-->Fantasies

The Daily Reckoning

Paris, France

Friday, 19 December 2003

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*** Not a care in the world? We'll give you one, dear
reader... a Christmas present from the Daily Reckoning
(don't get your hopes up too high)

*** Bankruptcies, deficits, falling dollar - what... me
worry?

*** Funny employment numbers... Manhattan
restaurants... puzzling inflation... Bearaholics
Anonymous... and more!

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

"Sans Souci" is the name of an expensive restaurant.

It might also serve to describe today's incredible markets:
without a care in the world.

Day after day, the carefree trends continue. Stocks go up.
Investors should know better. Whenever prices get this
high, it is extremely unlikely that the real return will be
more than a percent or two - or more likely, it will be
negative - over the next few years. But they've decided not
to care. Someone told them stocks were going up. That's all
they needed to hear.

Meanwhile, the U.S. consumer - the world's patsy-of-last-
resort - continues going deeper and deeper into debt, in
the belief that he is getting richer. It is not that he
cannot add or subtract. He has just decided that this
devil-may-care fashion becomes him. He tried it on during
the last bubble 4 years ago and rather liked it. Now, he
wears it wherever he goes...

And let us not forget the central bankers of China, who
deserve special mention in this short history of
insouciance. Who else would put their nation's reserves in
a currency that was falling almost daily... in the benighted
belief that lending to deadbeat spendthrifts so they can
buy your products is the route to riches?!

Are the Chinese stupider than other central bankers? We
have no reason to think so. They just seem to have picked
up the zeitgeist of the times - yes, they are probably
headed to their own special corner of economic hell, but
why worry about it?

Of course, here at the Daily Reckoning, we are the last
ones to want to take any of this seriously. It is all
entertainment as far as we're concerned. We take it in a
lighthearted spirit, just as we would a bedroom farce. But
we still gasp for air from time to time when we think of
it.

The last few weeks have brought headlines to help sustain
the fantasy. Unemployment numbers have been edging down.
The Detroit Free Press explains that the decrease, in their
area anyway, was a result of taking people off the list who
had not been able to find a job. They are no longer merely
jobless, it would seem; they no longer exist. The other big
reduction in the jobless numbers has come from"restaurant
hiring," in which well-paid computer engineers take jobs as
busboys while they wait for the 'recovery' to gather itself
together.

They may wash a lot of dishes before the recovery actually
arrives. Economist Joseph Schumpeter, quoted by Marc Faber,
explains why:

"Our analysis leads us to believe that recovery is sound
only if it does come from itself. For any revival which is
merely due to artificial stimulus leaves part of the work
of depression undone and adds, to an undigested remnant of
maladjustments, new maladjustments of its own."

New maladjustments come to light every day. Stocks rise
even higher, debt increases, house prices go up. But the
news is still positive... and the great majority of the
unthinking, unknowing and uncaring are free to dream on. At
least, for a while...

Eric Fry, our man on Fantasy Island, New York, with more
news:

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

Eric Fry, on the corner of Wall and Broad...

-"A perfect combination" is powering the stock market,
says one of Wall Street's many bullish strategists. What,
we wondered, might that perfect combination be? Might it be
America's record current account deficit, combined with a
plummeting dollar?... Or maybe it's our record household
indebtedness, combined with our negligible household
savings?... Or could the perfect combination be soaring
commodity prices, combined with runaway health-care costs?

- No, says the bullish strategist, the perfect combination
is benign inflation data combined with strong economic
data. We would not quarrel with the strategist's
assessment, but we would point out that the operative word
is"data." It's true that the inflation DATA are benign,
but commodity prices and health-care costs - to name just
two important business expenses - are soaring. It's also
true that the economic DATA are strong, but the economy's
statistical strength is producing an abysmal lack of job
growth.

- But why quibble about joblessness when GDP is growing at
an 8.2% annual clip and the stock market is booming?
Nothing is perfect, after all. Even an economy enjoying a
perfect combination of low inflation and strong economic
data has its imperfections. But a rising stock market -
like new love - has a way of making imperfections seem
utterly irrelevant. So let's call the glass half-full and
enjoy ourselves for awhile.

- The Labor Department kicked off yesterday's parade of
pleasing economic data by announcing that initial claims
for unemployment insurance dropped 22,000 this week to
353,000. Next up, the Conference Board said the U.S. index
of leading economic indicators increased in November for
the sixth month in seven. Next, we learned that U.S.
industrial production jumped nearly 1% last month, the
biggest increase in four years. Topping it all off, the
Philadelphia Fed announced that the City of Brotherly Love
is booming. The December Philadelphia Fed's manufacturing
index rose to 32.1 in December from 25.9 in November - the
highest level in a decade. The report also showed that
factories in the region hired more workers than at any time
since 1973.

- Yesterday's deluge of delightful data wowed the
lumpeninvestoriat, who wasted not time bidding the Dow
Jones Industrial Average to a new 19-month high. The Dow
jumped 103 points to 10,248, while the Nasdaq Composite
gained 1.8% to 1,956. The robust economic data took a
little luster off the gold price, but failed to add any
sparkle whatsoever to the tarnished dollar. February gold
fell $1.60 to $411.10 an ounce. But the dollar barely
budged, falling very slightly against the euro and rising
slightly against the yen.

- If we can believe the latest economic stats - and can
ignore certain inconvenient facts like a surging current
account deficit and a plummeting dollar - the American
economy is in pretty darn good shape. At least it's in good
enough shape to entice the lumpeninvestoriat to buy
stocks... and to keep buying stocks, even as they climb
higher. And because the lumps are buying stocks, the market
averages are rising, IPOs are making a comeback and Wall
Street brokerage firms are flourishing. Yesterday, Morgan
Stanley and Goldman Sachs both reported strong fourth-
quarter net income. Goldman reported almost a doubling of
net income.

-"Providing further proof that confidence in the stock
market is on the mend," says USA Today, five initial public
offerings stormed Wall Street on Wednesday, making it the
biggest day for IPOs since the dying days of the Internet
boom." It's no wonder then that year-end bonuses are on the
rise in the securities industry."Wall Street bonuses are
back big time," says the New York Post,"giving Wall
Streeters an average bonus 38% bigger than a typical New
Yorker's entire year of pay."

- Boom-time conditions have returned to Wall Street, but
the boom is much more subdued than the 1999 and 2000
vintages. Manhattan's high-end restaurants are thriving
once again, but investment bankers are not engaging in
exotic, 1999-style acts of extravagance like flying friends
to Turks and Caicos for the weekend, or ordering hand-
tailored suits made from the foreskin of llamas. But signs
of resurgent prosperity are again evident in Manhattan.

-"'The one-month wait for reservations at certain
restaurants is back," says Tim Zagat, publisher of the
Zagat survey. He relates that the famous Nobu sushi bar in
TriBeCa had been easy to get seated in during the recent
slump."They're back to one-month waits for reservations,"
says Zagat,"if they answer the phone at all," Zagat said.

- The wait for a Starbucks cappuccino also seems to be
getting longer. Your editor has never dined at Nobu, even
though he loves sushi... Some luxuries are simply beyond his
reach. But, on occasion, he does buy a triple tall
cappuccino at Starbucks. The crowd of folks buying $5
cappuccinos and lattes at the Starbucks on Union Square is
much larger than it was last year. Almost every weekday
morning, your editor arrives at the Starbucks to find about
20 people queuing up for pricey java.

- And every weekday morning, millions of Americans queue up
to buy pricey U.S. stocks... Evidently, the recovery has
arrived.

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Bill Bonner, back in Paris...

*** The inflation indicator - the gap between inflation-
adjusted treasuries, known as TIPS, and regular 10-year
notes is narrowing. It has shrunk by about 10% in the last
few months - signaling DECLINING rates of inflation ahead.

*** It is a confusing picture. Things that can be
manufactured and shipped - such as cars, clothes, furniture
- are falling in price. Things that are produced locally -
often with much government interference - such as health
care, education, and housing are rising. Commodities are
also going up - presumably because the dollar is
falling... and because China is buying so much of the stuff.
Oil is almost $34 a barrel. Cattle have risen 36% in the
last 12 months. Scrap steel is up 42%.

Go figure.

Could these trends could continue - falling prices for
manufactured, globalized goods... rising prices for
commodities? Yes.

*** Housing has outpaced inflation by about 35% since 1995.
But housing, like stocks, could fall sharply - even if
commodities continue to rise.

What would happen if house prices stabilize... or fall?
Millions of people would find their lives harder than
expected. Already, with the lowest interest rates in 45
years, foreclosures and bankruptcies are at record levels.

From Denver, for example, comes news that foreclosures have
hit a 15-year high. And"the worst is not over," says a
local economist."People have refinanced so many times,
they've taken the equity out of their houses."

*** We would like to give you a little present for
Christmas, dear reader. We would like to tell you what will
happen in the New Year so that you may prepare for it. But
in our humble condition of near total ignorance, we have
not the means to do it. All we can offer, and it not even
wrapped in a bow, is this modest insight: That which is -
and upon which so many hopes and mortgages depend - will
probably not be forever.

It is not necessarily a mean, mean world. But neither is it
the Fantasy Island that most people now expect. In short,
dear reader, we give you the gift of a worry. A souci. A
gnagging, gnawing, gnatty, gniggling care in the world.
Have a care, dear reader, have a care. You might need it.

***"I can see it now," writes Dan Ferris, editor of Extreme
Value."Stark, fluorescent lighting in an old classroom.
White styrofoam cups of coffee in every hand. New faces. Old
pros. The meeting begins...

"'My name is Bob. I'm an institutional investor, and I'm
bearish... '

"Bob is the newest member of Bearaholics Anonymous, the new
12-step program for investment managers who sell more
stocks than they buy.

"Bob is about to share a wonderful experience, offering his
co-bears a ray of hope. You see, he recently received a
call from Brendan Wood International, a research group.

"Bob was one of 3,000 institutional investors surveyed
anonymously by Brendan Wood International. When Brendan
Wood finished, they made a list of the ten stocks that
investment managers like Bob had the least confidence in...

Qwest
Ford
TXU Energy
Sears
Computer Associates
Lucent Technologies
Interpublic Group (A former Warren Buffett holding)
Schering-Plough
Sun Microsystems
Safeway

"Due to the anonymity of the survey, Bob was able to come
clean about the stocks he used to own. He admitted that
some of his bearishness came from watching what the
smartest, or at least most informed, money in these stocks
is doing.

"The most visible example of that would be Philip Anschutz,
founder and chairman of Qwest, who just unloaded 19 million
shares on Nov. 17, for proceeds of over $66 million. Bob
figures Anschutz ought to know what his own company is
really worth.

"2,999 other investors came clean in the Brendan Wood
survey. They cleared their consciences about those ten
stocks. And there was a lot to clear, too.

"Last quarter, institutional investors...

.. sold about 1.9 million shares of Ford.
.. sold 68 million shares of Sears.
.. sold 47 million shares of Lucent.
.. sold 83 million shares of Sun MicroSystems.
.. sold 16 million shares of Schering Plough.

"Thanks for sharing, Bob. Of course, Bob filed all his
transactions with the SEC. So he's not really anonymous at
all. But he knows all the shareholders in the mutual fund
he runs think that it's a waste of time to read all those
filings. There's nothing about Volume and Momentum in them.
And that's all they seem to be interested in."

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The Daily Reckoning PRESENTS: The American majority, racing
ahead of absurdity...


FANTASIES
By Bill Bonner

"I think we differ principally in that you assume the
future is a mere extension of the past whereas I find
history full of unexpected turns and retrogressions."

- Winston Churchill

The U.S. is fighting, we are told in the editorial pages,
to make the deserts of the Mideast safe for democracy.
George W. Bush, America's conservative president, is
conducting what Thomas Friedman has called a
"revolutionary" and sublimely"idealistic" war.
"Nurturing," he tells us; that is what the 4th Army is
really doing. At the same time, on the home front, the
Republican administration has put into place the largest
budget and largest budget deficit ever... along with the
most ambitious, most activist domestic spending program
ever seen on this jolly planet.

Meanwhile, on the economic front, America's 'strong dollar'
policy seems to include allowing the dollar to take a dive
in the early rounds against its main rivals - the euro and
gold - and to lie there looking dead for the rest of the
match. That doesn't seem to stop central banks from betting
on it; they see the gamble as a way to stimulate their own
spectacles. We guess they think it is worthwhile to
impoverish themselves so their nations can grow rich. How?
By lending to people who cannot pay the money
back....selling to people who cannot afford to buy... and by
buying assets that cannot be worth what they pay for them.

The American consumer not only keeps pace with the
absurdity; he races ahead, as if he wanted to be first in
line at bankruptcy court. He has convinced himself that the
more he spends, the happier he will be. A NY Times headline
explains that he must continue spending - even if he has no
more money. The economy depends on it, explain the geniuses
at the Times.

Our head spins.

And along comes David Brooks, again in the NY Times, with
more fantasy. He tells us that these all these 'positive
trends' prove that government works! The Times really ought
to include paper airplane bags for readers with sensitive
stomachs and no sense of humor.

But we write today neither to put ourselves in earnest
opposition to these trends, nor to offer constructive
comment, nor even to throw up. Instead, we offer ridicule
and nothing more.

First, we notice that the trouble with politics and
economics is that the words lack precision. Talking
politics with your neighbors is worse than asking a
teenager about his personal life. The teenager gives you
nothing you can use - just rough sentiment formed of half-
shaped syllables interspersed with MTV groans. If you work
hard enough, you can pry some useful data out of him -
names, addresses, times, places. Given enough time and
energy, you might even know something.

Not so with politics or economics. Almost all political
statements are empty of meaning; nearly every word is a
promiscuous lie. We know of no political leaders today -
from the most craven to the most honorable - who do not
claim to act in the name of prosperity, freedom and
democracy. Yet, no one has any idea what the words mean.
And if you peel off the layers of humbug, what do you find
at the center? Truth? Not at all; you find a mountebank
masquerading as an imposter. It is not merely a fraud, but
a compound fraud, in other words - so dense and
impenetrable that there's practically no hope of making
sense of it.

If by some accident, Saddam's goons had failed to rig his
2002 referendum properly, and it had gone against him, we
doubt he would have given up power. But if Osama bin Laden
were elected president of Iraq, tomorrow, we have little
doubt but that the Bush Administration would demand a
recount. Neither leader honestly believes in democracy.

But underneath, the lie is even more profound... for the
idea of democracy itself is such a scam that only a fool
would take it seriously. Suppose a majority of voters
should decide we should all speak ancient Greek at home and
tie our shoelaces together and hop to work each day? Would
you go along, dear reader? Suppose they should vote to
exterminate Presbyterians or force vegetarians to eat pork
rinds?

The majority is merely a big bunch of dunderheads; you have
only to read the papers and watch the stock market to
figure that out. Why should they get to tell us what to do?
Which is why nobody who has ever thought about it actually
believes in democracy. When people say they believe in
democracy, what they mean is that they believe in Western-
style consensual government, in which the voter is only
marginally involved.

What really count are the institutions, customs, habits,
and manners of a modern, civilized society. The voter gets
to cast a ballot from time to time, but he is only dimly
aware of what the vote is all about... and generally makes
his decision on the basis of which candidate has the more
likable mug and promises to dig deepest into his neighbor's
pocket. Despite him, government goes on its way -
mismanaging the economy is the usual ways.

We only bring this up in order to reach for a point... not
being too sure what we will grab: almost all discussion of
political and economic issues is as futile as arguing with
a goose about the Christmas menu. The poor goose is not
likely to understand a word... and it doesn't matter what he
says anyway.

Instinctively, people know this. The big words merely fill
the empty headlines, the empty space in campaign speeches,
and the hollow cavities in the lumpencrania. People do not
waste their time talking to geese. But they still need to
explain what they can't understand. They bring up GDP
growth, democracy and freedom from time to time. And when
things go wrong, they lay it onto wicked men and
incompetent managers. If the dollar declines too sharply,
they will blame Greenspan or the Chinese. If the war in
Iraq turns sour, it will be the fault of evil Mohammedans.

Not since the Enlightenment have people been ready to
concede that many things happen beyond their ken and beyond
their control. Nor can they admit that they often live in a
fantasy world - where their own credulity... and their own
desires... bend light and muffle sound, so that all they
hear and all they see confirms what they most want to
believe. 'The economy is recovering,' they say to
themselves. 'Somehow, it will all turn out all right.'

"We are fooling ourselves if we think the world is going to
wake up one of these days and merge the fantasy to the
reality," writes Fred Sheehan in Marc Faber's Boom, Doom
and Gloom Report.

"When it hits," Peter Bernstein goes on to describe the
gathering storm,"and whichever sector takes the first
blow, the restoration of balance will be a compelling force
roaring through the entire economy - globally in all
likelihood. The breeze will not be gentle. Hurricane may be
the more appropriate metaphor."

What will happen, will happen. Somehow, the war in Iraq
will run its course... The deficits... debt... and
dollar... will all meet in some fatal destructive collision.
And one way or another, the goose will be cooked.


Bill Bonner