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The Daily Reckoning

Ouzilly, France

Monday, 29 December 2003

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*** Still thinking about THINGS... what would Jesus say?

*** Stuck in the eye of the needle... Globalization,
Derivatization, Consumerism and Dollarization... and the end
of the world...

*** Best year for equities in 17 years... Christmas shopping
disappoints... Women prefer furs... and more!

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We have been taking advantage of this lull in the markets
to think about THINGS.

Our consumer economy depends on people buying more things.
But every major religion tells us that the more
'enlightened' we become, the more we realize how
unimportant things really are. What things did Jesus have?
We don't recall any mention of them.

On the contrary, Jesus sermonized more than once against
letting yourself get distracted by wealth and worldly
things. It is easier for a camel to pass through the eye of
the needle than for a rich man to enter heaven, he warned.
It now looks as though our entire economy has gotten
trapped... stuck like a fat camel in the eye of the needle
on its way to paradise... so blubbered up with things bought
on credit - it cannot get through.

When we are interviewed on the radio, we are frequently
asked,"Well, what should George Bush do... what should
Greenspan do... to avoid the grim scenario you see coming."

"Nothing," we reply."There is no easy way out. We are
stuck."

And there is no escape. Going forward means getting deeper
into debt - which will cause even greater problems in the
future. Backing up, by curtailing spending and borrowing,
would mean recession, joblessness, and lower standards of
living - now. It would also mean that George W. Bush would
serve only a single term.

But we are thinking about other things, too. It is nearing
the end of 2003. So far, we have little cause for
complaint; the 3rd millenium has seemed about as agreeably
mad as the 2nd.

In last week's paper, the Wall Street Journal noted that
IBM had announced moving nearly 5,000 well-paid jobs
offshore.

"Most of the millions of white-collar workers who could be
affected by this phenomenon over the next several years are
clueless as to what they can do about it," writes Bob
Herbert in the New York Times.

Mr. Herbert was thinking in terms of labor unions... and how
they might pressure either IBM or Congress to prevent the
loss of jobs. No one asked us, but we would have given the
same response we give to the radio: nothing.

"These families have little protection against the powerful
forces of the global economy," Herbert concludes.

Americans are trapped in more ways than one. Not only has
their spending wiped out their savings and laden them with
debt... it has also destroyed their industries and their
ability to pay. Each dollar of excess purchasing power in
America brought forth a dollar and fifty cents worth of
extra effort overseas. Gradually, foreigners - with almost
inexhaustible supplies of cheap labor, abundant capital,
and an apparently unquenchable demand for new THINGS from
American consumers - built the factories that might
otherwise have been built in America... and took the jobs
that might otherwise have been given to American workers.

We have not quite seen the proof of it yet. Only the hints
and soupçons - a falling dollar, rising gold, a strange
'jobless' recovery. But we believe we are entering a
different world, a different epoch. Globalization,
derivativization, consumerism, dollarization... all have
turned the tables on Americans. The huge advantage that the
average American enjoyed - merely by being born into a
rich, high-wage society - is giving way. Capital is
available worldwide now. Except for the curious marvel of
the Dollar Standard System, Americans have no special
access to it.

In fact, with national savings rates near zero... they are
forced to rely on Chinese communists for their spending
money. And now the Dollar Standard System is giving way,
too. It seems inevitable that wages in America will fall,
compared to the rest of the world. Living standards will
rise in other countries... and stabilize or even collapse in
the U.S. Somehow, we suspect, Americans must go through a
veil of tears - paying down their debt, building their
savings, turning their backs on runaway consumerism, buying
gold, and adjusting to a new and less accomodating world.

In the meantime, here's more news from Eric:

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

Eric Fry from the belly of the beast...

- Wall Street's losing streak is finally over... (unless the
stock market crashes 20% before Thursday). This year's
double-digit gains will bring an end to three years of
falling share prices, while also bringing an end to Abby
Joseph Cohen's three-year forecasting slump. The Dow added
seven points last week to 10,324 - giving the blue-chip
index a plump 24% gain for the year. The S&P 500 is up a
similar amount, while the Nasdaq Composite has surged
nearly twice as much.

- Abby Joseph Cohen - for one - is delighted that her
perennially bullish prediction for the stock market came to
pass in 2003, unlike the perennially bullish forecasts she
issued for 2000, 2001 and 2002. If memory serves, Ms. Cohen
issued a succession of overly optimistic stock market
forecasts for share prices, beginning with the prediction
that the S&P 500 would hit 1,755 by the end of 2000.
Instead, the index fell to 1,320 - 25% below her forecast.

- Undaunted, she called for the S&P to hit 1,650 by year-
end 2001. Instead, the index fell to 1,148. She came
roaring back in 2002 with a guess that the S&P would
recover to 1,425 by the end of that year. Oops again! The
S&P ended the year a whopping 38% below her forecast, at
880. Mercifully, 2003 brought a bit of much-needed
redemption to Ms. Cohen. This year, her forecast was off by
less than 5%. The S&P currently sits at 1095, only 55
points shy of her year-end price target.

- Abby Cohen's experience demonstrates just how tricky it
is to outguess Mr. Market. We are sure we know what he
should do, but we are never sure what he could do. That's
why we here at the Daily Reckoning have a perfect
forecasting record; we never offer a forecast.

-"The annual parade of strategists' predictions has
devolved into a mock-heroic farce," we observed one year
ago in this column."The strategists play their part by
taking their predictions - and themselves - very seriously,
which enhances the comedic effect of the farce. However,
the effect is much less comedic for those gullible souls
who, over the last three years, may have trusted in the
strategists' woefully errant forecasts. Recall that at the
very start of 2002, Abby Cohen urged investors into the
stock market with her confident assurances that share
prices would rise briskly. Heeding the call, many bullish
investors, armed only with their naïve enthusiasm, rushed
into the fray and went head-to-head with bearish financial
market trends... The outcome wasn't pretty."

- But this New Year's Eve, let's let bygones be bygones and
raise a glass to Abby Cohen's"clairvoyance." Let's toast
the occasional success of robotic bullishness and let's
hope that Abby is"right" again in 2004. Ms. Cohen is
expecting the stock market to advance again next year. Not
surprisingly, she holds the highest Dow forecast for 2004
of any Wall Street strategist. She expects the blue-chip
index to hit 11,800 by year-end, and expects the S&P to
reach 1250... Here's to Abby! As the new year dawns, Ms.
Cohen's bullish outlook is hardly a contrary opinion.
Everyone, it seems, is bullish - professional strategists
as well as amateur investors.

-"A thorough, if not exhaustive, review of the formal
year-end outlook dispatches produced by every Wall Street
strategist and buy-side chief investment officer reveals a
kind of harmonious, upbeat perspective," observes Barron's
Michael Santoli."Here are the beliefs espoused broadly as
the year turns: The bear market ended in October 2002.
Stocks will continue higher, though at a more moderate
pace... The cyclical upturn in the economy is strong and
probably sustainable... Business spending will grab the
baton flawlessly from consumer spending, which will
slow... Treasury yields are headed higher - but that's okay
for stocks because it means the economic improvement is
real. The dollar will continue trending lower - but that's
no problem for stocks because it helps multinational
earnings and will cut into the trade deficit. Profit and
gross domestic product growth will decelerate - but stocks
can still log gains in a moderating growth climate."

- Sounds good to us... Maybe too good.

- Wall Street's happy scenario reminds us of a child's lie
- as entertaining as it is unbelievable. To be sure, some
things will go right in 2004. But the happy scenario
assumes that nothing will go wrong... We have our doubts.

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

Bill Bonner, back in France...

*** The papers report an un-encouraging Christmas shopping
season. Wal-Mart said its sales were near the low end of
the forecasts.

***"Small business hiring on hold," reports the Arizona
Republic.

*** But hey, who's complaining. Stocks are up!"Best
results in 17 years," says the Financial Times. Worldwide,
investors averaged a 29% return this year... with emerging
markets up 64% in dollar terms.

The Dow is up 21%... also in dollar terms. Adjusted to real
money - gold - or better phony money - euros - U.S. stocks
gained little during the year.

***"Things mean more to women than they do to men,"
Elizabeth volunteered."Status is more important. At least
for women who don't work; they get their status from having
fine things. And successful children. They have few other
ways to show off."

The conversation began about spending money. It took a
curious turn.

No serious man gains status by spending money, your editor
explained. The man who buys a fancy sports car or a
expensive suit of clothes - or who dumps his long-suffering
wife in favor of a trophy bride... is regarded by other men
as a fool. They know he is just giving himself handicaps.

A man gains status - at least among other men - by being
able to do things. A man who knows how to fix a car... mix a
good drink... cure a ham... or track an elk is a hero to all
who know him. But women cannot appreciate him. They prefer
the big-spending nincompoop. And maybe they are right.

A fur coat is more than just a way of proving you are
successful, Elizabeth replied. It is success itself. It is
all very well for a man to feel like a success just because
he has been able to make some money. But what good is it?
It is merely an abstraction... something he can look at on a
report from his stockbroker... or put in his will. But a fur
coat is something that you can enjoy. It is real. It feels
good and it makes you feel good about yourself... knowing
that life's good things are available to you.

"I don't like wasting money," she went on."But I don't
mind spending it either. Otherwise, it has no value. No
point. The miser who lives a Scrooge-like life... and saves
all his money in gold coins is always a pathetic figure in
literature. And there's a reason for it. He is a pathetic
creature in life. Money is meant to be used, enjoyed.

"Now, sweetheart... about that fur coat..."

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The Daily Reckoning PRESENTS: Mogambo on Monday! Our
fearless leader explains how the reckless creation of money
engenders both a"fraud" and a"horror" in one fell swoop.


COST FREE
By the Mogambo Guru

When I see one of the cool new twenty-dollar bills, it is
usually in the hand of a stranger, and I always think to
myself"Man! I wish I had a bunch of those! Or even one!"
But Dan Neel, writing a nice piece entitled"Fancy Greens
and Pusherman Blues" at the NY Press, is more advanced in
his thinking than that.

"The U.S. is making an incalculable profit on the roll-out
of the snazzy new twenties," says Mr. Neel. He figures that
the profit comes from the underground economy, who are
being roiled by this new regime of currency issuance.
"Wholesale drug resellers as close as two tiers above
street-level distribution have begun asking buyers to
separate older twenties from new ones to more quickly
direct the old currency at laundering operations and retail
purchases. The result is an accelerated rate of tax revenue
for the U.S. government."

Now, I freely admit that my experience with the drug trade
is very limited, although I wish I had a big ol' drug
problem so that I could qualify for some of those luscious
federal program benefits, with free food and housing and
medical care and case workers to handle all my problems for
me, and keep people from hassling me because I would be
certified as a Person With A Disability And Therefore
Possess Powers Beyond Those Of Mortal Men. But the few drug
dealers I have run into always wanted cash, and I patiently
tell them that I thought the first ones are supposed to be
free, and that is how they get me hooked, and it is only
AFTER I become an addict that they start charging me and
they make all their money on the back end of the service
period, but this is just the beginning of the service
period, and therefore the drugs are free to me. But that
is, alas, only in the movies, and in real life there is
only that awkward moment when they are just staring at me
in stunned disbelief, and then they tell me to get the hell
away from them before they whomp me upside my freaking
head, and I do.

But getting back to Mr. Neel, he explains that"Such
transactions are also the key to a little-recognized form
of seignorage. Call it paranoid seignorage: a spike in tax
revenue from resurfacing notes when the government
refreshes its currency. Think of it as yet another way the
government makes money from making money."

In case you are new to the concept of seignorage, he
explains:"Seignorage is the difference between the value
of money and the cost of its production. In the case of
notes, the Fed buys at four cents apiece and sells them to
banks at face value." Well, in actuality, the banks sells
some T-bonds to the Fed for the money, or the Treasury
deposits the money in the banks to use to pay government
employees, and therefore the banks don't spend a dime or
even have to do anything other than record the transaction
in the books.

But looked at another way, seignorage is also a shining
example of glorious government productivity, as two things
are accomplished at once, namely, 1) some debt is
extinguished and 2) the money supply is enlarged,
committing both a fraud (the artificial extinguishment of
debt) AND a horror (the precondition for resultant price
inflation, as this extra money works its way into prices).

But I regret that Neel really falls short of the mark when
he quotes"post-Keynesian economic theorist William
Hummel," who has the temerity to write,"For a few cents
worth of paper, the [U.S.] notes buy foreign goods and
other assets at their face value, and as long as those
notes remain overseas, those assets are effectively cost
free."

Well post-Keynesian economic theorist or not, if this
Hummel fella thinks for one lousy minute that there is no
effect on economies because of a large influx of U.S.
dollars, or an outflux of U.S. dollars, or large influx of
any currency, or a large outflux of any currency, or a
medium sized influx or outflux, or even a small influx or
outflux of money, influx outflux influx outflux in any
country anywhere on the planet, and if he further believes
that U.S. nationals burrowing themselves under a mountain
of debt so as to finance raw, naked consumption are
included in his definition of"cost-free," then I can only
surmise that the term"post-Keynesian" means"complete
idiot," because I am here to tell you that any movement of
even the most insignificant amounts of money has far-
reaching repercussions, because it must, and of all the
words in the world that I would pick to describe the
effects of money piling up anywhere, the very last
descriptor on the list, down there at the very, very bottom
of the list, is"cost-free." And if you don't believe me,
then watch carefully what happens the next time my wife
asks me for ten bucks, and you will note the HUGE effect
that it has on me, starting out with the usual"What? Ten
dollars? Do you think I'm made out of money or something?"

"Cost-free." Hahahahaha! I love it.

"Under the current system," writes Robert Blumen in a
little essay called"The Dollar Crisis" on the incomparable
Mises.org site,"the United States year after year imports
goods from the rest of the world for consumption and pays
for them with dollars. The dollars are then used by foreign
central banks to purchase debt instruments from either the
Fed or the private sector, in addition to U.S. stocks and
real estate."

Now note what Blumen says here, leading to the point that
assets we buy from foreigners are definitely not"cost-
free":"Where these are Treasury securities, they are
created out of nothing, requiring no savings by any
American consumer. Under this arrangement, Americans are
now freed from the ponderous burden of saving and the
onerous requirement of first producing in order to later
consume. Their consumption is offset by a growing
indebtedness of the private sector and the Fed to
foreigners. This state of affairs is unsustainable, and
will come to an end with a deep fall in the exchange value
of the dollar relative to other currencies." As we are now
seeing, if you pay any attention at all to the fate of the
dollar, every day.

Blumen draws extensively from a new book by Richard Duncan,
"The Dollar Crisis: Causes, Consequences, Cure."

Mr. Duncan writes,"How much longer will the rest of the
world be willing to accept debt instruments from the United
States in exchange for real goods and services? It is only
a matter of time before the United States will no longer be
considered creditworthy. It is only a matter of time before
the United States will not be creditworthy." If it was me
writing that, I would have capitalized that last sentence
to read"It is only a matter of time before the United
States will not BE creditworthy."

The dollar must collapse, forecasts Mr. Duncan, because it
will become impossible for the U.S. to continue to sell
one-half trillion dollars worth of debt securities each
year (the amount required to offset the trade deficit) for
very much longer, because foreigners, who are obviously a
real stupid bunch of people, are not so stupid that they
will never get smart enough to stop doing it.

Now this is the place where I take exception to that, as
the great advantage of a fiat currency is that we don't
have to sell nuthin' to nobody, much less a bunch of debt.
We can print up all the money we want, anytime we want. We
can have so much money floating around that we can retire
the entire national debt in one stroke if we want. However,
the resultant monetary inflation will, of course, filter
through to inflation in prices, and then all the poor
people start starving to death and getting uppity, and
commerce falls to zero as everyone is afraid to go to the
mall and have to wade through mobs of angry, homicidal
people.

But Mr. Duncan anticipates that very objection when he
says,"The more familiar effect of inflation, consumer
price inflation, is the bidding up of the money prices of
consumption goods as the money supply expands. However,
inflation does not always take this route: asset price
inflation occurs when credit money creation flows into
financial assets." Namely, stocks and bonds and houses.
Which is what we are seeing nowadays, as if that is okay
somehow. It is not, in case you were wondering.

But back to the Blumen essay, in which Blumen goes on to
say,"Bubbles are followed by busts, which usually result
in banking crises, and then fiscal crises generated by the
ensuing costly bailout of the banking system by the
government."

Not to mention, of course, the inevitable bailout of every
dirtbag country and THEIR banking systems that have fallen
victim to the IMF's ministrations, which is the exact same
thing on an international scale. And not to mention the
bailout, in this case"debt-forgiveness" of Iraq and
Afghanistan, since we decided to invade them and destroy
their economies, which means that we taxpayers eat another
huge cost.

And still, insists the aforementioned Mr. Neel, the U.S.
consumer's profligacy is, of course,"cost-free."
Hahahahaha! I love it.


Regards,

The Mogambo Guru
for the Daily Reckoning