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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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Osama Bin Smoot
THE DAILY RECKONING
PARIS, FRANCE
FRIDAY, 1 FEBRUARY 2002
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*** Investors go long...and good luck to them...
*** The recession was brutal...or was there ever really
one at all? But thank God it is over...
*** New York is still in a slump, but who cares about
New York? Profits are still in a slump, but who cares
about profits? The productivity miracle was really a
figment of accountants' imaginations...but who cares
about that? Consulting the oracle...and more!...
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Stocks rose yesterday as the lumpeninvestoriat
rushed to get in on the next bull market. They're pretty
sure a bull market is coming; everybody says so.
So what if stocks are trading at prices only seen
at the end of bull markets, not at their beginnings? So
what if profits as a percentage of GDP have fallen to
levels not seen since the Great Depression? So what if
consumer debt has reached a record relative to income -
18.9%? So what if corporate bond defaults hit a new
record high in January?
So what if, as Dr. Kurt Richebacher reports, the
U.S has just suffered the "steepest decline in economic
growth that has ever happened," from an annual rate of
4.1% 1998-2000 to negative 1.1% through the third
quarter of 2000? So what if the tiny positive bump in
growth in the 4th quarter was almost all a feature of
auto sales and defense expenditures (neither of which
can be sustained for very long)?
"On bold investor of the future!," writes the
Mogambo Guru, "Thou art surely an idiot."
But "wow! That was a brutal recession! I sure am
glad it's over," says Eric Fry.
Well, you just never know.
In the late '90s, Americans enjoyed the biggest
financial bubble in history. Now, here we are, early in
the next millennium, and we are blessed again - this
time with the feeblest recession ever. Maybe no
recession at all..."Some day I wouldn't be surprised if
we go back and take a look at this whole episode," said
Charles Lieberman on CNNfn, "and really question whether
or not we really had a recession."
Could it be, dear reader? Could we all be wrong
about symmetry...about sheep...about everything? Is it
really a New Era, after all? More below...but first...
Eric, what do you really think?
******
Eric Fry in Manhattan...
- That bear market was pretty nasty, too. What a relief
to have that behind us! And thank goodness everybody has
stopped spreading all those frightening stories about
accounting fraud. That was very upsetting.
- Without any brand-new reasons to sell stocks,
investors decided to buy some more yesterday. The Dow
jumped another 157 points to 9,920, while the NASDAQ
tacked on 1% to 1,934.
- Happily the bad news is behind us, and the economy is
back on an even footing. The fourth quarter's 0.4% GDP
growth is all the proof that most folks require.
- But even if the national economy is rebounding, the
country's largest city is still reeling. "New York
City's economy deteriorated sharply in January," says
Crain's. "The composite number for the business
conditions index [from the Institute for Supply
Management] registered a chilly 32.6. That number is
down sharply from the 62.2 registered in December."
- American corporations are beset by some chilling
numbers as well. "Cash Flow and Profits Drop to Record
Low Versus Debt," proclaims the latest Moody's Credit
Perspectives. As of the third quarter of last year,
corporate cash flow and profits both fell to record lows
relative to corporate debt levels.
- In fact, cash flow based on this measurement peaked in
1994, while profits peaked in 1997. So much for the
"productivity miracle."
- What kind of productivity miracle causes corporate
cash flow relative to debt to shrink steadily between
1994 and 2001? And what is so miraculous about pretax
profits relative to debt collapsing between 1997 and
2001?
- Furthermore, isn't it curious that corporate cash flow
relative to debt hit its high-water mark in 1994, but
profits relative to debt did not top out until three
years later in 1997? How, you ask, did earnings continue
to rise without a commensurate increase in cash flow?
Accounting, my friends. The biggest productivity miracle
of the last decade may have occurred in America's
accounting departments. The corporate bean counters
discovered ever more innovative ways to show a profit on
the books, even when the "profits" produced no cash.
- Meanwhile, the cash-flow spigot in U.S. households is
not exactly dashing. A steadily rising number of credit
card holders are paying their bills late, or not at all.
The bad loans write-off rate has now risen for 10
straight months, while the delinquency rate has risen
for 12 straight months.
- Curiously, these credit card repayment trends are
deteriorating despite soaring mortgage originations. How
can this be? Shouldn't refinancings help consumers "pay
off those credit card debts," just like the late-night
TV ads promise? They should be...but they aren't.
- In such a world of indebted corporations and
consumers, a world of overvalued stocks and Fiat
currencies, a world where CEOs sometimes don't tell the
whole truth and nothing but the truth, shouldn't the
gold price rise...even just a little? The answer is an
unequivocal "probably."
- But like resisting a bad habit, many investors try to
suppress the urge to buy gold. As longtime gold
investors are well aware, the gold market has been a
financial "Lorelei" - the mythical Rhine River siren who
beckoned mariners dangerously close to the rocky
shoreline. The seductive yellow metal, which promised to
succor investors in times of trouble, has instead
suckered investors - luring them onto the shoals of
capital loss.
- "A Financial Times article from last Friday reports
that gold retailers in Tokyo are seeing an increase in
bullion sales" observes Strategic Investment editor Dan
Denning. "Japanese savers are cashing in their yen
holdings and taking home gold."
- Are the Japanese ahead of the curve, just like they
were with sushi and Pokemon? Will we Americans follow
their lead if our currency's value recedes? The
Financial Times story implies that we might. The British
journal relates: "Yoshihiro Matsumoto, who runs the gold
retail division at Mitsubishi Materials, says,
'Normally, our customers buy 1kg-5kg of gold, but
recently, they're buying huge amounts. And most people
want to take their gold home rather than have it in a
bank deposit box.' Yoshiko Mizutani, who manages a
retail store called The Gold Shop, explains it
succinctly: 'Customers tell me that even if the price of
gold falls, it'll never fall to zero. But if their bank
goes under, they worry their savings could disappear.'"
- Don't the Japanese know that they could buy Cisco
instead?...Oh, the things that Abby Joseph Cohen could
teach the Japanese!
******
Back in Paris...
*** Last night, you editor was deeply troubled by all
this good news. It was as if he'd just learned that his
dog had died and his wife had run off with the cheese
monger. But he couldn't quite believe it.
*** Passing along the rue de la Verrerie towards the
metro, he espied the oracular figure often seen passed
out on the pavement in front of the Paradis Bar. But
last night, the Chinaman must have been unable to cadge
any serious coins from pedestrians...or perhaps he had
just been a guest of the local gendarmerie...for the
little nipper was as sober as a Baptist.
*** "What gives," I asked him. "Is it true? Is that all
there is to the recession? Is it over...or has it just
not happened yet?
*** Expecting a grunt, your correspondent was surprised
by the reply: "I have been pondering the same set of
curious statistics," came the answer. "I believe the
current optimism is misplaced."
*** "Oh...why?"
*** "Ah...I'm flattered that you have asked," said the
inscrutable face, a twinkle rising in the eyes, "but I
do not give strategic economic forecasts for nothing. If
you wish me to continue, a donation of 10 francs will be
required."
*** So, I reached in my pocket and handed the oracle a
10-franc coin.
*** "You see," he said, "around here they call me a
Chinaman. But I'm really Japanese. I was once a fund
manager for Nokimura, with one of the largest equity
portfolios in the country. Well, do you remember when
the Japanese market started going down in January 1990?
The economy headed down, too. But soon, stocks rallied.
And the economy bounced too. Real GDP rates never went
negative in the early '90s in Japan. And by 1993, growth
rates were actually increasing. And like everyone else,
I believed the glory days were still ahead, not behind
us. By 1993, it looked like both the bear market and the
economic slump were over. I went long stocks. I didn't
want to miss the next big boom. Boy, was I wrong..."
*** At this point, the Chinaman broke down. Tears filled
his eyes. I reached into my pocket again, handed him
another 10-franc piece and walked on.
*** More on the recession that hasn't happened
yet...below.
* * * * * * * * Advertisement * * * * * * * * *
TIDAL WAVE OF CASH!!!
"The unemployment rate is headed for 6%," says Merrill
Lynch's chief economist. S&P sees it hitting 6.5%. Auto
analyst Stephen Girsky expects car sales to drop to a
low 15 million by the end of 2002.
Over the last decade, corporate debt exploded 88%...
household mortgages skyrocketed 82%...and the U.S.
national debt, already over $5.7 trillion, shoots up
another $123 million every single day.
Enron and Global Crossing are just the tip of the
iceberg. With these massive imbalances crashing ashore,
is it any wonder Alan Greenspan is throwing money around
"like a racetrack junkie that just cashed in on a 50-to-
1 hunch"?
For your free copy of "Make 500% Profits In The Great
Money Flood Of 2002!" please click here:
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* * * * * * * * * * * * * * * * * * * * * * * * *
OSAMA BIN SMOOT
by Bill Bonner
Reed Smoot and Willis Hawley are household names. But
only in the households of economists. There, the names
Smoot and Hawley come up from time to time, rarely in a
favorable context. Were it not for a single piece of
exceptionally lunkheaded legislation masterminded by the
two in 1930, the pair might have passed into history
unremembered. Instead, the two politicians are widely
blamed for snuffing out candles during the darkest
period of U.S. economic history.
What makes people prosperous, we ask again. Is it pieces
of paper or lumps of gold? But if printing currency
could make people wealth, the Germans in the early '20s
would have been the world's richest people. Presses ran
night and day to supply Fritz und Frau with paper
currency. But so quickly was the new currency marked
down that workers demanded to be paid twice a day...so
they could rush out and spend their new bills before
they became totally worthless.
Likewise, if gold made people rich, Spain would have
gotten immeasurably richer in the 16th century - after
its conquistadors discovered a whole new world of it.
Instead, as reported in these letters, Spain was not
enriched by the new gold that flowed into its coffers,
but impoverished. Even today...the world's chief
suppliers of the yellow metal, Russia and South Africa,
are far down on the list of the world's most well-heeled
nations.
No, dear reader. It is not money that makes people
wealthy, but the ability to make things that you can
trade with other producers. Money is only valuable
insofar as it represents real productive assets.
It follows that anything that inhibits people from being
able to produce or trade makes them poorer. War, for
example, typically impairs trade. On the other hand,
war-time factories gear up for extraordinary feats of
production, so it often appears that people are getting
richer - even though their output is of little peacetime
value.
Other impediments to production and trade include high
taxes, tariffs, theft, piracy, inflation, currency
crises, and so on. In 1930, pressed by conniving
businessmen for protection from foreign competitors,
Misters Smoot and Hawley chose tariff barriers as a way
to stymie world trade. They succeeded all too well.
Foreign nations were soon raising retaliatory barriers
of their own. Soon, trade slowed and the entire world
went into a deep recession.
Smoot & Hawley have long since shuffled off this mortal
coil. But Osama bin Laden, Pat Buchanan, and George W.
Bush are, we assume, still alive. Any one of them could
do as much damage as Smoot and Hawley combined.
"The U.S. economy will take a staggering $639 billion
hit through 2003 and lose as many as 2 million jobs as a
direct result of the Sept. 11 air attacks," says a
Reuters report.
But that is just the beginning.
"Globalization is in trouble," writes Stephen Roach.
"One of its key premises - increasingly frictionless
cross-border connectivity - is in doubt as the world
responds to terrorism. The events of September 11 have
imposed the equivalent of a new tax on trade, capital
and information flows...National borders will have to
tightened. Cross-border transfers will take longer.
Insurance rates on shipping will go up, as will premiums
for worker compensation..."
Here at the Daily Reckoning, we suspect that terrorism
is over-bought. A huge, worldwide network of terrorists
- armed with the latest technology, supported by
billions in secretive funds, enlisting an almost
unlimited number of suicidal maniacs - is supposed to
exist. Everybody says so. But not a one of these
fanatics has bothered to strike a single blow against
the U.S. since September - even as U.S. armed forces
sought to destroy the terrorist's leading archangels.
In Palestine, hardly a week goes by without an explosion
going off somewhere. What is wrong with the anti-
American terrorists? The axle of evil barely seems
capable of a single turn against the U.S. Perhaps there
are not really as many terrorists as people think.
But the world's anti-terrorist industry is geared up and
enjoying a boom - at the expense of the world's economy.
Barron's recently published an alarming article on the
nation's rail system. "It's high time Americans had more
security for freight containers," says the headline.
Why? Because "whole trains of containers on flat cars
ride the rails through U.S. cities, past key industries
such as oil refineries, over and under highways, through
tunnels and across bridges, some of which are potential
bottle-necks in the national freight-transportation
system."
What's in the containers? Nobody really knows. It takes
too long to inspect them all, so most of them are never
opened until they reach their final destination. In the
meantime, the contents could be controlled
electronically - even by a simple cell phone.
A container could be loaded at any one of hundreds of
terminals all over the world - in India, Pakistan, the
Persian Gulf, North Africa...it could make its way
through the major freight terminals at Rotterdam or Hong
Kong and then enter the U.S. at Baltimore or Los
Angeles. Osama bin Laden, by the way, is said to have
owned 20 freighters. Who knows what might happen.
But a lot of people don't want to find out. Even at
substantial cost and delay, they want the boxes
inspected before they even reach the U.S., which would
mean substantially higher shipping rates.
"The risk premium of globalization has just gone up,"
comments Stephen Roach. "That undermines the global
earnings stream of multinationals. Suddenly, the brave
new world looks a lot less frictionless than it did
before."
"The costs of terror are one thing," Roach continues.
"But globalization now faces challenges from the
business cycle, too. The world is in a rare 'synchronous
recession': all the major economies are stumbling at the
same time. This is unusual for three reasons. First, the
global economy is more dependent than ever on trade,
which now accounts for a 24% share of world GDP."
That's a lot more, Roach points out, than in previous
global recessions. In 1975, global trade was only 17% of
world GDP. It was only 19% in 1982.
Roach: "Second, the world faces the sharpest ever boom-
bust in trade. Global trade volumes surged by a record
12.4% in 2000 but shriveled after the pop of the tech
bubble, with 2001 likely to show an increase under 1%.
"Third, the world has become unbalanced, far too
dependent on the American growth machine."
In the last 20 years, the U.S. growth machine has
powered the entire world. But who will power the U.S.
when its growth engine stalls? Maybe no one.
Signing off for the week,
Bill Bonner
* * * * * * * * * Advertisement * * * * * * * * *
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