Last Oozing Of The Dollar?
All I have to do is read the paper. I feel smarter. Richer. Cooler.
The dollar is my home currency. And every day, it goes up.
With no effort on my part – I feel superior, just as I would if the Orioles won the World Series. And I get richer, too – without working more.
The popular media creates a whole alternative emotional life. I have no control over the dollar’s rise or fall. I don’t even follow the Orioles. Yet if my currency rises, my home team wins or my man gets in the White House – I share in the victory.
I can barely get Jules to take out the trash…but maybe I can boss around the Serbs…as Washington Post columnist Richard Cohen recently suggested. I know it is hard to increase my own income…or save money…but thanks to Mark Malloch Brown on page 10 of today’s International Herald Tribune, I can feel good about myself for supporting a program for “Halving World’s Poor.” (I presume he means halving the number of poor people…not cutting each one in half.)
Through the magic of mob-thinking, I can stand up to terrorists I have never met…and give advice to politicians whose names I can’t pronounce.
The sensation mongers provide a fantasy world. It is complete with friends, heroes, villains, nice guys, the possessed…and hopeless clowns.
George W. Bush kissed Oprah. Isn’t that nice! I think I’ll vote for him.
And, oh…how sad…my favorite lesbian couple, Melissa Etheridge and Julie Cypher announced that they are ending their relationship. I hope it won’t cause too much pain for the kids.
“Our top priority continues to be what is in the best interest of our children,” they said “…our family will always remain intact.” That’s a comfort.
And how ’bout dem O’s? I see they lost yesterday to Oakland.
But the dollar – there’s a winner!
The same rag that brings me up to date on the Orioles includes an editorial by Paul Krugman in which the economist tells us that “the fall of the euro now looks very much like herd behavior. To justify the euro’s current weakness you have to believe not only that America’s ‘new economy’ will keep delivering spectacular growth indefinitely, but that Europe will never experience a comparable surge of its own. And that is just not plausible.”
Will the dollar – that apple in the eye of global investors – ooze juice forever…while the euro is forever dry and barren?
Plausibility is not a requirement for mob thinking. There was, after all, the Michael Jackson wedding…the non- inhaling Chief Executive of the world’s largest economy …the O.J. Simpson trial…Mission Impossible II…the Spice Girls…the balanced budget and saving Social Security.
“The extraordinary weakness of the euro,” writes Krugman, “is possible only because investors, focused on the short term, have stopped thinking about tomorrow…”
As long as the Fed will save the day, there is no need to worry about tomorrow. But that was yesterday’s point. The burden of my letter today is that the euro is oversold – thanks to the fantasyland of collective thinking.
“Euroshambles,” as the cover of the Economist put it, has become a popular slogan. And like all slogans, it is the bastard son of a lie mated with a moron. On Tuesday, I introduced you to one of the parents – the statistical lie of ‘hedonic’ measures; today we meet more of the family.
The very same IHT that gave me the news of the O’s defeat, the breakup of the lesbian couple, and Krugman’s comments also reports on page 13 that the “U.S. Trade Deficit Soars to Record $31.89 Billion.”
Last year, the total increase in America’s GDP was about $500 billion. The trade deficit is about 75-80%% of that number. This represents money that is sent out of the country to buy goods and services…but comes back to buy capital assets. We know it comes back, because if it didn’t the dollar would fall. The rising dollar represents, in effect, an over-funding of the trade deficit.
The trade deficit is just a part of something else – a huge buildup of debt in the U.S. “Credit excesses have many parallels in history,” wrote Dr. Richebacher recently, “but those in the U.S. of the last few years are of such extreme magnitude that they suggest a form of collective, manic euphoria.”
“The crucial measure,” continues Dr. Richebacher, referring to the relationship between the national economy and debt levels, is “the so-called credit-to-GDP ratio. For fully three decades since the end of WWII this ratio has fluctuated very little around 1.4.”
For every dollar of GDP, in other words, the economy carried $1.40 of debt. But debt levels began to increase as the boom of the 80s got underway…slowly at first, and then, in the late 90s, at a spectacular rate.
Today, the total GDP of the U.S. equals about $10 trillion. But debt has risen to $26 trillion. The ratio, 2.6, is almost twice the historical norm…and means that there is about $12 trillion more in debt in the system than there would be if the debt ratio had remained constant.
Where did that $12 trillion go? Of course, a lot of it went to buy the running shoes and videos. Some went to buy new cars…and new houses.
But we know that the GDP has increased only modestly. Consumer spending would show up in the GDP figures. What doesn’t show in the GDP figures is investment spending. And we know the prices of certain assets – conspicuously, dollar-based equities – have skyrocketed.
Could there be, say, trillions of dollars worth of debt capital speculating on in U.S. assets?
In very rough numbers, the S&P currently has a P/E of 29. Its average is around 12. Getting down from 29 to 12 would mean a loss of about 60%. The current capital value of the NYSE and Nasdaq combined is about $16.3 trillion. A 60% loss would be nearly $10 Trillion – not too far from the $12 trillion of extra debt in the system.
In other words, a return to normal debt levels would parallel a return to normal stock prices.
I don’t know when it will happen. But it is implausible to think it will never happen.
Paris, France September 21, 2000… the first day of the Autumn of Anxiety
P.S. This is the first day of Autumn. See Keats’ poem, from which I got today’s title.
By John Keats
Season of mists and mellow fruitfulness,
Close bosom-friend of the maturing sun;
Conspiring with him how to load and bless
With fruit the vines that round the thatch-eaves run;
To bend with apples the mossed cottage-trees,
And fill all fruit with ripeness to the core;
To swell the gourd, and plump the hazel shells
With a sweet kernel; to set budding more,
And still more, later flowers for the bees,
Until they think warm days will never cease,
For Summer has o’er-brimmed their clammy cells.
Who hath not seen thee oft amid thy store?
Sometimes whoever seeks abroad may find
Thee sitting careless on a granary floor,
Thy hair soft-lifted by the winnowing wind;
Or on a half-reaped furrow sound asleep,
Drowsed with the fume of poppies, while thy hook
Spares the next swath and all its twined flowers;
And sometimes like a gleaner thou dost keep
Steady thy laden head across a brook;
Or by a cider-press, with patient look,
Thou watchest the last oozings, hours by hours.
Where are the songs of Spring? Ay, where are they?
Think not of them, thou hast thy music too,-
While barred clouds bloom the soft-dying day,
And touch the stubble-plains with rosy hue;
Then in a wailful choir, the small gnats mourn
Among the river sallows, borne aloft
Or sinking as the light wind lives or dies;
And full-grown lambs loud bleat from hilly bourn;
Hedge-crickets sing; and now with treble soft
The redbreast whistles from a garden-croft,
And gathering swallows twitter in the skies.
*** “There’s a general feeling,” said a hopeful analyst, “that the market is oversold.” That general feeling helped the techs go a bit higher yesterday – but just 31 points on the Nasdaq. The rally looks as though it is losing momentum.
*** The Big Techs still have a long way to go – down. Steve Sjuggerud reminded me that Yahoo has fallen from $250 to $105 over the past year. But it is still trading at more than 200 times earnings. Yahoo is expected to earn 48 cents per share this year, and 59 cents next year. That’s an increase of about 20%. Big deal. At that rate, you’d have to wait 15 years before the CURRENT price is justified by earnings.
*** The Yahoo price probably reached its zenith, Steve believes, when it ceased being an investment and became a popular sensation. The lead character in the movie “Frequency” traveled back in time and urged his friend to buy the shares. If only we could travel back in time!
*** “Let’s face it,” urges an email sales letter for Michael Murphy, “the future – and the real money – is in technology.” The letter continues, promising to tell me “the top 6 tech stocks you must own for 2001.” I want to know. They are sure to be good short-sale candidates.
*** The Dow, meanwhile, was full of short-sale candidates. It fell 101 points.
*** The Advance/Decline ratio continued to slump – indicating widespread damage. There were 1147 advancing stocks on the NYSE, 1648 declining ones.
*** New lows beat new highs almost three to one – with 138 of the former and only 48 of the latter.
*** The Old Economy index was troubled by the Four E’s again. In particular, word came out yesterday that the U.S. trade deficit and the U.S. dollar both hit records. The dollar index hit a new high of 116.14, and the euro shrank to 84.79 cents. The euro has fallen in 8 out of the last 11 trading sessions.
*** And the trade deficit ballooned to 31.89 billion in July. I have been estimating the trade deficit at $1 billion per day. Now, it has surpassed that number.
*** The trade deficit has been widely blamed on the fall of the euro, which hurts sales of U.S. goods in Europe. But Americans have been on a shopping spree all over the world. The U.S. deficit with China is $7.64 billion. It is about the same with Japan. Even with Canada, the U.S. has a $4.75 billion net deficit.
*** Oil hit a 10-year high of $37.80. If oil stays above $30 for the rest of the year, it will mean an average price for the year of more than $28…$9 more than the 10-yr. Average.
*** Both gold and platinum fell $2.90 yesterday. Everyone wants dollars. No one wants gold.
*** “Don’t Fear Baby Boomer Stock Selling” says MIT economics professor James Poterba. One of the cliches of the great bull market has been that the Baby Boomers would buy stocks until about 2010. And then the boom would be over. Now, we find that the boom may indeed last forever. “Warm days will never cease…” See below.
*** Another New England academic, Roger Ibbotson of Yale, says the Dow will reach 110,000 by 2025. He estimated that stocks would rise 12% per year – but not necessarily in a steady line. He also noted that 401k’s, self-managed retirement funds and the Internet, have given people “all the tools and all the information to do radically destructive things with their life savings. With more freedom of choice,” he said, “folks sometimes might make the wrong choices, but on the whole it’s improving our society.”
*** Collective thinking seems to encourage bad choices. Folks made a lot of wrong choices in ’29 too, thanks in part to the encouragement given by another Yale professor, Irving Fisher. In October, 1929, Fisher gave a speech in which he said, in effect, ‘unless there are more crazy people in the markets than I think,’ the boom will continue. It turned out there were a lot more crazy people than he thought. The boom ended the very next day – with the Crash of ’29. How the Great Depression improved society is perhaps a subject for philosophers.
*** Here’s something interesting from Le Figaro. “A pair of Jewish researchers claim to have discovered the hidden meaning of the Bible.” The Book of Exodus has never been confirmed by the records of ancient Egyptian history. But we have the story from the Jewish perspective. From the Egyptian viewpoint, say the researchers, the story tells of the people of Akhet-Aton which was the capital of the first monotheistic pharaoh. These people were exiled to Canaan around 1344 B.C., whence they founded the kingdom of Judea 40 years later.