-->A CYNIC'S GUIDE TO INSENSITIVITY

The Daily Reckoning

Paris, France

Friday, 30 January 2004

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*** Capitalism is not working... or is it?

*** Gold hits buy target... Buy! says the Bhagavad Gita...

*** India... Asia... and more, more, more!

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"Capitalism is not working. There has been a corrupting of
the system of capitalism."

The remarks are attributed to Alan Greenspan, central
banker to the entire world... and reported by former
Treasury secretary Paul O'Neill.

Few doubt it.

The common shareholder buys stocks with less than 2%
dividend yield. How could it make sense? He earns less than
the rate of consumer price inflation. Far less than the
rate of housing price inflation. Less even than he could
get from putting his money in a 'risk-free' government
bond. The only way he could possibly come out ahead would
be by finding a 'greater fool' to buy the shares from him
at an even more preposterous price.

And how likely is that? The smart money has been dumping
shares for months - at the highest ratios of insider sales
to purchases in history. All that is left are the
fools... millions of them. This is all very well at the
beginning of a boom; then, there are plenty of fools who
have not yet bought shares. Besides, at the beginning, an
investor can still get a 5% dividend yield. But at the end
of a boom, there are no greater fools left.

Meanwhile, the managers enjoy corporate jets and dining
rooms... corporate credit cards, health care plans,
retirement programs.

It is presumed that the corruption of the system is the
fault of greedy businessmen. More government regulation is
said to be what is lacking.

We take a different view. Most of the corruption we see is
merely normal and natural, in which greedy businessmen take
advantage of gullible investors. We take this as evidence
that capitalism is working just fine. Fools and their money
are soon parted... no matter what. What is extraordinary
about the beginning of the 21st century is that there are
so many fools who think they have so much money.

We live in a remarkable era, where - economically at least
- almost everything that could go right, did. Interest
rates came down... giving consumers more money, which they
spent. Housing prices rose, giving consumers the illusion
of greater wealth. And the lower rates enabled them to
refinance their houses in order to"take out equity" and
spend it. They bought goods at cheaper and cheaper prices,
from China and elsewhere... and then, the Chinese were nice
enough to give them back the money! It was all too good to
be true. And it led Americans into a delusion... thinking
that what couldn't be true for a single minute would last
forever.

You can search for the source of this effervescent delusion
down among the greedy businessmen all you want. You will
not find it. Instead, look higher - into the farthest
reaches of central banking. There... on the banks of the
Potomac... in the boardroom of the Federal Reserve... gushes
the wellspring of today's popular madness, like cherry
coke. And there is the Corrupter in Chief... Mr. Alan
Greenspan himself, shaking the bottle...

Moving along....Addison with more news:

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

Addison Wiggin, writing about a mètre away... not far from
the banks of the Seine...

-"Everything has been said before," wrote the philosophe
André Gide,"but since nobody listens we have to keep going
back and beginning all over again."

- 'Whisper numbers' are back on Wall Street. A hallmark of
the 1996-2000 bubble era, whisper numbers are unofficial
earnings numbers whispered by analysts and traders while
riding treadmills or downing tumblers of scotch in their
off-time. Last week, when Yahoo! missed its 'whisper
number' of 12 cents by a penny, the stock was whacked for a
4% loss... despite hitting its official number dead on.

-"It used to be that it took a generation or more for a
lesson to be learned and forgotten," begins a charming
article by CBSMarketWatch's Bambi Francisco, in which she
uncomfortably notes the parallels between the rally in 2003
with that of bubble year 1999.

-"GDP grew at 6.9 percent in the fourth quarter of 1999,"
Ms. Francsico writes,"the fastest clip in 3.5 years. And
back in early 2000, one economist said this: 'The economy
has too much momentum to grind to a halt.' Today, GDP is
expected to post growth of 4.8 percent to 6 percent for the
last quarter of 2003, following a torrid 8.2 percent in the
third quarter. New-home sales set a record in 1999. They're
on pace to set another record in 2003.

-"Back in 1999, 'Y2K'-related spending ignited corporate
demand. In 2003, massive tax cuts and low-interest rate
stimulation ignited consumer demand.

-"Dotcoms are advertising again, and foregoing profits for
revenue. 'Momentum in the last 11 months has pumped up
valuations (price-to-sales) to 2000 bubble levels,' wrote
Mark Fitzgerald, an analyst at Bank of America Securities.

-"Margin debt stood at $244 billion in January 2000, and
had risen for much of the previous 15 months. Margin debt
hit its peak of $278.5 billion in March 2000. If you don't
think it's a problem, maybe you're right. But even the best
and brightest were fooled. To wit: Greenspan said back in
February 2000: 'Margin debt isn't a particular problem.'

-"Margin debt rose to $173 billion in December 2003. It's
been rising for most of the previous 15 months." As has the
rate at which insiders are selling out... and retail
investors jumping in. We expect, by year's end, that
insiders and sellers will be getting the better of this
trade.

- The Daily Reckoning has caught some flack this week for
not reporting that the River of No Returns, AMZN, posted -
what? - profits of 8 cents per share in 2003. Forgive us,
dear reader, but just because the dynamic market momentum
junkies are feeling their oats doesn't mean we can justify
paying 674 times earnings for the stock. Apparently,
neither can the market. Following the announcement, AMZN
promptly lost 6% of its 'value'... and has continued its
decline ever since. We can only suppose that now that the
lumps can actually see a number in the P/E column, rather
than the customary N/A... they immediately begin suffering
from sticker shock.

- Investors in the Dow, who might ought to be suffering
from sticker shock themselves, weren't yesterday. The
'blue-chip' index rose 41 points to 10,510. The S&P 500
gained 5 to 1,134... the Nasdaq dropped 9 (thanks in part to
AMZN) to 2068.

- The gold price plummeted right from the get-go in New
York trading yesterday. It took a few hours for Mr. Gold
Market to comprehend the petulant game of word play hosted
by the Fed the day before. Once he did, well he over-
reacted. The sell-off sent the price down $13 to as low as
$396... before rebounding to close at $398. In overnight
trading in Hong Kong and Sydney, the price played footsy
with the $400 mark... and is (at the time of this writing)
trading at about $400.50 in London.

- The dollar rallied two cents, too, on the Fed phrase
exchange... but the rally was short lived. In overnight
trading, it gave back a penny to 1.25 against the euro.
Just because Easy Al and his FOMC pals removed an empty
phrase from their press release does not mean that rate
hikes are imminent.

-"Nothing has really changed," says Strategic Investment
guru Dan Denning."The Fed sees no inflation in consumer
prices. The labor market is a joke. Home sales were down 5%
in December. New mortgage applications dropped over 5% last
week as rates crept up. Taken altogether, there's no macro
case for raising rates any time soon."

-"In fact, the only good explanation for the change in
phrases," Denning surmises,"is that the Fed wants to
support the dollar in words without actually changing its
policy at all."

- With such a weak rally to build off of... it's most likely
going to take a lot more than a few silly words to support
the dollar. And given the current administration's penchant
for pork, the risk of a rout remains.

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

Bill Bonner, back in Paris...

*** After a period in which things were 'too good to be
true,' what would you expect, dear reader? A period in
which things were 'too bad to be true.' Imagine the dollar
falling... forcing up prices of energy and other key
imports. Imagine the collapse in the bond market - when
foreigners finally tire of losing money by lending to the
U.S.. Imagine higher interest rates... putting a terrible
squeeze on homeowners (who now have about $7 trillion worth
of mortgage debt alone). Imagine millions of people without
jobs... going bankrupt... demanding the government 'do
something.' Imagine president Bush or Kerry or
Clinton... invading Abyssinia!

*** Gold hit our 'remorse price' yesterday, falling below
$400. It dropped $17... Unfortunately, in this morning's
trading it has bounced back above our remorse price. What
the heck; close enough. Buy!

*** But wait. What if the U.S. really is going into a long
period of deflation similar to the Japanese after their
bubble burst? Why would gold go up?

Answer: Maybe it wouldn't. But we don't buy gold because we
know what is going to happen, but because we don't. What we
do know is that it takes a lot of time to add to the supply
of gold. Currently, above-ground gold increases at a rate
of only about 1.65% annually. Paper money supplies, on the
other hand, may be increased quickly. Just add a single
zero to a bill and you've increased that money by 10 times.

*** We don't know what will happen. But India has come to
interest us. And today, we take our direction from a 2000-
year-old Hindu epic poem, the Bhagavad Gita:"Do what
you're supposed to do. And don't worry about the fruits.
They'll come on their own."

George Washington put it differently:"We can't guarantee
success. But we can deserve it."

*** Back to the future... India... where capitalism is
working! This from Wired Magazine:"This is a story about
the global economy. It's about two countries and one
profession - and how weirdly upside down the future has
begun to look from opposite sides of the globe...

"I've come to Mumbai to see what software programmers in
India make of the anti-outsourcing hubbub in the U.S..
Mumbai may not have as many coders per square foot as
glossier tech havens like Bangalore and Hyderabad, but
there's a lot more real life here. Mumbai is India's
largest city - with an official population of 18 million
and an actual population incalculably higher. It's a
sweltering, magnificent, teeming megalopolis in which every
human triumph and affliction shouts at the top of its lungs
24 hours a day.

"... Hexaware is located in the exurbs of Mumbai in a
district fittingly called Navi Mumbai, or New Mumbai. To
get there, you fight traffic thicker and more chaotic than
rush hour in hell as you pass a staggering stretch of
shantytowns. But once inside the Millennium Business Park,
which houses Hexaware and several other high-tech
companies, you've tumbled through a wormhole and landed in
northern Virginia or Silicon Valley. The streets are
immaculate. The buildings fairly gleam. The lawns are fit
for putting. And in the center is an outdoor café bustling
with twentysomethings so picture-perfect I look around to
see if a film crew is shooting a commercial.

"Hexaware's headquarters, the workplace of some 500
programmers (another 800 work at a development center in
the southern city of Chennai, and 200 more are in
Bangalore), is a silvery four-story glass building chock-
full of blond-wood cubicles and black Dell computers. In
one area, 30 new recruits sit through programming boot
camp; down the hall, 25 even newer hires are filling out HR
forms. Meanwhile, other young people - the average age here
is 27 - tap keyboards and skitter in and out of conference
rooms outfitted with whiteboards and enclosed in frosted
glass. If you pulled the shades and ignored the accents,
you could be in Santa Clara. But it's the talent - coupled
with the ridiculously low salaries, of course - that's
luring big clients from Europe and North America. The
coders here work for the likes of Citibank, Deutsche
Leasing, Alliance Capital, Air Canada, HSBC, BP, Princeton
University, and several other institutions that won't
permit Hexaware to reveal their names.

"Jairam works in a first-floor cubicle that's unadorned
except for a company policy statement, a charcoal sketch,
and a small statue of Ganesh, the elephant-headed Hindu god
of knowledge and obstacle removal. Like most employees,
Jairam rides to work aboard a private bus, one in a fleet
the company dispatches throughout Mumbai to shuttle its
workers to the office. Many days she eats lunch in the
firm's colorful fourth-floor canteen. While Hexaware's
culinary offerings don't measure up to Google's celebrity
chef and gourmet fare, the food's not bad - chana saag,
aloo gobi, rice, chapatis - and the price is right. A meal
costs 22 rupees, about 50 cents.

"After lunch one Tuesday, I meet in a conference room with
Jairam and five colleagues to hear their reactions to the
complaints of the Pissed-Off Programmer. I cite the usual
statistics: 1 in 10 U.S. technology jobs will go overseas
by the end of 2004, according to the research firm Gartner.
In the next 15 years, more than 3 million U.S. white-collar
jobs, representing $136 billion in wages, will depart to
places like India, with the IT industry leading the
migration, according to Forrester Research. I relate
stories of American programmers collecting unemployment,
declaring bankruptcy, even contemplating suicide - because
they can't compete with people willing to work for one-
sixth of their wages."

*** Neo-conmen or paleo-cretins?

It's hard to know which is which. We speak of the two
leading candidates for the job of president.

Both are shopping for votes. They pay in integrity, a
currency of which neither has much to spare.

One signed the Omnibus Appropriations Bill last week -
including a provision that limits the Federal government in
using offshore outsourcing. It is contrary to the principle
of Free Trade and prudent government finance. But this is
an election year.

The other proposed a"Call Center Consumers Right to Know
Act," which requires operators to tell callers where they
are located early in the conversation. (We have not read
the bill, but we presume longitude and latitude are not
enough.)

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The Daily Reckoning PRESENTS: A little levity for an
otherwise sunny Friday...


A CYNIC'S GUIDE TO INSENSITIVITY: HOW TO DISCOVER YOUR
INNER BIGOT
By Bill Bonner

"We haven't insulted anyone lately," said Addison recently.

Today, we make up for it.

Not that we really want to insult anyone. The Daily
Reckoning is, although we tend to forget, a commercial
enterprise. And as our friend Christoph Amberger reminds
us, pecunia non olet. (Money has no odor.)

But we have lately come to the conclusion that we live in a
world of delusion. Even our insults are largely phony and
preposterous. We look down the list of epithets and slurs
on the list of the Racial Slurs Database and laugh. The
'slur count' has reached 2,163 and is growing daily. But
most are just silly and ridiculous. Did you know that it is
considered a slur to call Canadians"51st staters?" Or that
in Russia, Jews are known as"cosmopolites?" If that is the
best bigots can do, we will soon lose all respect for them.

Long-time Daily Reckoning sufferers will recall our
mentions of bog-trotters, huns, frogs, canooks and West
Virginians. The words sound so harmless; we use them
affectionately, like calling a tall friend 'shorty.' On the
list of 'slurs' is"brown sugar," used for a black woman.
Why would that be a slur? We don't know. Likewise, Eskimo
is supposed to be a bad word. We don't know why. Nor do we
know why 'gypsy' is derogatory. Or why, in England, it is
supposed to be offensive to refer to someone from Scotland
as a"jock."

On the other hand, there are some words we care not to use,
because they are vulgar or mean. And there are some that
seem perfectly innocent to us, yet get readers worked up
into a lather.

We refer to people from China as"Chinamen." The phrase
seems straightforward enough. But there seem to be a lot of
people who don't like the sound of it. They would prefer to
be known as"Chinese people." Or even as simply"Chinese."

This troubles us on two levels. First, we are amazed that
people think they can determine the nouns that others use
to describe them. If that is the case, we announce herewith
that from this moment forward we want to be known as a
'smart-man' or 'handsome-man.'

The other problem we have is that the words people find to
describe themselves are not merely idle flattery, but
generally dull and barely grammatical. Our grandmother
refereed to blacks as"darkies" or"colored people" - which
seemed descriptive. These were not racial slurs back then.
No harm nor discrimination was meant by them; they were the
polite way to describe black people. The term"pickaninny"
was regarded - at least as we recall - as an affectionate,
descriptive noun. Less polite people had other words.

As early as the 1950s, groups of people began to choose
their own collective nouns."Colored people" was the term
American blacks preferred, as evidenced by the title of
their group, The National Association for the Advancement
of Colored People. Fifty years later, the term has come
back in style, but in an awkward form:"people of color."

The conceited delusion of the world improvers is that if
you refer to a German as a"kraut" or a Frenchman as a
"frog," you might as well be building a road to Auschwitz.
So certain are they that words are evil they have passed
laws making some of them illegal.

But beneath the ban on words is a strong belief in the very
thing they claim to be against - racism. It exists
everywhere, they believe. Without the vigilant efforts of
the word police and world improvers, bodies would be
stacked up all over the place.

We recall a conversation in the mid-'80s. In Baltimore, a
very race-conscious city, we worked with a young black
woman who in all things, other than her actual physical
appearance, might have been mistaken for a white person. A
group of us were discussing her work. Someone mentioned the
word 'black' and all of a sudden we were struck by a
curious thought: her skin was black as a gypsy's heart; but
we had forgotten that she was black. And why not? It didn't
matter.

Even more curious, our new friend, the sinologist, had told
us something that made us stop short. She - a French woman,
obviously not Chinese - could travel around China... and,
after the initial shock, people did not seem to notice that
she was not Chinese. She spoke the language. She understood
the culture. She fit in.

Which makes us wonder. Is racism itself a delusion? Are we
not capable of picking out the amusing, endearing,
engaging, repulsive and obnoxious traits of our
neighbors... giving them handles that entertain us... and
yet, having no desire to send them to gas chambers or hang
them from trees?

We don't know. But we've run out of time wondering....and
so, fearing we have left some readers uninsulted... we
include a handy list of"slurs" from the Slur Data-
Base... so readers may find one or two that suit them.

Adolf, Ahab, Arab, Angie, Babushka, Bamboo coon, barbarian,
boong, bog trotters, beaner, dago, chink, Christ-killers,
cracker, Eskimo, Euro-trash, flip, gabacho, goat roper,
gook, goy, hillbilly, honkey, gypsy, Jap, long nose,
kaffir, heeb, mick, mud person, naga, ninny, nip, paddy,
papist, raghead, polack, shyster, skunk, slant-eye, spic,
slope, swamp honkey, terrie, whitey, wetback, yankee.

Bill Bonner

Descended from bog-trotters
Raised among rednecks
Living with the euro-trash..