Natural Law And Crabby Kooks

The Daily Reckoning
Weekend Edition
September 28-29, 2002
Paris, France
By Addison Wiggin

“Back in 1997-98 you were considered a crabby kook, behind the times, to warn that the bull market in tech stocks could not last,” Lew Rockwell said at a gold conference on September 14th arguing for a return to the gold standard. “But economic law intervened, and fashions changed. Back in those days, too, had you suggested that the business cycle had not been repealed, you would have been dismissed out of hand. But economic law intervened.”

Economic law intervened. While we here at The Daily Reckoning have taken a bit of pride in being cranky on occasion… and no one denies we’re all a little kooky… we lay no claim to being able to discover economic law, let alone apply it. But we’re not afraid to suggest a few “laws” of our own… namely “in good time, all things revert to the mean,” and you may have heard Bonner suggest on occassion “investors get what they deserve, not what they expect.”

How about this one: “Nothing fails quite like success.”

After nearly a decade of hearing the financial media boast that the American model of capitalism was destined to go global and be the world’s savior, we have noticed another fashionable change. Suddenly “deflation” is on the lips of serious commentators… and in the headlines of major publications. The Economist this week dedicated an enormous special issue to the subject, titled “The Duldrums: The World Economy And How To Rescue It”… noting among other things the resurgence in Austrian business cycle theory.

John Mauldin, noticing the increasing popularity of the subject himself, offers a finely cut definition for what is meant by “deflationary spiral”. Using Japan’s recent history as an example Mauldin suggests: “Japan is in a decades long recession/depression and is currently in a deflationary spiral. Excess capacity means lower prices means less profits means fewer jobs means less consumption which leads to lower prices because of excess capacity and so on. It is a vicious spiral. Japanese exports to the US fell again this month, and any thoughts of a recovery are only in the dreams of politicians.”

Japan – after astounding the world with its own business model in the 80s – is dealing with an outright “liquidity trap”, Mauldin suggests, using another term getting tossed about like an infant on horseback. A liquidity trap is “a condition when interest rates are as low as they can go, but since deflation is even lower, the real cost of money is high. It leaves a central bank powerless, as they cannot lower rates to stimulate spending.”

This week, in the US, we’ve seen two flagrant indicators of our own liquidity trap in the making. Mortgage rates dropped below 6% – their lowest point since the 1960s. Fannie Mae reports home refinancings have reached their highest level ever. (And who wouldn’t really… if you can borrow money for 30 years at less than 6%?) Yet, the Dow dropped 295 points and finished the week at its lowest point for the year.

The drop in mortgage rates, by the way, followed on the heels a Fed meeting where the chairman opted to leave the Fed funds rate unchanged. Even bankers – acting on their own to induce even more consumer activity – seem to be wondering: does it matter what the Fed decides to do?

Certainly investors in the stock market don’t care. While the common consensus suggests the problems in Japan are the result of rampant cronyism and the economic elite’s unwillingess to administer the correct drastic remedies (i.e. letting banks with bad loans fail)… what drastic measures are likely to help the US economy out of it’s own impending spiral? War… perhaps?

Enjoy your weekend,

Addison Wiggin,
The Daily Reckoning
September 29, 2002

P.S. Some good news, too! Late Friday, I received a note from Amy London, an associate of ours, working with Jim Davidson’s Strategic Opportunities group. Amy writes to say one of the early stage companies they’ve been working with “…has gone public. It’s now trading at $6.20 and is providing our early stage investors – who got in at $.60 – a 1,000+ return.” If you’re familiar with Strategic Opportunities, this really is big news!!! But as it was late Friday when I received the note, I’m still awaiting the hard details. We’ll keep you posted…

– Daily Reckoning Book Of The Week –
– In Association With Laissez Fair Books –

America’s Great Depression
by Murray N. Rothbard

There’s probably no better time to take a serious look at America’s last great investment bubble and it’s disastrous aftermath. History doesn’t often repeat, but it’s awfully symmetrical.

Historian-economist Rothbard shows how government policies caused the 1929 crash and prolonged the subsequent depression. He explodes scores of economic and historical myths, and calls laissez faire “the only course that can assure a rapid recovery in any depression crisis.”

What will be the political fallout of our own crash and slow-motion depression?

America’s Great Depression by Murray N. Rothbard,

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THIS WEEK in THE DAILY RECKONING

09/27/02 EARTH’S BRIGHT SIDE
by Bill Bonner

“…Once a land of boundless opportunity, it is rare to see Argentina described in the press today without a modifier such as ‘hopeless’ or ‘basket case’ attached. This does little for the self-esteem of the proud race of the pampas, but investment value and self-esteem vary inversely, or so we think we’ve noticed…”

09/26/02 OLD WORLD, NEW WORLD
by Eric Roseman

“…the U.S. dollar and the Euro are like two drunks after a big night of partying. They walk in tandem, occasionally stumble, intoxicated by spending, sluggish growth and deteriorating trade balances. But in a relative world, Europe is indeed healthier, still harboring a positive trade-balance and current-account surplus versus massive deficits for the United States on both scores. The Euro is simply a better currency at the moment…”

09/25/02 DAY OF PATRIMONY, II
by Bill Bonner

“…All across the country, the innocent and the connivers slouch toward comfort. A long period of stability, progress, peace and prosperity has brought on a lazy-boy relaxation where it is dress-down Friday all week long…But in bear markets things go wrong. We wonder how the average American will react when they do…”

09/24/02 PREPARING FOR A RECOVERY
by James Boric

“…So why don’t more people invest in small cap stocks? The answer is simple. They are intimidated. And small caps can be risky. People are scared of things they don’t know or understand. And the popular media rarely ever mentions investing in anything other than Fortune 500 companies…”

09/23/02 DAY OF PATRIMONY
by Bill Bonner

“…Our complaint with the typical American home is the very thing others regard as its nicest feature: its comfort. Whether in the middle of the Nevada desert or the swampy woods of Maine, a man enters his house and cuts himself off from the rigors – and pleasures – of the outside world. Ensconced in his own home, he is as remote and insensate to the changing seasons as a rutabaga is to the next national election. Soon, his senses are blunted by the uniform temperature. His vigor is sapped by the ease ofit…”

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HEADLINE, NEWS And INSIGHT: Here’s An Idea – We’ll Steal It (Fair And Square!)… Policy Ills Of The BoJ And Their Unintended Consequences… Is America’s Love Affair With Stocks Finally Over?

It’s The Oil, Stupid!
by William Thomson

“…Washington’s attitude towards Middle East oil reminds us of the quote of an eccentric Japanese-Canadian member of the US Senate, Senator Hayakawa, who, when asked his view on the Panama Canal and the prospect of returning it to the locals, quipped ‘Why, it’s ours, we stole it fair and square’…”

Wrong Policy Choice, Right Economic Outcome?
by Marshall Auerback

“…The Bank of Japan has belatedly diagnosed the ills of the economy, but still appears unable to prescribe the correct medicine…ironically, BOJ Governor Hayami may have set up a law of unintended consequences that may ultimately put Japan on the road torecovery…”

Not a Correction, A Destruction
by Daniel Denning

“…What we have here is nothing less than the beginning of a final, spectacular sell-off of U.S. stocks and a final repudiation of overblown promises, criminal management, shameless pandering, and gullible investing by an entire generation of investors, journalists, analysts, and CEOs. This bear market will end the American public’s love affair with stocks for at least ageneration…”