenback-holding foreigners in a bind... where is the
greater fool? The steel mills of Donora... things do not
always get better... and more.

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We begin today's insensitive remarks with a rich, deep,
belly-laugh.

"Senator Charles Schumer, Democrat of New York, and two of
his colleagues," reports the International Herald Tribune,
"sent [U.S. Treasury Secretary] Snow a sharply-worded
letter:

"'As you know, China is not the only country engaged in
illegal currency manipulation,' the letter charges."

Already, we can barely contain ourselves. Illegal currency
manipulation? Schumer is referring to China's decade-long
policy of maintaining its currency at the same value as the
dollar. The U.S. has announced to the world that it intends
to destroy its own currency... and has set about doing so,
cutting rates 13 times and introducing, over the past 15
years, more dollar credits than during the entire prior
history of the republic.

A lower dollar reduces the weight of America's 9 trillion
in overseas obligations... it reduces the competitive
advantage of low-cost foreign manufacturers... and it offers
the consumer - hanging on his cross of debt - a little
vinegary refreshment. But in trying to lower the value of
its own paper money, the U.S. drags down the dollar-linked
yuan along with it... and gains nothing.

"We are also concerned with Japan's on-going and massive
intervention in global currency markets," continue Schumer
and his free-coinage posse."These actions, intended to
obtain an unfair competitive trade advantage for Japanese
export industries, amount to a substantial subsidy of its
major exports."

Ha... ha... ha... ha... ho... ho... ho... hee... hee... hee.

What else can we say? We have heard of pots calling kettles
black, but here we have the biggest marmite on the stove
fuming and bubbling over.

"The American Fed under Alan Greenspan," explains Kurt
Richebächer,"has radically broken all rules and traditions
of caution and reluctance in central banking. Not only has
it acted with unprecedented aggressiveness in lowering its
interest rates and in opening its money spigots: in order
to lower longer-term interest rates, it has been bluntly
inviting leveraged carry trade in bonds with the assurance
that the Fed will keep interest rates low for a long time
even if the economy recovers."

And yet, Senator Schumer, and practically every other
analyst and commentator, is convinced that this is the way
things work. Managing an economy is just a matter of
improvisation. They do this... we do that... then, everything
works out for the better. The Fed lowers rates... or it
raises them. The president says something. A negotiation
with the Japanese produces some agreement. Congress cuts
taxes... or it increases them.

Is that how it works, dear reader? If the U.S. government
wants a lower dollar... won't it get what it wants? Won't
Schumer and his fellow demagogues do what is necessary to
keep the economy moving? Won't it all work out somehow... by
pulling a few strings here and tightening a few loose
screws there?

Let us ask the question another way: can the greatest ever
build-up in debt be managed by a little tinkering here and
there... some bluff and bluster by empty-headed
politicians... and some hocus-pocus by Fed economists?

Or, does it work some other way, whereby debt bubbles end
in debt busts... no matter how many arms are twisted or
knobs turned? People don't necessarily get what they want,
we keep saying, but what they've got coming. Usually, they
get it good and hard!

In the meantime, we turn to Jennifer Westerfield,
another denizen of the Paris DR HQ, for more news:

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Jennifer Westerfield, writing in Paris...

- At first blush, yesterday's news from the mortgage market
was nothing unexpected:"Mortgage Applications Off in Oct.
24 Week," remarks a Reuters headline. Existing homeowners
are still laying claim to imaginary equity - refi
applications nudged higher last week - but overall mortgage
applications fell half a percent.

- But troll a little further in the headlines, and you'll
discover a very interesting development at our favorite
government-coddled mortgage lender."Fannie Mae Reports
$1.2bn Accounting Error," writes the Associated Press. Due
to a"flawed application of new accounting standards,"
Fannie Mae claims, the lender had previously understated
its portfolio by $1.7 billion. Now, Fannie admits both its
total assets and unrealized gains on certain securities are
each over a billion dollars more than originally reported.

- Erm... do we detect a bit of déjà vu in this scenario?
Last June, your New York editor provided in-depth coverage
of the scandal involving Fannie's smaller 'cousin', Freddie
Mac. Freddie also reported its own 'accounting error'... a
similar story of significantly underreported figures
intended to 'smooth earnings.'

-"Here we go again, First Freddie, now Fannie," declared
Rep. Richard Baker of Louisiana, longtime critic of the two
lenders."And here's Fannie, just like Freddie... announcing
a bigger than $1 billion accounting error, asking us to
believe it's no big deal."

- Together, Fannie and Freddie make up the lion's share of
the mortgage lending market - and wield a giant-sized
influence over the U.S. economy."What a mortal can easily
see," wrote Jim Grant in Grant's Interest Rate Observer, at
the time of Freddie's 'accounting error' disclosure,"is
that a Freddie accident would be a dollar accident as well
as a corporate-finance accident." Who knows what trauma a
new 'Fannie accident' could bring to the economy?

- The dollar does not need a new 'accident' to add to its
woes. Yesterday, the yen, sterling, the Australian and New
Zealand dollars all climbed to fresh highs against the
green(soon to be multi-colored)back. The pound rose to its
highest level in five years, at $1.70.

- Meanwhile, in the equity market, indices around the world
continued to drift gently upward. U.S. equities gained
ground for a third straight day; the Dow edged up 26 points
to 9,775, while the Nasdaq added 4 to 1,937. Most European
bourses posted gains, while Japan's Nikkei managed a 1.7%
advance to 10,739.

- Gold for December delivery rose $3.60 to $387 - still
above your editor's new $370 buying mark. Bonds rallied as
well: the yield on the 10-year Treasury note rose 0.09
points to 4.2% percent.

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Bill Bonner, back in Ouzilly...

*** The administration aims for a gently falling dollar. So
far, the dollar has glided down so gracefully that scarcely
anyone has noticed. Still, it is down nearly 6% against the
euro since the beginning of September.

"You're saying the dollar has a lot further to fall?" asked
a French friend last night."Great. I buy my products from
the U.S. and sell them in Europe. The cheaper they are, the
better I like it.

"You know, there are some great products in the U.S.. But
often, you Americans are only interested in your own home
market. Which makes sense; it's so big. But what I've found
is that there are a lot of very good products in America
that can be reworked slightly and sold into micro-markets
around the world."

*** The risk of a weak dollar policy is that the dollar
might turn out to be weaker than expected. Americans cannot
really work their way out of debt, because they have too
few products to sell. Likewise, foreigners cannot work off
their net $3 trillion in U.S. dollar assets by spending
them on U.S.-made goods; there are not enough good products
they want to buy.

There was a time, before 1971, when a foreign government
with a large surplus of dollars could go to the Treasury in
Washington and exchange his dollar bills for gold. This had
the effect of limiting central bank reserves to what could
be covered by gold. But now, what can a foreigner with
extra dollars on his hands do with them? He can only
exchange them with other foreigners for other currencies.

Of course, the same may be said of stocks. A stock buyer
can only sell his stocks to other investors. But stocks
usually have some intrinsic value that puts a cushion under
price declines. Companies have factories, land, offices,
patents, technology, customers, stores, products. And, an
investor can look to a stream of profits that encourage him
to hold the stock, even if its price is falling.

But why would anyone want to hold onto a falling currency?
The real rate of return - after inflation - from holding
short-term dollar deposits is already near zero - or below.
If the currency were to fall just 10%... what foreigner
could resist selling at least a part of his stash?

But to whom would he sell? Only to other foreigners with
exactly the same worries. Which is why the dollar may not
merely float down... but drop like a tax collector tossed
out of a 20th floor window. In the wink of an eye... it
could lose 50% of its value.

*** Your editor's father hails from the steel mills of
Donora, Pennsylvania. Hard to believe, but the Monongahela
Valley in which the town is found must have been the
Silicon Valley of the early 20th century. And Donora was a
thriving burg on the cutting edge of applied technology.
Today, it is little more than a metropolitan reminder that
things do not always get better. This from our friend Byron
King of Pittsburgh:

"Here is an interesting excerpt from the Pennsylvania State
Archives on the history of Donora...

http://www.docheritage.state.pa.us/documents/donora.asp

"Donora is located on the western bank of the Monongahela
River in Washington County...

"Modern Donora began in 1900 with the development of heavy
industry in the area. The town was incorporated in 1901.
Its name is a combination of Nora Mellon, wife of R. B.
Mellon, and W. H. Donner, the purchasers of the land along
the river on which their Union Steel Company constructed a
rod mill that later became the American Steel and Wire
Works. In 1902, the Carnegie Steel Company completed a
facility that consisted of two blast furnaces, twelve open
hearth furnaces, and a forty foot blooming mill furnace. At
the same time, the Matthew Woven Wire Fence Company erected
a facility. A third rod mill was constructed in 1916. A
year earlier the Donora Zinc Works began production. Such
industrial expansion required more effective transportation
facilities than the river barges and short-line railroads
could provide. The Pennsylvania Railroad bought what had
been the Monongahela Valley Company and expanded rail
service. By 1908, the Donora station had the largest volume
of freight in the 'Mon Valley.' Of course, these industries
needed workers, and job-seekers flocked to the area,
especially recently arrived immigrants. In 1948, 14,000
people resided in Donora, and additional thousands lived in
towns in the immediate vicinity.

"1948 population: 14,000+
"2000 population: 5,653

"In the early 1960's, the nail-mill closed. Then the other
mills and factories shuttered the doors and locked the
front gates. By the late 1960's and into the 1970's, Donora
was a distressed town. Population declined as people died
off or moved away. Looking at the other side of the coin,
the cemeteries have many fine tombstones recalling
individuals and families of the days when, as the saying
goes, 'a lot of money got pulled out of that valley.' But
by the mid 1970's, only the very old, and those with few
options or little imagination, remained in Donora. And, to
be fair, a few die-hards who wanted to stay and try to make
a difference in the life of an old town. But how could a
worn out old mill town, filled with environmental 'legacy
sites,' and in a high-tax state to boot, compete with the
Sun-Belt and with overseas production? How indeed?

"Now, the finest old houses along the main street have been
converted into funeral homes. The commercial district is a
collection of discount stores, mixed in with vacant real
estate. There are a few commercial developments that are
trying to make a go of it, but any substantial outside
investment comes only on the heels of a great deal of state
or federal aid. And obviously, things are not what they
used to be. To end on an upbeat note, however, I think that
in the shadows of the present one can still sense the proud
past. And a proud past is always worth recalling, because
if one could do it before, cannot another do it again?

"And on a note more germane to The Daily Reckoning, one has
to wonder if Donora serves as a tale of caution, whispered
into the ears of modern America by the Fates. 'You too, my
friends, can be swamped by the economic storms.'

"A final comment: According to the above-cited history,
between 1900 and 1916 there were at least six major
industrial facilities erected or placed on line in the
humble town of Donora, PA. Looking at the United States as
a whole in 2003, how often does anybody build a new mill or
factory anywhere, let alone build six of them in one small
area? I read all the time about new housing developments,
shopping malls, office buildings going up. There is the
occasional warehouse or 'distribution center' erected along
some nexus of interstate highways, to serve the malls and
outlets. But build a new mill or factory? I almost never
hear of such a thing. And of those mills and factories that
are being built, we are closing old ones a heck of a lot
faster than we are building new ones. Welcome to Donora."

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The Daily Reckoning PRESENTS: Fools, wise fools and greater
fools... novice investors, take heed!


THE TRAGIC DEATH OF CURTIS MOBERLY
by Dan Ferris

Two Sundays ago, a man was killed on a motorcycle just a
few miles from my house.

Curtis Moberly was riding his brand new 2003 Harley
Davidson Heritage, having purchased it only minutes before.
He went around a turn, lost control, and slid into a car.
As he lay in the road, another car came from behind and ran
over him.

Moberly was 39 years old. I can just imagine him, saving up
to buy a new bike, this great symbol of freedom among men -
especially middle-aged, American men. Then, in an instant,
the vision transforms from dream to nightmare, becoming the
instrument of his early demise.

The local sheriff said speed wasn't a factor in Moberly's
loss of control. He didn't die because he pushed the
envelope too hard. A newspaper article said he tried to lay
the bike down because he lost control. I obviously can't
predict the outcome of the sheriff department's
investigation, but at first glance, it seems that Curtis
Moberly died because he just didn't know how to handle a
simple turn... and panicked.

The thing I can't fathom is this: I can't believe Curtis
Moberly didn't have some sneaking, small voice somewhere
within him that said,"buying this bike is a bad idea for
you," or even,"this could kill you, you know." I can't
believe he didn't know that some curve like the one that
killed him wasn't at least a possibility, somewhere in his
future. It's like the way a gambler knows he's going to
lose. It's just there, unspoken, perhaps even denied at
every turn, but no less present and certain.

Curtis Moberly was from the same town as me, though he died
in another town nearby. I know he lived near me, since the
town is so small that everyone lives near everyone else.

The accident made me wonder about Moberly's and my
neighbors, the few thousand other denizens I see coming and
going through town each day. Specifically, I wonder how
their financial situations resemble Curtis Moberly and his
brand new motorcycle.

They probably feel great, having just made money for a
whole year after losing it for three years straight. They
feel the way Moberly felt when he drove his new bike off
the Harley Davidson lot. It's the same feeling you get
after struggling through any difficult period, after which
you come out on the other side with something you've been
wanting for some time. Elation. Release. Triumph. I'm
there. I've made it.

Perhaps they've increased their 401(k) contributions to
take advantage of the"new bull market." They've got some
momentum going. They're feeling good and they've now got
the money to justify that feeling. They're over the hump of
the 2000-2002 bear market. Now they're cruising along, the
way Moberly was cruising along just before he took the turn
that ended his life.

As with Curtis Moberly, I find it difficult to believe
there isn't a nagging little voice inside his former
neighbors."Do I really have any idea of what I'm doing?"
it asks."I know nothing about any of these companies, and
I've just bought a piece of them for thousands and
thousands of dollars. I spend more time buying a new
car... or motorcycle... than I do allocating my own
investment funds. What am I doing here? Something is wrong
with this."

It's probably not such an articulate voice as that. And
probably not very loud. I imagine it's easily drowned out
by a good CNBC story or a quick look at one's rising
Ameritrade balance. By the time Moberly's little voice was
audible, telling him to bail out, it was too late. He'd
reached the point of no return. Investors were there in
2002, and now they think they've dodged a bullet. I doubt
it.

Curtis Moberly's poor neighbors are probably as unprepared
for their futures as he was for that last turn. After all,
they've invested in mutual funds through financial planners
and 401(k) plans. Maybe they have an Ameritrade account
with a few thousand bucks in it, which they churn a little
every day, buying and selling Sirius Satellite half a dozen
times a week.

I'm willing to bet they know as much about investing, have
as much experience at it, as Moberly did at riding a Harley
hog: very little. I remember what the Christian brothers
called us as high school sophomores: wise fools. That's
what investors are today, and what Curtis Moberly was - may
he rest in peace. Wise, having had a little experience.
Fools, not realizing they haven't had enough experience.
Moberly won't get fooled again. I bet investors will
continue to get fooled for as long as there's a stock
market.

All across America, investors are about to slide into an
oncoming price slide, the way poor Curtis Moberly slid into
an oncoming Subaru. Make no mistake about it, stocks will
slide. They've never been this expensive without sliding
downward towards cheapness again.

The equity risk premium is forecasting that most stock
market investors will lose money in the coming years. The
rational investor has no reason to expect to make money in
90% of all mutual funds out there today. No rational reason
to buy almost all the stocks out there, especially those
that individual investors love the most, like Sirius
Satellite, XM Satellite Radio, Sun Microsystems, Intel,
Cisco and Microsoft. Those are the stocks individual
investors bought the most of the day before this writing,
according to my broker.

Consider what I've done in my investment advisory, Extreme
Value. In the last 14 months, I've only found 10 stocks
that were cheap enough to buy, with enough upside to
justify hanging onto them. 10 stocks out of 8,000 or so.

Fortunately, we don't hold any stocks in the Extreme Value
Model Portfolio that I wouldn't buy more of if the price
slid far enough.

As for all those people buying stocks like Sirius Satellite
Radio, Intel, Cisco, Microsoft and Pfizer... well, they're
going to lose their money. Period. They've paid way too
much and gotten way too little. No margin of safety. No
90,000 acres of raw land in Hawaii. No idea of what price
is too low or too high.

All investors have are promises: satellite radio promises;
microprocessor promises; internet router promises; Windows-
based software promises.

One day soon all these promises, even if they're
technologically sound, will look to investors like the
promise Curtis Moberly made to the bank when he signed the
agreement to repay the loan on his new Harley Davidson.


Good Value Hunting,

Dan Ferris
for the Daily Reckoning