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-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.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
Last Man Standing
The Daily Reckoning
Baltimore, Maryland
Wednesday, 5 November 2003
-----------------------
*** House prices sometimes go down... imagine that!
*** LA real estate... rising debt... we don't owe it to
ourselves anymore...
*** Our own little micro-bubble... American Caesar... and
more!
-----------------------
Donora, Pennsylvania...
Even in the 1960s the place looked decrepit. The old houses
were clad in an asphalt-based product which was intended to
look like brick - from a far distance... to a near-sighted
half-wit.
It had probably been put on in the 20s or 30s... or maybe
the 40s. By the '60s it had cracked and warped like a
neglected packing lot.
When owners went to replace the asphalt, they typically put
on aluminum siding... which almost looked good for a year or
two... until it became dented and faded.
Like Argentina, Russia, and Baltimore... Donora did what now
seems almost impossible. For most of the 20th century, the
real value of its property went down. Americans can hardly
believe it; but real estate can go down in price for very
long periods of time.
>From Los Angeles comes news that house prices have been
rising at 8.3% for the last 34 years. The numbers lean a
bit, bent in a favorable direction by the warm winds of the
last couple of years. Over the last 12 months, for example,
prices in LA County rose 24%.
House prices... like stock prices... are rising on a
trillion-dollar gust of hot air from the Feds. Lower rates
and greater government spending have encouraged the
illusion of a boom. People borrow and spend as if they had
not a care in the world. In the Here and Now of the 3rd
quarter, GDP was said to be increasing at more than 7%
annualized. The dollar was recently seen - rising! And
stocks are still going up.
So, what if we're wrong? What if the recovery is for real?
What if things don't work the way we think, after all? What
if there IS such a thing as a free lunch... and you NEVER
have to pay the piper... and a stitch in time really does
save something?
We leave the questions unanswered. For if there is no moral
to the story, we're not interested; it becomes like a tale
told by an idiot, full of sound and fury, but signifying
nothing. So let us push on, as if the world still turned on
its axis in the old familiar way...
Total debt levels have doubled in the last 5 years - up
from $16 trillion to $32 trillion. Debt is now rising at 8%
per year - about the same rate as real estate prices.
Mortgage debt is going up almost twice as fast. And the
federal government is adding debt at the rate of more than
a half-trillion per year.
Debt is often dismissed with the words 'we owe it to
ourselves.' Franklin Roosevelt referred to it as "our
national bond," making debt sound vaguely respectable, even
patriotic. But in August, when the Feds borrowed $42
billion to fund the deficit, the buyers were not ourselves
at all. 81% of the new government securities were taken up
by foreigners. The national bond has become a ball and
chain... with foreigners holding the keys.
Still, people don't seem to care that their mortgages are
held by foreigners. And what difference does it make,
anyway? For the last 17 years, the U.S. has relied upon the
kindness of strangers to finance its living expenses. What
could go wrong?
So sure are people that house prices will sell for more and
more money that they bet their financial futures on it. The
median house sells for $374,000 in LA. Were it not for
unusually low interest rates, the median family would find
it very difficult to buy a house at all. And should rates
rise - which they surely will - those who bought houses
using adjustable rate mortgages might wish they hadn't.
Still, people can barely believe that house prices do
anything but go up. We suggest a trip to Argentina... or
Donora.
*** The markets must have forgotten their rose-tinted
glasses yesterday... by day's end, the Dow had fallen 20
points to 9,839, while the Nasdaq slid 10 to 1,958.
Outplacement firm Challenger Gray & Christmas came out with
the sad, sad news that layoff levels leapt 125 percent last
month, after three months of declines. 171,874 pink slips
were given out at U.S. companies during October - the
highest monthly total in a year.
Gold added 90 cents to $378, after losing nearly $8 on
Monday. The dollar slipped following its recent mini-rally:
the euro was up 0.3% at $1.1498 by yesterday's close.
*** Real estate prices in downtown Baltimore peaked out in
the 1920s. But after a bear market that lasted 8
decades... they seem to be coming back.
"Are you kidding," said a friend last night, "real estate
is booming in Baltimore."
It seemed so. All around the harbor, at least, Baltimore
looked almost alive - except for the absence of people.
*** "It's our own little mini bubble," we told colleagues
last night.
We were referring to our own business. New readers to the
Daily Reckoning might not realize it, but your editor is
also the owner of a publishing business. Not only do we
give away advice, opinions and sundry annoying observations
here on the Daily Reckoning, we also sell investment ideas.
Recently, people are so eager to for investment ideas that
business has been booming.
In fact, we've been contacted by venture capital groups...
"This is the time to sell," said one, "while the business
is doing well. You don't get this kind of opportunity very
often."
"You're right," we meant to reply. "But we look upon our
business in the same way we think of our marriage. We've
stuck with it for so long... we think we'll stick with it a
bit longer. It's an adventure, after all; we want to see
how it turns out."
*** Down in New Orleans, your editor signed copies of his
new book. He was pleased to see a line form and pleased to
hear from many Dear Readers...
"You know," said one, "I've bought so much stuff from your
company over the years... I've probably paid for your
daughter's college education."
"Thank you," came the reply. "Keep buying. I've got four
more still at home."
*** About the book, this kind reader writes to say:
"Now that I am enjoying my 60th year in Wall Street I can
say with a decent background of credibility that your fine
work - Financial Reckoning Day - should be required reading
for anyone who signs up for Economics 101 -
Congratulations!"
Arthur Gray, Jr.
Senior Managing Director
Carret & Company
Thank you, Arthur.
Bill Bonner
The Daily Reckoning
P.S. For more on the book, don't miss:
"The best investment book I have ever read... "
http://www.agora-inc.com/reports/RCKN/FDR/
P.P.S. How does it all end, we keep wondering? If debt
cannot build up forever... there must come a time of
recognition and solution. What happens?
We reprise comments from Austrian economist Hans Sennholz
made in these pages yesterday:
"Our debt generation is a sad generation misguided by false
notions and doctrines, and preoccupied with its own needs
and wants. When economic conditions begin to deteriorate it
may grow ever more egocentric and wretched, which tends to
aggravate the social tension and strife. Clinging
tenaciously to its transfer claims and rights, the unhappy
society thus may deteriorate into a militant assembly of
diverse pressure groups feuding and fighting each other.
"When the political conflict finally explodes into
violence, the transfer society urgently needs a peacemaker
who is prepared to suppress violence with superior
violence. In the end, a society that can no longer work
together in peace must submit to the dictates of a strong
president armed with an array of emergency powers. In other
places, at other times, he would be called Caesar."
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---------------------
The Daily Reckoning PRESENTS: A DR Classique originally
broadcast September 13, 2002... and an inspiration for
themes explored in Chapter 5 of Financial Reckoning Day.
LAST MAN STANDING
By Bill Bonner
"Disgraceful."
We had asked Lord Rees-Mogg what he thought of Alan
Greenspan's speech in Wyoming.
We hate to bring it up again, dear reader. You must be
getting tired of hearing about it. But we can't resist.
Here at the Daily Reckoning we are connoisseurs of
absurdity. And here we have the man who - in an unusually
lucid moment - described stock market investors as
'irrationally exuberant' in '96, claiming he could see
nothing untoward 5 years later, even with the Dow 100%
higher. He would not know a bubble if it blew up in his
face, he seemed to say; he would have to wait and check in
the mirror for bruise marks.
And even if he had been able to spot the bubble expanding,
the Fed chairman continued, he would not have been able to
find a pin or even to duck. The hundreds of economists at
the Fed were powerless, "confronted with forces that none
of us had personally experienced... aside from the recent
experience of Japan, only history books and musty archives
gave us clues to the appropriate stance for policy."
In today's letter, we revisit our Fed chief. We do so
partly for the pure baroque mischief of it - like offering
an immensely fat person a second helping of dessert - and
partly because we have an investment insight that might be
worth sharing.
You see, we have come to believe that Alan Greenspan is one
of the last of the New Era heroes. As long as he still
stands, we think, the delusion of greater wealth through
greater borrowing stands, too. Yesterday brought news that
the current account deficit hit a new record in the second
quarter [of 2002] - internationally, Americans continued to
spend more than they earned - $130 billion more. And, as
reported above, consumers stood in line to borrow even more
money on their homes - even as mortgage delinquency rates
hit new records.
But the last man standing - the only member of the
'committee to save the world' triumvirate still in office,
the Caesar of central banking - cannot last much longer.
And now the pundits are edging his way, golden daggers in
their hands. Paul Krugman in the New York Times... Abelson
in Barron's... they're escalating their attacks, from
criticism to open contempt.
When Greenspan's reputation gives way... we think... so will
the dollar, and the consumer. Yesterday, the price of gold
rose to $320. We're willing to bet that when the bubble in
Greenspan's reputation finally bursts, many more people
will want to trade 320 of the chairman's paper dollars for
an ounce of gold. Then, it might be too late.
The photo in today's Daily Telegraph shows the titan of
central banking looking a little tired. Even an hour
soaking in his bubbles does not seem to be enough. Speaking
before Congress must be a wearying job, of course. Neither
Congresspersons nor their many apparatchiks are likely to
understand what he is talking about. Of course, the
chairman himself may not know what he is talking about -
that was the implication of his testimony which, in the
little bits reported in today's paper, made absolutely no
sense... maybe he is becoming confused. But absurdity takes
energy. The Fed chairman rested his chin against his arm,
as if he was running low.
The minutes of past meetings of the Fed's Open Market
committee reveal a surprisingly more confident and
energetic chairman. In September '96, for example, Mr.
Greenspan told his fellow central bankers: "I recognize
there is a stock market bubble at this point." Then,
referring to a suggestion that margin requirements be
raised to dampen speculation: "I guarantee that if you want
to get rid of the bubble, whatever it is, that will do it."
What became of these insights? What became of the Alan
Greenspan of that era? He is no Volcker; the former Fed
chief was made of sturdier stuff and was willing to go
against the mob. Greenspan bent.
The Fed chief had already re-invented himself to suit his
ambitions. Had not the gold-buggish Ayn Rand devotee remade
himself into the greatest paper-money monger the world had
ever seen... increasing the supply of dollars more than all
the other Fed chiefs and U.S. Treasury secretaries
combined? Had not the man who once wrote that gold was the
only honest money already betrayed his own beliefs as well
as the nation's currency?
Now what can he say... now that the only thing still keeping
the world economy growing is the willingness of the poor,
hapless consumer to keep 'extracting equity' from his home
- that is, going deeper and deeper into debt - in order to
continue spending?
Can Greenspan admit that he has done the nation a great
disservice... allowing the debt bubble to expand, wafting
the hot air of 'productivity miracles' into it... and
turning up the gas with below-market interest rates? Or
will he try to keep the consumers borrowing even more - as
the Japanese did - with still lower rates and even more
confident hokum? "He'll end up as the most hated man since
Herbert Hoover," continued Lord Rees-Mogg over dinner. "He
gave America the 'Clinton Boom.' Clinton is gone. But
Greenspan is still there. He'll be the one left holding the
bag."
Your correspondent,
Bill Bonner
Editor's Note: Bill Bonner is the founder and editor of The
Daily Reckoning. He is also the author, with Addison
Wiggin, of the Wall Street Journal best-seller: "Financial
Reckoning Day: Surviving The Soft Depression of The 21st
Century" (John Wiley & Sons), available wherever books are
sold:
"The best investment book I have ever read... "
http://www.agora-inc.com/reports/RCKN/FDR/
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