[Futurework] Some thoughts in memory of Keith

[Ray Evans Harrell]

Land Of The Free The Daily Reckoning Paris, France  Friday, 4 July 2003 Independence Day                    -------------------- *** 54 Economists Agree - uh oh... *** Big increase in unemployment - 30,000 jobs lost in June... *** Bonds tumble...stocks up...our last tango in Paris...and more!                    -------------------- "If all the world's economists were laid end to end," begins the joke... "...it would be a good thing." In an attempt to gauge the temper of the times, the Wall Street Journal interviewed 54 economists. The paper should get some sort of prize for this. Perhaps a "Fool's Errand" award. Can you imagine anything so tedious, dear reader, as having to listen to more than 4 dozen of the world's most pompous, boring, and clueless people? Almost every one of them said what the one before had said, that on the one hand this...and on the other hand that... Not a single one, according to the WSJ account, gave an honest answer...which would have been something such as: "How the heck should I know?" Instead, they almost all gave voice to the prevailing opinion - that things are getting better and that the second half will be better than the first. Whether things will get better or not, we cannot say. But we take it as a bad sign that the economists are so unanimous about it...and that individual investors have almost never been more bullish...and that insiders are dumping stocks like pilots dumping fuel before a crash landing. We also take it as bad sign that bond yields seem to be bottoming out. The Fed cut rates again last week, but 30-year mortgage rates have actually gone up, to 5.11% yesterday. And in Japan, bonds plunged yesterday too, with yields registering their biggest increase in 4 years. When the refi bubble pops, the end draweth nigh. Clever investors may be locking in these once-in-a-lifetime low rates. Less clever people are taking out money as if they never had to repay it. See Eric's comments, below...                       -------------- Eric Fry from the Empire State... - The Dow slipped 73 points yesterday to 9,070, while the Nasdaq dropped 1% to 1,663. In explaining the stock market's weak showing, a Bloomberg News headline declared: "Stocks in U.S. Drop as Jobs Report Raises Economic Concerns." But curiously, in attempting to explain the bond market's steep drop yesterday, a nearby Bloomberg News headline stated: "Treasuries Fall After Survey Shows U.S. Service Economy Improved in June." - In other words, stock prices fell because the economy is weaker than expected, and bond prices fell because the economy is stronger than expected. Thus, Independence Day 2003 finds the stock market and the bond market both relishing in their "independence" from underlying economic realities. - The stock market has been celebrating Independence Day for months already - rallying higher, completely independent of the nation's lackluster economic conditions. The Dow has been gaining points almost as fast as the economy has been shedding jobs. - Yesterday, the Labor Department released another employment shocker: the U.S. unemployment rate jumped from 6.1% in May to 6.4% in June, the highest in more than nine years. Weekly jobless claims also spiked - up 21,000 to a hefty 430,000 new claims for unemployment insurance. Meanwhile, the Rust Belt continues to rust. Manufacturers lost 56,000 jobs last month, the 35th straight decline. Since July 2000, factory employment has fallen by a staggering 2.6 million jobs to 14.7 million. - But the dismal employment news was not dismal enough to prevent the stock market from racking up gains on the week. The S&P 500 rose 1% for its fifth weekly gain in six and the Nasdaq jumped 2.4%, its biggest advance in five weeks. Meanwhile, government bonds tumbled for the third straight week, their longest slide since November. As bond prices dropped yesterday, the yield on the 10-year Treasury note jumped to 3.65% from 3.54% on Wednesday. - Suddenly, interest rates are rising almost as rapidly as they had been falling in May. The 10-year U.S. note yield has jumped to 3.65% from a 45-year low of 3.07% on June 16. Hmmm...does the bond market smell something...like inflation perhaps? [Ed note: for more on the bond market, see Kurt Richeb�cher's article on the DR website: The Crucial U.S. Imbalance http://www.dailyreckoning.com/body_headline.cfm?id=3292 ] - What happens if interest rates continue rising? Who will be in harm's way? Will the highly leveraged, floating-rate- mortgage-toting American consumer crumble under the strain? Your New York editor - putting his money where his mouth is (or at least his borrowed money) - refinanced his house yesterday. (He locked in a rate of 5.75% for 15 years). While signing the myriad mortgage documents and pushing them around the table, your editor engaged all parties present in a discussion about the red-hot refi market. - "So what sorts of trends are you all seeing?" your editor inquired. "Are you seeing a lot of 'cash-out refis' or interest-only loans or any other sorts of mortgage-finance curiosities?" The representative from the title company chimed in immediately, "I'm seeing a lot of folks cashing out equity, especially the ones that are making less than $100,000 per year...In the under-$100,000 group, almost everyone that pulls equity out of their houses is using it just to pay off credit card bills. No one puts money back into the house. I had a husband and wife the other day with a combined income of $80,000 that had $40,000 in credit card debt. So they pulled cash out of their houses, just to pay off their credit cards." - "Wow!" your editor replied, feigning surprise about the utterly unsurprising borrowing tendencies of the American consumer.   - "Oh yeah," the title agent continued, "most folks are taking on loans that lock [interest rates] for only five years or less. That's why, if rate rise, these folks will be in big trouble." - Then, one of the other mortgage professionals in the room, an attorney who caters mostly to 'high net worth' clients, countered, "My clients are doing the exact opposite. They're taking no equity out of their homes and they are locking in low rates for 30 years." - Hmmm...Maybe there's a reason that the folks with money still have some money to spend. - Based upon this small, unscientific sample, the folks who can least afford rising rates will suffer the most if interest rates rise. That doesn't sound like a good situation...not for the housing market, not for Freddie Mac and not for the U.S. economy.                       ---------------- Bill Bonner, back in Paris... *** The little woman with a big head and long dark curls spun around. She was facing away from her dancing partner, leaning over his bent left leg. Then, she took her right leg and kicked up backwards, like a horse aiming at a farrier, between the man's legs. "Oh l� l�...," she turned to us with an immense smile, "you have to do that just right. If you kick too low, you have no style. But if you kick too high, you will have no partner. Ha, ha, ha..." Then, she swung around in the other direction and repeated the maneuver, this time with her left leg. And so the world spins around - with everybody holding on for dear life...with a combination of faith and reason...with blind recklessness and untidy contradictions everywhere. We came to learn the tango. And why not? We are preparing for the future. And in the days ahead, we see salsa as well as sushi, tango as well as kabuki, and inflation as well as deflation. America seems to have loosed the chains that once anchored it so firmly against the 54th parallel...The U.S. Constitution...the balanced budgets of Republicanos...the thrift and industry of its people...it is as if they had all wilted a bit under the warm sun of the Dollar Standard. And now, the Argentine peso rises against the dollar. Since January, even the Mexican peso has gained slightly, too. All the world's pesos seem to be worth more than the Norteamericano brand as America itself drifts beyond the Rio Grande, headed down towards the Rio Plata... More below...                                       --------------------- The Daily Reckoning PRESENTS: Bill Bonner ponders the nation's most important holiday. LAND OF THE FREE by Bill Bonner "This is a society of true believers. The belief in democracy, market economics and the importance of religion is far more pervasive here than Marxism ever was in Russia." Michael Ignatieff, in The Daily Telegraph It is the Fourth of July. Should we hang out the red, white, and blue bunting from our office balcony...or the black crepe? Should we whine about the America we have lost, or give a whoop for what we have left of it? That star-spangled banner still waves, but does it still fly over the land of the free, we ask? Or over a country with a spy camera on every street corner...a nation so deeply in debt that freedom has become a luxury it can no longer afford? Whatever direction we take, we trip over a contradiction. Things always seem to be black and white at the same time. That is why we took up tango, dear reader. People who dance the tango or write poems don't let contradictions bother them. They glide across the floor and enjoy themselves. As far as we know, no serious tango dancer has ever committed suicide. It's the mathematicians and engineers who blow their brains out. An ideologue or a mathematician cannot tolerate contradiction. His little world has to fit together neatly, like a crossword puzzle. It is 'cat' in one direction and 'day' in the other. Each intersection has to work perfectly. But that is not the way real life or real people work. A healthy woman loves her husband, but often hates him too. She has two eyes, and sees a slightly different view of him with each of them. What is wrong with that? Likewise, even a man with only a single eye cannot help but notice that the world is menaced by inflation and deflation at the same time...and that America is both free and un-free at exactly the same moment. What we have come to dislike about the neo-conservatives is not that their view of the world is right or wrong - for how could we know? - but that it is so small. They are true believers in a very tiny world...one with no room in their world for mystery, contradiction, ignorance or humility. It has to be small, otherwise they could not understand it. Neo-cons think they can see what no mortal has ever seen: the future. That is the twisted genius of the 'Preemptive Attack'; they stop the criminal before he has committed his crime! They think they can know what no mortal has ever known: not only what is good for himself and his country...but what is good for the entire world. And they intend to give it to them, whether they want it or not. In today's email box, for example, George W. Bush himself sends us the following message: "...liberty is God's gift to humanity, the birthright of every individual. The American creed remains powerful today because it represents the universal hope of all mankind." Here we will take a wild guess: there are probably more than a few bipeds hobbling around the planet for whom the 'American creed' is not so much a hope as a dread. But the president continues: "We are winning the war against enemies of freedom, yet more work remains. We will prevail in this noble mission. Liberty has the power to turn hatred into hope." "America is a force for good in the world," continues the leader of the world's only super-duper power, "and the compassionate spirit of America remains a living faith. Drawing on the courage of our Founding Fathers and the resolve of our citizens, we willingly embrace the challenges before us." America's citizens, meanwhile, are deeply in debt. They see little choice but to back the system, such as it is. Free or un-free, they could care less. Just keep the money flowing. They have come to rely on government. They need Fannie Mae...and unemployment insurance...and social security...and jobs...and the Fed...and fiscal stimulus. Or, at least, they think they do. After 50 years of the Dollar Standard boom, the average American finds himself less free than ever. He is a slave to the highest government spending and biggest public debt burden in history...and to the heaviest mortgage and other private debt load ever. He has mortgaged up his house...he has taken the bait of credit-card lenders. Now he has no freedom left; he must keep a job...he must pay attention to the Fed's rates...he must have an interest in George Bush's government (for now he depends on it)! "July 4 should be about celebrating freedom and independence," wrote Richard Benson, published in this week's Barron's, "yet the bankers are the only people jumping for joy. Never have Americans owed so much in terms of their total debt, the ratio of total debt to income and the amount of cash flow the debt needs to serve it. Americans used to believe that if they were debt-free, they were free. Today, Americans just want the freedom to borrow more, even if it means they are on the way to becoming enslaved by their debt." The average citizen is only a few paychecks from getting put out of his house. He no longer has the freedom to step back...to reflect...to think...to wonder about things...or enjoy the contradictions. Instead, he must listen to the words of economists as if they meant something...and bow before the politicians who control his livelihood...and place himself at the beck and call of every government agency with a dollar to spend. The message from George W. Bush concludes with an endearing personal note, in which "Laura joins me in sending our best wishes for a safe and joyous Independence Day..." Laura who, we wondered? Oh yes...the First Lady. How we got to be on a first-name basis with the woman, we don't know. We have never even met her. Why she should wish us a happy day, we don't understand. But these are the peculiar, baroque eccentricities of America that make it such an endearing place to its citizens and such a rich treasure for contemporary ethnologists and stand-up comics. They, too, will wonder about the contradictions. Why do Americans celebrate 'freedom' ever more loudly, while becoming ever less free...? How can they crow about the "home of the brave" when they attack pitiful, third-world nations that can't defend themselves? How can they ballyhoo their own independence when their armies occupy two foreign nations? Most people will ignore the contradictions altogether. Many will see them as hypocrisy. Some will be outraged. And a few will hear the off-tempo tango beat, and enjoy the holiday anyway. Your editor, Bill Bonner P.S. What a surprise! Upon announcing we had assembled a collection of essays exploring the "Idea of America," we wrote: "Of course, we have no illusions"...suspecting that people glued to their TV sets watching FOXNews would have no interest in a collection of "deep thinking on the meaning of our nation." But, we are happy to announce...within a month, the entire first print run has completely sold out! Perhaps the ideas expressed in the collection resonate well with readers concerned about military adventurism abroad...and skyrocketing budget deficits...and perishing personal freedoms at home. Naahh...we suspect most people would still rather not ask questions...so we still have no illusions. But if you are curious, dear reader, what better day than the 4th of July to take a look? "The Idea of America" - 2nd Printing! (What's it all about?) http://www.agora-inc.com/reports/901SIOAB/Ideas/ Ed note: Bill Bonner is the chairman and CEO of Agora Publishing as well as the editor of The Daily Reckoning. Along with Addison Wiggin, Mr. Bonner is the author of "Financial Reckoning Day: Surviving the Soft Depression of the 21st Century" (John Wiley & Sons) due in bookstores in September. ------------------------------------------------------ The Daily Reckoning is a FREE e-mail service of Agora Financial Publishing. 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