-->The Psychology Of Credit And Debit
The Daily Reckoning
Paris, France
Thursday, 13 November 2003
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*** Gold also rises... and rises... and rises....to a 7-year
high.
*** Another big buying day on Wall Street... Newmont or
CMGI?
*** A consumer economy is a fraud... Americans working more
than ever... China boom continues... commodities go
up... George W. Bush - fully articulated... and more!
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Stocks go up... and gold goes up, too. Stocks go down... and
gold goes up anyway. Gold keeps going up... rising $6.80
yesterday to close way over $390.
It passed our buying target of $350. Then, it rose above
our second buying target of $370. Now it looks as though it
will break through our third buying target - $400 - even
before we set it. We feel like a kid again... trying to grab
a bar of soap in the bathtub; it slips away each time.
No, it's not easy, dear reader. There is so much 'noise' to
filter out: buy this stock, buy that stock... corporate
earnings... corporate scandals... stocks up... down... Fed
rumors... terrorist attacks... sentiment
indicators... blabbermouths on TV... empty heads on the
editorial pages...
But gold also rises.
We are at the beginnings of what we believe will be a major
bull market in gold - one that will last for several years
and take gold's price above $1,000 per ounce. Of course,
God does not whisper His plans in our ear... nor do we have
any way of reading the news before it happens. It is not
given to man to know the future. Besides, if we really knew
what the price of gold would do, we wouldn't waste our time
telling you. At least, not for free!
No, our view of gold is merely a default position; we just
don't know what else to say.
Over the last 32 years - since the collapse of the Bretton
Woods semi-Gold Standard system - the world has been
drenched with U.S. dollars. Not since the time of Noah has
mankind seen such a flood. Since the arrival of Alan
Greenspan at the helm of the Fed, more U.S. dollars have
been created than under all the Fed chiefs and all the
Treasury secretaries in the history of the Republic. The
money sloshed around the globe... watering economies and
greening investments almost everywhere.
Americans have had a credit card with no limit. If they ran
out of money to spend... they could just print more.
After WWII, America was the world's biggest creditor... more
people owed more money to Americans than to any other
people. By 1988, their position had weakened... but they
were still even with the world. But now, they're nearly $3
trillion in debt to the rest of the world... and the debts
increase (as measured by the current account deficit) at
the rate of $1 million per minute.
In an 18-month period, the federal government alone went
from surplus to deficit - a swing equal to half the total
of all the gold ever mined in all of history. Next year, it
is expected to borrow almost as much.
Former Treasury Secretary Paul O'Neill wanted to know just
how deep the Federal government's hole really was. Putting
a team of economists on the case, he discovered that
foreseeable obligations exceeded expected receipts by $44
trillion - or about 30 times the world's gold supply.
Meanwhile, in the private sector, total debt now equals
about 20 times the world's gold. By every measure we know,
Americans have never before carried such a load of
debt... and the world has never before had so little gold,
by comparison, to balance against it.
We can't remember how we made the calculation, but when we
compared the increase in the number of dollars to the
increase in the gold supply, we discovered that more than
$6,000 came into being for every new ounce of gold pulled
from the earth.
People believe the 'recovery' is a done deal. But a
recovery from what? The recession was a flop - people never
cut back spending. In an effort to get the economy moving,
the Fed turned on the hoses, showering consumers with more
credit, more dollars... and drenching them even further in
debt. But where are the jobs? Where is the capital
investment? How come the lines of people in bankruptcy
court are longer than ever? Why are foreclosures at an all-
time peak?
Inasmuch as we can't know the future, anything is possible.
Interest rates may go up... or they may go down. Stocks may
become even more overpriced. Inflation? Deflation? Who
knows? All we know is that, for the moment, gold also
rises. And we see nothing likely to stop it. It will have
its day, no matter what.
We turn to Eric for more news... [Eric, by the way, is co-
hosting CNNfn's Market Call this morning between 9am - 10am
EST. Catch him, if you can... ]
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Eric Fry writing, very early, from New York...
- Strange day on Wall Street... stocks soared, while the
dollar tumbled... and gold rocketed to a new 7-year high.
The phrases"dollar sell-off" and"stock rally" do not
normally appear side by side. But in the Greenspan economy,
anything is possible; the economy can boom while jobs
disappear, GDP can jump 7.2% while national indebtedness
soars, and the stock market can rally while the dollar's
value plummets.
- Yesterday, while the dollar's value plummeted 1% against
the euro, the Dow rallied 111 points to 9,848 and the
Nasdaq jumped 42 points to 1,973. We are not persuaded that
a depreciating dollar is bullish for anything other than
gold, the ultimate counter-currency. Yesterday, gold jumped
$6.80 to $395 an ounce, its highest price since May 1996.
- The dollar's distress does not deserve all of the credit
for the gold market's strength. Escalating violence in the
Middle East warrants at least a dishonorable mention.
"Certainly the gold market is taking notice of the Middle
East," writes John Myers, editor of Outstanding
Investments."As the situation in the Middle East goes from
terrible to terminal, you will see higher gold prices,
perhaps a lot higher."
- Of course, most gold stocks have been in"rally mode" for
months already. Gold stock investors tend to recognize
macro-economic and geo-political crises well before their
tech-stock buying counterparts. Indeed, gold stock
investors tend to recognize crises, even when none exist.
- The gold market's months-long rally implies that global
macroeconomic and geopolitical stresses are mounting. Yet,
the Nasdaq's months-long rally implies that everything is
just hunky-dory... Or does it? Maybe the Nasdaq's rally
implies nothing more than the fact that speculative trading
has made a comeback. To illustrate, let's indulge in a
malicious little comparison between the shares of Newmont
Mining and those of CMGI, one of the infamous"Internet
incubators" of the late 1990s.
- According to Bloomberg,"CMGI Inc. owns and invests in
business-to-business and business-to-consumer Internet
companies. The company offers products and services for
interactive advertising and marketing, as well electronic
commerce products and services to consumers and
businesses." We don't really know what this description
means, and we suspect that most of the company's
shareholders don't, either.
- But whatever it is that CMGI does, it does it
unprofitably. Since the end of 1999, this formerly hip, B2B
and B2C e-commerce company has racked up an astounding $7
billion of losses on sales of less than $3 billion... and it
is still losing money. Nevermind the losses, CMGI was
precisely the sort of stock that investors wanted to own
during the late 1990s. Amidst the Internet-stock mania,
CMGI shares skyrocketed from $5 a share to more than
$160... and then crashed.
- CMGI was hardly unique. Many high-flying tech and
Internet stocks reached their zenith in 1999 and 2000. In
those days, almost every four-letter symbol on the Nasdaq
seemed to represent a multi-billion dollar company
producing multi-billion dollar losses. But 2000 was also
the year that the gold share bull market began. Since late
2000, Newmont Mining shares have tripled, while CMGI shares
have collapsed more than 90%.
- Why do we reminisce? Because investors are buying
speculative stocks again, and doing so with only slightly
less abandon than they displayed in 2000. Over the last 12
months, Newmont shares have posted a healthy 80% gain,
while CMGI shares have soared a freakish 500%. The stock
now boasts a market capitalization of more than $800
million. Maybe this former penny stock is worth every penny
of its hefty market cap... Maybe not. Either way, the
history of financial markets suggests that money-losing
penny stocks tend to jump 500% when rallies are ending, not
when they are beginning.
- Speculation isn't a bad thing... as long as you remember
to pull some chips off the table.
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Bill Bonner, back in Paris...
*** Does a credit-driven consumer economy really work? Or
have Americans merely worked harder in order to make up for
a bad system? We answer the questions as well as pose them:
almost all the income gains of average Americans - since
the advent of the Dollar Standard System - have come from
longer working hours. Over the past 30 years, middle-income
couples have added an average of 20 weeks of work to their
annual schedules, equal to 5 additional months of labor.
Inference: the consumer economy is a fraud. (More from our
friends at Elliott Wave, below... )
*** No doubt about it, the Fed has managed to create a real
boom - in China! The Chinese are buying up resources at an
astounding pace, in order to feed their booming industrial
machinery. Shipping rates have doubled in the last 3
months. Steel is up. Copper hit a 6-year high. Aluminum has
doubled.
While commodity prices are going up, real labor rates
worldwide may be in a major deflationary trend. A Chinaman
will work all day long for just $5. Hard to compete with
that.
***"You don't understand," began the explanation."Henry's
class is the only class in the world to get to do their
'profession of faith' in the Vatican. It takes place at
Easter. This is a big deal. And they take these things very
seriously. They know Henry was not baptized Catholic; they
have his birth certificate in his file. So, I just want to
talk to them to make sure he is not excluded from the
activities."
***"Thank you so much for the 'George W. Bush, U.S.
President & Naval Aviator' action doll. I haven't been able
to put it down since I opened the box!... It's funny; George
W., the doll, is 'fully articulated,' but George W., the
human is completely inarticulate."
Eric Fry was thanking a reader for sending us two dolls -
vaguely resembling the Commander in Chief in full military
regalia, as he appeared on the deck of the Abraham Lincoln.
We noted that the doll was made in communist China...
Curiously, the leader of the free world is saluting with
the wrong hand, but what do the Chinese know?
*** And here's an interesting note from Ann Coulter:
"The U.S. military has had considerably more success in
turning Iraq around than liberals have had in turning the
ghettos around with their 40-year 'War on Poverty.' So far,
fewer troops have been killed by hostile fire since the end
of major combat in Iraq than civilians were murdered in
Washington, D.C., last year (239 deaths in Iraq compared to
262 murders in D.C.). How many years has it been since we
declared the end of major U.S. combat operations against
Marion Barry's regime? How long before we just give up and
pull out of that hellish quagmire known as Washington,
D.C.?"
*** Columnist Tom Friedman, always a source of laughs,
believes the U.S. is doing important work in Iraq."Nation
building," he calls it. He seems to believe the U.S.
military can build a model society - to his specifications
- in a country thousands of miles away populated by hostile
desert tribes, where he doesn't speak the language,
understand the local culture, the history, or the local
cuisine... and where a man can't even get a decent drink. We
wish him well. If he succeeds, he can launch an attack on
Washington next.
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The Daily Reckoning PRESENTS: As men move, so do markets.
The public's willingness to"submit to the servitude of
credit" is at an all-time high... and it does not bode well
for the U.S. economy.
THE PSYCHOLOGY OF CREDIT AND DEBT
By Wendy Raffel and Robert Folsom
It's hard to shock people with numbers these days,
especially when it comes to debt - so many folks have so
much of it. An eight, nine, or ten-digit figure just
doesn't impress... unless it relates, somehow, to"what will
happen to me."
So let's assume that you already know there's"a lot of
debt out there," and that you want to get right to the"me"
part. Some patience, please; the"me" part is clear only in
the context of"us"... us being the mass psychology that
actually created the epic debt bubble.
Consider, therefore, a few facts about"us" -
* Americans paid out approximately $63 billion dollars in
credit card interest alone in the year 2000.
* Undergraduate college students carry an average of three
credits cards which total an average balance of over
$2,000, reports the Louisiana State University's study of
Youth Financial Literacy Statistics.
* According to the same study, academic administrators say
they lose more students to credit card debt than to
academic failure.
* The"late fees" charged by credit card companies have
become the industry's fastest-growing revenue source,
rocketing from $1.7 billion in 1996 to $7.3 billion in
2002.
* Senator John Edwards claims that,"Almost half of all
Americans pay the minimum [credit card] balance or less
each month, running up large interest debts."
* The outstanding U.S. Public Debt as of August 18, 2003
was $6,776,165,078,368.71. The total working population of
the U.S. is approximately 217,000,000. So if each hard-
working American contributed their due, each of them would
owe $31,226.58.
Then there's real estate. During the most aggressive
interest rate-cutting campaign in its history, the Federal
Reserve has helped millions of households convert their
assets into debts. But this debt will produce no income,
only the burden of repayments.
Yet the Fed's policy has not increased overall borrowing by
businesses (despite the lowest lending rates since the
1950s), which could use the loans to create growth. So the
Fed's attempt to expand credit has increased"bad" debt,
even as"good" debt shrinks. This (among other things) is
what the media somehow overlooked in the frenzy of"Fed
rate cut" stories over the past three years.
Millions of families use their homes as a checkbook, via
home equity loans and credit lines. In revolving home
equity loans, for example, the debt has grown from $128.3
billion in January 2001, to an all-time record $243.4
billion as of June 2003. As a percentage of market value,
home equity has fallen to the lowest level since the Fed
began keeping records in 1965.
And what will happen when the interest rates, which are not
fixed at recent lows, start their inevitable rise? Many
people may find it difficult to make increasingly large
payments, especially if the unemployment level doesn't
begin to drop.
The obvious solution to making larger payments would be to
use savings. But, the savings rate of the average American
household has dropped by two-thirds since 1989.
Why do we have so much debt and so little savings?
Because we are a nation of consumers who live beyond our
means. Our consumption exceeds what we can afford... hence
the overuse of credit, and the debt extremes that come with
it. The Federal Government has encouraged credit expansion,
keeping interest rates low to facilitate the use of credit.
Multiple sources of credit used to be the province of the
rich, but now they're a rite of passage, a necessary step
on the way to adulthood. You need a"credit record" to open
a bank account, to get a loan, to buy a car or a house, to
rent an apartment or even to get a job. And you want it for
the sheer convenience it provides:
Pay at the pump. Shop on-line. Get 10% off your first
purchase when you get an in-store credit card. Get a second
mortgage with no appraisal fee. Put no money down and get
two years interest free! Apply today and get a great fixed
rate! American Express: Don't leave home without it. Visa:
everywhere you want to be. Earn cash back each time you use
your Discover card.
These are more than tag lines from advertisers. The
public's willingness to submit to the servitude of credit
is a direct measure of their optimism - or pessimism -
about the future, and a reflection of mass psychology and
social mood.
The psychology of debt has a context - a broad pattern of
behavior that produces very visible extremes: the stock
market bubble, the real estate bubble, and yes, an immense
debt bubble.
A pattern this large doesn't change overnight, but there's
no doubt that a reversal from optimism to pessimism is
underway. This is why the stock market peaked in early
2000, and why so many rallies since then have failed (the
current rise notwithstanding). The reversals in the real
estate and debt bubbles will be just as swift and sudden,
and every bit as unexpected.
"Once you understand the fundamentality of social mood
change, you approach the socionomic insight," writes Robert
Prechter in the foreword to his book, Pioneering Studies in
Socionomics."Conventional assumptions about the direction
of social causality are not only incorrect but opposite to
what occurs. Social events do not compel social mood, as is
widely supposed; rather, the patterns of social mood impel
social events. For example, the state of the economy does
not underlie social mood; social mood underlies the state
of the economy."
Understanding how"cause and effect" really work in social
trends equips you to anticipate and identify stock market
trends. You can't be on the right side of a trend you don't
recognize - which is the plight of most investors, and of
most households that carry too much debt.
The danger will only grow in the months ahead... yet - for
individuals who understand the trend - so will the size of
the opportunities.
Regards,
Wendy Raffel and Robert Folsom
for The Daily Reckoning
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