Make It Stop!

How much debt are you towing? If your load is anything like America’s – or John Myers’s boat, below – you may want to "lighten up" before it’s too late.

The American economy has no rivals…at least on paper. The nation has a gross domestic product (GDP) over $10 trillion. The next-largest economy is China, with a GDP only half as large. On a per-capita basis, America’s GDP is 8 times larger than China’s and 40% larger than that of the United Kingdom.

You might think that such a powerhouse would be immune to recessions, stock market crashes or currency crises. Yet America faces all three of these risks – risks so real that the Federal Reserve has pegged interest rates at their lowest levels in half a century. The answer to why the central bank has taken such extraordinary measures comes down to one word: DEBT. As powerful as America is, it is towing trillions of dollars of debt.

Towing a Boat: Taking on More Than You Can Chew

Most of us have at some time or another taken on more debt than we can chew. I know I’ve done it. In 1991, my brother and I bought a used cabin cruiser. It cost us less than $20,000, but I thought our old Sea Ray was the most beautiful boat on Lake Pend Oreille, a glacial lake in Idaho with 111 miles of shoreline.

When you buy a boat, you need to tow it to your final destination. I found the perfect vehicle – a Chevrolet Suburban. I told my wife Angela that it made sense to buy it because we could tow the boat to storage in Spokane rather than pay someone else to do it. I even got the optional towing package to prove my point. But the truth is I was smitten by the black 4×4 with its big block V-8 the moment I saw it.

I had witnessed a Suburban plow through three-foot snowdrifts and pull a tractor from a muddy quagmire. I wanted that kind of power for myself, even if I had to borrow to get it. Besides, according to the owner’s manual, the beefy Chevy could safely tow 7,000 pounds. That was roughly the dry weight of our boat.

On a warm autumn weekend Angela and I drove out to Sandpoint, Idaho, to tow the boat back to storage. On paper there shouldn’t have been a problem. However, I forgot to take everything into account. Besides being loaded with personal effects, the boat was carrying a small outboard engine and half a tank of gas. Added up, the boat and its trailer probably weighed close to 10,000 pounds. As we entered onto the highway, it began to feel more like the boat was pushing us than we were pulling it.

The boat trailer was taking up every inch of the lane we were traveling on. I was afraid what could happen if the right tires slipped off the pavement and onto the sandy shoulder.

Suddenly we came upon a sharp turn and my fear came true. The trailer tires slipped onto the shoulder. The boat began to shake us the way a Doberman would shake a gopher. The Suburban was being tossed left and right, across both lanes of the highway. Angela grabbed my right arm and screamed, "Make it stop!"

"I can’t," I yelled back. There wasn’t a thing I could do. As powerful as the Chevy was, it simply wasn’t big enough to handle the weight of the boat.

Luckily, there was no oncoming traffic. I prayed I would slow down enough to regain control. I gently applied the brakes and slowed our speed down to 40 miles per hour. The trailer finally straightened out. It took us awhile, but we made it home.

Towing a Boat: Can America Handle the Load?

As strong as America’s economy is right now, the question remains – is it sturdy enough to handle the massive debt load it is towing? If America is NOT strong enough, then the economy could be whipsawed, facing inflation on one side, deflation on the other. If that happens, I can picture President George W. Bush screaming, "Make it stop!" and Fed Chairman Alan Greenspan yelling back, "I can’t!"

If forced to choose, Greenspan will pick an inflationary spinout rather than a deflationary crash. In fact, the economy might be heading in that direction already.

America’s money supply is growing almost uncontrollably.

Since 1990, the money supply has nearly tripled. This excess of dollars, along with the fact that America continues to pile on even greater debt, has been reflected in the devaluation of the dollar against other major currencies and the rise of commodity prices.

This trend seems entrenched. If it continues, it will mean a major reduction in bond prices and at best a stagnant stock market.


John Myers
for The Daily Reckoning
March 10, 2004

P.S. So what should we do? By investing in real assets, you can protect yourself from the calamity of stagflation. Resource investments are well equipped to handle an inflationary payload. While most investors are happy to ride along, unaware of the risk ahead, the real asset investor is sitting safe, collecting profits rather than risking his neck.

P.P.S. Given the dollar’s entrenched downward trend, you may also want to hedge against continued loss in the value of your dollars. You can learn 7 ways to do this in the Special Reckoning Report my colleagues here at the Daily Reckoning have put together for you:

7 Ways to Sell the Dollar

Editor’s note: John Myers – son of the great goldbug C.V. Myers – is the editor of Outstanding Investments. Our man on the scene in Calgary, John has his fingers on the pulse of natural resource profits – including oil, gas, energy and gold. This essay was adapted from an article in the March edition of Outstanding Investments.

Learn more about John’s latest research by taking a look at his shocking exposé on the advent of the gold dinar:

The New ‘Secret’ Currency

Isn’t modern life wonderful? There is no longer any excuse for relaxing…or thinking…even for a single minute. Palm pilots, laptops, cell phones…wifi…you can always be connected to all the latest misapprehensions…all the time, from almost anywhere.

Here on the Thalys train between Paris, Brussels and Cologne, there are even electric outlets to make sure your devices do not run out of juice. At 7am, we plug in…gaze out the window wistfully…and begin our day…

We went to Edward’s school spectacle last night (More about that below…). We spent much of the time reflecting on the way America’s Baby Boomers are living through an almost complete economic cycle…from cradle to grave…from ashes to ashes…from bust to boom…and back again.

From the ’40s to the ’90s, the world went from one in which things couldn’t get much worse to one in which they couldn’t get much better. In the late ’40s, you could buy an ounce of gold for $35. Today it will cost you more than 10 times as much. And stocks? You could have bought all the Dow stocks for less than you’d pay for a single ounce of gold today. When the boomers were still in diapers, stocks rose hesitantly. Nobody really believed in them. People feared that the Great Depression might return after the war. They bought stocks at 5, 6, 7 times earnings…and considered it risky.

But that was the time to buy. Americans had savings, energy, growth, investment, factories…and they still had the habits, attitudes and prices left over from the depression. America was a screaming BUY! Since the end of the ’40s, stocks have gone up 30 times. Real estate is much more a local phenomenon, but you could hardly go wrong…as long as you didn’t buy in Detroit, Newark, Baltimore, Gary or Donora. Old, heavy industry was the first to go, peaking out before the boomers entered high school.

By the time the boomers entered college, the nation was nearing the top of its first post-war stock market exuberance. Stocks had reached a cyclical peak in which you needed 28 ounces of gold to buy the Dow (currently, it takes about 26). From there, they declined for the next 14 years, to the point where, on the 18th of January of 1980, you could have taken a single gold kruggerand and exchanged it for the entire list of Dow stocks.

While gold and stocks made headlines, who noticed that, year after year, the U.S. economy continued to follow the Baby Boomers’ life cycle? Full of beans in their youth…the boomers revolutionized their economy…from production to consumption, from savings to debt, from the world’s biggest creditor to its debtor, from Detroit to Bentonville, Arkansas. They rebelled against the constraints of parents, priests, took up credit cards, and – with great expectations – proceeded to debauch themselves with debt.

Now in fat middle age, they resist the inevitable. Their jowls and finances both sag – under the weight of excess – and they become delusional: their houses cannot fall in price; their stocks will never go down; they will never die.

Interest rates are loose…looser than they been since the boomers were born. But the economy is tight. People spend more than ever. But jobs and incomes barely budge. It is not at all the same economy they found when nurses first wiped the dew from their eyes and slapped them on their bottoms…It is now a screaming SELL!

Over to you, Addison, for more news…


Addison Wiggin from Paris…

– A woman walked into a Wal-Mart in Covington, Georgia on Monday, rang up $1,675 worth of merchandise, then tried to pay for it with a fake $1 million bill. She was arrested.

– In Hong Kong, that same day, a company that makes toilet paper released news of an IT subsidiary and saw shares skyrocket 94% in one day…(more below…)

– The Nasdaq, one day shy of the four-year anniversary of its peak, closed below the psychologically significant 2,000. On March 10th, 2000, the Nasdaq closed at 5,048…but yesterday, the Nasdaq slid 13 points to close at 1995 – wiping out all of 2004 gains. After four years, the Nasdaq is still 60% below its bubble top.

– Incredibly, out of these three stories…Nasdaq investors actually look like the wisest characters! Yesterday, at least they seem to be recognizing the worthless paper in their hands for what it is.

– On second thought, maybe not. "While companies sell fresh paper [no pun intended]," TrimTabs president Charles Biderman says of the market action in ’04, "insiders bail out [and] individuals fuel the mania."

– "A sharp divergence of views now exists in the stock market casino," Biderman explained in his weekly report on market trends. "The house – companies and the insiders who run them – is selling heavily, while players – individual investors – are buying heavily. Who is correct? We will place our bets on the house."

– "To really keep you up at night," writes Dallas Morning News’ Danielle DiMartino, covering the Biderman release, "margin debt, or borrowing to buy stock, jumped $5.6 billion in January, five times more than the previous month. That means, we’ve made a swift return to 1999, when individuals were not only sinking their last dime into the stock market, they were mortgaging the farm to do it."

– DiMartino points out that even big dogs like GE are recognizing the public fleecing for what it is. On Monday, GE brought its first stock offering to market since 1961…and raised about $3.8 billion. En totale, public companies raised $28 billion in February. For the first two months of 2004, Wall Street has raised more capital from public offerings than in all of 2001 and 2002 combined. Vive le bull!

– Sadly, a quick look at the stock markets and today feels a lot more like early spring 2001 than 1999. The Dow lost 72 points to close at 10,456. The S&P shed six to 1,140. Across the globe, we find the same story: Nikkei down, Hong Kong down, Sydney down…the CAC 40 in Paris, the DAX in Germany, The FTSE in London all down, down, down.

– Perhaps…just maybe…the jobs report on Friday is having a bigger effect on the markets than we had suspected it would. The world’s growth engine, it would seem, just isn’t producing the kind of earnings and incomes one would expect from this stage in a "recovery" – stimulus-led or any other kind.

– The harsh data from Friday’s report keep spewing forth… 400,000 thousand people fell off the back of the government’s unemployment statistics wagon in February. If you bothered to stop the tractor, wheel back, and let them climb aboard the hay bales again, the official unemployment rate would be a staggering 10%. Factories actually laid off 3,000 more people in February. And the report included a downward revision for December and January – the months Fed governors and Labor Dept. officials alike were pointing to as evidence of an ‘improving jobs picture.’ These months now show 23,000 jobs lost…wiping out all but 2,000 of the November gains.

[Ed note: For a closer look at the BLS’s statistics, see John Mauldin’s article on the DR website:

The Bureau of Labor Statistics Magic ]

– Regardless, madness reigns. The Washington Post reported Sunday that the demand for new town homes priced in the $560,000 to $1 million range is so high, people are camping out three and four days ahead of contracts on the homes due to be released by contractors. One nutcase, a network engineer – or do we repeat ourselves – told the Post he was "not prepared" when he showed up at the work site, so he ran to his apartment a few miles away to grab his North Face tent. "I had to run home [again, to get supplies] and pay somebody to stay in my spot…"

– Tent spreads along the historic Old Town are one of the more public manifestations of the "hot" real estate market in Washington, the paper says. Er…three, four days in the mud, workmen and the great unwashed…and you can imagine the smell. If this isn’t the sign of a bubble top for the area, we can’t imagine what God has in store for us.

– "It was amazing," an architect holding the No.9 spot said. "If you didn’t know what was going on, you would have thought, ‘who are these people?’ They didn’t look like people who are qualified to buy million-dollar homes."

– Our gratuitous comment? They probably aren’t.


Bill Bonner, back on the train…

*** Like a warm puppy in a boa constrictor, Baby Boomers made their way through the guts of the American system, and nourished it.

They changed the economy…and businesses, too. Large companies had typically been created by innovators, risk-takers and entrepreneurs. Then, they were taken over by Wall Street’s greedy shareholders, who exploited workers for their own advantage. But when the boomers entered the large intestine of late American capitalism, they turned the system to their own ends. Henceforth, businesses would be run for the benefit of the workers!

While stockholders get measly dividends – under 2% on average – and pray for capital gains, the workers give themselves corporate perks, pensions, golden parachutes, and healthcare plans.

The subject is in the news lately, after it was revealed that Disney CEO Michael Eisner paid himself $285 million since 1996, even as the company stock fell 63%.

Why do capitalists put up with it? Because modern shareholders are not really capitalists…but lumpeninvestors, with no real power, no clue and no hope.

*** We went to a school spectacle last night expecting to be proud of our son Edward and left feeling very proud of his mother. Unexpectedly, Elizabeth played a star role. The whole spectacle was a song and dance routine, recalling a trip the class had taken to an abbey. But, in the accompanying film presentation, Elizabeth appeared, giving the parents’ point of view; she did a fine job. We wouldn’t have known she wasn’t French.

We’re beginning to understand what immigrants to America must have felt like. After nearly 10 years, we still have trouble understanding what is going on. And every time we open our mouths we risk making fools of ourselves.

The work of integrating the family into local life falls mostly upon the wives and mothers. It is they who must figure out the schools and social system. Somehow, Elizabeth seems to have figured it out. She has the kids in good schools…with tutors and after-school activities…and even has the boys in "rallyes" – which seem to be like the cotillions we were never invited to attend in America.

*** How do working mothers do it? How do they manage to keep up with all of the complexities of running a family…and still hold down a regular job? We don’t know.

But one of the great frauds of the Baby Boomer era was that two incomes were better than one. Stay-at-home moms were relics of an earlier, more gracious, era that the Baby Boomers rebelled against. Women should go out into the world, they said – and pretend to do important things, just like men. Yes, I could have stayed at home baking cookies, explained Hilary Clinton famously, but it was much more fun making a mess of the entire world!

As Marc Faber explained last week, two-income, Baby Boomer families are not really better off financially. Surprisingly, they are now declaring bankruptcy faster than everyone else. What goes wrong is obvious. Nobody saves anything. Nobody has any cash. Nobody has food or fuel stockpiled. Everything is ‘just in time,’ and not a minute sooner. Every line of credit is maxed out. Every budget is stretched. But at least a family with a non-working spouse holds a little labor in reserve. If the main breadwinner gets drunk and insults his boss, the distaff side of the house can help fill in the gap until the big lunk gets back on his feet.

*** As Addison writes above, the latest Asian stock story just doesn’t smell right. Colleague Porter Stansberry sends details:

"Guys…you won’t believe this one…here’s the report:

"’Previously known just as a Hong Kong-based maker of toilet paper, this company has attracted the interest of the momentum crowd after last week announcing plans to acquire a China-based company in the information technology sector as a new business unit. While there were few details associated with the announcement, the stock has enjoyed a 125% advance since issuing the press release. Today, DFCT shares have rallied 94% on enormous volume of 30.6mn shares (25x avg).’

"A Chinese maker of toilet paper is up nearly 100% on the day…because it is launching an I.T. [information technology] subsidiary.

"Toilet paper…seems an adequate description of the shares

The Daily Reckoning