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* * * * * * * * * * * * REMINDER * * * * * * * * * * * * *
On the days that I don't publish, like today, you 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
reinforce each other.
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UNSAFE AT ANY SPEED
THE DAILY RECKONING
PARIS, FRANCE
FRIDAY, 11 JANUARY 2002
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*** The dollar springs a leak...
*** Currencies going loony...battling for self-
destruction...
*** Much more other stuff that I don't have time to tell
you about...
* * * * * * * * * * * * * * * * * * * * * * * * *
Bill Gross runs the largest bond fund in the
world, with $48 billion in assets. "The dollar may not
explode," he writes, "but it has got a leak with an
almost indistinguishable hiss that should grow louder as
2002 winds on," he wrote.
All over the world, currencies are leaking air...
mostly against the dollar. The South African rand...the
Argentine peso...the Japanese yen...currencies are
deflating everywhere you look.
Canada moved to a floating exchange rate policy
back in '70. It floated higher against the dollar until
April '74, when it hit $1.04. But it's been sinking ever
since, and sank to 62 U.S. cents on Christmas Eve, 2001.
Why are all these currencies falling? Because the
countries need weaker money in order to remain
competitive. How can the U.S. keep a strong dollar while
everyone else cuts the value of his currency to
undersell U.S. firms? It can't. U.S. manufacturing is
suffering. Detroit has lost 8% of world market share
since the beginning of the boom in America. And since
the bust began, U.S. manufacturing firms have
experienced a longer period of consecutive monthly
declines than any time since the Great Depression.
The dollar has to come down too. But wait. It has
to have something to come down against. How can the
dollar fall when other currencies are falling too?
Ahh...this is where it gets interesting. Nations will
compete - as is happening in Asia now - to see who can
ruin the value of his own currency fastest. And all
paper currencies will fall against non-paper currency,
gold.
Right, Eric?
*****
Eric Fry from New York...
- The bad-news-good-stock trend continued yesterday. The
Gap reported that its same-store sales in December fell
ONLY 11%. The stock promptly jumped more than 12%.
- Imagine how well the stock might how done if the
company had managed to sell even fewer clothes! Oh well,
there's always next month.
- But The Gap's miserable same-store sales report was
not enough to spark a rally. The Dow Industrials lost 26
points to 10,068, while the Nasdaq eked out a 2-point
gain to 2,047.
- Meanwhile, far removed from the center court of
finance, the gold market is putting on quite a show. The
barbarous relic has actually rallied for three days in a
row and has gained $8.50 per ounce to $287.40.
- Perhaps nervous short-sellers in the gold market are
buying gold to cover their short positions, now that the
notoriously unhedged Newmont Mining appears to be
winning the fight to acquire Australia's Normandy
Mining. One story making the rounds is that if Newmont
prevails, it might buy back the gold that Normandy has
sold short, thereby triggering a short-squeeze that
drives the gold price higher.
- If this sounds a little complicated, all it means is
that gold might rally...On the other hand, it might not.
Virtually overlooked amidst the brouhaha about the S&P
500 falling in 2001 for the second straight year is the
little-remarked fact that the XAU Index of gold shares
gained almost 6% in 2001. And it has already jumped
another 7% this year. Long-time gold stock investors
call that a bull market.
- The Wall Street Journal reported yesterday that the
Ford Motor Company might incur restructuring charges
totaling a whopping $4 billion. That's a lot of money,
even for a great big American car company. The number is
so large, in fact, that some Wall Street analysts
expressed concern about the company's cash burn-rate...
as if the venerable auto manufacturer were a mere
product-of-the-bubble Internet company.
- Ford will divulge details today of its "major"
restructuring plan designed to restore profits and cash
flow. Funny how these plans to "restore profits" always
cost so darn much money.
- The company has already announced that it "plans to
produce a recovery with great new vehicles and better
quality." Aren't Chrysler and General Motors both
planning to do the same thing?...Not to mention Toyota,
BMW, Volvo, etc.
- For example, Chrysler's top brass aims to boost its
annual sales by one million vehicles over the next five
to ten years. "It is a staggering goal in a global auto
market already choking on too many cars and trucks,"
said the Wall Street Journal.
- How exactly will all of the Big-3 automakers increase
their market shares at precisely the same time? Who's
going to buy all these great new cars? The same people
who, thanks to zero-percent financing, just bought a
great new car two months ago?
- Speaking of excess capacity, "The national average for
office vacancies rose to 12.3% in the third quarter of
this year, from 8.1% a year earlier, according to Torto
Wheaton Research, the real estate data unit of CB
Richard Ellis Services," the Wall Street Journal
reports. "The office-leasing market in Manhattan is dead
right now," my well-placed industry contact informs me.
- More news from the beleaguered-consumer front:
Household liquid financial assets (LFAs) are dwindling,
says Moody's. After climbing to a 29-year high in 2000 -
when LFAs totaled nearly three times household debt -
LFAs have fallen to little more than two times household
debt currently.
- The bear market in stocks beginning early in 2000
deserves most of the blame for the dwindling household
liquidity. When the stock market was booming during the
back half of the 1990s, savings accounts were for
losers. The best way to "save" was to buy a tech stock
mutual fund and hang on for the ride. Therefore, it's
not surprising, that the liquid financial assets of
households relative to debt levels topped out in the
first quarter of 2000, right along with the stock
market. It's been downhill ever since.
- "Who or which demand component could possibly lead the
predicted U.S. economic recovery?" wonders Dr. Kurt
Richebacher. "Rising capital spending by debt-laden
corporations confronted with collapsing profits? Or
higher spending by the debt-laden consumer confronted
with huge wealth losses in the stock market, rising
unemployment and stagnating or shrinking disposable
income?"
Beats me.
*****
Back in Paris...
*** Ten months into a recession and people are buying
more big ticket items then ever. New mortgage
applications rose 20% last week. New refinancing
applications rose 32%. Auto sales are strong.
*** What kind of recession is this? It is one like no
other in U.S. post-war history. Then what is it like?
More below...
(Bill had to rush off to catch a train to London...but
on his way out the door, asked me to inform you that on
this day in 49 B.C., Julius Caesar crossed the Rubicon.
Neither Bill nor any of the rest of us are sure how this
fits into today's Daily Reckoning...but there it is.
Becky, your Daily Reckoning intern)
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UNSAFE AT ANY SPEED
by Bill Bonner
Ralph Nader recently organized a press conference to
discuss what a bad job Alan Greenspan is doing.
Professor James Galbraith of the University of Texas
"called for a congressional investigation into why the
Fed's army of economists failed to forecast either the
stock market bubble or the recession."
Here at the Daily Reckoning, we urge Congress to take up
Professor Galbraith's suggestion. We can't imagine
anything quite so entertaining as the resulting report.
What might investigators find, that a bureaucrat
misplaced a decimal point? That the folks who work at
the Fed actually knew a recession was coming...but
didn't want to alarm the population?
The trouble with humanity, we believe, is a lack of
imagination. For anyone with a chemical trace of
imagination can see that if the Fed could accurately
forecast anything...it would never happen as it was
supposed to. If the Fed believed a bubble was
forming...wouldn't it do something? If a GS-12
statistician, working in some barren office in
Washington, realized he could predict recessions, or
stock price bubbles...mightn't he be tempted to buy a
pair of suspenders and manage a hedge fund?
Fed economists cannot forecast anything worth
forecasting. If they could, they'd move to New York and
try to make a buck or two from it. Still, it would be
amusing to see an investigation. Like a Marx Brothers'
movie...we would not expect much good to come from
it...but it would be fun.
Here at the Daily Reckoning, dear reader, we do not
crunch numbers the way they do at the Fed. We like
numbers and see no reason to subject them to unnecessary
pain and suffering. We are neither monetarists nor
Keynesians nor even fundamentalists in the usual
sense...and certainly not econometricians. We continue
the work of the original economists - the Scottish moral
philosophers, Adam Smith and Adam Ferguson.
Instead of trying to anticipate the future, we try to
understand the world around us...and how it works. We
search for the essential, guiding principles - buy low,
sell high...don't cross against the light...don't eat
yellow snow - and try to apply them to the present
situation. We follow the rules, in other words. We try
to figure out what should happen and do the right thing
- and we are content to let Fortune punish us or reward
us as we deserve.
What, essentially, is going on in today's market? What
is the right thing to do?
Today, we offer more ruminations and guesses...
Is it rising stock and house prices that make people
wealthy, or something else?
"It is something else," answers the economist.
What, then?
"In line with traditional economic thinking," answers
Dr. Kurt Richebacher, "our attention is centered on net
fixed investment in tangible assets - factories,
machinery, offices, etc - as the key source of long-term
economic well-being. First and foremost, net fixed
investment is the single most important factor in
creating national wealth and productive power; and
second, it is moreover the economy's most important
profit source."
People invest in businesses in the hope of making a
profit. Without profits there is no reason to invest.
"We live in a society organized in such a way that the
activity of production depends on the individual
businessman hoping for a reasonable profit," wrote John
Maynard Keynes, a dead economist. "The margin which he
requires as his necessary incentive to produce may be a
very small proportion of the total value of the product.
But take this away from him and the whole process
stops."
In 1995, total profits of U.S. industry were about $400
billion. In 2001, total profits were once again about
$400 billion. In 6 years of effort, not a single extra
dollar of profits was added to the annual total. The
whole process has not stopped, but it is slowing down.
If profits fail to pick up...mightn't the whole process
slow even further?
"Company reported earnings per share...are taking the
worst beating, being actually down by more than 60%
against a year ago," continues Dr. Richebacher.
"Whopping write-offs and extraordinary charges to
earnings are ravaging company-reported profits. All of a
sudden, multi-billion dollar goodwill write-downs and
restructuring charges are littering American and British
corporate income statements."
The '90s produced "the weakest profit cycle in the whole
postwar period," says Richebacher. And now companies are
taking huge charges for bad acquisitions, IT investments
that produced nothing, and other wasted spending. When
money was cheap...businessmen treated it cheaply.
What might make profits go back up? Much of the
profitability of U.S. companies in the early '90s came
from reduced interest charges. But with the Fed Funds
rate at 1.75% and long rates headed up in recent weeks,
there is little hope of further cuts in interest
expense.
What usually makes profits go up is net fixed investment
- new and better machinery that produces more, higher
quality goods and lower cost. Net fixed investment is
the difference between gross investment in new machinery
and depreciation charges, which is the accounting
profession's way of recognizing worn out or obsolete
machinery.
But net fixed investment is disappearing.
"Next year, something unprecedented and extremely
negative will happen to U.S. non-residential fixed
capital formation," writes Dr. Kurt Richebacher. "As
rising depreciation charges seem set to overtake
declining gross investment spending, net fixed,
nonresidential investment will turn negative. The last
time this happened was in the Great Depression. The
outlook is further clouded by the danger that the
consumer will also retrench."
Maybe stocks will turn up - even without profits. But
what moral philosopher would bet on it? Equities are as
unsafe as the Corvair, we believe.
Bill Bonner, fastening his seat belt.
* * * * * * * * * Advertisement * * * * * * * * *
Conveniently, the WTC attacks are being blamed for a
surprise "slowdown" that has rocked the U.S. economy.
Suddenly, it seems, corporate profits are dropping;
investors are less sure...consumer confidence has been
shattered.
But... the writing WAS ALREADY ON THE WALL!
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