-->The Daily Reckoning

Paris, France

Thursday, 27 November 2003

Thanksgiving Day

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*** The lumps keep buying... Asian bankers - the biggest
lumps of all... turkeys of the investment world...

*** Be right, sit tight... gold market may correct, don't
worry about it...

*** Americans pay a high price for their headlines... and are
not as rich as they thought...

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What can go wrong? What can go right?

Successful investing, it has been said, means balancing risk
against reward.

Today, most investors load up the reward end of the scale
with the hope of rising asset prices forever... and see no
risk to put on the other side. By contrast, here at the
Daily Reckoning, we have no trouble finding heavy
risks... and big rewards too, but only by selling what the
lumps are buying.

For the benefit of new readers and those that weren't paying
attention a year ago, 'lumps' is an affectionate diminutive
for 'lumpeninvestoriat' - our psuedo-intellectual way of
describing the great seething mass of 'investors' who have
no business in the stock market, bond market, currency
markets... and, in fact, shouldn't even be allowed into Wal-
Mart without a financial advisor.

Buffett, Grantham, Soros, Rogers, Templeton - all the people
who seem to know what they are doing have warned the lumps
to watch out. But, bless their hearts, they pay no
attention.

The headlines continue to provide good news. Durable orders
are up 3.3%. New unemployment claims are near a 3-year low.
The economy is said to be expanding at its fastest pace in
20 years.

Business in the Midwest is hot. Housing in California is hot
- the LA paper reports a new record in sales of $1 million -
plus houses.

The lumps may not realize it, but they pay a terrible price
for those headlines. The federal deficit is swelling towards
$1 trillion. Consumers, too, are so confident that they see
no need to restrain themselves. In India, we recently
discovered, consumer debt is ballooning... but is still less
than 10% of income. In America, the equivalent figure is
over 100% - and rising quickly. Overall, American debt is
already 3 times the size of the U.S. economy... and growing 6
to 8 times faster.

Not for nothing has debt often been compared to liquor. The
first drink, especially on an empty stomach, produces a
pleasant sensation. But the alcohol loses its punch with
each dose. Finally, it has no visible effect at all.

The risk is that we are getting pretty far along in the
credit cycle... and that, like pouring shots of whiskey down
the throat of a drunken man, new debt will produce little
beneficial effect. We might also wonder where the extra
juice will come from. Another tax cut? Another round of rate
cuts? More spending on the War Against Terror?

Still, the lumps seem to see no danger - neither to the
dollar, nor to bonds, nor to stocks, nor to real estate
prices, nor to their personal balance sheet. (Judging by the
overwhelming amount of reader mail we've been receiving -
they're quite confident their eyesight checks out okay!)

Incredibly, the biggest lumps seem to be foreign central
bankers, particularly those in Asia. As Eric points out
below, it is only thanks to them that Americans continue to
spend so much. Without their buying of U.S. Treasury bonds,
the federal deficit couldn't have been financed... interest
rates wouldn't be so low... houses wouldn't be
refinanced... and the consumer buying binge wouldn't be
happening... and the assets they now value dearly - houses,
U.S. Treasuries, stocks - wouldn't be worth nearly as much
as they are now. But that is the sublime nature of lumps;
they are unable to see the risk they pose to themselves.

Bankers, generally, seem to come into this world with
'chump' or 'mooch' or 'lump' tattooed on their derrières.
They seem destined to buy things they shouldn't, at prices
that are too high, at the worst possible time. The Bank of
England, for example, sold its gold at almost the very
bottom of the market - and announced the sale in advance to
give prices a chance to adjust, downward, to the news!
Bankers seem to have a special knack for getting in on
something just before it blows up. (Lisa Hess, writing in
Forbes, explains why lumpy Asian bankers are buying
Treasuries at just the wrong time... more below)...

Meanwhile, the smart money is getting out of town at the
fastest pace we've ever seen. Colleague Dan Ferris sends
details:

"On page C3 of Monday's Wall Street Journal, it says that,
in the month of October, insiders sold $59 dollars worth of
stock for every $1 they bought. Generally, the article says,
a level of $20 or more is bearish. And it's been over $20
for six straight months."

But God bless the lumps. They're allowing the insiders to
get out of stocks at 30 times earnings. They are the turkeys
of the investment world... but what would Thanksgiving be
without them?

And now, over to Eric Fry, with more news.

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Eric Fry, writing from New York City...

- America's stock market investors might want to replace
their traditional turkey dinners this Thanksgiving with
something more appropriate... like filet mignon with white
truffles. This year's booming stock market rally warrants a
Thanksgiving meal grander than mere turkey. On the other
hand, the buoyant stock market and resurgent economy are
sure to make this year's roast turkeys and mashed potatoes
taste like filet mignon with white truffles. 8.2% GDP growth
can transform even the driest bites of overcooked foul into
delectable morsels of haute cuisine....And the giblets can
seem like foie gras when the Nasdaq sits on 45% year-to-date
gains.

- Yesterday, the Nasdaq tacked onto its winnings by gaining
10 points to 1,953, while the Dow added 16 points to 9,780.
But the gold market hosted the day's most dramatic trading
action. The February gold contract soared as high as $402 an
ounce, before retreating to $398.00 at the end of the
trading session - a hefty gain of $5.60 on the day.

- Government bonds and the dollar both fell. The 10-year
Treasury note slipped half a point, pushing its yield to
4.25% from 4.19% Tuesday. The dollar dropped nearly 1% to
$1.189 per euro.

- Evidence of economic recovery seems to issue continuously
from the bureaus of officialdom. The Commerce Department
said demand for U.S.-made durable goods in October rose at
the fastest rate in more than a year, while the Labor
Department said the weekly number of new claims for
unemployment insurance fell to 351,000, the lowest number
since early 2001.

- We Americans can be thankful, therefore, that Alan
Greenspan and the other wise men at the Federal Reserve
managed to produce an economic recovery from the ashes of
recession... And we should also extend a heartfelt thanks to
our dear friends, Fannie and Freddie. Thanks to Fannie Mae's
and Freddie Mac's unrestrained appetitive for funding
mortgages, we Americans can crack open our nest eggs
whenever we want and consume the contents immediately.
Without the help of Fannie or Freddie, we would not be able
to pull the equity out of our houses and spend the proceeds
on new cars, dream vacations and self-help books.

- Of course, life in the 50 states is not all fun and games
and Britney-Madonna kisses... Toasting our good fortune with
a bottle of fine French champagne will cost about 20% more
than it did last year. That's because the dollar is
tumbling.

- As a result, the rising stock market that we are all so
thrilled about is delivering much less wealth than
advertised. It's true that the S&P500 has rallied about 15%
since last Thanksgiving, but it's also true that the dollar
has tumbled about 20% against the euro over the same time
frame. Net-net, the dollar's losses have more than erased
the S&P's gain since this time last year... We have more
dollars in our pockets, but the dollars don't buy as much as
they used to.

- The tumbling greenback has boosted the cost of all our
favorite imports, while simultaneously reducing the
purchasing power of the savings we work so hard to
accumulate... But things could be worse.

- We should be thankful that the dollar's value has not
fallen even more than it has, says Paul Kasriel, Director of
Economic Research at Northern Trust, and we should direct
our thanks toward the eastern sky.

-"You recall the story of how Native Americans who lived
near the Plymouth colony came to be invited to the first
Thanksgiving feast, don't you?" Kasriel asks."The Pilgrims
were paying the Native Americans a debt of gratitude for
helping them survive their first year in the New Land. In
other words, the Pilgrims got by with a lot of help from
their new-found friends.

"Similarly, this Thanksgiving, we are getting by with a lot
of help from our new-found friends - not Native Americans,
but native Chinese and native Japanese... If it were not for
the fact that foreign central banks have become the buyers
of last resort for dollar-denominated assets, the greenback
would have fallen even more in value versus other currencies
than it has, U.S. prices for goods and services would be
higher than they are, and U.S. long-term interest rates
would be higher than they are...

-"So, just as the original Plymouth Pilgrims gave their
thanks to their 'foreign' friends, the Native Americans, for
their help in producing a bountiful first harvest, we should
give thanks to our foreign friends, central banks, for
financing at very favorable terms the importation of a
bountiful foreign-produced 'harvest.'"

- Amen to that!

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

Bill Bonner, back in Paris...

*** While the rest of the financial media is enjoying its
holiday, we are at work as usual, here at the Daily
Reckoning headquarters in Paris...

*** Here, Lisa Hess, writing in Forbes, explains why it is
the wrong time to buy treasuries. In brief, Asian central
bankers are fools, buying investments from knaves.

"One huge reason is government economic stimulation, a
calculated political strategy by the Bush Administration
that will breed long-term problems. The current White House,
one of the greatest political marketing machines of all
time, is always 'on message' and always united in its
overarching objective: getting reelected next fall. And sure
enough, the three engines of economic stimulus are today all
clearly 'on message.'

"Fiscal, monetary and foreign exchange policies are now
fired up to energize the economy, create jobs or, at the
very least, generate enough inflation so there's the
illusion of prosperity by next November. I'm not here to
debate George W. Bush's reelection. My point is simply that
after November 2004 bondholders are on their own.

"Fiscal policy is about as stimulative as the electorate can
stand it to be. Staring at what Wall Street estimates to be
a $500 billion to $600 billion deficit for next year,
depending upon how the war in Iraq is accounted for, you can
be pretty sure that some of that spending will find its way
into better job creation. Tax cuts are helping, too - both
the lower rates and the child care credit. The result is
continued robust consumer spending.

"Monetary policy has also done wonders in stimulating the
consumer by providing cheap capital for everything from
homes to boats. Vehemently focused on preventing deflation,
the Federal Reserve, Bush's silent partner, is making the
classic central banking mistake of fighting the last war. In
this case, the last war took place in the 1930s...

"Then there's the weak dollar, which has helped support U.S.
exports at the expense of making imports here more
expensive, a recipe for inflation. Good news for Boeing (for
a while, anyway), bad news for Wal-Mart shoppers. So this
all amounts to a tax cut for U.S. manufacturers, although
certainly the reverse for consumers. It gets worse. Foreign
investors, upon whom the U.S. depends to paper over its
trade deficit, may well decide in coming months to shun low-
paying Treasury bonds, driving down their prices...

"The steepness of the yield curve is enticing speculators
and leveraged investors to borrow short and lend long,
comforted by the knowledge that the Fed is holding down
short rates. Banks are taking in deposits and buying
mortgage-backed securities. Investors do the same thing when
they buy bonds on margin.

"Bad moves. You don't want to own bonds at a time when the
government deliberately debases its currency and fosters
inflation."

***"Be right, sit tight," says our old friend Bob Bishop.
Gold has risen 50% since its bottom in 2001. Many gold
stocks have doubled. Don't be surprised by a correction in
the gold market. In fact, we would be delighted; we would
buy more at lower prices. But don't try to time the market,
says Bishop. Just get in position. This is going to be a
long bull market. You just want to get in and stay in for
the long haul.

**** On paper at least, Americans are about even, we figure.
Stocks and houses are up this year. But as Eric points out,
the dollar is down. Since January of '02 the dollar has lost
25% of its value against the euro. It hurts here in
Paris... but most Americans have barely noticed. Yet, in
terms of what they can buy on the global market, their
spending power is down.

They also continued to borrow themselves into a hole. The
value of all assets in America is probably around $50
trillion, according to Warren Buffett. So, a half-trillion
dollar trade deficit is equivalent to"losing" 1% of the
nation's wealth to foreigners.

*** Trouble is, there is paper wealth and there is real
wealth. A house that has gone up in price is really no more
valuable than it was at a lower price. It gives the owner
the same 'return'... in terms of living space. But a rising
price encourages him to believe he can 'take out' a little
of the equity and enjoy it. What he is really doing is
giving up a piece of his home - leaving him actually poorer
than he was before.

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The Daily Reckoning PRESENTS: The little-known history of
the most American holiday... this essay was originally
published on Thanksgiving Day, 1999.


THANKSGIVING

I turned to my trusty assistant... Beirne White... this
morning.

"Beirne," I said gravely,"tell me about Thanksgiving in
Mississippi."

Beirne proceeded to tell me about a Mississippi bluesman
named"Son" House, who lived to be 102 by doing what
bluesmen tended to do... chasing bad luck, bad liquor and bad
women.

"What has that to do with Thanksgiving?"

"Nothing," he replied... whereupon he drew on the resources
generously provided by Britannica.com, formerly of Chicago,
lately of cyber space, to get me the research I requested.

Beirne hails from Mississippi. And while Mississippians will
sit down with the rest of the nation... and tuck into their
turkeys with equal relish... perhaps only substituting
Bourbon Pecan pie for the sweet potato or pumpkin pie
enjoyed in Maryland... it was not always so.

Somewhere deep in the most primitive part of his medulla
oblongata, the part of the brain where race memories are
stored, Beirne resists Thanksgiving. It is, after all, a
Yankee holiday.

In the middle of the war between the states, both sides
would proclaim days of"thanksgiving," following the
progress of the war as we now follow the progress of the
stock market. After each of the first and second battles of
Bull Run - which sent the Yankees fleeing back to Washington
- the Confederates proclaimed days of thanksgiving. But it
was Lincoln's day that stuck. Declared after the battle of
Gettysburg - the last great Napoleonic charge of military
history - Thanksgiving was set for the third Thursday in the
month of November, commemorating the Northern victory.

Beirne doesn't say so... but this fact must stick in his
craw.

It doesn't help that the original celebration took place in
Massachussetts. And that it was hosted by a dour bunch of
Puritans, who probably wouldn't have been able to enjoy a
good dinner if their lives depended on it. But they
certainly had a lot to be thankful for. As the Wall Street
Journal reminds us annually, they nearly exterminated
themselves in typical Yankee fashion - by wanting to boss
each other around.

They had arrived in Massachusetts by accident and bad
seamanship, intending to settle in the more hospitable
climate of Virginia, which had been colonized more than 10
years before. Once in Massachussetts they proceeded to set
up a such a miserable community that surely most of them,
had they lived, would have longed to return to England. The
Soviets could have learned from their example and spared
themselves 70 years of misery. Only after the"witch burners
and infant damners" abandoned their communal form of
organization, and allowed people to work for themselves, did
the colony have a prayer of survival.

But victors write the history books. And now this precarious
celebration by a feeble group of religious zealots has
turned into the most American holiday.

After Appomattox, the South was helpless. Its natural
leaders, the plantation aristocrats, were either dead,
bankrupted and/or discredited. Many of them went to Northern
cities, like New York or Baltimore, where, Mencken tells us,
they"arrived with no baggage save good manners and empty
bellies." They enriched the North. But back home, they were
sorely missed."First the carpetbaggers," says Mencken,
"ravaged the land... and then it fell into the hands of the
native white trash..." Scars of war can take a long time to
heal. But 130 years later, the South is the most
economically and culturally robust part of the nation.

Thanksgiving was declared a national holiday in 1931.
Through the Depression, and then WWII, Thanksgiving grew in
importance. In a country where roots meant almost nothing,
where people were ready to pick up and move at the drop of a
hat, where there were huge differences in what people
thought and how they lived, Thanksgiving served to provide a
unified, national myth... most popularly expressed in Norman
Rockwell's Thanksgiving cover for the Saturday Evening Post.

Roots mean more in Mississippi than they do in California.
"No man is himself," said Faulkner, Mississippi's most
celebrated alcoholic,"he is the sum of his past." Unlike so
many other American writers of the 20th century, Faulkner
stayed home. The forward to the"encyclopedia of southern
culture" has a passage from Faulkner, saying:"Tell about
the South. What's it like there. What do they do there. Why
do they live there. Why do they live at all."

Even in Faulkner's Mississippi... Thanksgiving is now part of
everyone. Where Beirne goes... it goes, too. And so, all over
the world, Americans, gathering in small groups, like
pilgrims on distant shores, celebrate the holiday (if not on
the actual day... perhaps the weekend following... as we will
do.) This can require a little ingenuity. Americans in
France have to search for the ingredients. Pumpkins are hard
to pronounce - citrouilles - and hard to find. Cranberry
sauce is unknown.

Art Buchwald has translated the Thanksgiving story for the
French, deftly turning Captain Miles Standish into Le
Capitaine Kilometre Deboutish. But no one has refashioned
American Thanksgiving recipes for the metric measuring cups
here in France. My wife, Elizabeth, descendant of the
Puritan fathers... former resident of New York... a Yankee -
in other words - will do her best.

And we will be thankful.


Bill Bonner