-->The Dog That Didn't Bark

The Daily Reckoning

London, England

Monday, 5 April 2004

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*** On the Road to Ruin... whee! Dow up 97 points...

*** Watch out... the stars tell us stocks may rise... or
fall... Gold down $6.50...

*** More jobs!? More from our favorite columnist... and just
more!

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Let's see, where were we?

Oh yes... on the Road to Ruin...

And what a pleasant drive it is! The jobs are finally
beginning to show up - 308,000 of them, says the Labor
Department. Stocks rose on the news... Everything is
beautiful in its own way - even the road to ruin. It is
like admiring the beautiful mountain views from a
convertible, just before you drive off a cliff.

Let us not go there just yet. First, we turn our faces to
the stars. If we cannot trust them, what hope is there?

Our friend, Veronique, publishes an investment newsletter
based on astrology. Her recommendations are up nearly 300%
over the last 19 months, she tells us.

Reading her latest issue, we find that we are entering a
new cycle:

"The period from April 4th to August 4th might be less
attractive for stocks than it has been since March of
'03... The end of the month [of April] will be volatile; it
is difficult and dangerous to guess in which direction
prices will go. In effect, we have two cycles, both
positive and negative, in the medium term. One is as
vigorous as the other."

The twinkling stars give the sailor a sure course, but
alas, the investor has to make his way the best he can. His
skies are always cloudy. So, let us try to remember how we
got on this road in the first place. We recall Minsky's
dictum: stability breeds instability. So safe and secure
have Americans felt, they saw little danger in spending
money - especially not when their most revered economists
told them that spending was good for the economy. Over the
last 50 years, they have built such a proud tower of debt
that it is likely to fall over at any time.

If that were all there was to it, our Day of Reckoning
would be a picnic. But there are other things to reckon
with.

Our favorite columnist, Thomas Friedman, hardly lets a week
pass without touting the benefits of democracy, nation
building and the empowerment of women. We would normally
dismiss these notions as hollow words from an empty mind.
But the fact that Friedman is so insistent about them makes
us wonder. Maybe they are not as harmless as they seem -
maybe they are just signposts on the road to ruin.

"It's all very well to talk about empowering women," said a
neighbor over the weekend."But when women go out, get
jobs, and stop raising children, the whole society seems to
fall apart. Crime, divorce, social problems... we've seen
all these things in France since women's roles began to
change. And the worst of it is that the birthrate falls.
The only nation in Europe - and it is barely in Europe -
that produces enough children to remain at replacement
level is the Ukraine. Fat lot of good it is to empower
women if the result is that the whole race disappears."

In the paper last week, scientists speculated that the
world was going through a period of mass extinction,
similar to the Ice Age, when thousands of species are said
to have died out. We doubt the human race, or Europeans,
will be erased. But we can't help but wonder.

While women in the West slack off, those in China, India
and dozens of smaller countries are adding new citizens as
if they were cell phones coming off an assembly line. That
these new proletarians will take more and more of the
world's decent-paying jobs seems almost inevitable.
Relatively speaking, incomes in America and Western Europe
should fall - just when Americans most need money to repay
their debts and pay for their retirements.

At the very same time, public retirement systems depend on
an influx of new workers to pay the living expenses of the
geezers.

"We're trapped," said our friend."France has had several
waves of immigration - from Germany, from Poland, from
Russia and from Italy. All these immigrants integrated
themselves quickly. But these immigrants from Africa... both
the muslims from the North and the blacks from the
South... don't integrate very well. They seem to make social
problems worse. But because we don't have enough children
to keep the system solvent, we depend on these immigrants
to pay for our retirements. If we don't let them in, our
economic system falls apart. If we do let them in, our
society is destroyed."

Growing old... in debt... facing the greatest competitive
threat since the advent of the Industrial Revolution, with
bankrupt retirement programs and mass immigration from
strange cultures - you'd think that would be enough. But
wait... there's more.

"Oil production is going down," said an executive from the
French oil giant, Total, on Friday."It looks like your Mr.
Hubbert was right, after all. Oil production worldwide
seems to be peaking out. Yes, you can get more out of the
ground, using modern processes. But it is much more
expensive. And it doesn't make up for the easy oil we've
been pumping for the last 50 years."

Americans use about a quarter of the world's oil
production. All of a sudden, they find they have to compete
with foreigners for it. As standards of living rise in
India, China and elsewhere... people are going to use more
oil.

"This huge increase in the demand for oil comes at the
worse possible time," said our friend,"just when supplies
are heading down. The economy of the West has depended not
just on oil... but on cheap oil. It will be interesting to
see what happens when the real price of oil goes up."

Very interesting.

We turn to Eric for more news:

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

Eric Fry in Lower Manhattan...

- The"jobless recovery," may it rest in peace... Although
our dear departed friend spent a very brief time on this
orb, his impact was unmistakable. Thanks to the jobless
recovery, interest rates plummeted to generational lows,
thereby facilitating simultaneous bull markets in bonds,
stocks, housing and... most importantly... debt-financed
consumption. We will miss our dear friend.

- Friday morning, the U.S. Labor Department announced that
nonfarm payrolls jumped 308,000 in March, well above
expectations of 122,000. The job-counters at the Labor
Department also"found" another 87,000 new jobs in January
and February that they hadn't noticed the first time
around. All told, the economy is 395,000 jobs better off
than we thought.

- But all may not be as rosy as it seems."Here," writes
colleague Dan Denning over at Strategic Investment,"is the
grisly, income-disinflationary truth:"Average hourly
earnings in retail trade for March 2004 were $11.99 - DOWN
from February by.05 cents and UP only 0.75% from March
2003. Average weekly earnings in retail trade for March
2004 were $364.50 - DOWN 1% from February of 2004 and UP
just.09% from March 2003. Bottom Line: More service jobs,
fewer hours worked, anemic if not falling hourly and weekly
income levels for those service jobs. And this is GOOD
news?"

- Yes indeed, the jobless recovery is dead and gone. But
investors spent no time in mourning on Friday (he wouldn't
have wanted it that way). Instead, they conducted a kind of
national wake - a raucous affair where everyone dumped
buckets-full of cash into the stock market.

- The Dow Jones Industrials Average rose 97 points to
10,471, while the Nasdaq Composite leapt 2.1% to 2,057. For
the week, the Dow gained 2.5% and the Nasdaq surged 4.9%.
Dollar-buyers also partied hearty on Friday, as the
greenback soared more than 2% versus the euro to $1.211.

- Despite the celebratory mood on Wall Street, some folks
were simply too torn up by the death of the jobless
recovery to participate in the merrymaking. Bond investors
broke out their hankies as long-dated Treasury bonds
plummeted, pushing up the yield on the 10-year Treasury
note to 4.14% from 3.89% the previous day. And even within
the jubilant stock market itself, the interest-rate
sensitive sectors were"hanging crêpe." Stocks like
mortgage lender Countrywide Financial and homebuilder Pulte
Corp. tumbled 5% or more.

- Gold also tumbled. In a world of job creation and rising
interest rates, gold seems to many folks like a luxury they
can ill afford. The newly irrelevant metal fell $6.30
Friday to $422.50 an ounce.

- Interestingly, gold seemed extremely relevant to
investors just one day before the jobs report. Thursday,
the gold price jumped to a 15-year high of $432 an ounce.
We suspect we have not heard the last from this contrary
precious metal.

- But the main question now before the House is whether
Friday's celebratory mood on Wall Street will yield to
angst over rising interest rates. The growth in jobs
prompted warnings from numerous economists that the Federal
Reserve will rethink its accommodative interest-rate
policy.

-"I am more concerned about the implications as regards
the Fed," said Peter Boockvar, equity strategist at Miller
Tabak."The Fed is likely to raise rates in August,
possibly earlier, and markets don't rally during rate
hiking cycles."

- But Donald Straszheim, president of Straszheim Global
Advisors counters,"We will see some upward pressure on
interest rates eventually, but not enough to stall the
recovery or hurt the gains in earnings. The fed funds rate
is at 1 percent. Even if the rate doubled, it would still
be low."

- Then again, maybe the March jobs number was a one-time
fluke. At the risk of stating the obvious - a Daily
Reckoning specialty - one month's strong jobs report does
not a trend make. We'll need to see few more"Marches" to
get the job engine running in high gear. And clearly, we'll
need to see the job engine humming if we are to have any
hope of strengthening our national balance sheet.

-"Some are dangerous illusions; others are welcome," your
Paris editor, Bill Bonner, observed in this space in early
February."When your wife tells you she loves you, you
might as well believe it as though it were Holy Writ. What
do you gain by questioning motives or deconstructing
meaning?

-"Every illusion has its price, of course. You will pay as
dearly for a chimera of love as for all others... but you
will pay in kisses and caresses, a currency better spent
than saved. Yet other illusions are far more costly and
fatal...

-"At The Daily Reckoning, money is our beat," your Paris
editor continued."And so we focus on America's leading
economic illusion-du-jour: Deficits don't matter. Here once
again, we climb a pile of bones to get a clearer view. This
is not the first time a nation has gone head over heels
into debt... The British Empire was built on debt...

-"The new system was slow to catch on in America. Thomas
Jefferson was against it. In 1789, in a letter to James
Madison, he wondered whether 'one generation of men has a
right to bind another.' His answer was no....Jefferson
concluded: 'No generation can contract debts greater than
may be paid during the course of its own existence.'"

- However, subsequent American politicians have adopted a
slightly more liberal definition of"existence." The modern
attitude toward debt, roughly stated, is that no government
should amass debts greater than can be paid before Man's
extinction upon the earth.

-"Budget deficits and debt finance are not an alternative
way of financing government expenditures," former Treasury
secretary Lawrence Summers said recently."They are a way
of deferring tax increases or subsequent expenditure cuts
at substantial cost in interest and ultimately in the
allocation of national resources."

- Fiscal probity... may it rest in peace.

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Bill Bonner, back in London...

*** The U.S. added jobs faster than at any time in the last
4 years, says the Labor Department. What to make of this
latest development? Are we wrong about everything, dear
reader? About stocks topping out... about the migration of
jobs to India and China... about debt, the dollar, and
America's economic calamity? Maybe we misread the
stars... or the map. Maybe we shouldn't drink so much. Maybe
we're not on the road to ruin after all. Instead, we're on
the road to glory. Yeah, we're on the road to glory... and
there is no stopping us. Stocks will go up from here to
kingdom come. Houses will become more valuable every year,
so consumers can continue 'to take out equity' for all
eternity. And all over the world, people will always want
to lend us money... and we will never have to pay it back.

Maybe you can have all boom and no bust... all gain and no
pain... all A's without studying... growth without
saving... Resurrection without Crucifixion. Gosh... we hope
so.

*** Thomas Friedman is remarkable. No sooner had he solved
the problems in Mesopotamia (his advice: more
"caring... nurturing" troops, much more money) then he went
to India. There, too, he saw the problem and had the same
solution: more democracy... reform (a term that seems to
work in any situation)... empower women! And today brings
yet more advice - this time for Mexico. What does Mexico
need to do? We can barely wait to find out.

"Revolution," says Friedman..."a reform revolution." Our
breathing stops. We are awed by the monumental imbecility
of it."Reform" we can imagine, dimly."Revolution,"
vividly. But we can't imagine the two together anymore than
we can imagine a jellyfish mating with bobcat. What strange
and horrible fruit would such a union produce? We read on
to find out. But even Friedman is stumped. His words go
nowhere. Having put the two creatures in the same cage, he
can't seem to get them to do anything. Lamely, he resorts
to his favorite remedy: raise taxes and spend more money.

"It is hard to stay competitive when you collect the lowest
percentage of taxes among leading Western economies," he
writes. Again, we can hardly draw a breath... We know of no
case where raising taxes increased competitiveness. Like
'revolutionary reform' and 'honest politician,' the ideas
seem at odds with each other. 'Oxymoronic,' we might say,
if we wanted to impress someone. Taxes are a cost. How can
you raise costs... while cutting prices? Does he just make
this stuff up as he goes along?

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The Daily Reckoning PRESENTS: Mogambo on Monday! In today's
episode: How did we get here, our hero wonders? From whence
came"the current Fed idea of massive and irresponsible
increases in Fed credit"... and how could the Fed, chaired
by a former gold bug, get it so very, very wrong?


THE DOG THAT DIDN'T BARK
by the Mogambo Guru

The Fed has screwed up, massively. And the result is, the
United States is headed down the path to economic
ruination.

If you want a good explanation why, then look no further
than the Wayne Angell article in the Wall Street Journal
last Thursday, entitled"The Rubin Recession." This Angell
character was a member of the Fed Board of Governors from
1986 to 1994. So you would think that he would have a
pretty good idea what he was talking about when he is
talking about economics. But then you'd be wrong, sort of.

The first sentence of the article sets the tone, as Angell
blames the recession that started in"the third quarter of
2001" on - and hold onto your hat because it is going to
comically jump up off of your head when you hear this -
"the Clinton administration's attempt to pay down the
federal debt."

This is the first I've heard of that! And if you have been
paying attention to the accumulation of government debt,
then this will no doubt be a surprise for you, too!

So I know that this where I have to do a little research,
because I'm sure that you are not going to take my word for
it, as Angell is a former Fed governor and a big shot,
writing in the Wall Street Journal and advising important
rich people, and I am just an angry, crazy man writing with
a crayon on the wall and begging for spare change from
people going into the mall, even though I am pleading,
"Please take my word for it! Please!"

So I grudgingly get up off of my big, fat butt with a lot
of whining and complaining, and I trudge over to where I
keep some graphs, still whining and complaining, and I dig
around in there awhile, and then I get tired and after
awhile I forget why I am there. Then I come back and sit
down and read what I wrote, and then I remember why I went
over there in the first place, and then I do a little
swearing and then, with a little more whining and
complaining, go back, and finally, finally, I locate the
graph of Treasury debt. I blow the dust off of it and hold
it up to the light.

Okay, admittedly from about 2000 until the third quarter of
2001 the accumulated debt does not go up that much. But it
did not go down, and only slightly trended up for a few
months, but that is a long way from the glib
characterization that anybody was paying down anything. And
Angell should know that.

Furthermore, this lack of borrowing was due, in the greater
part, to the fact that the government was taking in bigger,
more gigantic loads of money via the expedient of higher
taxes, especially the Social Security/Medicare tax, which
was tragically boosted to a mind-shattering 15.3% of gross
income, where it sits today.

But that"third quarter of 2001" is infamous for other
things. That is the exact moment when two things
simultaneously happened, 1) the debt really started to
explode, going from $5.8 trillion to today's $7.1 trillion
and 2) something else. And for all I know, there was a
third thing that happened, too, because these kinds of
things do not happen in isolation.

Then Angell goes on to castigate former Treasury Secretary
Robert Rubin et al, declaring that they did"not understand
the first principle of macroeconomics." I can tell by the
way your head snapped around that you are as curious as I
am about this fabulous"first principle." I love this
"first principle" thing, as it makes me think of Sir Isaac
Newton, or"Izzy" as I call him, because his Principles of
Physics are easy to comprehend, and there is never anybody
saying things like,"Well, before we can get started we
need a quick little review of the topographical hexadecimal
mathematical system in N-space."

This First Principle According To Wayne Angell is, and I
know you are going to love this as much as I did,"Output
growth is not sustainable without a growth of total credit
and debt." I say"huh?" I gotta tell ya that I have read a
lot of things in my life, although lately it is mostly
letters from collection agencies demanding that I send them
some money real fast or they will take stronger action, but
I have never, ever heard anybody tell me that"Output
growth is not sustainable without a growth of total credit
and debt." And especially never has anybody told me that it
was some basic principle! Because I am here to tell you
that if you want a Basic Principle that you can really take
to the bank, output growth can be sustained by profits
alone! And it usually was, all the way through the history
of mankind! And at the beginning of production, output
growth it can be started with savings alone! As it usually
was, similarly all the way through the history of mankind.

But it gets better, as we now see where the current Fed
idea of massive and irresponsible increases in Fed credit
comes from, as Angell concludes that since the private
sector has loaded up on debt,"this household debt burden
continues to require both low interest rates and rising
household wealth from real estate and the stock market to
avoid deflationary pressures." In other words, the private
sector has now gotten itself so loaded up on consumer debt,
real estate debt and total reliance on the stock market,
that it is now necessary to continue to force interest
rates down, and down, and down, down down down, downdy down
down de down down, so that the idiots who got themselves
into that kind of bankrupting mess can be saved from their
own folly. And not only that, but everybody thinks it will
work! Hahahaha!

But the really troubling thing about the mess the Fed has
gotten us into is that its chairman, the honorable Sir
Alan, knows better. I had lunch the other day with two guys
who are also scribblers about economics, Bob Wood and Steve
Heller. Over our meals, we all wondered aloud why it is
that Greenspan, an erstwhile gold-bug/sound money/Austrian-
type dude, and therefore recognizably one of the more
intelligent of our species, has apparently given up the
faith. Why is this Greenspan guy, who not only knows
better, but has actually proved that he knows better by
writing one of the better defenses of gold and the utter
refutation of fiat money, doing this to us? Why?

Steve Heller thinks he is doing it on purpose. For
Greenspan so loves mankind that he is deliberately proving
to the people of the planet that you MUST have gold as
money, and proving the profound wisdom of the Founding
Fathers, who were so careful to write into the Constitution
- the very Constitution itself! - that money shall only be
silver and gold. And he is teaching this Grand Lesson to us
via the brilliantly simple expedient of doing literally
everything that a central bank can do, to every excess,
when unencumbered by the strictures of gold, to ensure a
boom. Including enlisting, through the global financial
system, the cooperation of almost all foreign central banks
on the globe, to do the same things! Gaaaahhhhh! Uh-oh! I
feel one of my"spells" coming on.

The purpose of this deliberate boom-bust cycle, with the
emphasis on"bust," is to prove to the primitive savages,
namely you and me, once and for all that when the
inevitable bust comes, so that there will be nooooOOOooo
doubt in anyone's mind, that you cannot have a monetary
system that uses a fiat currency, especially one in which
you have fractional reserve banking, and DOUBLY especially
when you allow such leverage inside the banking system on
such an absolutely massive scale, and TRIPLY especially
when the expansion is accompanied by bigger government and
an economy receiving huge money transfers, which is the
government literally handing out money.

You don't need a big brain to see what is coming. All you
need to do is stop drinking heavily, lay off those
prescription medications that have a mind-altering
component, and take a look at some of the other times in
history when people did what we, and I am talking about us
Earth creatures again, are doing. And the one thing that
you would notice, if you were paying close attention with
your magnifying glass, snooping around looking for clues as
to what is going on around you, is what you did NOT see. It
is another famous case of the Dog That Didn't Bark.

Specifically, you never read about a time when people used
a fiat currency to expand government and its spending,
multiplied by a massive fractional reserve system of
banking, where everybody ended up rich and fat and happy.
Instead, what you always read, and lots of times there are
really neat pictures and photos with captions to make it a
more interesting read, is how all the fiat-currency people
went broke and died of starvation in utter poverty at the
end of the boom-bust cycle, usually involved in some
disastrously expensive and destructive war.

I shiver at the thought.


Regards,

The Mogambo Guru,
for The Daily Reckoning

--- Mogambo Sez: In response to overwhelming demand for a
way to hold gold, an asset that has been doing very well
and is guaranteed to do well for years to come, such is the
demand for shares of the Central Fund of Canada, which is
now so huge and popular that they are now selling their
shares on the American exchanges. Apparently there is a big
enough American demand for aggregated gold and silver
bullion ownership that does not want to go through the
Canadian exchanges, and be subject to all of that cross-
border, cross-currency hassle. So this is a way for
Americans, using dollars, to directly own gold in its most
highly liquid form: actual vault bullion that sells as
shares on an exchange. So why don't you tell me again how
gold is such a barbarous relic, and how nobody is buying
it?