* * * * * * * * * * * * REMINDER * * * * * * * * * * * * *
On the days that I don't publish, like today, you will
receive Bill Bonner's DAILY RECKONING. This will help you
to keep pace with the changes in the markets. Bonner and
I agree on most things in the field of economics, so the
two letters will reinforce each other.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
Mumbling and Grumbling
The Daily Reckoning
Paris, France
Monday, September 13, 2004
---------------------
*** The dragon's appetite... dinner is served...
*** Semiconductor stocks bounce... has a new bull market
been born?
*** Wal-Mart greeters... 20-something girls... empires...
love affairs and more!
---------------------
The latest trade deficit came in on Friday, as feared,
above $50 billion.
We just got off a plane... with no time to write.
Here's a message from our old friend, Martin Spring...
traveling in China:
"Here in Shanghai, on my first visit to mainland China, the
past and the future are 'in your face.' The 120,000 items
on display at the Shanghai Museum that celebrate the
grandeur of thousands of years of Chinese history -
porcelain, paintings, sculpture, bronze ware, coinage,
jade, furniture - are housed in a spectacular modern
building that cost $700 million. I traveled there from my
luxury hotel, where the rack rates start at $320 a night,
on a subway system for just 2 yuan (about an American
quarter).
"China is well on its way to becoming a superpower, yet the
rest of the world has hardly begun to consider the
implications. Political and cultural as well as economic.
"Investment bank Goldman Sachs has forecast that in less
than 40 years China will overtake the United States to
become the world's most powerful economy. Yet, with a per
capita income only one-sixth the American level, it should
have most of its growth still to come.
"Last year, for the first time, global markets really felt
the impact of China's surging economic expansion, which
accounted for all the growth in world demand for copper,
99% of the growth in nickel and 95% of the growth in steel.
It was the major factor driving up oil prices, as China
overtook Japan to become the world's second biggest
importer of crude.
"Yet 'the dragon' has only just started to develop its
hunger for imported resources... and manufactured goods.
"Within 10 years, 'its appetite for base metals, food and
probably also luxury goods will strain the world's ability
to produce them,' Financial Times bureau chief James Kynge
told the conference I've been attending in Shanghai. 'Its
people will be traveling abroad, buying property abroad and
educating their children abroad, in numbers that will shock
the world.'
"'China's competition for resources will cause great
problems' with other countries. For example, some analysts
forecast that over the next five years China will become a
major importer of grain, perhaps even the world's biggest
importer.
"China has emerged from its period of Maoist failure
(thanks to the wipeout of the 'Cultural Revolution,' a
whole generation had no advanced education) to become a
highly successful mixed economy with an increasingly
free-market character. 'The best capitalists live in
Communist China,' says the well-known investment
commentator Jim Rogers.
"Globalization and domestic reform are releasing the
enormous potential of one-fifth of mankind united by a
single culture, language and state. They are perhaps the
hardest-working people on earth, very thrifty (saving on
average more than 40% of their incomes), intelligent,
aggressively materialistic and with a high level of natural
commercial skills.
"China still has a long way to go, with an economy only
one-third the size of Japan's despite more than 10 times
the population. But I cannot conceive of anything that can
stop this juggernaut racing ahead, other than internal
political dislocation as one-party rule breaks down, as in
time it must.
"The coming emergence of China as a superpower is a
prospect that raises some interesting questions:
"To what extent will Chinese challenge the dominance of
English as the principal world language? Chinese is
particularly unsuited to international commerce, as it does
not translate well, being written in thousands of
ideographs, instead of a couple of dozen letters, as well
as being imprecise and full of subtleties. Yet economic
power always brings with it cultural power.
"How will other major nations in the region (Japan, Russia
and India), as well as those beyond it, but in a shrinking
world (America, Europe) adapt to China's increasing ability
to get its own way? There are some obvious potentials for
conflict - China's wish to reabsorb Taiwan, extend its
control over the hydrocarbon areas of surrounding seas, and
ultimately re-establish control over its 'lost lands' in
Siberia.
"How will the governments of other nations handle the
social and business implications of a mass shift of global
manufacturing to China, acquisition of natural resources
and other assets by globalizing Chinese megacorporations,
and an avalanche of Chinese visitors? (Kynge says there are
already more outbound Chinese tourists than there are
Japanese, and an 'exceedingly conservative' estimate is
that their number will treble to 100 million a year by
2020).
"How can you invest in China's growth? Marc Faber gave some
sensible suggestions that I reported in my last issue. What
I've learned here so far confirms that the most sensible
way is through indirect investment, through companies such
as Australian miners and Japanese equipment and components
suppliers."
Here's Eric Fry, with news from the Street...
---------------------
Eric Fry, from the Land of the Rising Stock Market...
- The Dow Jones Industrial Average patched together enough
winning days last week to eke out a 52-point gain, closing
out Friday's session at 10,313. This, despite the fact that
two Dow stalwarts, Coca-Cola and Alcoa, dropped more than
5% each on disappointing earnings forecasts.
- But while blue chip America swooned, the racier pockets
of the stock market soared, lifting the Nasdaq to a 2.7%
gain on the week at 1,844. Semiconductor stocks took a
break from their losing ways to jump 7% and lead the tech
sector higher.
- Over the last several months, the formerly sexy
semiconductor sector had become a kind of financial Paris
Hilton - more embarrassing than alluring. The SOX index of
semi stocks had plunged more than 30% between January and
Sept. 3 - the very day your New York editor observed in
this column that hating semiconductor stocks had become a
bit too fashionable on Wall Street.
- "Now that Intel and most other semiconductor stocks have
tumbled substantially from their recent highs, Wall Street
analysts are rushing to downgrade stocks throughout the
semiconductor sector," he noted. "UBS, First Albany, WR
Hambrecht, Janney Montgomery Scott and Piper Jaffray all
issued downbeat comments about one or more semiconductor
stocks. Might the Wall Street guidance system be sending
the wrong signals once again? Will semiconductor stocks
soon begin to outperform the rest of the stock market?"
- Sure enough, the ink had scarcely dried on Wall Street's
latest batch of downgrades before semiconductor stocks
started to rally. We aren't saying Wall Street's learned
and esteemed analysts have got it all wrong, but they sure
picked an inopportune moment to flip-flop from unbridled
bullishness to cautious bearishness.
- We'd tend to agree that the semiconductor sector is
struggling. But even bad stocks rally sometimes, and often
really bad stocks rally the most. The semis may advance for
a few more days, but we wouldn't be too surprised to see
them returning to their losing ways before too long.
Likewise, we suspect the broad market's mini-rally from its
mid-August lows has only a little juice left in it.
- "The rebound off the Aug. 13 low, which preceded a peak
in alarmism about oil prices, has now carried the S&P 500
to a 6% gain in four weeks," notes Barron's Michael
Santoli. "For an index that has occupied the range of
roughly 1060-1160 since mid-December, that qualifies as a
significant move.
- "A comparison with the two prior rallies off interim low
points (set in March and May) offers some perspective on
where the current bounce ranks. The rally from the March
low lasted two weeks and amounted to a 5.8% move. The next
bounce took six weeks and covered 6.5%. That places the
current move right around the average magnitude of the
prior two and right at the average duration. And notably,
each of these rallies has topped out at a lower point than
the prior one. But of course," Santoli concludes, "the
moment the market starts to appear predictable, it
rediscovers its tendency to confound."
- And the market is especially prone to confounding
investors when optimism is high and complacency pervasive.
Investors have become remarkably complacent of late. The
VIX index of option volatility dropped to a two-month low
last Friday, and to within a whisker of a multiyear low.
This near record-low reading of option volatility indicates
that the lumpeninvestoriat has become as complacent as it
is gullible.
- Typically, low levels of fear precede steep market
sell-offs.
- Options pro Jay Shartsis agrees that the current rally is
closer to its end than its beginning. "One gauge flashing
danger here," Jay warns, "is newsletter writer Joe
Granville's 'Climax Indicator.' This on-balance volume
measure of the Dow components has just generated its fifth
upside nonconfirmation. Joe notes that every major top in
market history has been preceded by a cluster of such
nonconfirmations. The current number of five was only
exceeded by the seven seen in September 1929 and January
2000. Were we to record a string of high call-buying days,
which is yet to happen, then the 'CLX' warning would take
on greater immediacy."
- Shartsis also points out that put/call ratios are
sliding, which is usually a bad sign for stocks.
- "At the May bottom four months ago," Shartsis notes, "the
21-day dollar-weighted equity put/call ratio hit about 94
cents in puts traded for every $1 in calls, which was the
most pessimism recorded since the March-April period of
2003, the big bottom. This year we also got a rally off the
May lows, but not a substantial one. The Dow, for example,
gained about 500 points in June. At that time, the 21-day
dollar-weighted put/call ratio dropped down to near 62
cents traded in puts for every $1 in calls, and then the
Dow dropped about 600 points. At the August bottom last
month, this ratio got up to near 98 cents in puts traded
for every $1 in calls, and the Dow has subsequently gained
nearly 400 points.
- "The dollar-weighted put/call ratio is now down to about
80 cents in puts for every $1 in calls," Shartsis
continues. "So maybe we get another 100 Dow points up
before a selloff, based on this indicator. But I think it's
worth noting that the rally off the May bottom this year
didn't get too far or run too long with similar starting
figures from the dollar-weighted put/call ratio as were
seen last month."
---------------------
Bill Bonner, back in Paris...
*** A woman reader - and one in her 20s!
"What a shock to a curmudgeonly old dude like yourself,
immersed in the financial pages and unending doomsaying
prophecies, to receive a response from a woman in her
20s."
"It is easy, I think, to doomsay forever, for all good
things, from empires to love affairs, do eventually come to
an end, so all your predictions of gloom and sorrow are
guaranteed to be correct... at some unknown, distant point
in the future.
"How easy it would have been, then, for someone in 1950 to
cry, 'It's over! It's all over! Don't you see? We can't
possibly continue to grow economically anymore! We're all
living in a fantasy world with grim economic realities
ahead!'
"This madman could have continued his rants daily for the
last 54 years, and still he wouldn't have been proven
correct. Despite occasional recessions and forays into the
financial doldrums, the American (and world) economy has
proven remarkably robust.
"And yet someday in the future - tomorrow? 2008? 2070?
perhaps later? - these madman predictions will prove true.
Then the madman can pound his chest and say, 'I told you
so!'
"What I am trying to say, with all due respect, sir, is:
You're full of s***. You deliberately write in this
sky-is-falling tone, not unlike George W. Bush with his ad
infinitum warnings of impending terror (or 'terra,' as he
likes to say), in order to convince readers to purchase the
financial advice of you and your cronies.
"'Buy my latest report which will show you how to get
wealthy in 3.8 seconds!'
"The nettlesomely verbose, pabulum-spouting,
foaming-at-the-mouth Mogambo Moron explains why he is God
and then brags about his latest correct forecast,
conveniently ignoring the other 2,741 woefully inaccurate
prognostications he has made! 'Send $400 a year for his
weekly madman rant newsletter!'
"'Send me, Bill Bonner, $500 to show you how to write
annoying, cliche-laden copy like this! It could make you
wealthy!'
"Nice try, Mr. Bonner. Some of us aren't stupid enough to
make you and your friends a hefty profit."
*** A 63-year-old reader...
"Many of my friends and acquaintances are either 'retired'
or not able to find the kind of work they would like. It is
not a lack of ability - it comes from the fact that many of
them choose not to work because it has become overly
burdensome. After the taxes are paid, the pay isn't all
that great, even given 'benefits' like 'health insurance'
(really, prepaid medical care). It is fascinating to
observe how people are dropping out of the system, finding
ways to curtail their expenses so they don't have to submit
to all the politically correct yahoos. The rules and
regulations just make everyday work unbelievably
difficult.
"People think it is a shame that older folks end up as
greeters at Wal-Mart. Why not? It's a job that doesn't
require filling out forms if you want to do something. You
don't have to ask permission from the company to purchase
stock, even in Wal-Mart. The person who does it even
halfway reasonably gets a fair amount of respect. So the
pay isn't so great - but after taxes, it isn't that much
less than what a teacher makes, and there is a lot less
grief."
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---------------------
The Daily Reckoning PRESENTS: It must be Monday! Today the
Mogambo meets John Snow... well, er... John Snow's security
team to be accurate...
MUMBLING AND GRUMBLING
by the Mogambo Guru
To show you how far removed from reality John Snow is - for
those of you who don't keep up with local politics, this
guy is the Treasury secretary of the United States -
BusinessWeek magazine sat down with him and listened to him
flap his lips for half an hour.
It is from the interview that we learn that that we should
"Give people more control over their own lives, empower
them to take greater responsibility for their own
retirements, health care and economic security." Hahahaha!
Where the hell has this guy been? Take responsibility?
We're suddenly going to act responsibly for our own
actions? Now? Hahahaha! The very essence of government
today is that it works day and night to make up for
everybody's mistakes, so that nobody ever has to take
responsibility for anything!
But it doesn't stop there! He goes on to say "People are
intelligent in the United States; they can make intelligent
trade-offs." Hahahaha! The Mogambo springs to his feet, and
whipping out a Magic Marker, quickly draws some graphs on
the wall.
As the security guards drag me away - they obviously don't
like Magic Marker on the walls - you can hear the Mogambo
yelling out, "When one charts the apparent IQ of Americans
through the decades, which is shown by this upper line that
is sloping down and to the right, simple extrapolation
dictates - dictates! - that we are provably, beyond any
shadow of a doubt, much more ignorant than at any other
time in American history! I mean, just look at us!"
Well, obviously, I was not there for the rest of the
interview, entangled as I was with the security personnel.
Instead, I was trying to gently calm them down by screaming
right into their faces that they can't arrest me because I
am the Mogambo, and they are infuriating me by acting like
they never heard of me, and you should have heard the
disrespect they showed for my License To Kill status!
Jerks.
Anyway, so it is to the actual magazine article that we
turn, and we read that Mr. Snow figures that we need to
fiddle with tax policy to encourage savings. So far, so
good! The reason is, and I love this, that he says that it
"plays into long-term growth rates, because if you invest
more for the future, you have higher real wages, higher per
capita income, higher prosperity."
This is where we part company on this savings thing,
because I am here to tell you that while we DO want
investment from savings, we do NOT want higher real wages
OR higher per capita income. We want prices and wages to
remain perfectly stable! Zero inflation. If we do that,
then the "Miracle of Productivity" kicks in! Prices go
down, while income stays up, and part of the extra money
saved per week (the marginal propensity to save) lowers
rates, and the remainder (the marginal propensity to spend)
provides the extra demand to soak up the additional
production! So textbook! So classic! So deliciously
perfect!
And that is the reason why I was dragging my feet as the
security people were dragging me down the hall - screaming
as loud as I could - that John Snow is an idiot, because
even a moron as intellectually impoverished as me can
immediately realize that the only real end result from
higher wages and higher per capita income, what he
envisions as our future, is that it necessarily breeds more
income inequality, which is characterized by the wealthy
and a middle class that raises its prices to cover its
increased costs (and thus merely offsetting the inflation
in prices) and that leaves a large, and growing, class of
people who do NOT have a higher income but have to pay the
damned higher prices. These are your standard categories of
your old, infirm, handicapped, homeless, mentally ill,
young, abandoned, weird, anti-social, homicidal, lunatic,
the unemployed and the unemployable, and various assorted
others, like the Mogambo, who embody a little of all of
these people, if modern psychiatric diagnostic techniques
are as good as they claim.
If you don't have any money, then a $1 loaf of bread is
more attainable than a $5 loaf of bread. And if you are
homeless, then a studio apartment at $50 a month, utilities
included, is a lot more attainable than an apartment
costing $1,500 per month, plus utilities and security
services to keep the poor people away.
And when you gather all these poor, miserable people into
one place, you will immediately notice that there are a lot
of them. And I mean a lot! Out of a population of 290
million currently living in America, 150 million do not
work at all! Of the 140 million who DO work, fully 22
million of them are direct employees of a government! And
the rest of the country is merely engaged in selling goods
and services to the government and to each other.
So how many people are going to benefit by higher wages and
higher per capital income? Let's find out! I walk up to the
microphone and announce, "May I have your attention,
please? Stand up if you think you are going to benefit from
a policy aimed at producing higher wages and higher per
capital income. Be honest." After a lot of shuffling of
feet and mumbling and grumbling, I look out over the
audience. With a sneer in my voice, I say, "I see the usual
suspects standing: Lawyers, politicians, power brokers and,
of course, the damn bankers. Perfect. Absolutely freaking
perfect."
And all the rest of the people, that vast, engulfing sea of
people who are not playing in the game, for one reason or
another, are going to suffer because of somebody else
getting higher wages and higher per capita income, which
makes prices go up. And increasing the suffering of more
than half the population of the United States is not in
Mogambo's Definition Of Economic Success (MDOES).
In a similar vein, the Associated Press reported that the
Census Bureau figures that "The number of Americans living
in poverty increased by 1.3 million last year, while the
ranks of the uninsured swelled by 1.4 million." Well,
rising immigration could explain that, I suppose.
In the same light, "Approximately 35.8 million people lived
below the poverty line in 2003, or about 12.5% of the
population. That was up from 34.5 million, or 12.1% in
2002." Well, that could be a statistical error, an all in
all, one could make the argument that things are, roughly,
about the same, and if adjusting by immigration, then
things are actually better!
But there is no escaping dollars and cents, and in that
regard, they report that "The median household income, when
adjusted for inflation, remained basically flat last year
at $43,318."
And I am here to tell you that the government massaging of
actual statistics only partially compensates for the real
level of price inflation, and if you fully adjusted incomes
for the effects of inflation, then the median household
income went DOWN, and has been going down for years!
Yikes!
Regards,
The Mogambo Guru
for The Daily Reckoning
*** The Mogambo Sez: The nearer to Election Day that we
get, the weirder and weirder it will get, as hard as that
is to imagine.
The Mogambo Guru lives!
Editor's Note: Richard Daughty is general partner and COO
for Smith Consultant Group, serving the financial and
medical communities, and the editor of The Mogambo Guru
economic newsletter, an avocational exercise the better to
heap disrespect on those who desperately deserve it.
The Mogambo Guru is quoted frequently in Barron's, The
Daily Reckoning and other fine publications. If you're
inclined to read more, you'll find the whole Mogambo here:
Doctor Dinero
http://www.dailyreckoning.com/body_headline.cfm?id=4096
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