Labor Day

“The wheels of fortune turn against Japan,” a Financial Times headline tells us.

How do you like that FT? Are they on top of the story, or what?

The wheels of fortune began turning against Japan in January of 1990 – 11 years ago. They’ve been turning against Japan for so long that they might be getting close to the end of the track…

But fortune’s wheels are just beginning to turn against the U.S.

“U.S. personal savings rate rises to 2-year high,” says another FT headline.

Meanwhile, last Thursday’s figures showed consumer spending slowing down…rising only 1/5 as fast as income.

“Well, Kurt,” I posed the question to Dr. Richebacher, who was visiting me this weekend, “what will happen when Americans cut back on spending and begin saving again?”

“The end,” came the response.

Kurt Richebacher is not like most economists. English is not his mother tongue…but he speaks it much more clearly and unequivocally than most economists. He believes he knows what is going on…and he knows what can be done about it: nothing. But more about Dr. Richebacher tomorrow.

For now, let’s turn to Eric’s report from Wall Street.


Eric Fry:

– Is this a bear market or what? Stocks are trading so poorly they remind me of the gold market – or of how the gold market used to be.

– The Nasdaq coughed up almost 6% last week, while the Dow and the S&P 500 shed more than 4% each. For the month of August, the Nasdaq dropped nearly 11%.

– Even while ordinary stocks falter, gold and other resource stocks remain among the year’s best performers. Is Mr. Market just teasing us? Or should we keep selling tech stocks and buying gold stocks?

– One noteworthy vote in favor of gold and other resource investments is the surprisingly robust performance of the Australian economy. Like a house miraculously spared when a fire consumes everything surrounding it, Australia’s resource-heavy economy stands tall amidst the scorched global economic landscape.

– “Almost every sector [in Australia] is looking up,” The Wall Street Journal reports. “Home building is on the rise; consumer spending is strong; corporate profitability is improving. Exports are booming.” What’s its secret?

– “A timely application of fiscal and monetary stimulus and the good fortune to have a weak currency at a useful moment,” guesses the Journal.

– Or maybe, we guess, Australia’s strong performance represents a triumph of the old economy over the new. Australia has always been known as, and still remains, a “resource economy.” In other words, it produces real stuff, not simply “intellectual property.”

– The world always needs “stuff” like oil and aluminum, and yes, Foster’s beer, even if it sometimes loses its appetite for “Web consulting” and “Internet incubating services.”

– Meanwhile, Australia’s Asian neighbors might be on the verge of becoming attractive investment destinations once again. The reason: Wall Street firms are exiting the markets.

– Bloomberg reports that many institutional brokerage firms are closing down or greatly reducing their emerging market equities operations. Could this be a contrary indicator, suggesting that investors should begin tiptoeing into emerging markets stocks?

– “Societe Generale SA closed its emerging market equities business, firing 30 people,” Bloomberg reports. “Credit Suisse First Boston is dismissing as many as 15 traders…BNP Paribas SA is shutting its equities business in Eastern Europe, Middle East and Africa. Credit Agricole is firing 25 people as the bank closes its Brazil brokerage. ABN AMRO Holdings NV and Merrill Lynch are also scaling back.”

– The cut-backs are hardly surprising, given the poor performance of emerging market stocks over the past few years. Since the end of 1996, The IFC Global Regional Composite Index has dropped 21 percent, compared with a 66 percent rise in the S&P 500 Index and 50 percent for the Bloomberg European 500 Index.

– As contrary indicators go, they don’t get much better than this. When brokerage firms – known for hiring at the top and firing at the bottom – exit an entire sector en masse, it’s usually a good idea to take a look.

– Back home in the States, economic silver linings are getting hard to find. “After years of fantastic growth, New York’s housing market is poised for a drop of up to 20%,” Crain’s reports.

– “The first cracks in the market are showing up as sales volume drops, prices plateau and homes take longer to sell…If history is a guide, prices will fall because Wall Street is shedding jobs and income…After the market crashed [in 1987], Wall Street gave up 35,000 positions and the bottom fell out of the real estate market.”

– Predicts John Lonski, chief economist with Moody’s Investors Service in Manhattan, “By the first half of 2002, the real estate market could really begin to feel the effects of layoffs and slower job creation.”


Back to Mr. Bonner:

*** Beautiful day here in Ouzilly. The sun is just peeking in one window of my little office while the moon says farewell from a window on the opposite side.

*** I’m here with colleagues and business associates. Elizabeth and the children went back to Paris – today is the first day of school. The children dreaded it all summer long. Now it is here. Good luck, kids. Bon courage, as they say in France.

Cigarettes and whiskey and wild, wild women

They’ll drive a man crazy, they’ll drive him insane

Traditional song

From the great state of Maryland comes more evidence that cigarettes will make you insane. In fact, tobacco seems to have driven Governor Parris Glendening and the Maryland state legislature stark, raving mad.

I say this after reading a news item sent by a friend.

Gov. Glendening launched a program in the state to encourage idleness among the state’s tobacco farmers. Instead of planting tobacco, hoeing it, fertilizing it, cutting it, spearing it, hanging it, wrapping it, packing it and taking it to market, where they sell it for an average price of about $1 a pound, farmers will now merely get a check from the state of Maryland – for an amount equal to what they would have gotten if they had actually done the work. Henceforth, they will toil not…neither will they spin. Their work is over.

The farmers, faced with the choice of working year- round or not working a single day, for the same amount of money, chose the latter. “Of the 990 farmers eligible for the program,” we learn, “674 have either taken a buyout or applied to receive one next year.”

What about the others? What kind of a numbskull would rather earn his porridge by honest labor – when he could so easily participate in the state’s pilfer program?

The only group with the moral fortitude or stubbornness to keep working has been the Amish. By habit or lunkheadedness, the Amish stay away from government giveaways and modern technology. In August, with both the heat and humidity in Southern Maryland often near the 100 degree mark, the Amish work out in the hot sun – in their dark, traditional clothes. With teams of horses and teams of men, they do the hard work of bringing in the tobacco – just as it has always been done.

For 350 years, Maryland farmers have grown tobacco. The plant has resisted mechanization, so it is grown today in almost the same way it was 350 years ago. The only difference is that tractors pull planters and wagons, instead of horses. But so marginal an improvement is this that the Amish farmers – who eschew the internal combustion engine – are about as productive as the farmers with computer terminals and the latest technology…In fact, since the Amish have no debt, they may be more profitable than other farmers in the area.

Your editor recalls the hard work of growing tobacco. The economy of southern Maryland changed in mid- century just as it did in France. The blacks who worked as field hands disappeared to easier, better paying jobs in the cities. What was left was friends and relatives – called out to help cut tobacco and hang it in the barns.

The mornings were pleasant. For an hour or two, the work seemed easy, when we were still fresh and the sun was barely up. Using something that looks a bit like a machete, we would work our way down a row, cutting down the plants one by one…and laying them down in a row. The plant would “lay” in the sun for a few hours, softening up a bit until we could go down those same rows with a metal spearhead. The spearhead was mounted on the top of a tobacco stick, about 5 feet long, held upright. Then, one by one, the tobacco plants were raised up with our right arms, as we placed the thick end of the stalk on the point of the spear. Using both hands, the stalk was driven down upon the spear onto the stick. The trick, of course, was to avoid spearing your own hand as you forced the stalk down.

After you had five or six tobacco plants on the stick, you would lay the stick down in a pile and move on to the next stick, the next pile, and so on.

By this time, the sun was blazing hot. Everything we had on was drenched with sweat – which ran down our arms and legs, soaking our work boots too.

My cousins, my brother, and I would make a competition of it. We each lined up at the beginning of a row and tried to be the first one to the other end. The game made the work go a little faster and broke the tedium of it. Usually, my brother was the winner. He worked as a blacksmith in those days and had forearms the size of Greek columns.

By 5 or 6 in the evening, we were worn out. If we had planned it right, we would then be loading the tobacco on wagons – hoisting it up, stick by stick. But the work was far from over. The tobacco still had to be hung in the barn – in neat rows, all the way up to the roof.

We would place ourselves on the rafters – each about 6 feet above the next. Then, taking up the tobacco, we passed it from the floor of the barn up, from man to man, to the peak of the roof. By now, the sun was no longer heating up the tin of the roof, so it was not much hotter inside than out. Still, it was the kind of work that made us think of government jobs in air-conditioned buildings.

But I guess it’s all over now.

“So many Maryland tobacco farmers have agreed to a state buyout,” reports a Baltimore Sun article, “that 81 percent of the crop will be gone by next year…”

Maryland officials are hardly alarmed by the disappearance of an entire industry from the state. “We are ending tobacco growing,” said the governor,proudly.

Ending tobacco growing has some popular appeal. People all over the nation seem convinced that the plant is as dangerous as a bureaucrat and as obnoxious as a tort lawyer.

But for hundreds of years people have enjoyed tobacco. Thousands of people die in the state of Maryland every year from tobacco related illnesses, we are told. But no one has ever shown that a cigarette every once in while does any harm. Besides, a few thousand deaths seem a small price to pay for tobacco’s many benefits.

Tobacco has been shown to reduce the incidence of alzheimer’s disease. Smokers are less likely to fall asleep at the wheel of a car. And one report I saw said smokers were more productive on the job. In fact, a colleague told me yesterday that the biggest burden on employers was neither the smokers nor the drinkers, but the eaters. Fat people, in other words, are more of a problem in the workplace than smokers.

And imagine a war without cigarettes. Your buddy might be lying on the ground – shot through by a machine gun round…or his leg torn off by a grenade. With only minutes to live…what do you think he asks for? A granola bar?

Heck no…he wants a smoke.

So what do you tell him?

“Sorry, pal, but this is a smoke-free war.”

But there’s no point in arguing with an extraordinary popular delusion.

And why be a sour-puss about it? Maryland’s tobacco farmers have toiled long enough. Let them sit around…and get fat.

Bill Bonner

The Daily Reckoning