Can Do Money
“As long as you’re pumping out money at a faster rate than demand for money is rising, you’re going to stimulate spending. I think it would be kind of fun to fight deflation, actually.”
Robert “Let’s hold hands and buy an SUV” McTeer
Robert McTeer must be something of an amateur magician. His idea of a good time, we guess from his remark from February, is creating money out of thin air.
We are not particularly shocked by this. For it has long been apparent that central bankers everywhere – McTeer is president of the Dallas Fed – must like inflating the currency, during working hours at any rate. We are pleased to see that Mr. McTeer enjoys his work.
What is shocking and new is that he would say so. Clipping coins used to be something bankers did when no one was looking, like going to the bathroom or sneaking into porno shops. John Law – when he still had his wits about him – threatened his subordinates with death…if they printed money without proper backing. He may not have had any particular interest in protecting the public’s money. But he knew what was good for him…and if the public ever caught on to the fact that his bank’s currency had nothing of value behind it, he would be ruined.
But now, it really must be a new era – of sorts. McTeer and Bernanke openly discuss the methods they intend to use to make sure the dollar does not rise in value. And the capo di tutti capi of central bankers, who is not coincidentally responsible for creating more money out of thin air than any central banker who ever lived – Alan Greenspan – has just been offered a new term at the head of the Fed. At 77 years, all he has to do is to keep breathing…and keep inflating…and he is assured employment.
Alan Greenspan: Whatever is Necessary
Fed officials, from Greenspan on down, have made it clear that they will do “whatever is necessary” to avoid a Japan- style deflationary slump, including interfering with interest rates on both ends of the yield curve. If setting very short-term rates does not do the job, the Fed will distort the long rates too. “If asset prices don’t adjust sufficiently to stimulate spending,” explained Vincent Reinhart, of the Fed’s Open Market Committee, “then open market purchases of long-term Treasurys in sizable quantities can more term premiums lower.”
Here we yield to James Grant for a translation: “We take that to mean,” writes Grant, “that if stock prices (or house prices, or other prices yet to be named) don’t do what they’re supposed to do, the Fed will cap the yields of longer-dated Treasurys in a bid to depreciate the value of the dollar.”
And now one further translation:
“The Fed will keep interest rates low – no matter what it takes.”
Alan Greenspan: Like Evil Knievel
Meanwhile, half a world away, another government employee brings the same spirit of optimism and determination to the sands of Mesopotamia. Jay Garner, proconsul, says he will stay “as long as necessary” in order to prevent things from regressing to their natural state in Iraq, while his boss, George Bush, affirms that his administration will do “whatever it takes” to bring peace and prosperity to the desert tribes.
In today’s letter, we offer no critique of either department – Defense nor Treasury. We merely marvel at the ‘can-do’ spirit that animates them…in the same way we once admired Evil Knievel for bouncing over the Snake River Canyon on a motorcycle. It was madness, but it was entertaining.
Here in Europe, people do not so much marvel as sneer. Where Americans see benefits, Europeans see problems… risks…dangers…complications. What if the whole Middle East is de-stabilized, they ask? What if more terrorists are incited to action…what if the Americans target us next?!
How the world has changed!
“We had our period of madness too,” Sylvie explained during our French lesson. “Oh là là…if you had lived through that period…1914 through 1945…you wouldn’t want to do that again.”
Sylvie might have gone further. She might have gone back centuries. Every problem…every difference…every border in Europe seemed to lead to war. Catholic or protestant… German or French…Fascist or Communist…no difference was so slight as not to be worth fighting over. It was the period of Machtpolitik…when Europe was strong militarily and every problem was thought to yield to the force of arms. For hundreds of years, armies marched in Europe…getting bigger and bigger, more and more deadly. Then, in the 20th century, Europe’s wars seemed to reach a level of such deadliness that it must have felt terminal.
In 1914…and then again in 1939…the Europeans marched readily into battle…each nation sure of itself, with a ‘can do’ attitude. Americans, meanwhile, hesitated. Not getting involved in foreign wars was thought to be a national virtue. Protected by two oceans, America’s military was relatively weak. And so, the nation favored negotiation…hesitation…discussion. In WWI and again in WWII, Americans waited years – until the major combatants had already exhausted themselves, said critics – before getting involved.
During those years…indeed, since the beginnings of the republic…American can-doism was largely focused on commerce, religion and other civil pursuits. Europeans marched…but Americans worked. And American factories from Trenton to San Diego profited by selling shoes, oil, guns…everything the Europeans wanted to buy.
Alan Greenspan: Learning More from Defeat
But now it is the Americans who put their faith in machtpolitik and the Europeans – protected by an ocean of U.S. military expenditures – who sell them things. “Negotiate,” say the Europeans…rely on the UN…talk… trade. The Europeans no longer have faith in ‘can do’ foreign policies; they barely have any foreign policies at all.
People learn more from defeat than from victory, we believe. Americans’ military interventions have been, largely, successful. Europeans’ have been mostly disastrous.
Likewise, too many devaluations…too many ‘new’ currencies…and too much inflation have squelched the Europeans’ can-do spirit in central banking. France has had two currencies and a one 100-to-1 devaluation since WWII. In the ’20s, Germany suffered an inflation so severe that a thousand marks in the morning were almost worthless by the day’s end. They do not want to do that again.
While the Fed cut rates 12 times – by 525 basis points – since the beginning of the slump, the European central bank has merely jiggled its rates up and down very cautiously. On the first of January 1999, the best ECB lending rate was 3%. Now it is 2.5%.
While the Fed program is aggressive, activist, and forward looking, the European central banker reacts slowly and deliberately, as if were less sure of himself…and more modest. And where Alan Greenspan is known throughout the world – a greater celebrity than Michael Jackson – who can cite the name of the ECB’s chief, let alone identify him in a police lineup? Wim Duisenberg is almost a nonentity.
But his currency is rising.
April 25, 2003
“Trenton Makes, the World Takes”
We haven’t seen it in a couple of years, but we suppose the sign is still there. We would see it every time we took the Amtrak from Baltimore to New York.
But the sign is a relic…it sits upon Trenton, NJ, like the yellowed photo of a 1939 Fair Queen on an old lady’s dressing table. We can imagine that the old girl was once thriving and full of life…but it almost brings a tear to our eye to think about it.
Trenton is not entirely derelict, but she has seen better days – when America’s factories belched smoke and America’s ‘can do’ entrepreneurs bussed and scurried to make things the rest of the world wanted to buy.
No more. Now comes a report that “mountains of empty shipping containers” are piling up in New Jersey’s ports. The Newark-Elizabeth complex, for example, the East Coast’s largest terminal, unloaded 1.6 million containers last year – full of goods coming in from overseas. It shipped out only 688,000 containers with good made in America. The two obvious consequences: thousands of containers stacked up all over the Garden State…and a huge trade deficit for the nation. To those might be added two more not-so- obvious-but-nevertheless-inevitable consequences: the Americans who used to make things lose purchasing power…and so does the money that they used to receive for working.
The manufacturing sector has been in decline for years in the U.S. No matter, the U.S. will become a ‘service’ economy, say the economists. But how will people pay for services if they have nothing to sell? Will we all take in each other’s laundry…or mow each other’s lawns? How will this give us the wherewithal to buy from people far away, whose lawns we cannot mow?
Jobless claims rose higher in the latest week. The numbers for the previous week were revised higher, too. There are also fewer help wanted ads, says the Conference Board.
The Fed’s Beige Book of regional trends tells us that despite record refinancings, consumers are spending less money. Chain store sales, for example, are rising at only about 1% – less than the rate of inflation.
Is it any wonder? When consumers do have jobs and do spend, the money goes overseas. About $8 trillion of it now bulges in the pockets of foreigners. That mass of money lost about 20% of its value in the last 12 months – at least against the euro.
Here at the Daily Reckoning, of course, we still love Trenton and her money. But foreign beaus may be losing interest.
Mr. Fry, reporting from Wall Street…
– Stocks sank yesterday like a “snitch” in cement goulashes. The Dow fell 73 points to 8,422 and the Nasdaq dropped half a percent to 1,459. Still, the results could have been worse. The Dow slipped more than 100 points during the morning, before recovering somewhat in the afternoon. Clearly, the dip-buyers are back.
– Is bullishness back in style? Or are investors – like a grounded teenager – merely exhausted by inactivity? For months, the lumpeninvestoriat has been squirreling away its cash. Accordingly, cash levels in bond funds and money market funds have been soaring, while the national savings rate has been trending higher.
– But after a while, all this saving and non-consuming becomes downright boring. So who can blame investors for wanting to break out their wallets and buy an expensive tech stock or two. That said, the mounting pile of cash on the sidelines might not come flooding into the stock market any time soon.
– “$4.7 Trillion Of Cash is sitting On The Sidelines,” writes Paul Kasriel, Director of Economic Research at Northern Trust. “Might It Stay There?” The answer is yes, according to Kasriel. Although he concedes that this sideline ‘cash’ is “potential high-octane fuel for a stock market rally,” he nevertheless suspects that “the retail investing public wants to hold more cash (defined as household deposits plus money market mutual fund shares [MMMFs]). In the fourth quarter of last year, deposits plus MMMFs were 10.6% of total household assets. Although up from a post-WWII low of 8.2% in 1999:Q4, this latest percentage is still very low in a post-war context…The average “cash” holdings as a percentage of total household assets were 12.7% from 1952 through 1999. So, households still have some distance to travel until their portfolios hold an average allocation of “cash”.
– Net-net, says Kasriel, “All of this sideline ‘cash’ is unlikely to be the catalyst for a stock market rally.” [Ed note. Paul Kasriel is a regular contributor to Apogee Research. For investment recommendations from Wall Street’s ‘secret think tank’ please click here: Apogee Research]
– Morgan Stanley’s Stephen Roach asserts that our national savings rate is much less than meets the eye. “Sure, the U.S. personal saving rate has now moved up to 4.0% – well off the rock-bottom level of 0.3% hit in October 2001 but still only about half the 9.0% pre-bubble average that prevailed over the 1970-94 interval,” says Roach. “[But] the modest rebound in personal saving has been [offset] by a massive reversal in the government’s saving position, as the federal government’s budget has swung from a surplus of 2.3% of GDP in early 2000 to a deficit of 2.3% in late 2002. As seen though the lens of the national saving rate – the combined saving of households, businesses, and the government sector – the United States is in terrible shape. America’s net national saving rate – which also subtracts the depreciation charges associated with the replacement of worn-out capital – fell to an all-time low of 1.3% in the second half of 2002; by way of comparison, this same metric averaged about 5% in the 1990s and considerably higher in recent years…
– “Lacking in such domestically-generated saving,” Roach goes on, “America has no choice other than to import surplus saving from abroad and run a massive current account deficit in order to attract such capital. But that’s not all. As the U.S. federal budget now plunges far deeper into deficit – reflecting the combined impacts of a weak economy, war and postwar spending commitments, and ill-timed multi-year tax cuts – America’s net national saving can fall only further.”
– But at least the lumpeninvestoriat has a bit of cash on hand, even if the lumps in government do not. The Golden State, for example, doesn’t seem to have an ounce of gold left in its coffers…nor even a wooden nickel. “California could completely run out of money soon,” KFWB News reports. “Financial conditions are such that the state controller could begin the budget process by issuing ‘IOU’s’ to vendors doing business with the state.”
– As the saying goes, “I’d rather owe it to you than steal it from you.”
Bill Bonner back in Paris…
*** “What is so worrisome at this point,” writes Richard Russell in the Dow Theory Letters, “is that great bull markets tend to beget great bear markets and ‘great values’. Here’s what I’m talking about. At the 1949 bear market bottom, the S&P was selling at 5.4 times earnings (and those were honest earnings) while providing a dividend yield of 7.6%.”
The Mogambo Guru helps us apply the math: “Take Mr. Russell’s figures, and let’s assume that the earnings of the S&P 500 are entirely honest. To have a bottom in this 2001-2003 bear market equivalent to stocks in 1949, the S&P 500 would have to fall to 151! For a dividend yield of 7.6%, using current yields, the S&P 500 would have to fall to 217.”
(Want more Mogambo? Click here:Looking Down The Barrel)
*** Our old friend, Amazon.com, is back in the news. The river-of-no-returns stock rose 75% last year…and is up another 35% so far this year. Is AMZN a great stock to own, or what?
‘Or what’ is our choice. The company is in “make-believe land,” writes Bill Fleckenstein. It lost $149 million last year…39 cents per share. If the cost of stock options had been included, it would have lost 60 cents a share. Plus, or rather minus, Amazon still has more than $2 billion in debt.
And yet, investors now gladly pay 79 times anticipated “pro forma” earnings (which can be anything the company wants them to be) for AMZN…just like old times. Yes, just like 1999 – when investors had not a care in the world…and as little sense.
*** “Yesterday, I was at Hong Kong Airport en route to Tokyo,” writes Daily Reckoning friend and contributor Bill Thompson. “A real ghost town and quite bizarre. SARS is real and underrated in its impact on psychology and economics.”
Yesterday, the World Bank seemed to agree. It issued a warning – not a health warning, for that is not its beat, but an economic warning.
The OECD knocked down its GDP growth projections. The Eurozone is expected to grow only 1% this year, not the 1.8% previously forecast. The U.S., says the OECD, should increase 2.3%, not the 2.6% formerly anticipated.
But if SARS is not brought under control, the only growth industry may be the companies that make face masks.
*** The Nikkei Dow fell to a new low of 7785.
*** Gold rose $3.40.
*** Don’t worry. Be happy. Buy gold. And a face mask.