-->Bad Bets

The Daily Reckoning

London, England

Monday, 5 January 2004

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

*** Bernanke speaks, dollar tanks... again...

*** American wages fell 20% last year -- in terms of real
money...

*** Time to buy Japan?... the (modern) Grapes of Wrath... where
will the Joads go this time?

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

Alan Greenspan and Ben Bernanke are in the news today. The two
Fed governors gave speeches over the weekend.

The big financial story of '03 was the drop in the dollar --
which dwarfed all other trends put together. All U.S. assets are
priced in dollars. If, all together, they are worth about $50
trillion -- Warren Buffett's estimate -- last year, Americans
lost $10 trillion (measured in gold or euros). This followed a
similar loss the year before. But neither Greenspan nor Bernanke
bothered to notice... or stooped to wonder what it might mean.

"There appears to be enough evidence, at least tentatively, to
conclude that our strategy of addressing the bubble's
consequences rather than the bubble itself has been successful,"
said Greenspan to the annual meeting of the American Economic
Association.

Success, in the Fed Chairman's view, is demonstrated by the
"exceptionally" mild correction will be followed by the most
extravagant bubble the world has ever seen. Despite terrorist
attacks, stock market scandals and war consumers just keep
trucking their way to the poorhouse. Mr. Greenspan did not
mention it, but since he has been head of the Fed the average
American has spent a higher percentage of income -- from 75% to
about 85% -- trying to keep up appearances while not falling
behind in his debt service payments.

Greenspan acknowledged that he might have raised rates to prick
the bubble. But that would have meant a real correction rather
than a phony one. A falling stock market would"bring the whole
economy down with it," warned Greenspan.

The Fed chief declined to explain why avoiding a correction by
increasing consumer debt was a good thing... nor did he explain
how debt might someday be eased without a correction... or what
would happen when his debt bubble, now at higher altitudes,
eventually blew up. Nor did he bother to reflect on what would
happen when foreigners lose confidence in the debt-puffed dollar.


But leave it to Ben Bernanke to rush in where even Greenspan
feared to tread. The newest Fed governor said he saw"little
risk" of a dollar crisis. Instead, the risk Bernanke sees is the
menace of not enough inflation. Inflation is"at the bottom of
the acceptable range," he said, and explained that the Fed would
make sure it moved higher, not lower.

These remarks seemed to push the world's lenders closer towards
the risk Bernanke couldn't see."Dollar drops to record low
against euro after Bernanke's comments," Bloomberg reported.
An American who earned $20 per hour in 2001... earned the
equivalent of only $12 last year.

In terms of real money, Americans are losing income faster than
at any time since the Great Depression. Pity no one mentions it.


*** Addison and company haven't quite assembled back in the Paris
HQ of the Daily Reckoning following the holidays. In lieu of any
insightful financial news for the day, Hugh Hendry, London-based
fund manager, gives his stock picks:

"I'm buying stocks with inelastic supply curves. That means as a
producer, you can't produce more of the product in the short
term. If demand rises, the only way you can ration demand is by
raising prices. I see monetary inflation and I'm betting this
money will bid up prices in the wider economy. So it takes me
into mining companies. We have Anglo American. It's raised
diamond prices three times this year. It also has gold. And you
see what's going on with gold. Others I own are Lonmin, BHP
Billiton, Rio Tinto, Phelps Dodge and Xstrata. Yet put them all
together and the market cap is less than Vodafone's. There is an
enormous reluctance on the part of institutional investors to buy
these stocks. They've looked at the past 20 years, and they say
'You know what? They stink.'

"Yet, these stocks are already performing. The valuations don't
look remarkably cheap, but the analysts are pricing expectations
by the absolutely awful 20-year prior history.

"There's a better chance of these stocks doubling than any other
stocks doubling in the marketplace. I own a zinc mine in Ireland
called Arcon International, a tiny company. Zinc is at a 70-year
price low versus the real economy when you've got China growing
and you've got every other metal higher. If we are wrong, Arcon
is [already] priced as if it has no future.
If we are right... Arcon's on two times earnings... I'm going to
make 10 times our money."

*** And how about Japanese stocks? Is it time to buy -- after a
13-year bear market? Maybe. In Japan you can get an 8% dividend
yield, says Hendry. And a P/E of 6. This is like buying equities
in the U.S. in 1976.

*** Tech stocks rose 66% last year. But gold stocks rose 68%%.
Which are likely to rise again this year? We will put our money
on the gold stocks.

***"History records many turning points leading to human
tradegy, but few 'turning-back' points," writes our friend Byron
King."From the pointy-headed wise men at the FED, to the
stampeding shoppers at Great-Wal-of-China-Mart, this nation's
economy is too far gone to reverse the unfortunate trends. We are
all in this together, unless maybe you have been foresighted
enough to open up an overseas bank account, or two, and squirrel
away some gold. The conventional thinking is that the problem of
a 'jobless recovery' is a strange and new economic disease. I
think that the 'jobless recovery'
is actually part of the cure, and we are now only suffering the
sniffles that precede full-fledged pneumonia. This is nature's
way of imposing a hard-edged economic phenomenon, a painful
social phenomenon, and a dislocating cultural phenomenon on the
world of the 'dollar standard', the purpose of which is to
deflect the political and economic forces that impel the nation
to its own disaster. We shall have to wait and see how the body
politic takes to this particular homeopathic cure."

Byron continues:

"When John Steinbeck published 'The Grapes of Wrath' in 1939, he
told a tale of the Joad family, driven off their land, in the
midst of the Great Depression, when the crops failed due to a
drought. What nature commenced, according to Steinbeck (and what
FDR prolonged, I must add), the Joad family's fellow American
citizens made into a tragedy along the sad route West in a
beat-up old truck. But 'Grapes of Wrath' was also a tale of hope,
because at least there was the possibility of a better life in
California, pre-Gray Davis.

"What is the modern version of 'The Grapes of Wrath?' I think it
can be updated to commence with a 'jobless recovery' because the
U.S. Federal Reserve created too many dollars, to fund the
long-term deficit spending of an unrestrained federal government
of Pharaonic scope. These excess dollars then went overseas via
the conduit of unchecked consumerism, an American version of what
Pope John Paul II has called 'the cult of radical individualism,'
pushing the nation to the point of irremediable indebtedness and
national insolvency. And then, in the updated version of the
Steinbeck novel, people lose their land and homes not to drought,
but to debt-collection and unpayable taxes. And when people pack
up in their beat-up old SUV's and head out onto the National
System of Interstate and Defense Highways, they go... hmmm...
where do they go?

"The Joad family went West and picked peaches in California, but
is that really a job for today's unemployed investment bankers,
mortgage brokers, graphic designers and software programmers? Is
the prospect of picking peaches for a bare living why countless
Americans went to college, and even took Economics 101 while
enrolled? Hardly. No, I wonder if the Joad families of the
future will wait for the next election cycle, and then vote for a
Man (maybe a Woman?) on a White Horse, who promises 'good jobs at
good wages,' and who will stand up to those perfidious
foreigners, with their 'sweat-shop wages.' Perhaps I am
overstepping my bounds in all of this. It is difficult to predict
the future, but when I find out what happens I will be sure to
let you know."

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

The Daily Reckoning PRESENTS: While contemplating the passing of
2003, we thought it might be worth taking a look at what we were
thinking at the end of 2002. This DR classique was originally
broadcast a year ago yesterday.

BAD BETS
by Bill Bonner

"God does not play dice."

Albert Einstein

Einstein upset the world with his Relativity Theory. All of a
sudden, there were no fixed positions; everything seemed
unhinged... loose.

"It's all relative," people said. Nothing was absolutely this or
that, right or wrong, here or there.

And then Heisenberg's Indeterminacy Principle came along and even
Einstein had had enough. Not only are there no absolutes, said
Heisenberg, but you couldn't know it even if there were.
Everything was in motion, he pointed out; you could figure out
where an object was... or its speed... but not both. And the
process of trying to figure it out can't help but change the
readings!

After Einstein and Heisenberg the world had begun to look like a
giant crap game. You throw the dice and hope for the best; what
else can you do?

The idea of an uncertain, unknowable universe did not please
Einstein; he spent the rest of his life trying to prove it was
not so.

But today, we hear the rattle of dice everywhere. It is the end
of one year and the beginning of another. People are regretting
what they did last year... and warming up the dice in their right
hands for another throw. What are the odds of this... or that...
they wonder, as if they could know.

To give you a preview of our conclusions; we guess that this is a
bad time to buy stocks. [Depending on how you look at it... we
didn't exactly get this one right.]

The odds of a huge meteorite destroying lower Manhattan, we
assume, are fairly low - as remote as the odds that Congress will
pass a sensible law or that Jack Grubman will win a Nobel Prize
for his investment research. Anything could happen, but some
things are more likely than others. But, as Heisenberg warns us,
as soon as we try to figure these things out, we distort the
odds.

That is the strange perversity of the marketplace. As people come
to believe that something will happen, the odds of it coming to
pass go down. Likely as not, it has already happened. As people
come to believe they can get rich by buying stocks, for example,
they disturb the universe - they buy stocks and run up prices.
Then, the higher stock prices go, the more people believe in
them... and prices go still higher. At some point, because this
cannot go on forever, stocks reach their peaks - at almost
precisely the point when people are most sure they can get rich
by buying them.

This point was reached in the U.S. somewhere between the fall of
'99 and March of 2000 - about 3 years ago. Since then, the Dow
has fallen 37%. The Wilshire Index, a broader measure, has lost
43%. It is has been the worst bear market since '29, with the
leading mutual funds down an average of 27% in 2002 alone. In
terms of money lost, it has been the worst bear market ever. The
total loss so far has equaled 90% of GDP, compared to only 60% of
GDP for the two years following the '29 crash. [Despite the Great
Reflation of 2003, these figures are still true.]

Almost all market forecasters were wrong during this period; they
overwhelmingly thought stocks would go up, not down - especially
in 2002, because stocks"almost never go down 3 years in a row."
Abby Cohen, Ed Yardeni, Louis Rukeyser, James Glassman, Jeremy
Seigel - all the big names from the '90s - still believe that
stocks will go up, if not last year... certainly the next. They
seem completely unaware that their own bullishness has tilted the
odds - against them. Talking up the bull market year after year,
they helped convinced Mom & Pop that stocks for the long run were
an almost foolproof investment. Now, the fools are having their
way - proving that nothing fails like success.

In the last quarter of the 20th century, nothing seemed to
succeed better than American capitalism. Stocks began rising in
1975... and continued, more or less, until March of 2000. By
then, all doubt had been removed. Americans had become believers
in the stock market.

"To believe that stocks will be rotten again...," wrote James
Glassman early last year,"is to believe that they will buck a
strong tide that has been running in the same direction for more
than 60 years."

Glassman doesn't criticize our metaphors, but we can't resist
criticizing his. Tides do not run in a single direction forever.
They ebb and flow in equal amounts and opposite directions.

Glassman seems to believe in tides and weather, but never looks
out the window."It rains, but the sun comes out again. Stocks
fall, but they always recover to a higher ground," he wrote. And
then, he failed to mention, it rains again! And when the sun
shines long enough, people stop noticing clouds on the horizon.

Who noticed, on those perfect days of early 2000, that odds had
changed; the stock market had become very different from the
stock market of '75... and that the few investors who bought
shares in '75 were very different from the many Moms & Pops who
put their money into stocks in 2000? Who noticed, as Buffett put
it, that these people may have bought for the right reason in
'75... but they bought for the wrongs ones 2000? Warren Buffett
has another helpful dictum: if you're in a card game and you
can't figure out who the patsy is, you're it. Millions of patsies
had entered the stock market in the last 25 years... lured by
Buffett's example, Rukeyser's spiel, and the appeal of getting
something for nothing. Hardly a single one of them carried an
umbrella.

It is now three years since it began raining on Wall Street. On
paper, more money has been lost than ever before. And yet, the
little guys still believe. They believe the 'reasons' why stocks
are likely to rise... because they hardly ever go down 4 years
in a row! On the little evidence available (since it so rarely
happens) after stocks have fallen 3 years in a row, the odds are
about 50/50 that they will fall again in the 4th year.

This year, the odds may be distorted - but not in the way
investors hope. Stocks rarely go down 4 years in a row because -
usually - after 36 months, they have almost always hit bottom.
But this year is different. The patsies are so confident that
they have not been willing to sell their stocks and take their
losses. At the beginning of 2003, stocks were still selling at
prices more typical of a top than a bottom. Based on 'core
earnings,' S&P stocks were priced at 40 times earnings. Or, as
Barron's calculates it, based on last year's reported earnings,
they sell at a P/E of 28. Either way they are expensive. [And
even more so now!]

While earnings are subject to interpretation, dividend yields are
not; stocks yielded only 1.82% in dividends at the end of 2002.

But maybe the patsies will get lucky in 2003. Maybe the U.S. army
will catch Osama bin Laden... and maybe stocks will go up. Maybe
it is just luck, after all. [Luck... and a whole lot of
government stimulous!]

Imagine the roar of laughter when Einstien arrived in heaven and
God explained,"I don't have any plan... I just roll the damned
dice!"

God can do what he wants, of course. But made in His image, we
will do the same. We don't presume to know God's plan or his
method. We know that history is full of myths and lies, that the
present is impossible to fully understand and that the future is
unknowable.

But so what? As the existentialists tell us, we still have to get
up in the morning and make decisions. Recognizing that we can't
know whether stocks will go up or down in the year ahead, what do
we do?

We take a guess... we make a wish... and we say a prayer. We
guess that stocks are a bad investment, for very simple reasons:

"The place to find a safe and remunerative investment is
unusually where others aren't looking for it," writes James
Grant. Everybody is looking on Wall Street. So we will look
elsewhere.

"Buy low, sell high;" the old chestnut practically pops out of
the pan towards us. For the last 100 years or so, the average
stock has sold for less than 15 times earnings (which used to be
calculated more honestly). Almost any measure you take puts them
about twice as expensive today.

"A bear market continues until it comes to its end - with real
values," says long-time observer Richard Russell. Stocks are real
values when they sell for 8-10 times earnings, not 28-40 times.
If stocks are destined to sell for 10 times earnings some time in
the future, why would we want to buy them today?

Of course, stocks could go up. And maybe they will. But it is a
bad bet. Not that we know the odds any better than anyone else.
What we know that many others don't is only that we don't know
them....

Bill Bonner,
The Daily Reckoning

P.S. Einstein and Heisenberg proved the latter's point. Trying to
describe the world - they changed it."A kind of madness gained
hold..." wrote Stefan Zweig of Germany in the '20s. The whole
nation seemed to come unhinged by the realization that nothing
was quite what they thought it was...