How to Relax and Enjoy the End of the World
The world as we have known it is coming to an end, but what do we care? We laugh and vow to enjoy it.
It took the Roman Empire hundreds of years to fall. During that time, most people didn’t even know their world was coming to an end. Most must have gone about their business, planting their crops, drinking their wine and bouncing children on their knees, as if the empire were eternal.
Of course, the mobs in Rome itself may have reeled and wailed with every news flash…
…the barbarians had crossed the Po…and were headed South…soon, they would be at the gates!
But others lived quiet lives of desperation and amusement as if nothing had happened. And what could they have done about it anyway…except get out of harm’s way and tend to their own affairs?
Plenty of people enjoyed the Great Depression. If you had a well-paying job, it must have been paradise – no waiting in lines, no need for a reservation at good restaurants. Keeping up with the Joneses had never been easier – because the Joneses were in reverse! If much of the satisfaction of life comes from feeling superior to other people…what better time than a depression to enjoy it?
Consumer Capitalism: Suspicious of Headlines
Besides, here at the Daily Reckoning, dear reader, we’re suspicious of headline events. We could never quite get into the spirit of the Great Boom of the ’90s…we doubt we’ll get much juice from the Great Bust either. Nor can we get very enthusiastic about going to war against enemies we don’t know for reasons we can’t understand.
It is a character defect; we just can’t seem to get in tune with mass sentiments. We’ve never been able to do ‘The Wave’ at baseball games without feeling like a fool. Now, we can’t even watch football on television without falling asleep.
But that is the way of the world; one madness leads to the next. A man feels excited and expansive because the economy is said to be in the midst of a New Era…and then he feels a little exhausted when he discovers that the New Era has been followed by a New Depression. And all the while, his life goes on – exactly as it had before. His liquor is no better, his wife no prettier or uglier, his work every bit as insipid or inspiring as it was before.
And we have no complaint about it!
Still, “the world is too much with us,” wrote Emerson:
“Most men have bound their eyes with one or another handkerchief, and attached themselves to some one of these communities of opinion. This conformity makes them not false in a few particulars, authors of a few lies, but false in all particulars. Their every truth is not quite true. Their two is not the real two, their four not the real four; so that every word they say chagrins us, and we know not where to begin to set them right. Meantime nature is not slow to equip us in the prison-uniform of the party to which we adhere. We come to wear one cut of face and figure, and acquire by degrees the gentlest asinine expression…”
What better time to shut the world out and wipe that silly grin off our face than now – when the world we have known for 5 decades is coming to an end?
American consumer capitalism is doomed, we think. The trends that couldn’t last forever seem to be coming to an end…or they will soon. Consumers can’t continue to go deeper into debt. Consumption can’t continue to take up more and more of the GDP. Capital investment and profits can’t go down much further. Foreigners will not continue to finance Americans’ excess consumption until the Second Coming – at least not at the current dollar price. And fiat, paper money will not continue to outperform the real thing – gold – forever.
Consumer Capitalism: A Structural Change
America will have to find a new economic model; for it can no longer hope to spend and borrow its way to prosperity. This is not a cyclical change…but a structural one, which will take a long time. Partly because structural reforms – that is, changing the way an economy functions – do not happen overnight. And partly because the machinery of collectivized capitalism resists change of any sort. The Fed tries to buoy the old model with cheaper and cheaper money. The government comes forward with multi-billion dollar spending programs to try to simulate real demand. And the poor lumpeninvestoriat – bless their greedy little hearts – will never give up the dream of American consumer capitalism; it will have to be crushed out of them.
The world is so much with these people. TVs are turned on 24-7. Thinking en masse, the latest news gets homogenized into one gloppy paste, where America’s success as an economy is amalgamated with its success in the war against terror. “Considering that we’re going to get an uptick in corporate profits and a quick win over Iraq,” said Scott Black in one of Barron’s Roundtables, “I think the market will be up 5% to 10% for the year.”
Meanwhile, America has become such an outsized military power that the world has become ‘unipolar,’ say the latest editorials. ‘Tis a strange world with a single pole, we note; out of balance, it cannot last.
Nature abhors a monopoly. Thus must America find a way to destroy itself…and seems to have found two:
First, its consumer economy depends entirely upon the kindness of overseas strangers. When they are finally fed up, Americans will have to stop buying…and start saving themselves. Since it is something that must happen, we will be happy to see it happen, for we might as well rail against death as oppose an inevitable change in the economy. “It will all have to be adjusted someday,” as Paul Volcker put it. Why not enjoy it?
Secondly, George W. Bush turned the gods of war against America when he announced that the U.S. would initiate armed conflict – with any nation it feels poses a threat. He has only to pursue this strategy, and he will eventually turn the whole world against America, too. We don’t know where this leads, but we will try to make the most of it. Here at the Daily Reckoning, we have already made our New Year’s resolutions. We will try to remember birthdays and vintages…we resolve to find a better way of curing ham…and, oh yes, we will buy gold on dips and sell the dollar and stocks on rallies. The Trade of the Decade, we keep saying, is to sell stocks and buy gold. This trade has been good to us so far. At its peak in March 2000, it took 41 ounces of gold to buy the Dow. You can buy it now for about 25 ounces. Before the decade is over, and here we take a wild guess, it will be one-to-one, as it was before the Great Boom began.
This may or may not be a profitable strategy, but we don’t care. We will do what we ought to do, even if it turns out to be unprofitable. Occasionally we will do what we ought not, too, but that will be just for fun.
January 15, 2003
Not for the first time in his life, Paul Volcker is worried about the value of the dollar. It was Volcker, not Alan Greenspan, who was at the helm of the Fed when inflation rates hit double digits in the late ’70s. It was he who brought inflation under control…and set in motion the Great Boom which lasted for the next 20 years.
The entire financial system was in jeopardy; faith in the dollar had to be restored. Volcker did it by forcing interest rates up to 18% and squeezing the money supply until there was little inflation left in it…which left his successor at the Fed free to allow rates to come down for the next two decades.
It wasn’t easy. Crowds gathered and burnt an effigy of Volcker; they might have burnt the man himself if they’d been able to get ahold of him.
For the moment, by contrast, Mr. Greenspan is safe. “We’ve had a very strong dollar,” Volcker said, noting that it came with a remarkably high current account deficit. “That’ll be adjusted someday,” he said. “And we have a nice question whether it will be adjusted in an orderly way or in a disorderly way, and we’ve left ourselves a little vulnerable.
“And someday we are going to have to get into an economic situation where we are saving a little more, spending less relative to the GNP, and paying a little bit more of our way internationally,” Volcker added. “And we’re not making very much progress in any of those directions in the short run…”
Every time a person adds to his mortgage, he becomes more vulnerable. Likewise if he buys stocks at today’s high prices. If panic selling of the dollar begins, he’s in trouble – stocks will go down and mortgage rates will go up.
To make matters worse, American manufacturers are getting pressure on both sides of the ledger – from China. Their costs are going up; China is buying so many raw materials that prices are rising. And their revenues suffer – because China’s finished products are so cheap. How are they going to compete? They’ll find a way…but probably at a lower dollar price.
It will all be adjusted someday…including the favor Mr. Greenspan currently finds in the eyes of the American lumpeninvestoriat….
…but not without wailing and gnashing of teeth.
Eric, what happened yesterday?
Eric Fry, reporting from Wall Street…
– Another lazy day on Wall Street yesterday. The Dow Jones Industrial Average shuffled along 56 points to 8,842, and the Nasdaq ambled 15 points higher to 1,461. Meanwhile, gold drifted lower, falling $2.70 to $352.40 an ounce.
– The dollar drifted lower as well. Despite the friendly influences of a strengthening stock market and a softening gold price, the dollar’s pathetic sell-off continued. The greenback fell half a percent against the euro at $1.0590 – – its lowest level in more than three years.
– “Is dollar party is finally over?” The Economist magazine wonders. We here at the Daily Reckoning have been wondering the same thing for some time. We are not wondering anymore…When the punch bowl is empty and the ice statues have become mere puddles, the polite guest retrieves his overcoat and bids the host “Goodnight.” The party is over.
– “For years, currency experts have been confidently – and largely mistakenly – forecasting the decline of the dollar,” the Economist reminisces. “They were able to marshal an impressive array of evidence in support of their arguments…America could not continue to absorb the large capital inflows which had propped up the greenback for so long. The euro, after its creation in January 1999, would soon challenge the dollar’s reserve-currency status…Yet the dollar…remained impervious to economic forecasts. The world’s most important currency continued to be its most sought-after.”
– “How could this be?” The dollar-bears wondered. “How could the dollar NOT go down,” they asked themselves over and over…and then it happened. The greenback tumbled nearly 18% against the euro last year and nearly 25% against the ancient money known as gold. And now, in the early days of 2003, the currency James Grant calls the “Coca-cola of monetary brands” is still rapidly losing its fizz.
– Accelerating the dollar’s decline is a Federal Reserve that is all-too-eager to “stimulate” the economy by debasing the currency. “In so many words, the Federal Reserve pledges not to settle for no inflation,” writes Grant. “It will try and try until it achieves the desired level of debasement.” To the extent the Fed’s mission “succeeds,” the dollar’s value will erode.
– During the late 1990s, foreign capital rushed into U.S. capital markets like married men into a strip club. The titillating promise of enormous profits insured a steady flow of foreign capital, which supported the dollar’s value. “Even when boom turned to bust,” the Economist notes, “America still looked to be a better home for capital than many other, even more lackluster economies.”
– But times have changed. The returns in the U.S. financial markets aren’t what they used to be. What’s more, the stewards of the dollar’s value are not only failing to prevent the barbarian “inflation” from storming the gates, but are inviting the barbarian into the castle for afternoon tea.
– “Some of the dollar’s weakness is also likely to be self- fulfilling,” the Economist winds up. “As investors become convinced that the American currency will depreciate, they will seek an alternative home for their funds. That will, in turn, put further downward pressure on the dollar.”
– Happily, one may still exchange 352 slips of green paper for one ounce of gold…
– “What were bond buyers smoking?” wonders Andrew Kashdan of Apogee Research. “After President Bush announced his $670 billion ‘growth and jobs’ package last Tuesday, the bond market rallied sharply.”
– The bond-buyer “buzz” didn’t last long, however, as the 10-year Treasury note tumbled later in the week, driving its yield up to 4.15% from 4.02% the week before. “Our prediction: more bond market sell-offs ahead,” says Kashdan. “Bush’s plan may or may not deliver growth and jobs, but thanks to a renewed burst of government spending, it is certain to deliver larger deficits. And deficit spending, all else being equal, is certain to boost interest rates for all borrowers. Government deficits tend to ‘crowd out’ private borrowing.
– “The Congressional Budget Office has estimated that the government’s shortfall this year will be $145 billion, not including the latest stimulus plans or a possible war,” Kashdan notes. “But mightn’t the war on terrorism, a possible war in Iraq, homeland security and the various ideas for ‘stimulus’ make this estimate too optimistic? We’d be willing to bet on it…Let’s see, the Fed is willing to inflate at all costs…[and] deficit spending has returned with a vengeance. Taken together, rising interest rates would seem to be the high-probability outcome.” [For more of Kashdan’s insight, see:Apogee Research.]
– Your co-editor does not disagree.
Back in Paris…
*** “Has the mutual fund industry betrayed investors?” asks a FORTUNE headline.
Back in the ’50s and ’60s, John Bogle led the effort to collectivize America’s lumpeninvestoriat. He formed the Vanguard group – now the 2nd largest in the country – and pioneered index funds. No need for stock research…no need to have a stockbroker…no need to know anything about stocks or how they work – just get in an index fund!
The little guys loved it. Bogle thought he was doing investors a favor by inviting them onto Wall Street. Now, come to find out – the mutual fund industry he helped create is taking advantage of them.
What business did Bogle think Wall Street was in, you might wonder? Making money for investors…or making money for itself?
Mutual funds did to their naïve clients just what you’d expect – they churned ’em and burned ’em. Turnover in equity portfolios rose from about 15% in the 50% to over 100% today. Costs averaged about 0.75% of assets in the ’50s; they’re more than twice as much today.
Meanwhile, portfolio managers became celebrities; the little investors thought investing was like voting or choosing a favorite rock & roll band; they chased after the stars as if they were the Grateful Dead.
“Not stars, but comets,” Bogle noticed. No sooner had one become a household word then he would flare out. Top funds one year ended at the bottom the next. Following behind in their day-glo Volkswagens and Jerry Garcia tie-dyed tee- shirts, the lumpeninvestoriat was always a little late to the party. By the time they got there, the beer was all gone!
During the period ’84-2001, according to figures from Dalbar, an investment research firm, the S&P 500 gained 14.5% per year – making it the biggest bull market in history. But the average equity fund investor made just 4.2% per year. And if you carried the calculations through to the end of 2002, the rate of return probably falls below 3% – or less than the inflation rate during that period.
Remarkably, the little guys still believe.
*** Today is Maria’s birthday. At the beginning of her 17th year, she’s getting some serious modeling work. Yesterday, she did some work for a fashion supplement to TIME. Next week, she’ll fly down to Mauritius to pose for a French women’s magazine, Madame Figaro. And then…to New York for the fashion shows in February. What a life!
“Maria, aren’t you afraid you’re falling behind on your schoolwork?” her father asked.
“Look, Dad…I can learn history any time…but I can only do this modeling now…”
And she is right. There is a time for every temptation…more below…