God, Man, and George W. Bush

“They’re a bunch of idiots.”

– An unidentified employee of the
U.S. embassy in Paris, speaking
of her employers

What worries Europeans most about the Bush administration is not that they are idiots – for they expected nothing less – but that they are religious fanatics.

“Is this religious fundamentalism…are they really serious? Do they really think they are doing God’s work? Isn’t it a bit arrogant? I mean, to think they know the mind of God?”

The questions came from Sylvie, our French teacher. The subject is much discussed in the French press lately, where the chattering classes are beginning to see the War in Iraq as a conflict between two religious fanatics, both preaching a holy war.

We want you to know, dear reader, that we take up today’s topic carefully, as we might approach a cold mistress or a warm bottle of champagne. We have ventured comments on our President and the war in Iraq before; we know what we can expect.

Religious Fanatics: What’s More Interesting?

Still, what subject is more interesting? What poses a greater threat to our peace, tranquility and prosperity? We can think of nothing. Besides, with the fate of the world and its favorite money at stake…how can we turn our backs?

Recently, readers of the Daily Reckoning think they have picked up just the barest soupçon of liberal politics…closet Europeanism…maybe even democratic tendencies…in this column. Many are those who have written in outrage. “Socialist nonsense…” some have ranted. “Liberal democratic b.s.,” others have raved. Some have gone further, suggesting loyalty tests…blood tests…even mental tests. We write today to reassure readers; whatever foul creed they worry about…we are almost certain to despise it more than they do.

On the other hand, we admit to being a little disappointed in our own president. We were impressed by the way the son of the congressman-turned-CIA director, Vice President and eventually President of the U.S. – the studious youth who himself had attended Andover and then Yale…a man, in short, who could not have been more a member of the East-Coast establishment if he had had a Lacoste logo tattooed on his derrière, right next to the silver spoon – nevertheless managed to re-invent himself as a half-smart Texas cowboy. It was a great act, and we admired him for it.

Bush came from a decent family…he had kicked the bottle…he left the office at 5pm – how much damage could he do? Besides, we figured that even a Texas ground squirrel would be an improvement over the Clinton-Gore crowd.

And we rather liked that line from Bush about ‘humility’ in foreign affairs in his inaugural address. As long-time sufferers of the Daily Reckoning know, our ears perk up to the sound of the word ‘humility’; we never met a man who had too much of it…and find more things in ourselves to be humble about every day.

Religious Fanatics: A Half-Smart, Yahoo Populist

Imagine conservatives’ chagrin when they discovered that the humility promised by the Bush boy was a lie, while the half-smart, yahoo, populist image he so carefully cultivated was not! Bush supporters may immediately counter that getting half of what you are promised from a presidential candidate is a better deal than most…but, alas, it was the wrong half. It has left the Bush administration with a bad combination of traits – like a fat, ugly oaf who also sells Amway products.

So unbecoming is this mélange that the Bush administration seems on the verge of doing the impossible – making Clinton look good! During the Clinton years, though probably through no virtue of Mr. Clinton himself, if there were any, the nation was at peace…and seemed prosperous. And the federal government was in surplus. Now, the nation is at war, seems to be in a slump, and the federal deficit is projected at about $500 trillion for next year – the biggest flood of red liquid since Pharoah’s Army drowned in it!

Meanwhile, the Bush administration has undertaken foreign and fiscal policies that must rank as the least humble in history. Bush’s address to the world of March 17, 2003, was a remarkable pronunciamento. There was nothing illogical about what Mr. Bush said…but it was so stained by buffoonish grandiosity that it must have made an intelligent European laugh and a smart American cry. “Instead of drifting along toward tragedy,” the commander- in-chief told the world, he would rush to meet it!

Whatever he may be, George W. Bush is not the humble conservative people thought he was. In fact, he may be the most expansionist, forward-looking president since Roosevelt…the biggest humbug since Lincoln…and the greatest threat to the nation since Bill Clinton.

Religious Fanatics: God Keeps His Secrets

Which is not to say that we know whether the effects of his actions will be good or bad. We have tried to look into the future, but we have never gotten the knack; all we see is our own hopes and fears reflected back at us. Finally, we have given up the effort as both unproductive and dangerous, concluding that it is not given to man to know the future; God keeps his secrets to himself.

You see, dear reader, here at the Daily Reckoning, we believe in God…and gods…and Nature…the madness of crowds…and the kindness of strangers. We never heard of a superstition or tradition we thought we could safely scoff at…we never pass a penny on the street without bending over to pick it up…and never ignore an old wives’ tale, nor a young ones’.

For in every tradition is the distilled wisdom of centuries…through bull markets…and bear markets…famine, drought, war, plague, boom, bust. People learn from their mistakes, not from their successes. And not perfectly or consciously…but unrelentingly and episodically. For every tiny bit of progress – a rule, a principle, a guiding law – such as “Thou shalt not kill”…”Buy low, sell high”…”The early bird gets the worm”…”Always save for a rainy day”…”Never sh** where you eat”…”Paper money never lasts…while gold never goes away” – there are hundreds of years of experience and a million tormented souls roasting in Hell.

But every once in a while, people come to think the golden rules no longer apply. God begins whispering in their ears…or so they think. “It is a ‘New Era’,” He says. Now, things are different; now we CAN see clearly into the future, and profit from it.

During the late, great bull market, many people believed that not only could they read tomorrow’s newspapers…they could take advantage of tomorrow’s news today. Peeking at the stock pages, they were sure they saw higher prices. If they bought the shares, were they not already as good as rich? So why not spend a little of tomorrow’s wealth today, they asked themselves?

Religious Fanatics: Establishing Democracies

What passes for comedy in the stock market, comes on stage as a tragedy in politics. “The terrorist threat to the world will be diminished the moment that Saddam Hussein is disarmed,” said George W. Bush, looking into the future.

“We have to establish democracies in these countries,” a friend, calling from Texas, elaborated. “If not, those anti-American groups will continue to grow and they’ll continue to get more and better weapons. And yes, it will cost hundreds of billions of dollars…that we don’t have. But what choice to we have?”

“We are now acting,” Bush continued, reading tomorrow’s headlines, “because the risks of inaction would be far greater.”

Inaction is, of course, what humble people do in foreign affairs. They admit that they don’t know what will happen in the future. Lacking clairvoyance, they mind their own business…and put up defenses to protect themselves from a possible attack.

Action is what humble people do after an attack…or what arrogant people do before one. Those who think they can tell when an enemy will attack them – like the police in Philip Dick’s science fiction book, The Minority Report – may try to arrest criminals before they commit a crime. But they risk the wrath of the gods. For thousands of years, in personal relations as well as international ones, being the one to start a fight was rarely rewarded. Will it be any different this time?

We do not know. “New Eras” do not come along very often. If George W. Bush has spotted one, he deserves credit as a hero and a genius…and when we both get to heaven, we will give him a hearty handshake and apologize for ever doubting him.

But here, we offer a humble guess on a closely related subject. The president may go down in history as a great man, like Lincoln. But Bush’s dollar – like Lincoln’s greenback – will go down, too. Even if it is a New Era in geopolitics…it is almost certainly an old one in central banking. Bush’s wars on terror may knock off a tyrant or two…but the cost of them is almost sure to blow up the dollar.

Bill Bonner
April 4, 2003


Yesterday brought more whiffs of sushi…

…more evidence that the world economy is turning into raw, cold, unappetizing, dead meat. Like Japan.

Initial jobless claims rose to more than 445,000 – the highest level in a year.

Factory orders fell 1.5% in February.

And February also turned in the lowest measure of core inflation in 37 years.

Deflation is a rare thing in the annals of economic history. In major economies, it has struck only twice in the last 100 years – first during the Great Depression, and second in Japan in the last half of the 1990s, continuing to the present.

What central bankers and economists fear most is that it might spread, like SARS, to Western economies. Already, there have been reports of an outbreak of deflation in Germany. And in America, economic officials watch the nation’s container ports for signs of infection. What they see is that almost all imports arriving from the Far East carry the disease – their prices sink like a failing hospital patient. Only the robust service sector…energy…and housing keep the country from getting sick.

Neither the bond market nor the gold market see an immediate change in this trend. Nor can we.

But our New York colleagues are convinced that higher rates of CPI inflation – and thus, lower bond prices – are as imminent as the fall of Baghdad.

We don’t know. Maybe inflation will rise sharply…interest rates will shoot up…bonds will crash…the price of gold will shoot up to $500 an ounce. Then again, maybe the deflationary trend will continue a little longer before it comes to an end…with another rate cut by the Fed…and another round of refis…and even lower prices for imports.

New York-based Daily Reckoneers and those on the other side of the Atlantic agree only on the essentials – neither would add to U.S. bond positions. Whatever their merits, they are far too risky for the little gain (possibly) left in them. More below…


Eric Fry in New York…

– Investors huddled in their foxholes yesterday, awaiting the latest news from the Baghdad front. In the absence of fresh, decisive headlines, investors remained non- committal. A little buying here and a little selling there and by day’s end the Dow had fallen 45 points to 8,240 and the Nasdaq Composite had slipped less than a point to 1,397.

– So let’s turn our attention to the home front…literally. Will the red-hot housing market ever cool down? If you didn’t know better, it would be easy to mistake an unlabeled graph of the Mortgage Bankers Association Refinancing Index for the Nasdaq Composite Index through March 2000. But the Refi Index’s parabolic trajectory is no mere replica; it is a bubble in its own right. Indexed to 100 as of March 16, 1990, the series recently registered 9,387. In other words, as James A. Bianco, president of Bianco Research, points out, the volume of refinancing activity is more than 93 times greater than it was 13 years ago.

– It’s no secret that our economy has been subsisting on the “free money” produced by “cash-out” refinance mortgages. “In 2002, $80 billion was shifted from homeowners’ equity accounts into homeowners’ wallets,” writes James Grant. “The funds sustained consumption and bore up stock prices, postponing the market’s rendez-vous (or even – as we continue to believe – less than fair value). Interest rates, far from losing their macroeconomic punch in the post-bubble years, have assumed an honored place by the American hearth…Refi activity has virtually displaced conventional bank lending as the mechanism by which monetary signals are beamed to Main Street.”

– The signals are coming through loud and clear. Cash-out refis are as popular as SUVs. In fact, without cash-out refis, there would be far fewer SUVs sitting in American driveways. The cash-out refi, like a whiff of nitrous oxide at the dentist’s office, dulls the anxiety – and a little bit of the trauma – resulting from massive stock market losses. In other words, thanks to the refi boom, the buoyant housing market giveth what the stock market taketh away.

– “John Lonski, chief of the Moody’s economics group, has come up with the clarifying fact of this interest rate cycle,” says Grant. “Since the 2000 stock market top, he observes, equities are lower by 44%, while the median house price is up by 20%. Low interest rates have cushioned the consumer and the stock market both.”

– But the dream-like conditions in the housing market may be approaching an unpleasant denouement. Signs of weakness are starting to appear. And falling home prices – or even non-rising prices – could be far more hurtful than most folks imagine.

– “For the past two years,” Bridgewater Associates notes, “the robust housing market has been a key underpinning of U.S. economic growth. The influence has been multi-pronged. First, investment in housing is a direct line-item of GDP. Second, investment in housing leads to purchases of related durables. Third, the strength of the housing market produced rising home price and capital gains. A significant portion of these capital gains were converted into cash and spent.”

– Bridgewater believes the worm is turning: “Homebuilders’ expectations of future 6-month sales took a big drop in March on the heels of a drop in February…inventories represented a 5.0 month sales supply, the highest since 1996. [And in absolute terms], the current inventory of new homes is approaching the highest levels of the past 20 years.” We should also point out that these nascent signs of weakness are emerging in the midst of the lowest interest rate environment in 40 years. In other words, low- interest rates are proving somewhat less stimulative to home-buying than previously.

– Meanwhile, finance companies have been gorging themselves at the mortgage-refinance trough. According to Stephanie Pomboy’s Macro Mavens, RE lending represents a record 40% of total bank lending, up from 17% two decades ago, which leads Pomboy to surmise that a related bubble-ette is developing in the shares of finance companies. The “safe harbor” status of financial stocks has taken on a life of its own, she says. “Since its peak, the stock market is now down 43%, with Tech declining a spectacular 77%,” Pomboy observes. “The Financials, on the other hand, have given up a scant 9% and many stocks in the sector have registered meaningful gains, like Fannie Mae, which is up 10% over this period…This fascination with Financials is starting to bear an uncanny resemblance to the blow-offs in Energy in 1980 and Tech in 2000…

– “Bubble or not, one thing that is beyond debate is that the credit quality of banks’ real estate loans is clearly deteriorating,” Pomboy concludes. “While the redefinition of ‘delinquency’ has kept an artificial lid on those stats, ‘foreclosures’ have risen dramatically. Indeed, when viewed in the context of the 40-year lows in interest rates, foreclosures have never been this high.”

– No one can say for certain how high is too high. Nasdaq 4,000 seemed pretty high…until we reached Nasdaq 5,000. Today’s refi activity seems unsustainably high, but of course, it might soar unsustainably higher. But the risks seemed skewed to the downside. In short, don’t rule out the possibility that the “American Dream” is about to become a “Nightmare on Elm Street”.


Bill Bonner, back in Paris….

*** Australia advised its citizens not to go to Toronto. The SARS plague is “just another nail in the coffin of the world economy”, says Stephen Roach. When people are spooked, they don’t travel. They don’t spend money. They don’t get deals done.

*** “Have you noticed any anti-American sentiment,” asked Sylvie yesterday. She had just come from the embassy (where she gives French lessons) and had been told of an incident on a Paris street. An American woman with two children was apparently insulted:

“You have no business here….we don’t want you here, go the f*** away,” she was told.

“They must have been Arabs,” suggested Sylvie, unable to believe that any Frenchman would say such a thing. “But people seem to be getting meaner…and more fearful…”

Politics or plague…either one could be fatal to the global economy.

*** You and I, dear reader, may have thought Fannie Mae and the other mortgage mongers were in business to make a profit – by helping American families go deeper into debt. But no. “We’re in the American Dream business” says a full- page announcement in Barron’s, paid for by Fannie Mae. During the 30 years Fannie has been hustling loans, she tells us, she has managed to hang the albatross of a mortgage debt around the necks of 49 million families.

Of course, people don’t see it that way anymore. When they take out a mortgage, they think they are managing a financial asset…as if the house were a long position in cocoa futures or an I.O.U. from a drug dealer.

*** Dinner last night with French friends produced the usual questions about America’s war aims. Your editor explained, as best he could, the thinking of the Bush administration. His listeners were not hostile, just puzzled. How was the situation different from Vietnam…or Algeria…or the West Bank …they wanted to know? They didn’t seem to realize that we have entered a New Era. More below…