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--- Begin Message ----Caveat Lector- * * * * * * * * * * * * 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. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Mogambo Monday The Daily Reckoning Paris, France Monday, 20 October 2003 ---------------------- *** The cruel month is not over... Dow slips, Nasdaq slides, S&P falls... *** Perils of the "Gilder Effect"... contemporary features of investment manias gone bad... *** Killing camellias... tango lessons, encore... and more, including Mogambo on Monday! ---- Advertisement --- The Financial Media Can Be Hazardous To Your Wealth! "... the hazards of democratic consumer capitalism and the financial follies of history suggest that DEPRESSIONS are not necessarily a thing of the past. In fact, they're almost certain to play a role in our future. Which is why, here in the present, we find CNBC and the financial media can be hazardous to your wealth!... " GO TO:http://www.agora-inc.com/reports/RCKN/FDR/ Find out why popular democracy, aging populations, and bad economic theories doom the major Western economies to follow the Japanese model - with recessions, bear markets and falling consumer spending likely to span the next 10 to 15 years. And how you can profit from the change in "leadership" that a softening economy portends. "The authors have mastered the art of finding humor and entertainment while tearing the veil off of the commonly held deceptions of our age... "Hint: don't rush your reading. Like fine wine, this book is to be savored and likely reread... " - David Bradshaw, The Swiss America Trading Corporation ---------------------- The month of October can be a cruel one for investors. The other months that can be cruel are January, February, March, April, May, June, July, August, September, November and December. Many investors are already looking forward to leaving October behind and coasting to the first year of stock market gains since 1999. "If we can just make it through October," they say to themselves... But October isn't over yet. The source of much optimism about the economy and stocks has been rising productivity... and rising profits. The latest figures presented as evidence purport to show that, excluding tillers of the soil, productivity rose at a 6.8% rate (annual rate) in the 3rd quarter of '03 and corporate earnings are expected to come in 20% higher than the year before. We don't have to tell you, but the numbers are already so jigged and jived there is little telling what is really behind them. But taking them as we find them, we would still like to ask a couple questions. First, isn't it true that cozy relationship exists between productivity, employment and profits? The fewer people you have working to produce something, the greater the productivity of each one. So it is common, in a downturn, for businesses to cut marginal workers. The rest of them carry on... typically, the most productive of them. While productivity goes up, so do profits, since labor is the denominator of the productivity fraction and also usually the largest business expense. Then, as a recovery develops, businesses typically rehire workers in order to keep up with rising demand. This causes profit growth to ease off, but it sustains the recovery by putting more money in more pockets. The more we think about it, the curiouser and curiouser this 'recovery' becomes. While productivity numbers have risen faster than they have since 1970, oddly, payrolls are off by more than a million people since the recession. Had employment increased as it normally does, there would be 4.3 million more people working today, that is, more people with real money to spend to keep the recovery going. And, had there been the usual uptake in jobs, both productivity and profits would have been much lower. What gives? How come so much apparent productivity and so little employment? We don't know. But we can take a guess. While stimulating the U.S. consumer to buy things, neither the Fed nor the Bush Administration could make him want to buy things made in America. Instead, he shopped for bargains and found them overseas. Employment rose, but in places such as China and Bengladesh, where 2 or 3 workers were probably hired for every one American who was laid off. Unlike those fulminating politicians in the U.S. senate, we have no problem with this. But neither should the resulting economic phenomenon -- in the U.S. -- be mistaken for a "recovery." A real recovery requires more than just debt and credit; it must have investment in new machinery and new employees -- at home, not just in China. What is happening is no recovery; it is merely an adaptation to a perverse set of conditions... and is sure to lead to an even more perverse outcome. Over to you, Addison... for more news: -------------------- Addison Wiggin standing fast on bubble watch... - It's d�ja vu all over again... During the height of the tech stock mania, there was no more influential voice in the markets than Mr. George Gilder. So great was his influence that simply talking about a stock in the discussion board for his newsletter, a board called the Telecosm Lounge, was enough to give unheard of tech companies a boost in stock price. If the company was actually added to the recommendation list of The Gilder Technology report, within minutes the stock might jump as much as 80%. The phenomenon became known "the Gilder effect" is back. - Unfortunately, as we point out in chapter one of Financial Reckoning Day, Gilder didn't "do price". When the stocks he had been covering began getting trounced alongside the rest of the collapsing market Gilder was in no position to get his readers out. "I was in this really ridiculous position," Gilder told the NYTimes, in a feature piece published in yesterday's Sunday edition, "because I explicitly didn't do timing." - "Many of the companies � including Global Crossing, Global Star, Metromedia Fiber, WorldCom and Corning," the Times piece goes on, "are now either reduced to wisps of their former selves or gone entirely." Of the crashing market Gilder says: "My whole optical paradigm crashed, and it crashed on my head." On the subject subscribers to his newsletter he said: "They were mad and hurt and aggrieved and pained and broke. And they had a real grievance. These people didn't lose 50 percent or 80 percent of their money. They lost 98 percent of their money." - Rich Karlgaard, perhaps correctly so, comes to Gilder's defense. "I don't think anything [Gilder] said or written about the trajectory of technology or the underlying economics has been wrong," says the publisher of Forbes. "But George, like all of us, got caught up in the stock market to heights that were unsustainable." [Ahem, not all of us.] - And yet... here we go again. Usually the expression "the more things change, the more they stay the same," takes years even decades to bear fruit. But, thanks to what is largely perceived as an effective "policy" response to the collapsing stock market and credit bubble "money" that might otherwise find its way into productive application, is finding its way right back to the tables of the world's largest casino. As the Fed keeps rates at garden slug levels and the Bush administration encourages consumers to spend at the expense of skyrocketing federal debt levels, the lumeninvestoriat are piling back into to tech stocks with abandon. And Gilder is getting his wind back. - "Today," the NYTimes proudly proclaims, "as the telecom sector rebounds, Mr. Gilder appears to remerging as an influential thinker who can once again move markets." [Ooooh, la la... ] "Over the last 52 weeks, the Gilder Technology Index has risen 221 percent, while the Nasdaq was up 71 percent and the S&P was up 29 percent... - "A little bit of excitement is beginning to creep back into the Telecosm Lounge. One day this month, after Mr. Gilder mentioned the Avistar Communications Corporation, a small company that sells videoconferencing systems in the Telecosm Lounge, the stock price doubled over the next two days." And a whole new heard of sheep shuffle off to get fleeced. May we remind you Gilder, in his own words, does neither price or timing. - Maybe it's just the fact that we have recently reread the book ourselves... or maybe we have brainwashed ourselves into finding proof for the argument everywhere... but everywhere we look � in the days headlines, in the e-mails of our friends and colleagues, in our coffee - we see evidence that "Financial Reckoning Day" is right on target. As the Mogambo Guru points out below: "S&P stocks are selling at 33 times earnings. Nasdaq 100 stocks are selling, by one estimate, at 8 times SALES, and by another estimate for a P/E of 233. Houses are selling at over three times median income. Private household debt is financing 20% of GDP, and the debt is at record levels, both absolute and relative, in all of American history. Interest income has been slashed to negative real returns. Government deficit spending is exploding." - The list, we can't help but notice, reads like a "Who's Who?" of contemporary details, updated for time and place, from collapsing investment manias of the past. If we were to rewrite financial history ourselves we couldn't script it any better. Unfortunately, as Andre Gide said, "everything has been said before, but since no one is listening, we have to keep going back and beginning all over again." Financial Reckoning Day reads like a survival-guide for the conscientious objector; If you do not yet have a copy, we recommend you buy one immediately: http://www.agora-inc.com/reports/RCKN/FDR/ George Gilder plays a starring role in the first act. - The Dow slipped 70 points Friday to 9,722. For the week, it still managed to close with a modest 47-point gain. The Nasdaq fared worse Friday, as the tech-powered index dropped nearly 2% Friday en route to a three-point loss for the week to 1,912. - As our man at the scene of the crime, Eric Fry pointed out over the weekend, two high-profile tech companies -- Intel and IBM -- posted positive earnings reports for the third quarter last week. And followed up with upbeat pronouncements about the fourth quarter and next year. "IBM wowed its fans by announcing plans to add 10,000 new employees next year," writes Mr. Fry, "But the earnings-surprise euphoria faded very quickly. Intel shares closed out the week with a small gain, while IBM slumped 4% after its earnings release." -------------------- Bill Bonner back in Paris... *** Next year, the tax cut will save the average family about $700. But the U.S. government will borrow an additional $1500 per family. *** Many are those who think the price of gold is manipulated. People seem to think the price of the yellow metal is being held back by a powerful cabal of insiders. We hope so. Gold is at $372. This is close enough to our new buying target of $370. We will buy. *** We went out yesterday to a huge garden show about a half hour from Paris at the Chateau de Couzances. Thousands of people came to see and buy plants. We had never seen anything like it. You could buy rare oaks, forgotten fruit varieties and gaudy cross-bred dogwoods... or discuss the merits of a peculiar camellia with an expert -- a substantial woman whose nose had spent so much time sniffing the flowers it had turned yellow. We began the conversation by confessing that our attempts at growing camellias had failed. "Failed? You mean, you actually killed them?," she replied, and took out her cell phone. We feared she was going to call the cops. "It's almost impossible to kill them," the woman sniffed, "so you must tell me how you did it. I will put it in my next book. In fact, the only other person I know who killed one was Catherine Deneuve. She bought a huge one from me and then called me to tell that the plant was not well. I realized immediately that she was over-watering it. She had it on one of those infernal automatic waterers. So I told her to bring it to me and that I would take care of it. "But no, she called me again to tell me that it was still on the automatic waterer and was nearly dead. I pleaded with her to bring the plant back so I could nurse it back to life. But I never heard from her and I guess the poor thing is dead by now... " As we left her, she looked as though she might press charges. *** The show was stunning, but the food service was appalling. We had to wait in line for half and hour in order to buy a pathetic sandwich and cup of coffee. Then, we found nowhere to sit except on the grass itself. So we took a place next to an alert young woman and struck up an conversation. Upon learning that we might have an opinion on financial matters, the woman wanted to know what it was. "Buy gold," we suggested. "Gold? Gold? Why it's so... well... prehistoric. I don't see how that would help the economy... " "No, it doesn't help the economy at all, it helps you... " your editor tried to explain, adding a short explanation of the Dollar Standard system. But we could see we were wasting our breath. The woman believed there was something wrong with buying gold. To her, buying gold was anti-social... and probably mad. *** In the Rush Limbaugh spirit of humbug confessions, we pad our list of bad habits today by acknowledging that we have taken up the tango. Reporters from the National Enquirer need not follow us around; we admit it -- when we finish this letter, in fact, we will go off to a studio and take it up again. "It is just like golf or tennis," we explain to people. It is physical exercise. The only difference is that you do not chase balls and you try not to sweat too much. And, oh yes, you do it in the arms of an attractive young woman. Unlike golf or tennis, it probably damages the heart rather than strengthens it; but it is worth it. --- Advertisement --- Triple-Digit Profits From the Things That Keep the World Running Imagine racking up big wins on 75% of your trades. It's possible, thanks to a roaring bull market you may have overlooked -- the bull market in commodities. It's much easier to play than you think... And you could quickly see profits of 125%, 174%, 304% or more. Here's how to cash in. http://www.agora-inc.com/reports/RTA/ThinkGains/ --------------------- The Daily Reckoning PRESENTS: Mogambo on Monday! The great one is horrified at this year's choice for the Nobel Prize in Economics... especially since they have eclipsed his own bid, yet again. I note with a certain shudder that econometricians have won the Nobel Prize in Economics this year. And if there is one thing that raises goose-bumps up and down my spine, it is econometrics. This is the crowd of mathematical idiot savant dimwits that got us where we are today, as they prove that up is down, square is round, left is right, and black is white. When psychiatrists can accurately measure personal behavior, and then use that to accurately measure crowd behavior, and use that to accurately predict crowd behavior over the long term, THEN you can start giving out prizes in econometrics. But not a minute sooner, as far as I am concerned. Perhaps an analogy will help to explain. It's Saturday morning. You are slouched in front of the TV, having a cup of coffee, trying to ignore your wife screaming at you, "Are you going to sit there in your underwear all day watching TV?" and there is this movie on, and an exciting one, too, where Godzilla is attacking Tokyo. The army general is explaining that they are optimistic, although to date they have found that guns, rockets, grenades, tanks, fighter aircraft and large-diameter artillery have proved totally ineffective against this enormous, rampaging monster. Meanwhile, Godzilla continues terrorizing the city infrastructure, stomping on bridges and things. Now, here is where it gets weird, because the hero, who is an American economics professor, is explaining how econometrics proves that this whole Godzilla thing is not as bad as it looks. "Consider that the clean-up and rebuilding of a devastated Tokyo, which would unleash a massive burst of economic activity, as you can see in my new equation!" he says. "Construction jobs for everybody! More activity! More spending!! Therefore more taxes! And therefore more government programs, which will cost us nothing, because they were paid for by the increased economic activity!" And then the American economist hypnotizes everybody by waving some equations and computer models seductively, and says the magic words "Nobel Prize And Incomprehensible Math! Nobel Prize And Incomprehensible Math!!" and convinces everybody that these Nobel Prize winning equations prove, with the he absolute finality of mathematical precision, that letting Godzilla destroy the city and kill all the people is a recipe for a glorious boom! That will end up making everybody rich! In a rising wave of revulsion, you look at your coffee cup and wonder if the cat did something inappropriate in it, because a bad smell is suddenly coming from somewhere. But you decide it is just the movie, so you idly pick up the remote, and you switch over to another channel - click! - and there is a Pharaoh, whose American economist son-in-law is explaining how the mighty Pharaoh should pay attention to econometrics and start building pyramids, which would be a terrific program, and it would employ millions of people. "And you are actually making an investment in the future," explains the American economist, laying prostrate before the divine king, "as the building boom would guarantee rising aggregate income, and the multiplier that I have included here in this ancillary set of equations proves that tourists will come from around the world to see these things. I mean, it ain't Disney Land or anything, but they are these huge freaking piles of rocks! And if you declare the pyramids to be one of the Seven Wonders of the World, you'll be knee-deep in tourists in no time, and you'll make a fortune, dude! I mean, oh Merciful and Wise Pharaoh, and Egypt will have a glorious expanding economy, and in the end we will all end up gloriously rich! And people will sing your praises forever, mighty Pharaoh, as I have proved mathematically that Egypt will always reign supreme over the whole world!" No, apparently the analogies didn't help. Sorry. Unless it demonstrated my profound natural antipathy toward econometrics, and then it is a big success. And I have a natural antipathy towards it because Alan Greenspan and his Fed buddies all love that stuff, and, I mean, look around you at the result! I almost hate to keep harping on this, but the one thing that happened that did NOT cause instant panic was the news that the central banks of the world, the G-7, having met at Dubai, all agree that the dollar is going to finally be devalued, but in deliberate, controlled steps! Therefore, every imported thing that you buy, from now on, will now cost you more, unless the exporters decide to cut prices and cut their own throats. Every day, day after day, more and more higher prices! It staggers the mind! I am actually surprised to find that the world is not erupting in flames! If you check back through your library of Mogambo Guru, you will note that this is the damned price inflation that I say always follows monetary inflation. The same price inflation that always follows monetary inflation that the Austrians have always said was coming. And now it is coming to a theater near you! And now, it's here! This is it! The central banks have all agreed to do it! So things will cost more! All thing will cost more. How much more? A lot more! Wake up! Get up and run for your life! And the people who are paying these higher prices for things are going to then find that they have to charge more for the things that THEY sell, or suffer a decline in their standard of living! And so they raise THEIR prices! And then everybody else starts raising THEIR prices, and that causes all OTHER prices to go up, and that increases costs, and so everyone finds that prices must be raised some more! And the rapid rise in prices causes the reported inflation rate to rise, and then interest rates rise, which increases costs to businesses, who must then raise prices to offset these new higher interest rates costs! Perhaps an example from my own life will clarify. Suppose I only have ten bucks a day to spend on food, and I get a six-pack of beer, a tub of fried chicken, and a pack of smokes. Then prices go up by ten percent. Then my ten bucks a day will only buy a six-pack of beer, a regular chicken platter, and a pack of cheap smokes. Then prices go up by another ten percent. Now I can only afford two beers, an economy-sized chicken dinner, and a pack of really cheap smokes. Then prices go up by another ten percent, and I can only buy one beer, a drumstick, and a pouch of "Cheap-O Loose Tobacco," which has the motto "Premium floor sweepings from real cigarette companies!" And in case you are at a loss to understand why the sirens in the Mogambo Bunker are blaring, why the klaxons are sounding, why all the bells are ringing, or why I have maps showing emergency routes out of town, the answer is that price inflation is here! So forget Godzilla smashing through your garage; the rapid rise in prices is going to be far worse than anything Godzilla can do to you! Jonathan Clements, a columnist for the Wall Street Journal, wrote an interesting piece in last Wednesday's issue, entitled "Why the Rising Market is a Bummer: Practically Everything's Overpriced." And this is exactly what I have been saying, because it is what real economists have always said, namely excess production of money and credit eventually works its way into prices. And now this Clements fella says that the gigantic, cancerous volumes of money and credit generated by the profligate and totally irresponsible Fed for the last decade or two, and I see that I forgot to include a gratuitous insulting remark, such as "the Fed is also a bunch of morons who couldn't think their way out of a paper bag," has now worked its way into the prices of everything. In the old days, of course, this used to be known as inflation. Now the Fed calls it "fighting deflation." And when we say everything is overpriced, I do mean everything, from stocks and bonds, to houses, to collectibles, to overly generous government salaries and benefit packages, to overly generous executive salaries and benefit packages, to practically every other freaking thing under the damn sun. Since I am one of those who grew up during a time when America was the smartest, toughest, wisest, richest and most wonderful dog on the street, it's embarrassing to watch, as we prove that we are among the dumbest dogs on the damn street. Because if there is one thing that you do NOT want, it is price inflation. And yet here we are, creating credit and money at levels never before seen, guaranteeing roaring inflation! And we're doling out prizes to the geniuses who help make justify it with math. Regards, The Mogambo Guru, for The Daily Reckoning P.S. Just as I am putting the revolver to my head in a coward's way out, I notice that even California wised up enough to get rid of Gray Davis, so I am still hopeful that there is a spark of that old America left. And to show my gratitude, I am not going to say any bad things about California for a long time. Mogambo Sez: S&P stocks are selling at 33 times earnings. Nasdaq 100 stocks are selling, by one estimate, at 8 times SALES, and another estimate is that the Nasdaq is selling for a P/E of 233. Houses are selling at over three times median income. Private household debt is financing 20% of GDP, and the debt is at record levels, both absolute and relative, in all of American history. Interest income has been slashed to negative real returns. Government deficit spending is exploding. And gold is only selling for... ? Editor's note: Richard Daughty is general partner and C.O.O. 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: Importing Deflation � Big Bad News http://www.dailyreckoning.com/body_headline.cfm?id=3490 --- Advertisement --- Using my secret Precision Guided Investment strategy, you can finally use "big-picture" ideas for massive short-term profits. Our recent track record shows gains of 58%, 84%, 88%, 91%, 112%, and 120%... all coming within a few days. In fact, during the volatile wartime market conditions, we hit 7 winners for every 1 loser. Click here to learn more about this conservative, super-powerful strategy. You could soon average 27.1% gains per trade, even in today's tricky market. http://www.agora-inc.com/reports/STA/MasterGains/ ------------------------------------------------------ The Daily Reckoning is a free daily e-mail service brought to you by the authors of the Wall Street Journal Best-seller: "Financial Reckoning Day: Surviving the Soft Depression of the 21st Century" (John Wiley & Sons). For a limited time only, you can purchase Financial Reckoning Day for a 30% discount! You'll have to hurry if you want to catch it... See: The Least Well Kept Secret In Financial Publishing http://www.agora-inc.com/reports/RCKN/FDR/ ------------------------------------------------------ MAKE YOUR OPINIONS COUNT! Visit our Discussion Board at http://www.agora-inc.com/forums/index.cfm?cfapp=3 and submit your views or read what others are saying. Our writers and contributors also welcome your questions and comments. Simply reply with the word 'Question' or 'Comment' in the Subject of your e-mail. ------------------------------------------------------ If you'd like, please e-mail this issue of the Daily Reckoning to a friend: http://www.dailyreckoning.com/emailfriend.cfm?id=6964 ------------------------------------------------------ ADDRESS CHANGE? WISH TO CANCEL? You can administer your account online. 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