-->Bitte nicht für Anlageentscheidungen verwenden, die auf kurzfristige Gewinne abzielen.
For The Cautiously Optimistic
The Daily Reckoning
London, England
Thursday, 17 June 2004
---------------------
*** Nothing happened yesterday. Will nothing happen
tomorrow?
***"Bust does not have to follow boom" and other
fantasies...
*** Long, long cycles in stocks and bonds... and more!
---------------------
Yesterday, the Dow went nowhere. It has gone mostly nowhere
this year. And mostly nowhere for the last 6 years.
There are a lot of days in a year... and a lot of years in a
lifetime. On most of them, nothing is likely to happen.
But that doesn't mean you should not prepare for something.
Alan Greenspan has created bubble after bubble... there are
now major bubbles in consumer debt, housing, stocks (a
bubble that began in the late '90s and still has not
deflated)... imports... and a capital spending bubble in
China (the Chinese are feverishly trying to keep up with
American consumer demand).
Anatole Kaletsky, writing in today's Times, argues,"Bust
does not have to follow boom."
"Consumption," he quotes Adam Smith,"is the sole end and
purpose" of all economic activity. So what if Brits and
Americans are consuming their heads off, he says... it is
just"a natural and desirable consequence of... improving
economic performance."
"The unsustainable orgy of government spending, personal
borrowing and consumption which Britain has enjoyed... is a
sign that the British economy has gradually transformed
itself from the sick man of Europe into one of the
strongest and healthiest economies in the world."
Consumption may be the end of economic activity; the
trouble for Britain and America is that it is not the
beginning. It is not consumption that creates wealth;
instead, consumption extinguishes it. Of course, the
healthier the economy, the more wealth it produces that may
be consumed.
But a society that consumes more than it produces is headed
for trouble. Yesterday, we reported that, in May, America's
balance of trade dipped to its lowest level ever - a
negative $48 billion. This is a rough measure of how far
consumption outpaces production... and another milestone on
the road to ruin.
How many miles are left? Will tomorrow be the day we 'get
there?'
Most likely, no. There are a lot of days... and only one day
on which the biggest bubbles in history begin to explode.
Still, Daily Reckoning sufferers are advised to consider
the gravity along with the likelihood. You may put a bullet
in a revolver, spin the chamber, and put the barrel to your
head. There will be only a 1-in-6 chance the gun will blow
your brain out. Nonetheless, it would not be a good idea to
pull the trigger.
Likewise, the end of Alan's bubbles is not likely to come
along today or tomorrow. Still, readers are cautioned to
invest as if they happened yesterday.
Over to Eric for more news:
---------------------
Eric Fry, from New York, New York...
- Here in Manhattan, the weather has turned sultry... and
your New York editor is grateful. The local fauna have shed
their thick winter coats and may now be seen ambling along
the sidewalks in tank tops, shorts, and sandals... The warm
weather seems to flush attractive women out of their
apartments like a Springer Spaniel flushes pheasant from a
hedgerow - not that your New York editor pays any attention
to attractive women... other than the one who routinely
hangs on his arm, of course.
- No, your Wall Street correspondent never averts his eyes
- or his mind - from the financial markets, except to eat
or sleep. Yesterday, however, he nearly nodded off during
market hours, as the stock market refused to commit to any
particular direction. It fell a little, then rose a little,
then continued to alternate between the two activities for
the next 6 hours until the closing bell mercifully sounded
the end of trading. The Dow slipped less than one point to
10,380, while the Nasdaq added three points to 1,998.
- Depending upon one's perspective, the stock market's
behavior was either impressive or disappointing. On the one
hand, a steep sell-off in the bond market failed to drag
stocks lower. On the other hand, news of the biggest jump
in industrial production in nearly six years failed to
drive them higher.
- The dollar, however, relished this fresh indication of
economic growth by rallying more than 1% against the euro
to $1.202. The dollar's rally sapped buying interest from
the gold market, pulling the safe-haven metal down $4.40 to
$384.65 an ounce. Curiously, the XAU Index of gold shares
ROSE yesterday - up more than half a percent. We'd like to
imagine that the sellers of gold shares have exhausted
themselves, but we are too timorous to declare the sell-off
complete. We'll be watching today's action very closely for
additional clues...
- Returning now to the kinds of things that bore most
normal folks, the Federal Reserve says we're producing more
stuff than before and that we're starting to use up some of
our spare production capacity. According to the Fed's
reports yesterday, industrial output climbed 1.1% in May to
a record high, while capacity utilization rose to 77.8% -
the highest level in three years. The utilization rate has
advanced by over 5% since setting a 20-year low in June
2003. So clearly, somebody's producing more of something.
- Usually, but not always, rising production and factory
utilization portend rising inflation. And traditionally,
rising inflation produces higher interest rates. But Wall
Street tells us not to worry. Sure, the overall inflation
rate seems a bit high, but the"core" rate is just as tame
as can be.
- Tuesday, the Labor Department reported a ghastly 0.6%
jump in consumer prices for the month of May. But the
experts on Wall Street urged investors to focus on the
"core" rate, which only rose 0.2%. The lower"core" rate
is, naturally, the one championed by Wall Street as the
"real" number... if there's a way to shade the truth -
particularly a negative truth - the folks on Wall Street
will find a way. They create more shade than a cabana boy.
- So far this year, consumer prices have increased as a
5.1% annual rate, while"core" prices have increased by
"only" 2.9% annualized, or more than twice the 1.3% rate
recorded in the first five months of last year.
- Would it be wise to ignore the headline inflation
readings and focus only on"core" rates? Let's respond to
the question by imagining that the mutual fund industry
reported two sets of performance numbers -"overall"
returns and"core" returns. And let's imagine a year-end
portfolio review that would read:"Dear shareholder, we are
pleased to report another successful year. While it's true
that your fund's overall portfolio value tumbled 26%, its
"core" portfolio soared 87%, handily beating the S&P 500
for the 13th consecutive year..."
- Embrace the core number if you wish, dear reader, but the
core of the truth probably resides in the overall number.
-"Inflationary pressures are not likely to be a serious
concern in the period ahead," Alan Greenspan calmly advised
the Senate Banking Committee on Tuesday. The chairman's
assertion seems a bit disingenuous because it ignores the
inflationary pressures that already inhabit the U.S.
economy. Even the toned-down, core consumer price index is
tracking at nearly triple the Fed funds rate, while the
overall CPI is five times the Fed funds rate! In other
words, based upon the government's own data, Greenspan is
asleep on the job - like a kind of Homer Simpson of central
banking. The keeper of the currency is snoozing while the
inflation rate doubles.
-"If I am a bondholder," says James Paulsen, Chief
Investment Strategist at Wells Capital Management,"I want
a massively aggressive, inflation-fighting Fed. The last
thing I want is a Fed that is timid, touchy-feely, slow and
communicative. The Fed has said we're going to be slow in
our response so we don't scare anybody. But I think that
approach is exactly what is going to scare everybody."
- Your New York editor has chills up his spine already.
---------------------
Bill Bonner, back in London:
*** We watch gold... and bonds. Everyone knows inflation and
higher interest rates are coming. But yesterday, bonds
eased off - but just a little; they do not seem to have
gotten the message. Likewise, gold fell $3.50. If inflation
really were increasing... why wouldn't gold rise?
Our guess is that Mr. Market is fooling nearly everyone.
The long bull market in bonds... that began in 1981... may
not be over yet.
After WWII, stocks bottomed out in 1949. Then, they rose
for 17 years until '66. A bear market began in '66, with a
confusing second peak in '68... but then continued going
down, a total of 16 years, until '82. Then began the great
bull market that lasted another 17 years.
That last bull market peaked out in the first quarter of
2000. Most likely, stocks are in a major bear trend again.
Most likely, it will last at least another 10 years.
Bonds follow even longer trends. Government bond yields
rose from 1946 until 1981... a period of 35 years. Since
1981, bond yields, interest rates and consumer price
inflation have all trended down. The end of the trend is
widely believed to have come almost exactly a year ago this
week - when the 10-year Treasury yield slipped to 3.11%.
Yields have risen since then. Most observers believe it
will be a long time before they drop back.
We're not so sure. Which is not to say that we want to pull
the trigger on U.S. bond purchases. The bull market in
bonds may not be over, but the risk of owning them probably
far outweighs the potential reward. Some day, bonds will
fall. Maybe tomorrow. Maybe next month. That would be a bad
day to have the pistol pointed at your head.
*** A reader writes:
"Your vacation concerns and determination are both right
on, but frankly, I can't think of anything that would
support your style of thinking and writing better than a
trip around the U.S.
"The very things that make kids hate it are so incredibly
important from an adult's point of view. It is just so
damned big and hot with so much distance between the points
of interest, so much incredibly indifferent food, and so
many strip malls that all have the same stuff.
"And that completely leaves out the people. You definitely
won't see many attractive young ladies with flowers in
their hats and white pants on their escorts. They make less
money than you can believe. They don't read and they have
never met anyone who is gay. (Well, they think they
haven't.) The most polite ones will just smile indulgently
if you talk about things that interest, concern, or worry
you and me. And yet, most of them are happy, smiling, well
adjusted and while they might marvel at someone else's
travels, income, or thoughts, they wouldn't really consider
trading places.
"I've never met anyone who wasn't surprised at the effect
the Grand Canyon had on them, or the Grand Coulee Dam in
Washington, or the hot springs in Thermopolis, Wyoming that
must be free to the public because some smart old Indian
saw the white man clearly enough to write that into the
treaty which took the land away.
"If the rest of your family doesn't mutiny, the rest of us
will be treated to stories and metaphors that explain the
markets in new and interesting ways from things that happen
on that trip.
"Good luck."
---------------------
The Daily Reckoning PRESENTS: In the face of a decade of
slogging returns on Wall Street, what should the individual
investor do? Addison Wiggin has a suggestion...
FOR THE CAUTIOUSLY OPTIMISTIC
by Addison Wiggin
Great bear markets take their time. In 1929, we started a
17-year bear market, succeeded by a 20-year bull market,
followed in 1965 by another 17-year bear market, then an
18-year bull. Now we're going to have a one-year bear
market? It doesn't seem very symmetrical.
- Jeremy Grantham, 2001
From time to time, we like to remind readers that markets,
like all natural beasts, have a tendency to get out of
whack. And, that nature, never too shy, likes to force them
back into whack.
In a 2001 Barron's interview Jeremy Grantham unveiled the
conclusions he had drawn following an extensive study of
market bubbles, including stocks, bonds, commodities and
currencies - 28 bubbles in all. Grantham and his associates
defined a bubble as"a 40-year event in which statistics
went well beyond the norm, a two-standard-deviation event."
"Every one of the 28 [bubbles] went back to trend,"
Grantham noted,"no exceptions, no new eras, not a single
one that we can find in history." It will come as no great
surprise to Daily Reckoning pedants that we are prone to
Mr. Grantham's influence. In fact, if you were a bully and
you pressed our backs tightly up against a chain link
fence, you'd sooner hear us squeal"Dow 3000" than 13000...
or even 12...
What may come as more of a surprise, in today's essay,
however, is a nod to optimism, albeit a cautious one. We
have just put down friend and colleague John Mauldin's new
book:"Bull's Eye Investing: Targeting Real Returns in a
Smoke and Mirrors Market," and would like to recommend that
you buy a copy and read it. Today.
Firstly, Mr. Mauldin argues forcefully, for six chapters,
that we are in the early stages of a secular bear market in
U.S. stocks. The comprehensive coverage in those chapters
alone makes us - purveyors of the longest daily e-mail in
recorded e-history - feel like slackers.
Mauldin shows - citing studies that would make any market
historian swoon - that when valuations reach the levels
they are at today, investors have always been better off
investing in money market funds over the following ten
years. But what fun is that? After Mauldin gets done
thoroughly discouraging his readers... he offers many a ray
of hope. Cautiously, of course.
For example, John cites an article from the 2001 Academy of
Sciences Journal of Financial Intermediation, in which a
researcher by the name of Albert Wang found that neither
"under-confident" investors nor perma-bearish sentiment
could survive in the market. Massively"over-confident" or
bullish investors likewise lead themselves to the
slaughterhouse. Only the investors who are cautiously
optimistic were able to, not only survive, but also win.
"In the world of our ancestors," Mauldin writes,
"overconfidence will get you killed. Lack of confidence
will mean you sit around and starve. Cautious optimism is
the right approach. What Wang is showing is that the same
is true in the new world of investments. It should be self-
evident that it is necessary to play if you are going to
win. Further, a willingness to accept some level of
volatility and risk is characteristic of successful
investing. But taking too much risk will soon get you sent
to the sidelines."
But the wrong type of"confidence" will get you killed just
as quickly. As an example, let's look at another study
Mauldin has unearthed:
"First, a researcher takes a deck of 52 cards and holds one
card up. Watchers pay a dollar for the chance to win $100
if that card is picked out of the deck. Keep in mind the
expected payout is 1/52 × 100 = 1.92. Las Vegas would
quickly go broke with such odds.
"Then they are asked if they would like to sell their
chances: roughly 80 percent would sell if they could,
asking for an average price of $1.86. If you could get such
a price, it would be a reasonable purchase. For someone who
could buy all 52 chances, it would be a good investment or
arbitrage. He would make a quick 3.18 percent.
"Now it gets interesting. The next time, someone is allowed
to pick a card out of the deck and offered the same chance,
but now he has a personal attachment to the card because he
touched it. Only about 60 percent of those who picked cards
were willing to sell their chances, and they wanted an
average price of just over $6. And when this same trick was
performed at MBA schools the average sale price has been
over $9.
"'I know this card. I have studied it. I have a personal
involvement with the card; therefore it is worth more,'
thinks the investor. Of course, it is worth no more than in
the first case, but the psychology of 'owning' the card
makes investors value it more."
Investors, Mauldin suggests, continually make that same
mistake, substituting familiarity for value-based research
and reason, basing their investments and their future on
false confidence that, in the end, leads to disaster. You
could substitute fund, market, country, currency, or metal
for stock. Just because we know a lot about an investment
does not mean it is a good one.
But where then, does Mr. Mauldin find the right kind of
confidence? In a true sense, that search is the unstated
theme of his book... and it comes from several sources.
First, it is the steady march of history. Mauldin sees the
stock market, currencies, commodities, bonds, interest
rates - in short, everything - as subject to historical,
economic and fundamental forces. Finding these forces and
investing with the trend - rather than against it - is the
key to confidence. Where some might see the continued
decline of the dollar as a reason to despair, John simply
sees another trend from which to profit. If the economy
grows slower than in the past - something Daily Reckoning
readers will recognize as Mauldin's 'Muddle Through
Economy' - again it is not a problem, but an opportunity.
When the Fed wants to manipulate interest rates - they may
theoretically be wrong - but astute investors recognize it
as a gift of potential personal profit. Every chapter of
Mauldin's book is grounded in history... yet he steps out on
occasion and deigns to predict the future.
If you're a regular reader of the Daily Reckoning, you know
Mauldin believes that value is the driver of market cycles.
In Bulls Eye Investing, he offers numerous ways that small
investors - which he demonstrates have an inherent
advantage over institutions in today's market - can invest
with confidence in today's market. His chapters on value
investing may be considered as essential reading for the
individual investor. Mauldin's data mining on"behavioral
investing" is worth an entire book of its own.
How can you be in the top 10% of all investors over the
next ten years? Simple. Just be above average for each of
the next ten years. You don't have to shoot for the moon or
take great risks. If you can beat the average - each and
every year - in the end you will be among the most
successful of investors on the planet.
Regards,
Addison Wiggin
for the Daily Reckoning
P.S. If you've read our book you know there are, quite
frankly, few occasions upon which we agree with George
Gilder. But when he writes:"Mauldin is the Ben Graham of
the new millennium, but unlike Graham, he combines
investment savvy with a sense of humor and a gift of
style," we are tempted to do just that.
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