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--- Begin Message ----Caveat Lector- A Bullish MirageThe Daily Reckoning Ouzilly, France Wednesday, 31 December 2003 New Year's Eve --------------------- *** Our So-Called Recovery... �ber-optimism among investors *** Dow slips, housing starts up, Japan fights rising yen... *** Unemployment is higher than you think... fur coats... socializing... and more! --------------------- We have nothing in particular to say this morning; nothing we haven't already said. The 'recovery' is a fraud... or as Paul Krugman refers to it in his New York Times column, "Our So-Called Recovery... ." The consumer economy is a humbug. Debt-driven growth is a trap. The feds believe they can stimulate the economy - with additional debt - to such a pitch of growth that the debts themselves will be no problem. Give the economy a shot of that old time medicine - lower rates, more credit, more borrowing and spending by consumers and government! In a normal recovery cycle, people begin to spend... which creates business investment and new jobs. The jobs lead to more spending... profits... and a genuine boom. But in a normal recovery, they have money to spend, money they saved during the downturn. This is no normal recovery. The processes of consumerism, debt, dollarization and globalization have gone too far. Americans owe too much money to too many people. When they get an extra dollar - even on credit - they already have too many debts to pay. They never stopped spending during the recession... now they have nothing to recover from - except debt. When the feds offer more credit - at the lowest interest rates in 45 years - consumers are only able to continue keeping up appearances; they can make no headway. And when they do buy, chances are the THINGS they purchase are no longer made in America - but overseas. So the stimulating effect of debt ends up among foreigners... while the crushing burden of it remains right here at home. But we have said this all many times before. And it is the end of the year... .we bow our heads and apologize. We were surprised that the year went as it did. We expected a bright �clat of revelation; instead, we got more darkness, debt and dumbness. The huge burst of government spending and additional debt did manage to hold off the day of reckoning... at least for a while. George W. Bush still has a shot at another term. Alan Greenspan is not yet regarded as the mountebank he really is. Americans are deeper in debt than ever... and going bankrupt at the fastest rate ever in history... but seem perfectly happy to do so! So, it worked! The bubble was successfully reloaded. Investors can now buy stocks for more they are worth... and ruin themselves by borrowing for less than the real cost of money. And now millions of Americans can look on their end-of-the- year statements with satisfaction. They will think themselves heroes and geniuses. While Soros was getting out of the dollar - the patriots stuck with it, like Daughters of Dixie with their confederate bonds. While Grantham, Rogers, Templeton and all the other great investors urged them to get out of stocks and the dollar - they held their ground like Custer's men at Little Big Horn. While Buffett could find no stocks worth buying - they stepped up and bought Amazon.com! And the great big River-of-no Returns stock paid off. The trouble with these stock market gains is that in terms of real money - gold - or less-bad paper money - euros - they amount to little of anything... and could disappear in a trice. "I made all my money by selling too soon," explained J.P. Morgan. At any time in the past year... and at any time in the next... too soon might not be soon enough. For, unlike the gains in euros or gold, profits in stocks rest upon nothing but an illusion - that the Feds' debt bubble can last forever. When it will all come to an end, we don't know. But that it will come to an end we have no doubt. Nothing lasts forever - least of all a debt bubble. Already, even with the lowest interest rates in 4 decades, Americans' debt-service ratio is at historic highs. And, at least in Silicon Valley, as many as 68% of all mortgages are adjustable rate. The average mortgage rate currently is only 5.8%. Even a slight upward movement will squeeze homeowners and bring an end to their spending. As recently as the early '80s, mortgage rates were above 18%. Hard to believe... but not hard to imagine that they could bounce back to, say, 7% before the end of 2004. Hardly anyone expects this to happen before the November elections. The dollar is expected to drift lower. Stocks are expected to rise gently. George W. Bush is supposed to float into Washington like the bloated body of a Capital Hill staffer drowned on the upper Potomac. It might happen that way. Then again, it might not. Tomorrow, we bring you our own predictions for 2004. In the meantime, here's Eric with more news: -------------- Eric Fry in the wilds of Manhattan... - The stock market paused to catch its breath yesterday, as the Dow slipped 25 points to 10,425 and the Nasdaq added 3 points to 2,010. Consumer confidence also retreated a bit, as did manufacturing activity in the Chicago area. But make no mistake, investors are bullish, consumers are confident and manufacturers are optimistic. America is a very different place today than it was on December 31, 2002. - One year ago, stocks were in a deep freeze and bonds were as sexy and sizzling as Rio de Janeiro. Stock market investors were gripped with fear, worried that three years of falling stock prices would become four and fretful that the imminent invasion of Iraq would snuff out our nation's budding economic recovery. Only die-hard bulls, intrepid speculators and faithful Abby Joseph Cohen disciples dared to load up on stocks... You know what happened next: bonds tumbled and stocks soared. - Today, investors find themselves in precisely the opposite situation. Stocks are sizzling and bonds are room temperature, at best. Accordingly, almost everyone expects stocks to rise and bonds to fall. That's because almost everyone expects the economy to continue growing in 2004, while almost no one worries that the dollar's decline will become a freefall. We hope that "everyone" is right. But we wouldn't be surprised to be surprised. - "Everybody seems upbeat," observes Paul Farrell of CBSMarketwatch. "Economists, politicians, securities analysts and pollsters are falling all over themselves forecasting a rising market that may blow through 11,000 in early 2004 and predicting a growth economy that will bolster the President's reelection bid. This euphoria smells like 1999 all over again to me, a renewed irrational exuberance negating common sense as the lemmings blindly rush over the cliff. - "The biggest enemy of every investor," Farrell continues, "is their bias toward �ber-optimism. It sabotages more innocent investors and wastes more of their money than any other brain function." - Farrell cites a number of reasons why the optimism for 2004 is overblown. "Analyst sentiment is extremely bullish," he says, "which is a contrarian signal." At the same time, corporate insiders are dumping stocks. For the past seven months, corporate insiders have been dumping stock at a rate exceeding a 20-to-1 ratio. Another negative, he says, is the likelihood that interest rates will rise in response to a strengthening economy and/or weakening dollar. - Farrell did not bother to mention that stocks are pricey. Investors have become so accustomed to paying 20, 30 or 100 times earnings for stocks, that rich valuations seem utterly unremarkable. Nevertheless, at 17 times estimate 2004 earnings, the stock market is not cheap. - That said, 17 times earnings poses no problem without a crisis. Perhaps the falling dollar is the sort of crisis that could make expensive stocks seem expensive. A dollar crisis - like a light switch at an orgy - could expose the market's obscene overvaluation for what it is. - The dollar has been falling nearly every day, despite the fact that the Japanese and Chinese are continuously intervening in the foreign exchange markets to support its value. - "Purchases of U.S. debt from offshore central banks surged to the second record in as many weeks," Reuters reports. The Federal Reserve's total holdings of Treasuries and agency debt for foreign central banks in the week ended Dec. 24 jumped above $1 trillion for the first time ever. - "Japan's central bank committed around 10 trillion yen ($93 billion) this year to currency intervention operations, " observes Strategic Investments editor Dan Denning, " [and still] the dollar fell 10% against the yen in 2003. $93 billion is a lot of cash to start throwing around in your currency fight. Consider this, though: the Federal government ran up a $374 billion deficit in 2003. It's budgeted to be around $450 for 2004 - and that's if receipts don't fall and outlays don't rise more than budgeted. - "Let's say Japan and China together buy up 40% of the NEW U.S. debt (about what they own now)," Dan continues. "That still leaves US$270 billion in new bonds the U.S. government would like the rest of the world to buy at between 4% and 5% interest. Will the government sell US$270 worth of new bonds next year? Probably. But you have to wonder how 'safe' a 4% yield is when you're losing 10% a year on the currency conversion alone. - "Meanwhile, the dollar is falling faster in euro terms than yen terms. That kills European investors and firms who've seen the euro gain 19% on the dollar this year. The Europeans are going to start asking for a stronger dollar - and soon. Kind of makes you wonder... if EVERYONE in the world (except American manufacturers) wants a stronger dollar... .why is it still falling? Well, you don't have to wonder that much. It's the debt... " [For more, see Dan's latest research: http://www.agora-inc.com/reports/DRI/RealTT/ ] - Those debts won't be going away in 2004. -------------- Bill Bonner, back in France... *** The economy is said to be adding 82,000 jobs a month since August. But manufacturing alone lost 1.4 million jobs since the recession ended. And this week's Los Angeles Times estimates that if you added in the number of people who have given up looking for work... and those who have taken marginal jobs rather than serious ones... the real unemployment rate would be nearly 10%, not 6%. *** It was another GUDD day yesterday. Yawn. Gold hit a new 14-year high of $417 an ounce. The euro rose over $1.25. *** A note on fur coats from our friend Byron: "As much as any other woman who walks upright on the planet, [my wife] Barbara likes the idea of possessing a fine fur coat. 'You are an old geology-major,' she said to me. 'You must understand the primal human instinct to protect yourself from the elements, wrapped in a full- length shaved mink with a chinchilla fur collar.' I replied that, yes, I majored in geology, but that is a different subject from anthropology, which encompasses the study of the ancient human craving for full-length fur coats. Barbara looked at me in a certain way, indicative of 'Keep it up, wise guy.' "To her credit, Barbara has also hedged her bets by owning and running her own business. If Barbara were typical of some of the hired hands and hacks who run at least some publicly-listed corporations, she might just have the brass to get the company to buy her a fur coat. 'Business expense,' and all that. But a fur coat so-procured is nothing more than a hide bought from a poacher, an illicit souvenir essentially pinched from the business till, a meaningless nouveau riche-girl's bauble, and as gauche a statement as using the corporate jet to fly the family to Aspen for a weekend of skiing. Barbara lacks completely the arrogance to think, let alone to say, 'The shareholders paid for it, and screw 'em,' if you know what I mean and I think you do. "So it falls to her husband to do his manly duty, visit Saks, and have a talk with the manager of the fur coat department. Speaking as the husband, I think that reaching deep down and buying your wife a fur coat, using your own hard-earned currency, falling like a stone against gold and the euro though it may be, can create an elevated sense of harmony in the home. Post-fur coat, you are more productive and therefore better able to earn more dollars and thereby acquire more gold. Win-Win. P.S. - Barb to Elizabeth: 'You go, girl!'" *** "I don't see why you want to invite the Delam�res," said your annoyed editor. "He is a pompous windbag who is always trying to pick a fight. I know just what he is going to do. He's going to begin by asking a question about what the Bush Administration is doing in Iraq... hoping to start an argument." "Yes, but I like him... " came the reply from the distaff, "besides his wife is very nice." "But she never says a word." "It doesn't matter. If you want to socialize, you have to spend time with people you don't particularly like. It's just part of what it takes. And if you don't do it, you don't get invited to parties and you don't meet people and you spend your whole life holed up in your own little world." "But we've already met the Delam�res... and I don't like them. Besides, I don't want to meet people. I know enough people already." "Oh stop being such a crank. It's good for your character." *** "It is time to remember the family," said P�re Canta at church on Sunday. The service was dedicated to family life, as near as we could tell. P�re Canta, never married, no children, preached on the subject: "Now, I know I have little personal experience. But I keep my eyes open. And I have never seen a family that did not have some problems. Sometimes the problems and tensions of family life are so sharp that people cannot stand them; they simply go away and have nothing more to do with their families. But this Christmas season is a time to rediscover, rebuild and reintegrate family life. Families reassemble to celebrate the birth of Christ. "Heh, heh... and you think you have problems. Think of how Joseph must have felt. Mary was pregnant before they were even married. And it wasn't his child. Sure, an angel came to explain it to him. But imagine the thoughts that must have crossed his mind!" Our family did come together for Christmas. All six children... plus your editor's mother... plus one fianc�e. Fires were stoked throughout the house. Music, laughter - even an occasional argument - were heard in rooms all over the maison. But now the holidays are wearing out. Airline tickets have been checked. Trains booked. The happy flood that filled up the house is now ebbing away. Our oldest son and his fianc�e have headed back to Florida already. The two girls left for Paris this morning. Soon, it will be time to pack the car and leave. Except for the noise of the dishwasher, and Edward's occasional outbursts, the place is almost silent. --- Advertisement --- The Best Way to Get Rich Very, Very Quickly Here are four simple rules for making big gains no matter what's happening on Wall Street. As you'll learn, finding triple-digit gains in today's market is easier than you think - and fast, too: 260% in 2 weeks... 392% in 28 days and 898% in a month could be yours. Learn the secret now, and you could be cashing in by next week! Here's how to get started. http://www.agora-inc.com/reports/OHL/841RC/ --------------------- The Daily Reckoning PRESENTS: The widely heralded sharp upturn in business fixed investment - and the advent of self-sustaining economic growth in the U.S. - is merely so much statistical smoke and mirrors, reports the good doctor below... A BULLISH MIRAGE By Kurt Richeb�cher Good news about the U.S. economy is proliferating. The international media is littered with articles stating that the U.S. economy is forging ahead with rapidly rising profits. Yet neither the stock markets nor the currency market have taken any notice. Asking traders, nobody could offer a plausible reason. Yet there are two very simple tentative explanations: first, the economic news is good, but not good enough to meet the high-riding expectations; and second, the bulls are fully invested, and short- covering by the bears is finished. Better-than-expected economic news, actually, is coming from all parts of the world. Asia, accounting for 24% of global GDP, is hitting 7.7% growth this year. Ex Japan, the economies are firing on all cylinders, with growth rates vastly outpacing current and expected U.S. GDP growth. The tiger in the group is China, with expected 11.5% growth this year. Common to all these countries are high levels of gross national saving, including depreciations (averaging almost 30% of GDP), and also high levels of gross investment (averaging between 22-23% of GDP). The U.S. economy, accounting for a quarter of the world's GDP, is likely to finish 2003 with GDP growth of 2.9%. Gross national saving is hitting a low of 13.5%, while gross investments in the past few years have been hovering around 18% of GDP. The euro area, accounting for 18% of global GDP, will exit the current year with barely 0.5% GDP growth. Both gross domestic savings and gross domestic investment equal on average between 20-21% of GDP. While U.S. economic growth is increasingly lagging Asian growth, the global focus remains primarily on the U.S. economy as the world's supposed predestined locomotive, for the apparent reason that America's consumer is the world's greatest spender. Implicitly, the U.S. current-account deficit of about $560 billion per year reflects what Americans spend in excess of their current production and income. Yet the Asian countries, ex Japan, have a second reason to run a surplus with the United States. It is the main source of the high-powered money of their banking systems. As their central banks are buying gargantuan amounts of surplus dollars, they create liquid reserves for their banks that foster the lending boom to their domestic producers. Vastly excessive reserve growth is creating vastly excessive money and credit growth, stimulating and financing an unprecedented investment boom, similar to that in Japan in the late 1980s. Global activity data has kept surprising on the upside for months, and there has even developed speculation that unexpectedly strong global economic growth may fuel considerably higher inflation rates. Commodity prices, in the past generally an early indicator in this respect, have soared spectacularly. Given, moreover, years of extremely rampant money and credit growth around the world, accelerating inflation will be the next great surprise for many people. All this raises many questions. It seems quite feasible that the Asian tigers, with their record-high savings and investment ratios, will continue to power ahead with runaway credit creation. Yet our fear rather is that some of them, in particular China, may derail into Japan-style bubble economies. For us the greatest uncertainties are about the U.S. economy, its financial system and its currency. The great issue not only for America but also for the global economy is whether the U.S. economy has definitely reached the stage where economic growth has become self-sustaining. Or whether it may relapse into sluggish growth next year, if not recession. Looking at the markets, we have the impression that many people are struggling with this question. On the surface, the report of real U.S. growth of 7.2% in the third quarter, later revised to 8.2%, was most impressive. Many commentators hailed it as the highest growth rate since 1984. To us, the exciting growth number raised more questions than it answered. Yes, it was the U.S. economy's fastest sprint in 19 years. At the time, it was actually 7.3%, but this rate referred to GDP growth over the whole year. This time, it was an annualized quarterly growth rate of 2%, which is not always meaningful. Considering that the U.S. economy's long-term growth potential is around 3%, it should be clear that after three years, during which annual real GDP growth has averaged 1.8%, it will still take a lot more demand and growth acceleration to remove the output gap that has accumulated in these years. It is also generally agreed that a sustained and sufficiently strong recovery of the economy is only possible with a prompt, brisk rebound of business fixed investment. The bullish consensus is satisfied that this is happening. As reported, nonresidential business investment rose in the third quarter of 2003 by 11%, after 7.3% in the second quarter. For sure, these are impressive numbers, but the only thing that gives them this strength is the fact that the actual quarterly numbers have been annualized. The true non-annualized growth rates of 2.75% and 1.8% for the two quarters would have caused nothing but yawns. But there is a second big snag in the reported investment numbers. As usual, it arises from the familiar statistical spin concerning the measurement of business investment in computers. In real terms, or "chained" dollars, it increased over the full year until the third quarter of 2003 from $297.6 billion to $390.3 billion, that is, by $92.7 billion, of which $35.4 billion occurred in the third quarter. That is the statistical fiction; actual business spending in current dollars on computers increased over the same time by just $11.5 billion, from $76.8 billion to $88.3 billion, of which $5.9 billion was in the third quarter. In reality, measured in current dollars, nonresidential investment over the year increased overall by $46.2 billion. Among this total, computer investment soared by $93.1 billion, of which $81.6 billion came from the hedonic spin. Each additional dollar spent on computers in the real GDP accounts during the year translated into eight additional "chained" dollars, accounting, by the way, for 26% of real GDP in this time. The difference between the two measures of business computer investments is exploding. So much for the trumpeted investment recovery. As we have explained many times, these particular dollars are fictitious dollars that nobody has paid and nobody received. Obviously, such dollars inherently add nothing to profits. Putting it briefly and bluntly: The trumpeted brisk rebound in U.S. business capital investment is another bullish mirage lacking any serious substance. Given this reality, it seems likely that the coming year will find the U.S. "recovery" neither sufficiently robust nor constant enough to foster true self-sustaining economic growth in the U.S economy. Regards, Kurt Richeb�cher, for the Daily Reckoning Editor's note: Former Fed Chairman Paul Volcker once said: "Sometimes I think that the job of central bankers is to prove Kurt Richeb�cher wrong." A regular contributor to The Wall Street Journal, Strategic Investment and several other respected financial publications, Dr. Richeb�cher's insightful analysis stems from the Austrian School of economics. France's Le Figaro magazine has done a feature story on him as "the man who predicted the Asian crisis." In the December issue of his newsletter, Dr. Richeb�cher aggressively dissected the data economists are interpreting as a miracle 'recovery' - including a critical look at the actual composition of the touted U.S. GDP growth. His conclusion: the 'recovery' has already peaked. If you are not already a subscriber, you can't afford to miss this special report: Greenspan Is Robbing You Blind! http://www.agora-inc.com/reports/RCH/YesMoney/ --- 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. Follow the link below 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/ ------------------------------------------------------ MAKE YOUR OPINIONS COUNT! Visit our Discussion Board: http://www.agora-inc.com/forums/index.cfm?cfapp=3 ------------------------------------------------------ If you'd like, please e-mail this issue of the Daily Reckoning to a friend: http://www.dailyreckoning.com/emailfriend.cfm?id=7697 ------------------------------------------------------ Are you having trouble receiving your Daily Reckoning? You can ensure its arrival in your mailbox here: http://www.dailyreckoning.com/whitelist.cfm ------------------------------------------------------ ADDRESS CHANGE? WISH TO CANCEL? You can administer your account online. Simply go to Subscriber Services at: http://www.dailyreckoning.com/subsvcs.cfm Our writers and contributors also welcome your questions and comments. Simply reply to this e-mail with the word 'Question' or 'Comment' in the Subject of your reply. The Daily Reckoning Ouzilly, France Wednesday, 31 December 2003 New Year's Eve --------------------- *** Our So-Called Recovery... �ber-optimism among investors *** Dow slips, housing starts up, Japan fights rising yen... *** Unemployment is higher than you think... fur coats... socializing... and more! --------------------- We have nothing in particular to say this morning; nothing we haven't already said. The 'recovery' is a fraud... or as Paul Krugman refers to it in his New York Times column, "Our So-Called Recovery... ." The consumer economy is a humbug. Debt-driven growth is a trap. The feds believe they can stimulate the economy - with additional debt - to such a pitch of growth that the debts themselves will be no problem. Give the economy a shot of that old time medicine - lower rates, more credit, more borrowing and spending by consumers and government! In a normal recovery cycle, people begin to spend... which creates business investment and new jobs. The jobs lead to more spending... profits... and a genuine boom. But in a normal recovery, they have money to spend, money they saved during the downturn. This is no normal recovery. The processes of consumerism, debt, dollarization and globalization have gone too far. Americans owe too much money to too many people. When they get an extra dollar - even on credit - they already have too many debts to pay. They never stopped spending during the recession... now they have nothing to recover from - except debt. When the feds offer more credit - at the lowest interest rates in 45 years - consumers are only able to continue keeping up appearances; they can make no headway. And when they do buy, chances are the THINGS they purchase are no longer made in America - but overseas. So the stimulating effect of debt ends up among foreigners... while the crushing burden of it remains right here at home. But we have said this all many times before. And it is the end of the year... .we bow our heads and apologize. We were surprised that the year went as it did. We expected a bright �clat of revelation; instead, we got more darkness, debt and dumbness. The huge burst of government spending and additional debt did manage to hold off the day of reckoning... at least for a while. George W. Bush still has a shot at another term. Alan Greenspan is not yet regarded as the mountebank he really is. Americans are deeper in debt than ever... and going bankrupt at the fastest rate ever in history... but seem perfectly happy to do so! So, it worked! The bubble was successfully reloaded. Investors can now buy stocks for more they are worth... and ruin themselves by borrowing for less than the real cost of money. And now millions of Americans can look on their end-of-the- year statements with satisfaction. They will think themselves heroes and geniuses. While Soros was getting out of the dollar - the patriots stuck with it, like Daughters of Dixie with their confederate bonds. While Grantham, Rogers, Templeton and all the other great investors urged them to get out of stocks and the dollar - they held their ground like Custer's men at Little Big Horn. While Buffett could find no stocks worth buying - they stepped up and bought Amazon.com! And the great big River-of-no Returns stock paid off. The trouble with these stock market gains is that in terms of real money - gold - or less-bad paper money - euros - they amount to little of anything... and could disappear in a trice. "I made all my money by selling too soon," explained J.P. Morgan. At any time in the past year... and at any time in the next... too soon might not be soon enough. For, unlike the gains in euros or gold, profits in stocks rest upon nothing but an illusion - that the Feds' debt bubble can last forever. When it will all come to an end, we don't know. But that it will come to an end we have no doubt. Nothing lasts forever - least of all a debt bubble. Already, even with the lowest interest rates in 4 decades, Americans' debt-service ratio is at historic highs. And, at least in Silicon Valley, as many as 68% of all mortgages are adjustable rate. The average mortgage rate currently is only 5.8%. Even a slight upward movement will squeeze homeowners and bring an end to their spending. As recently as the early '80s, mortgage rates were above 18%. Hard to believe... but not hard to imagine that they could bounce back to, say, 7% before the end of 2004. Hardly anyone expects this to happen before the November elections. The dollar is expected to drift lower. Stocks are expected to rise gently. George W. Bush is supposed to float into Washington like the bloated body of a Capital Hill staffer drowned on the upper Potomac. It might happen that way. Then again, it might not. Tomorrow, we bring you our own predictions for 2004. In the meantime, here's Eric with more news: -------------- Eric Fry in the wilds of Manhattan... - The stock market paused to catch its breath yesterday, as the Dow slipped 25 points to 10,425 and the Nasdaq added 3 points to 2,010. Consumer confidence also retreated a bit, as did manufacturing activity in the Chicago area. But make no mistake, investors are bullish, consumers are confident and manufacturers are optimistic. America is a very different place today than it was on December 31, 2002. - One year ago, stocks were in a deep freeze and bonds were as sexy and sizzling as Rio de Janeiro. Stock market investors were gripped with fear, worried that three years of falling stock prices would become four and fretful that the imminent invasion of Iraq would snuff out our nation's budding economic recovery. Only die-hard bulls, intrepid speculators and faithful Abby Joseph Cohen disciples dared to load up on stocks... You know what happened next: bonds tumbled and stocks soared. - Today, investors find themselves in precisely the opposite situation. Stocks are sizzling and bonds are room temperature, at best. Accordingly, almost everyone expects stocks to rise and bonds to fall. That's because almost everyone expects the economy to continue growing in 2004, while almost no one worries that the dollar's decline will become a freefall. We hope that "everyone" is right. But we wouldn't be surprised to be surprised. - "Everybody seems upbeat," observes Paul Farrell of CBSMarketwatch. "Economists, politicians, securities analysts and pollsters are falling all over themselves forecasting a rising market that may blow through 11,000 in early 2004 and predicting a growth economy that will bolster the President's reelection bid. This euphoria smells like 1999 all over again to me, a renewed irrational exuberance negating common sense as the lemmings blindly rush over the cliff. - "The biggest enemy of every investor," Farrell continues, "is their bias toward �ber-optimism. It sabotages more innocent investors and wastes more of their money than any other brain function." - Farrell cites a number of reasons why the optimism for 2004 is overblown. "Analyst sentiment is extremely bullish," he says, "which is a contrarian signal." At the same time, corporate insiders are dumping stocks. For the past seven months, corporate insiders have been dumping stock at a rate exceeding a 20-to-1 ratio. Another negative, he says, is the likelihood that interest rates will rise in response to a strengthening economy and/or weakening dollar. - Farrell did not bother to mention that stocks are pricey. Investors have become so accustomed to paying 20, 30 or 100 times earnings for stocks, that rich valuations seem utterly unremarkable. Nevertheless, at 17 times estimate 2004 earnings, the stock market is not cheap. - That said, 17 times earnings poses no problem without a crisis. Perhaps the falling dollar is the sort of crisis that could make expensive stocks seem expensive. A dollar crisis - like a light switch at an orgy - could expose the market's obscene overvaluation for what it is. - The dollar has been falling nearly every day, despite the fact that the Japanese and Chinese are continuously intervening in the foreign exchange markets to support its value. - "Purchases of U.S. debt from offshore central banks surged to the second record in as many weeks," Reuters reports. The Federal Reserve's total holdings of Treasuries and agency debt for foreign central banks in the week ended Dec. 24 jumped above $1 trillion for the first time ever. - "Japan's central bank committed around 10 trillion yen ($93 billion) this year to currency intervention operations, " observes Strategic Investments editor Dan Denning, " [and still] the dollar fell 10% against the yen in 2003. $93 billion is a lot of cash to start throwing around in your currency fight. Consider this, though: the Federal government ran up a $374 billion deficit in 2003. It's budgeted to be around $450 for 2004 - and that's if receipts don't fall and outlays don't rise more than budgeted. - "Let's say Japan and China together buy up 40% of the NEW U.S. debt (about what they own now)," Dan continues. "That still leaves US$270 billion in new bonds the U.S. government would like the rest of the world to buy at between 4% and 5% interest. Will the government sell US$270 worth of new bonds next year? Probably. But you have to wonder how 'safe' a 4% yield is when you're losing 10% a year on the currency conversion alone. - "Meanwhile, the dollar is falling faster in euro terms than yen terms. That kills European investors and firms who've seen the euro gain 19% on the dollar this year. The Europeans are going to start asking for a stronger dollar - and soon. Kind of makes you wonder... if EVERYONE in the world (except American manufacturers) wants a stronger dollar... .why is it still falling? Well, you don't have to wonder that much. It's the debt... " [For more, see Dan's latest research: http://www.agora-inc.com/reports/DRI/GetWealth/ ] - Those debts won't be going away in 2004. -------------- Bill Bonner, back in France... *** The economy is said to be adding 82,000 jobs a month since August. But manufacturing alone lost 1.4 million jobs since the recession ended. And this week's Los Angeles Times estimates that if you added in the number of people who have given up looking for work... and those who have taken marginal jobs rather than serious ones... the real unemployment rate would be nearly 10%, not 6%. *** It was another GUDD day yesterday. Yawn. Gold hit a new 14-year high of $417 an ounce. The euro rose over $1.25. *** A note on fur coats from our friend Byron: "As much as any other woman who walks upright on the planet, [my wife] Barbara likes the idea of possessing a fine fur coat. 'You are an old geology-major,' she said to me. 'You must understand the primal human instinct to protect yourself from the elements, wrapped in a full- length shaved mink with a chinchilla fur collar.' I replied that, yes, I majored in geology, but that is a different subject from anthropology, which encompasses the study of the ancient human craving for full-length fur coats. Barbara looked at me in a certain way, indicative of 'Keep it up, wise guy.' "To her credit, Barbara has also hedged her bets by owning and running her own business. If Barbara were typical of some of the hired hands and hacks who run at least some publicly-listed corporations, she might just have the brass to get the company to buy her a fur coat. 'Business expense,' and all that. But a fur coat so-procured is nothing more than a hide bought from a poacher, an illicit souvenir essentially pinched from the business till, a meaningless nouveau riche-girl's bauble, and as gauche a statement as using the corporate jet to fly the family to Aspen for a weekend of skiing. Barbara lacks completely the arrogance to think, let alone to say, 'The shareholders paid for it, and screw 'em,' if you know what I mean and I think you do. "So it falls to her husband to do his manly duty, visit Saks, and have a talk with the manager of the fur coat department. Speaking as the husband, I think that reaching deep down and buying your wife a fur coat, using your own hard-earned currency, falling like a stone against gold and the euro though it may be, can create an elevated sense of harmony in the home. Post-fur coat, you are more productive and therefore better able to earn more dollars and thereby acquire more gold. Win-Win. P.S. - Barb to Elizabeth: 'You go, girl!'" *** "I don't see why you want to invite the Delam�res," said your annoyed editor. "He is a pompous windbag who is always trying to pick a fight. I know just what he is going to do. He's going to begin by asking a question about what the Bush Administration is doing in Iraq... hoping to start an argument." "Yes, but I like him... " came the reply from the distaff, "besides his wife is very nice." "But she never says a word." "It doesn't matter. If you want to socialize, you have to spend time with people you don't particularly like. It's just part of what it takes. And if you don't do it, you don't get invited to parties and you don't meet people and you spend your whole life holed up in your own little world." "But we've already met the Delam�res... and I don't like them. Besides, I don't want to meet people. I know enough people already." "Oh stop being such a crank. It's good for your character." *** "It is time to remember the family," said P�re Canta at church on Sunday. The service was dedicated to family life, as near as we could tell. P�re Canta, never married, no children, preached on the subject: "Now, I know I have little personal experience. But I keep my eyes open. And I have never seen a family that did not have some problems. Sometimes the problems and tensions of family life are so sharp that people cannot stand them; they simply go away and have nothing more to do with their families. But this Christmas season is a time to rediscover, rebuild and reintegrate family life. Families reassemble to celebrate the birth of Christ. "Heh, heh... and you think you have problems. Think of how Joseph must have felt. Mary was pregnant before they were even married. And it wasn't his child. Sure, an angel came to explain it to him. But imagine the thoughts that must have crossed his mind!" Our family did come together for Christmas. All six children... plus your editor's mother... plus one fianc�e. Fires were stoked throughout the house. Music, laughter - even an occasional argument - were heard in rooms all over the maison. But now the holidays are wearing out. Airline tickets have been checked. Trains booked. The happy flood that filled up the house is now ebbing away. Our oldest son and his fianc�e have headed back to Florida already. The two girls left for Paris this morning. Soon, it will be time to pack the car and leave. Except for the noise of the dishwasher, and Edward's occasional outbursts, the place is almost silent. --- Advertisement --- The Best Way to Get Rich Very, Very Quickly Here are four simple rules for making big gains no matter what's happening on Wall Street. As you'll learn, finding triple-digit gains in today's market is easier than you think - and fast, too: 260% in 2 weeks... 392% in 28 days and 898% in a month could be yours. Learn the secret now, and you could be cashing in by next week! Here's how to get started. http://www.agora-inc.com/reports/OHL/841boost/ --------------------- The Daily Reckoning PRESENTS: The widely heralded sharp upturn in business fixed investment - and the advent of self-sustaining economic growth in the U.S. - is merely so much statistical smoke and mirrors, reports the good doctor below... A BULLISH MIRAGE By Kurt Richeb�cher Good news about the U.S. economy is proliferating. The international media is littered with articles stating that the U.S. economy is forging ahead with rapidly rising profits. Yet neither the stock markets nor the currency market have taken any notice. Asking traders, nobody could offer a plausible reason. Yet there are two very simple tentative explanations: first, the economic news is good, but not good enough to meet the high-riding expectations; and second, the bulls are fully invested, and short- covering by the bears is finished. Better-than-expected economic news, actually, is coming from all parts of the world. Asia, accounting for 24% of global GDP, is hitting 7.7% growth this year. Ex Japan, the economies are firing on all cylinders, with growth rates vastly outpacing current and expected U.S. GDP growth. The tiger in the group is China, with expected 11.5% growth this year. Common to all these countries are high levels of gross national saving, including depreciations (averaging almost 30% of GDP), and also high levels of gross investment (averaging between 22-23% of GDP). The U.S. economy, accounting for a quarter of the world's GDP, is likely to finish 2003 with GDP growth of 2.9%. Gross national saving is hitting a low of 13.5%, while gross investments in the past few years have been hovering around 18% of GDP. The euro area, accounting for 18% of global GDP, will exit the current year with barely 0.5% GDP growth. Both gross domestic savings and gross domestic investment equal on average between 20-21% of GDP. While U.S. economic growth is increasingly lagging Asian growth, the global focus remains primarily on the U.S. economy as the world's supposed predestined locomotive, for the apparent reason that America's consumer is the world's greatest spender. Implicitly, the U.S. current-account deficit of about $560 billion per year reflects what Americans spend in excess of their current production and income. Yet the Asian countries, ex Japan, have a second reason to run a surplus with the United States. It is the main source of the high-powered money of their banking systems. As their central banks are buying gargantuan amounts of surplus dollars, they create liquid reserves for their banks that foster the lending boom to their domestic producers. Vastly excessive reserve growth is creating vastly excessive money and credit growth, stimulating and financing an unprecedented investment boom, similar to that in Japan in the late 1980s. Global activity data has kept surprising on the upside for months, and there has even developed speculation that unexpectedly strong global economic growth may fuel considerably higher inflation rates. Commodity prices, in the past generally an early indicator in this respect, have soared spectacularly. Given, moreover, years of extremely rampant money and credit growth around the world, accelerating inflation will be the next great surprise for many people. All this raises many questions. It seems quite feasible that the Asian tigers, with their record-high savings and investment ratios, will continue to power ahead with runaway credit creation. Yet our fear rather is that some of them, in particular China, may derail into Japan-style bubble economies. For us the greatest uncertainties are about the U.S. economy, its financial system and its currency. The great issue not only for America but also for the global economy is whether the U.S. economy has definitely reached the stage where economic growth has become self-sustaining. Or whether it may relapse into sluggish growth next year, if not recession. Looking at the markets, we have the impression that many people are struggling with this question. On the surface, the report of real U.S. growth of 7.2% in the third quarter, later revised to 8.2%, was most impressive. Many commentators hailed it as the highest growth rate since 1984. To us, the exciting growth number raised more questions than it answered. Yes, it was the U.S. economy's fastest sprint in 19 years. At the time, it was actually 7.3%, but this rate referred to GDP growth over the whole year. This time, it was an annualized quarterly growth rate of 2%, which is not always meaningful. Considering that the U.S. economy's long-term growth potential is around 3%, it should be clear that after three years, during which annual real GDP growth has averaged 1.8%, it will still take a lot more demand and growth acceleration to remove the output gap that has accumulated in these years. It is also generally agreed that a sustained and sufficiently strong recovery of the economy is only possible with a prompt, brisk rebound of business fixed investment. The bullish consensus is satisfied that this is happening. As reported, nonresidential business investment rose in the third quarter of 2003 by 11%, after 7.3% in the second quarter. For sure, these are impressive numbers, but the only thing that gives them this strength is the fact that the actual quarterly numbers have been annualized. The true non-annualized growth rates of 2.75% and 1.8% for the two quarters would have caused nothing but yawns. But there is a second big snag in the reported investment numbers. As usual, it arises from the familiar statistical spin concerning the measurement of business investment in computers. In real terms, or "chained" dollars, it increased over the full year until the third quarter of 2003 from $297.6 billion to $390.3 billion, that is, by $92.7 billion, of which $35.4 billion occurred in the third quarter. That is the statistical fiction; actual business spending in current dollars on computers increased over the same time by just $11.5 billion, from $76.8 billion to $88.3 billion, of which $5.9 billion was in the third quarter. In reality, measured in current dollars, nonresidential investment over the year increased overall by $46.2 billion. Among this total, computer investment soared by $93.1 billion, of which $81.6 billion came from the hedonic spin. Each additional dollar spent on computers in the real GDP accounts during the year translated into eight additional "chained" dollars, accounting, by the way, for 26% of real GDP in this time. The difference between the two measures of business computer investments is exploding. So much for the trumpeted investment recovery. As we have explained many times, these particular dollars are fictitious dollars that nobody has paid and nobody received. Obviously, such dollars inherently add nothing to profits. Putting it briefly and bluntly: The trumpeted brisk rebound in U.S. business capital investment is another bullish mirage lacking any serious substance. Given this reality, it seems likely that the coming year will find the U.S. "recovery" neither sufficiently robust nor constant enough to foster true self-sustaining economic growth in the U.S economy. Regards, Kurt Richeb�cher, for the Daily Reckoning Editor's note: Former Fed Chairman Paul Volcker once said: "Sometimes I think that the job of central bankers is to prove Kurt Richeb�cher wrong." A regular contributor to The Wall Street Journal, Strategic Investment and several other respected financial publications, Dr. Richeb�cher's insightful analysis stems from the Austrian School of economics. France's Le Figaro magazine has done a feature story on him as "the man who predicted the Asian crisis." In the December issue of his newsletter, Dr. Richeb�cher aggressively dissected the data economists are interpreting as a miracle 'recovery' - including a critical look at the actual composition of the touted U.S. GDP growth. His conclusion: the 'recovery' has already peaked. If you are not already a subscriber, you can't afford to miss this special report: Greenspan Is Robbing You Blind! http://www.agora-inc.com/reports/RCH/RighteousGains --- 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. Follow the link below 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/wealthSTA/ ------------------------------------------------------ MAKE YOUR OPINIONS COUNT! Visit our Discussion Board: http://www.agora-inc.com/forums/index.cfm?cfapp=3 ------------------------------------------------------ If you'd like, please e-mail this issue of the Daily Reckoning to a friend: http://www.dailyreckoning.com/emailfriend.cfm?id=7697 ------------------------------------------------------ Are you having trouble receiving your Daily Reckoning? You can ensure its arrival in your mailbox here: http://www.dailyreckoning.com/whitelist.cfm ------------------------------------------------------ ADDRESS CHANGE? WISH TO CANCEL? You can administer your account online. Simply go to Subscriber Services at: http://www.dailyreckoning.com/subsvcs.cfm Our writers and contributors also welcome your questions and comments. 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