Going From Bad to Worse The Daily Reckoning
Paris, France Monday, January 3, 2005 --------------------- *** The incredible lightness of being... sweet souvenirs... inhumanly cheerful... *** We weren't born yesterday... looking through media's rose-colored lenses... taking the road less traveled... *** The Ten Trillion-Dollar Question... the surreal life of the dollar... we want a new drug... and more! --------------------- You are receiving this email as a part of your FREE Subscription to The Daily Reckoning. Should you wish to unsubscribe please follow the instructions at the bottom of this email. --------------------- We felt the spring in our step this morning... the incredible lightness of being years younger than we really are. Ah... we feel our youth coming back to us... better than it was went it left! The attack of callowness came on this morning as we read the financial section of The International Herald Tribune. It was just like old times... oh, the memories... oh, the good times that rolled five... seven... ten years ago. Ah... the sweet souvenirs of when we were young, white, and over 21. It seems like just yesterday. "The market remains undervalued," says Abby Joseph Cohen, "because of nervousness over the election, possible terrorism and uneven global growth. But investors will capitalize on a perception of improving conditions." How we admire Ms. Cohen. She must be from Montana or Wyoming... somewhere way out West, where never is heard a discouraging word. Every bit of news is a plus for the stock market. Every year will be an up year. And every day brings new reasons for optimism. But has anyone gone through her trash? The woman is inhumanly cheerful; she must be on some form of mood enhancer. And now revealeth the IHT: "Stock prices could actually forge ahead solidly, if not spectacularly, market strategists say." We feel younger by at least five years... maybe ten. But how we envy the reporters at the IHT. They must have been born yesterday! Who else but a mere babe, still wet and soft, would report such a thing with a straight face? Market strategists always say stocks are going up. That's what they are paid to say. "We're not gung ho," said one of the quoted strategists, "we're realistic... markets have been pricing in a more pessimistic outlook than we think is warranted." Hmmm... the Dow went up last year, modestly... and only in dollar terms. Still, at 20 times earnings, we have to look under the doormat and the seat cushions to find signs of pessimism. Near as we can tell, investors are about as positive as they've ever been... as buoyant and bubbly as they were in the late '90s, in fact. The huge majority of analysts think stocks will go up in 2005. So do the great majority of private investors. The great majority in America believes things will get better in 2005; they believe the dollar will fall, with no negative consequences; they believe stocks will rise, as American companies become more competitive; they think Alan Greenspan actually controls the economy and will make sure nothing goes wrong. These are the chipper views you find in almost all the financial media. They are the "mainstream" opinions of magazines such as Kiplingers and Money... the "under the top" views that everyone accepts as reasonable and responsible. Of course, here at The Daily Reckoning, we have no more idea of what will happen in 2005 than they do. But we embarrass less easily, which makes it possible for us to examine the alternatives without worrying about our reputations. Besides, while we may not know what will happen... at least we know what won't make you any money. You won't make money by following the mainstream view. Or, to put it another way, if you do what everyone else does you can't expect to get better results than anyone else. Those who make above-average gains are those who do things that others do not do - beginning with having thoughts others dare not have. Which is, of course, what we do at The Daily Reckoning. (More on this below... ) More news, from our currency counselor: -------------- Chuck Butler, reporting from the EverBank trading desk in St. Louis... "Last week, I reported that the 2-year Treasury Auction showed the worst participation by foreigners in a year. If that situation continues, the dollar could be in for a swift ride on the slippery slope down! Otherwise, we'll just continue on with this general depreciation, with minor blips, or bear market rallies for the dollar in 2005." For the rest of this story, see today's issue of The Daily Pfennig: A Fork In The Road http://www.dailyreckoning.com/body_headline.cfm?id=4383 -------------- Bill Bonner, back in Paris: *** What thoughts have we today? You'll recall that when we left you on Friday, we said the story in the financial markets had changed from a tragedy to a mystery. The collapsing dollar should have brought down prices of the assets it measures - most notably, the prices of U.S. bonds, which are extremely sensitive to changes in interest rates or currency movement. There are about $10 trillion of U.S. dollar assets in foreign hands. Yet, bonds have not gone down - at least in dollar terms, which leads us to pose the Ten Trillion Dollar Question: Why not? We will not remind you of poor Mr. Asakawa. You've already heard enough about him. But how many times have people like him - with, collectively, trillions of dollars' worth of assets - almost reached for the phone? How many strangers overseas have wondered if they shouldn't say "SELL EVERYTHING" before losing more money on the currency exchange markets? And yet, they have not picked up the phone. They have not sold. Bonds, which would be the first things to be sold, have held their value... or actually risen. Meanwhile, on the very same page, where the health of the bond market is reported, is an article assuring us that almost every sentient analyst and expert anywhere in the solar system now expects the dollar to fall more! "Prospects are grim for the dollar," says the IHT headline. The scene might be from an Italian movie from the '60s; "surreal" might reviewers describe it: Dollar holders see the train coming. (They have subscriptions to the IHT too!) But they continue enjoying their picnic - right in the middle of the tracks [Ed. Note: Concerned about the dollar and its continuing slide? You can protect yourself... Look at Dr. Richeb�cher's special report on the dollar's demise... it's coming out tomorrow night.] ***And so the plot thickens... . "I read your book," said an attractive woman at a New Year's Eve party. "But you seem to be wrong; the world doesn't seem to be headed towards a Japanese-style slide. U.S. stocks rose, slightly, in 2004." "Well," we replied, trying to sound as if we had figured something out, "U.S. stocks rose in dollar terms. But the dollar fell so much that, when measured by foreign currencies or gold, the Dow actually went down." The tale we told in our book was that the U.S. economy seemed to be tracking Japan - with a 10-year lag. We couldn't think of any particular reason why this should be so, except that the Japanese story itself was a classic. Markets boomed... and then bubbled up to absurd levels. When the crack came, people didn't believe it was possible that the Japanese miracle economy could go down. And for several years, it looked as though Japan, Inc. had suffered only a setback. But by the mid-'90s Japan was sinking. Asset prices were collapsing. Consumer prices fell. The credit expansion that had made Japan such an extraordinary success story in the '80s turned into a credit contraction, which made Japan into an extraordinary failure story in the '90s. If America were to follow the same pattern, its stocks and real estate would have to fall too. Note, we do not include bonds. Because a credit contraction typically wipes out poor quality bonds, but it favors credits of good quality, such as government issues. Interest rates typically fall during a contraction, which tends to hold up prices of Treasury bonds. Stocks, real estate and other assets usually go down, as people's cheerful expectations from the bubble period give way to dark foreboding. The mysterious element is the dollar. Japan was deeply in debt at the beginning of the '90s - but to its own citizens. The country had a positive trade balance and trillions in savings. There was no need to devalue the yen. The dollar, by contrast, is vulnerable. Americans save little. They depend on foreign lenders in order to maintain current living standards. Each day, the pressure on the dollar grows by $2 billion; it almost has to go down. And since it has to go down, it provides an opportunity for deceit; Americans can now grow poorer without realizing it. Last year, U.S. asset holders - principally Americans - lost between $4 trillion and $8 trillion, when their assets were measured in euros. So, there we have a soupcon of how the Great Mystery might resolve itself. Why has the bond market not sold off with the dollar? The answer, we think, is because we ARE still tracking Japan... not perfectly... but appropriately. The U.S. economy is sinking into a long, slow, soft slump - where long-term interest rates will not go up... and good-quality bonds will not go down, at least, not in dollar terms If we are right, the great U.S.-dollar credit boom must be followed not by inflation... not by growth... not by a new boom... but by a great U.S. dollar credit bust. Marginal credits - such as junk bonds, expensive stocks and leveraged real estate - are likely to be marked down. Some of the markdown can be realized by a cheaper dollar. But the dollar is already too low on a purchasing power parity basis. Things are already too cheap in the United States and too expensive in Europe. And, though Europe has a current account surplus, the euro itself is paper too - just like the dollar, and not much better. What's more, if the dollar were to fall too much - that is, enough to fully deflate America's credit bubble - there would be Hell to pay. Mr. Asakawa and other foreigners are already sitting on the edge of their chairs... barely restraining themselves from picking up the phone; they could sell at any moment. If they were to sell, it would quickly take down the value of U.S. dollar assets... and push the U.S. economy into recession. In other words, we do not doubt that the dollar will fall, but we doubt that that will be the end of the story. For the year ahead, we expect U.S. dollars assets to fall - stocks and real estate, primarily. The price of credit is likely to rise - especially short-term rates. But quality bonds are likely to be supported by the credit contraction itself - people will covet secure income streams. And gold? People want a lower dollar. They think it will make U.S. exports more attractive... while writing down the value of U.S. overseas debts at the same time. But people do not get what they want and expect from markets; they get what the need and deserve. What better way to deflate the American credit bubble than to deflate it in terms of real money? Just look at a chart of the Dow in terms of gold. You will see that the bear market that began in January, 5 years ago, is well advanced... and continues. Our guess is that the dollar falls against other currencies in 2005... but even more about gold and commodities. A rise in the price of oil, along with an increase in short-term lending rates, will help give American consumers the shock they need. They will, most likely, stop buying as though they expected to drop dead next week... and begin preparing for the future. They must start saving money sometime; 2005 seems as good a time as any. This shift in consumer spending would tip the U.S. into the long, slow, soft slump was have been expecting. Five years ago, we announced our "Trade of the Decade." Just sell the Dow and buy gold, we said. We are now halfway into the decade. Our trade is up comfortably... but not spectacularly. We see no reason to change. *** This from our old friend Martin Spring: Will the drug addict go cold turkey in 2005? The addict I'm referring to is the U.S. economy. And the drug it's addicted to is abundant cheap credit. Consumers have borrowed more... and more... and more... to finance spending way beyond what they can really afford. Ditto for the politicians - the federal government is now borrowing more than a billion dollars a day to pay for spending beyond its revenues. In the third quarter dissaving (taking on more debt or looting savings) accounted for two-thirds of economic growth, higher incomes for only one-third. It's possible that Americans will go even deeper into debt. Rising incomes allow them to finance greater borrowing and household wealth continues to rise. But the odds against their going deeper into debt are mounting. [Editor's Note: For the rest of this article, see our site: Going Cold Turkey http://dailyreckoning.com/body_headline.cfm?id=4385&tp=a --- Advertisement --- FOUND: Enough Oil To Last 400 Years... Right in Our Backyard Overnight, this dirty, unglamorous oil field became the 2nd largest oil deposit in the world. The supply is VERY safe... it's right here in North America... and you can jump in before everyone else... and take up to 668% gains. Find out what stock T. Boone Pickens, the Texas oil maven worth $760 million, recently told Bloomberg News was his 'number one pick'... http://www.agora-inc.com/reports/OST/oilC09 --------------------- The Daily Reckoning PRESENTS: With the top-dog slot open at Fannie Mae, there is only one person fit for the job... all we'll say is, "Vote for Mogambo in '05!" GOING FROM BAD TO WORSE by The Mogambo Guru Franklin Raines, disgraced former head of Fannie Mae, proves that perfidy and failure is worth a retirement package measured in tons of money and benefits. Fannie Mae was originally set up to help poor people buy houses. Remember the phrase "poor people" because it is important. Instead, Fannie Mae has grown like the government cancer that it truly is, and is now so big that it is now one of the top two or three biggest corporations in the whole freaking country! And not only that, but it is an absolute, total, colossal freaking failure at its mission. Their job was, to refresh your memory, to help a few poor people buy some cheap houses, probably something out near where I live, as I seem to depress property values wherever I go and only very poor, very desperate people with literally no place else to go would even think of living near me. Homeownership was supposed to give these poor people a cuddly feeling of security, but which evaporated as soon as they learned that they had to fix anything that broke, and they couldn't just call up the landlord and yell at him to fix things anymore. Instead, and I say this with that look on my face that means, "I can't believe my freaking ears when I hear it, nor my eyes when I read it," Fannie Mae has actually driven up the price of housing to the point where not only can the POOR not qualify for a loan to buy a house anymore, but in some places not even the freaking middle class can afford to buy a house anymore, either! And why can't these people afford to buy a house? Because housing prices have been going up in price at double-digit inflation rates for years now, thanks to Fannie Mae. And now houses just cost too damn much, and that, and I stretch out my arm and to point at THAT, is the horror of inflation, which is, Number One on The List Of Things That Make The Mogambo Go Out Of His Freaking Mind In Fear (TLOTTMTMGOOHFMIF). But this is not about me, although I love talking about me, and having people wait on me hand and foot, and cater to my every whim, and if I can't have that, is it too much to ask to be able to go ten lousy minutes without somebody throwing a roll of flaming toilet paper at me? I mean, I'm trying to get some work done here! But we were talking about Fannie Mae and the horrid Franklin Raines, and that whole horrid Fannie Mae bunch, and how they have not only failed at what they were supposed to do, but they actually made the situation much, much worse! And it is worse for many, many more people! Talk about your typical government program, eh? And yet, here these guys are, getting fired and receiving these enormous retirement packages. But we were talking about houses and the prices of those houses. And why do they cost too much? Because Franklin Raines and his stinking, grubby friends (which is, of course, Congress, the courts, the banks, and the powerful friends of either one) at Fannie Mae provided seemingly unlimited funding to buy mortgages. And where did they get all this funding? From investors. And where did the investors get all that the money? From the Federal Reserve, which created it out of thin freaking air and loaned it to the investors. And all this new money increased the money supply as it increased debt loads. And here is where we take a short journey down a pleasant path that I hope will impress you. It is with great pleasure that I present a Mogambo Axiom Of Economics (MAOE) that has a lot of mathematical mumbo-jumbo that I can make up on the spot, mostly long and complicated formulas with all these cool mathematical symbols everywhere, and that rigorously proves: All money must go somewhere. I hope it is more profound that it looks, because it looks like nothing on the page. I originally thought of it at a recent Christmas party, and I admit that I was pretty blasted, and to tell you the truth I am amazed that I remembered it at all because I have apparently forgotten most of everything else that happened at the party, judging by my wife suddenly referring to me as Satan and how she is always making the sign of a cross when she looks at me, which is weird, since she is not Catholic, and a lot of policemen are suddenly asking me some very embarrassing questions. So, do me a favor here: Give it awhile to sort of sit in your brain, and then perhaps you will leap to your feet and say, "The Mogambo is not as stupid as we thought! In fact, it's brilliant! Because if a lot of money flows into one area of the economy, then prices in that area will increase. And then other capitalist entrepreneurs will start moving into that area, attracted, like moths to a flame, to all that lovely, lovely money flowing in, because they also have wives and children and mortgages, and they are also up to their eyeballs in debt, and things aren't going so hot here the last couple of years, and at this point I am pretty much willing to do anything for money, especially try and flip a few houses. And the increase in tax collections is like manna from heaven to stretched local, state and federal governments." At that, my eyes bug out and I stand back and look at you in absolute awe! I had no idea that you were that educated in economics! And then I remember that, like Buddhism, macroeconomics only takes a few minutes to learn, but a long time to acquire wisdom. I humbly bow to your achievement! Now, what I want as my reward for coming up with this brilliant new economic verity is to be the new head of Fannie Mae. If all it takes to get fired and received a multi-million dollar annual retirement package is to spend a few years growing into a malignant a cancer and be worse than a total failure, then THAT is the job I want! If there is one thing that I am good at, it is failure. I'm a natural! So now, everywhere you go, I want to hear it loud and clear, "Mogambo for Fannie Mae! Mogambo for Fannie Mae!" And in a similar vein, Bob and Barb at 321gold.com have a pithy quote from Henry Ford on their site that shows that old Henry knew about more things than cars and assembly lines, and I want to get it into my own stupid newsletter because I take my hat off to old Henry, which is what I call him because he is dead and there is nothing he can do to make me stop calling him by his first name, and in this way maybe somebody will think, "Hey! That Mogambo is quite a fellow! He knows lots of important, famous guys!" But Henry said, "It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." So here is Fannie Mae providing these selfsame "people of the nation" with a glaring example of the misery of how our government, banking and monetary systems have run amok, and not only is there no freaking revolution, but the guy responsible is going to retire rich as a reward for being a complete failure! Not only that, but Fannie Mae has a $2.306 trillion Book of Business, but only $29 billion in capital. That comes out to a leverage of 80:1! This is the range of leverage that caused Long Term Management to go belly up! Wasn't it H.L. Mencken who said something like, "The people in a democracy decide the kind of government they want, and they ought to get it good and hard"? Well, we are about to "get it good and hard." Regards, The Mogambo Guru for The Daily Reckoning Editor's Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter, an avocational exercise to heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications. If you're inclined to read more, you'll find the whole Mogambo here: I'm Going to Turn This Spaceship Around!http://www.dailyreckoning.com/body_headline.cfm?id=43 84 --- Advertisement --- Get Ready For a Shocking Glimpse... "China, 2050" The year is 2050. China is the richest, most powerful nation on earth. And America's Golden Age has come to a crashing end. Impossible? Don't be so sure... Protect yourself now, and you can not only "China Proof" your money... you can also use these two simple investments to multiply your wealth by as much as 794%... http://www.agora-inc.com/reports/DRI/chinaB22 --------------------- MAKE YOUR OPINIONS COUNT! Visit our Discussion Board at http://www.agora-inc.com/forums/index.cfm?cfapp=3 and submit your views or read what others are saying. Our writers and contributors also welcome your questions and comments. Simply reply with the word 'Question' or 'Comment' in the Subject of your e-mail. ------------------------------------------------------ If you'd like, please e-mail this issue of the Daily Reckoning to a friend: http://www.dailyreckoning.com/emailfriend.cfm?id=11165 ------------------------------------------------------ ADDRESS CHANGE? WISH TO CANCEL? You can administer your account online. 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