-->A Slap in the Face

The Daily Reckoning

Tampa, Florida

Monday, July 12, 2004

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*** The promiscuity of money as viewed from the President's
lounge...

*** Nasdaq down 5% in first 7 days of Q3...

*** Florida, Nova Scotia, Cape Cod and more!

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Florida is everything Nova Scotia is not. Nova Scotia was
cloudy and cold when we left on Saturday; Florida was hot
and sunny. There were few people in Nova Scotia - even in
the height of the tourist season; Florida was full of them.
In Nova Scotia, people have white skin and wear plaid
shirts; in Florida, they are invariably tanned and wear
little of anything. In Nova Scotia, the people are modest
and the scenery is striking; in Florida the people are
extravagant and the scenery is modest. Nova Scotia revealed
no trace of a credit bubble; here in Tampa, the skin of the
credit bubble seems so taut, it may explode at any minute.

We have never seen so many auto dealers. Or so many new
cars. Why do people need so many cars? So they can drive
somewhere and spend money. What can they buy? A new car!

Or a new house. Or just about anything else - so long as it
is tacky enough to appeal to a mass market. It's amazing
what you can buy just by driving down the main roads.
Dozens of stores offer cars and things for cars - mufflers,
tires, and so forth. Dozens more offer things for the house
- windows, doors, carpeting, kitchens, you name it. There
are also a fair number of art galleries offering a wide
range of beach scenes that all look alike.

But that is what people come here for: to feel as though
they are on vacation, whether or not they are. They let
themselves go, in other words. Gone are the neckties, the
dresses, the suits, the forbearance, the discipline, the
vegetable gardens, the woodpiles, the modesty, the uptight,
worried, critical nags of the North.

In their place, a fleshy lassitude reigns.

For more fleshy lassitude, we turn to Eric Fry for the
news:

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Eric Fry, back 'on The Street' in Downtown New York...

- Last week, your New York editor loaded his kids into the
family wagon, donned his Yankees baseball cap and ventured
up to Cape Cod - deep in the heart of Red Sox country.
After five days of feasting on lobster, soaking up sun and
chuckling at the Bostonian accent, your editor returned to
the Big Apple to find Mr. Market in very sorry shape. The
guy seemed dazed and disoriented, as if someone had smacked
him over the head with a lobster mallet.

- Or maybe his knees are buckling because tech companies
aren't producing the earnings growth that so many investors
had been anticipating...or maybe Mr. Market is staggering
because the oil price jumped back above $40 a barrel (and
the gold price jumped above $400 an ounce.)

- Whatever the cause, the Dow slipped 69 points last week
to 10,282, while the Nasdaq wilted 3%, falling 60 points to
1,946. The new quarter is only seven trading days old and
already the S&P 500 is down 2.5% and the Nasdaq is off a
hefty 5%...Something is wrong. Corporate earnings are
growing nicely, but share prices are not...in fact, they're
shrinking, and small cap stocks are shrinking the fastest.

- Size matters, and for the last several months,"small" is
the size that has mattered most on Wall Street. The Russell
2000 Index of small cap stocks has soared more than 50%
since the end of 2002, or more than double the return of
the S&P 500 over the same time frame. The index sports a
gargantuan P/E ratio of 66. Perhaps this wildly popular
index is overdue for a change in fortune.

-"There's a trade that seems so easy, so comfortably
logical in its rationale, that it almost begs the skeptical
thinker to ask how it could backfire," Barron's observed
last week."This is the 'size trade.'" In other words, sell
your pricey small-cap stocks and buy the RELATIVELY
undervalued and sedate large cap stocks.

-"The logic behind rotating from small to large stocks
comes in a few forms," says Barron's."One plays on the
'nothing lasts forever' theme, pointing out that small
stocks have outperformed big stocks for some five years, a
bit longer than the typical win streak."

- According to Morgan Stanley, small-caps have trounced the
S&P 500 by an annualized 21 percentage points over the last
five years, versus 13 percentage points over 3 and a half
years in the prior cycle, which ended in 1994. Maybe a new
era of underperformance is about to begin.

-"Slowing economic growth, too, usually portends an end to
small-cap overachievement," Barron's notes."And one of
Wall Street's rules of thumb is that small companies are
more exposed to rising interest rates, due to heavy
reliance on bank financing. This pattern is observable from
past data, but isn't as persuasive as perhaps it used to be
due to the tech- and financial-heavy industry makeup of the
small-cap indexes.

-"The market action very recently has lent encouragement
to the advocates of this rotation trade," Barron's notes.
"The Russell 2000, for instance, marginally trailed its
large-cap sibling, the Russell 1000, last quarter for the
first time in five quarters." The trend continues...The
Russell 200 has dropped about 4% since March, or double the
drop in the Russell 2000.

- Raising a little cash might not be a bad thing.

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Bill Bonner, back in Florida...

*** Our friend Frank Holmes sends this little note:

- In a study conducted by Morningstar...[our] U.S. Global
Investors' (NASDAQ: GROW) World Precious Minerals Fund
(UNWPX) ranked as the top performing fund among 4,145
selected funds in terms of return for the three-year period
ending June 30, 2004. The fund's high correlation to gold,
as well as its fund management team's dedication to
actively manage the fund on a daily basis, has led to the
fund's superior relative performance.

***"Whatever reason Hollywood has for its love affair with
the"f" word, it is decidedly not about the money," writes
Dan Ferris.

"Since the year 2000, Hollywood has turned out five times
as many R-rated films as it has films rated G or PG or PG-
13. No less than 2,146 films released since 2000 received
R-ratings, compared with 137 films rated G and 252 films
rated PG.

"Is it a case of simple supply and demand at work?
Apparently not. Of the top 20 moneymaking films of all
time, not a single one is rated R, and of the top 50, only
five are rated R - with the other 45 rated G or PG.

"It's all about the art, man. The"f" word is"bad," which,
of course is good...only you're not supposed to be
good...you're supposed to be bad...not that being bad is
good, or being good bad..."

*** Money talks in America.

More than that. It commands. It shouts. And it coos and
whispers to every Tom, Dick and Harry: you too can be
someone important, no matter how tasteless and clueless you
are.

European nations have a different kind of history. Over
hundreds of years, European societies stratified
themselves, like layers of sediment on the bottom of a mud
bucket. Each layer had its own style, its own manners and
its own contempt for everyone else. Having money in Europe
is less important than maintaining an appropriate style. A
man is admired not for his money, but for his dress, his
comportment, his education, even his way of speaking
(especially in England.)

But in America, money does the talking; because it is the
only language everyone understands.

In the President's Lounge (operated by Continental
airlines) we saw all sorts. One couple looked as though
they had stepped out of a Mafia movie. Black pants. White
designer t-shirts, with gold chains. They had a son with
them, who also looked the part.

In another corner, a huge couple looked as though they had
gotten lost and ended up on the wrong side of the
continent. The man wore a Hawaiian shirt. He might have
been Hawaiian, except that he looked Irish...with a round
pudgy face and a 'mullet' hairdo, which we thought went out
of style 10 years ago.

And then, there were the wasps too. A foursome. Oh my, oh
my. The two men must have been investment bankers on Wall
Street. They were dressed identically - khaki pants,
loafers without socks, a business shirt without tie, and
blue blazers. Both were handsome, with full heads of hair
combed back in a fashionable way, but the younger man had
such a mane, that it poofed up and tilted to one side, to
make it look at as though his head was misshapen. One wore
tortoise shell glasses, which made him look vaguely
intellectual. The women accompanying them were quite
different. One was young and beautiful...dressed in some
sort of simple, black outfit. The other wore white, and was
beginning to look like the sort of woman a successful man
might regret.

In theory, the first class lounges are reserved for people
traveling first class...so you might expect that the crust
on the group would be the upper sort. But money is
remarkably open minded, even promiscuous. It is as likely
to rush into the arms of a vulgar slob from Brooklyn as
those of a well-mannered swell from Rye. What counts in the
getting of wealth - luck and pluck - have little to do with
cultural education, good taste, or good manners. So while
they help a man get money...they don't help him much when
it comes time to get rid of it.

A man hustles in the auto-parts business and builds up a
tidy fortune. But he has no more idea of what to do with it
than the guy who sat around watching TV all day. More
likely than not, he merely upgrades his lifestyle to an
even gaudier caliber. The money doesn't improve him, he
still wants what he wants, no matter how vulgar it is; when
he gets rich, he can simply buy more of it. Not
surprisingly, once he's accumulated a little money, he
heads to Florida or California - where he can buy all the
vulgarity he wants.

The Belleview Biltmore in Tampa was built for another era.
The old photos on the wall show a respectable beach
hotel...set out on the sand like a piece of driftwood.
Today, you drive past a security guard and feel as though
you are in a deluxe modern complex. But the hotel rooms
themselves have barely changed - except for the ubiquitous
air-conditioning and the exposed, retro-fitted sprinkler
system.

When the Biltmore was put together, America was a different
country. Men in suits and straw hats came down, on the
train, bringing with them women in splendid gowns...and
good manners along with their traveling trunks. They sat up
straight...and paid their bills in money that still had a
stiff backing of gold.

Today, breakfast at the old Biltmore is like any modern
hotel. The dining room is full of relaxed people in shorts
and t-shirts...enjoying a breakfast buffet as if they would
never eat again. But on the wall hangs a relic of that
earlier era... a painting of a gorgeous woman in full-dress
19th century regalia. We thought we saw a tear in her eye.

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The Daily Reckoning PRESENTS: Debt to Mogambo is like salt
to a slug...it makes him froth and bulge until eventually
his brain explodes. It just happened...again. We catch up
with the MoGu from intensive care...


A SLAP IN THE FACE
by The Mogambo Guru

"The total US credit market debt expanded at a seasonally
adjusted $2.733 trillion (in one year) to $34.625
trillion," points out Bill Buckler of The Privateer.

Stupefied by such an impossibly large number, I grab the
calculator - in stunned incoherence - and I punch in...let
me check that figure again...2.733.

Notice that I am NOT talking about $2.73. No, I am not even
talking about $2.73 million. Nor am I even talking about
$2.73 billion. No, I am tossing around trillions of dollars
here! Trillions!

So, for every dude and dudette in the country that has a
non-farm job - all 131 million of us - this increase in
debt comes to an astounding $20,865 each. Each! And that's
just the damn increase!

Now, if we take GDP to be $11 trillion, and divide it by
the $2.73 trillion 1-year increase in debt, we come up
with...my guts twist into a knot as I look at the
calculator...0.248. After a few moments spent in some form
of suspended animation, it finally impresses onto my tiny
little brain that this increase in debt is equal to a
quarter of GDP! A fourth of total annual income is borrowed
and spent! In one year! One! Year! In one lousy freaking
year! My mouth goes dry with panic.

Now I find myself lying in my bed in the hospital, IV lines
dripping clear fluids into each arm, and a snotty little
doctor is looking at my chart and telling me that my
abnormally small brain has, according to the X-rays,
exploded again. This must be it - the last time - I will
never be able to work in economics again. Then the phone
rings. Straining against the straps that tie me to the bed,
I do a McGyver trick...with one foot I kick the plastic
water pitcher against the wall, which ricochets across the
room, hits the phone, and knocks the receiver up onto the
pillow and right next to my ear.

"Hello?" I answer feebly. Imagine my surprise to find Bill
Buckler on the other end of the line. You see, he spoke to
my wife at home and she told him how much I would love it
if he would call me up and finish talking about the
increase in debt. I look at the doctor. I think about what
he said. I look at the phone. And then I say to Bill,
"Sure! I'd love to hear more about it!" And so, continuing
his nice little bedtime story, he tells me,"Since the
beginning of 1998, total U.S. borrowings have climbed from
about 255% of U.S. GDP to 302%!"

302% of GDP! My puny little brain is suddenly kicked into
action, as it suddenly occurs to me that this is a new
record.

Notice that this is higher than the 260% of GDP recorded at
the height of the bull market in 1929, and we all know how
well THAT turned out! This is really scaring the bejesus
out of me, and not just because I am a scaredy-cat little
coward with a yellow streak down his back.

Suddenly, I feel all woozy again, and I begin to feel my
brain pressure increasing; I need to lie down...

But Bill Buckler is not done with us yet. No sooner have I
closed my eyes and gotten my snoring machinery back into
gear, than he comes charging across the ward, and smacks me
with a rolled up newspaper. He orders me to stop making
such an obnoxious noise and get up off the floor.
Staggering to my feet, he gives me one more slap across the
face and reports,"Total U.S. mortgage debt now stands at
$9.618 trillion."

I stagger and I swoon, but I do not fall. Using the best
Rocky impersonation I can muster, I still come out slugging
- animated by sheer instinct - despite the double vision
and the dribble. My brain swirls with the nagging notion
that there is something vaguely familiar about that number.
$9.618 trillion. Hmmm. What is it? Then it hits me. This is
almost as much as total Personal Income! So I turn around
and pick up Bill's copy of Barron's from the floor, and I
discover that total Personal Income is $9.686 trillion! So,
in mortgage debt alone, we owe everything we make!

What to do? What to do? I suggest that we all should run
around screaming,"the sky is falling, the sky is falling"
while loading up with large-caliber weapons. Then, when
fully stocked up, I suggest you head for the hills because
we are all doomed, doomed, doomed, as that is what I
typically do. But Mr. Buckler has also looked at things, as
I have, and has concluded, as I have, that,"there is no
'solution' to this dilemma, just as there is no 'solution'
for a man who finds himself in a barrel on the lip of
Niagara Falls."

The same fatal inevitability that exists for the guy in the
barrel going over the waterfall also exists for the economy
that allows the central bank to create excess money and
credit. That is why it is imperative that you don't get
your economy into trouble to start with, and why it is
important that you don't get into a barrel and float
downstream to a waterfall. There are some situations where
you get to a point where there are no solutions.

But, then again, we area talking about the Federal Reserve,
and the Federal Reserve is seemingly always happy to commit
any kind of monetary fraud you can name.

And meanwhile, all we can do is stand around shaking our
heads in bewilderment and wondering what in the hell went
wrong to get us to where we are now, and at the same time
expecting these idiot-savant simpletons to fashion a
marvelous solution, which involves simply doing more of the
same thing that got us here in the first place, only more
so. Ugh.

This will soon change. Welcome to hell.


Regards,

The Mogambo Guru
for The Daily Reckoning

---Mogambo Sez: In keeping with consistent historical
precedent, I will not try to summarize with some witty
epigram, because I grow weary of having people e-mail me
with their snotty observations, as if I have never come up
with anything original in my whole life, like this is some
big news to me or something.

So it is my pleasure to quote one of the guys at the Daily
Reckoning, I don't know who exactly. But all of them can
write better than me, except when they are busy squabbling
good-naturedly amongst themselves about things like who has
the better taste in wine, or who's the better writer, or
who is better looking, or who seems to write in these long,
continuous, stupid run-on sentences that never seem to get
to the point, or who was the darling little rascal that
cleverly took the last six donuts and stuffed them all into
their mouth at one time so that his cheeks were puffed out
like a chipmunk and there were crumbs all down their chin
and staining the front of their shirt.

So it is my pleasure to immortalize one of their most
profound phrases."Mother Nature is a hanging judge." And
you can take it from me, the Mogambo, that no truer words
were ever spoken.