Marriages of Convenience

Bill Bonner does battle with his most formidable adversary…his wife.

"The rich rule over the poor and the borrower is slave to the lender."

– Proverbs 22:7

It began at the dinner table.

"You’re not telling me that our economy is going down the tubes because we no longer make shoes in New England?"

Some couples argue about the family budget. Others are set off by jealousy or disappointment. But the conversation last night was sharpened neither on the wheel of love nor the stone of money…but trade policy.

In the battle of wits at the dinner table last night, your editor was surprised to find a well-armed woman who sounded like a disciple of Alan Greenspan.

"Let China make all the shoes and radios and cell phones it wants. Who wants manufacturing, anyway? It’s a low-wage, low margin business. We’re much better off evolving to a service economy. What’s wrong with that?"

"Is it important for an economy to have manufacturing?" the Fed chairman asked aloud, just last week. "There is a big dispute on this issue. What is important is that economies create value, and whether value is created by taking raw materials and fabricating them into something consumers want, or value is created by various different services which consumers want, it presumably should not make any significant difference, so far as standards of living are concerned, because the income, the capability to purchase goods is there. If there is no concern about access to foreign producers of manufactured goods, then I think you can argue it does not really matter whether or not you produce them or not."

Marriages of Convenience: Getting What You Deserve

Somehow, the dispute had entered our dining room like an addled chef with a blade in his hand.

Marriages have their ups and downs…their rough patches and smooth highways. When a man who must win every argument marries a woman who cannot bear to lose a single one, he is asking for trouble. He gets it, of course. And if he has God’s light upon him, he enjoys every minute of it.

If you have been suffering through the Daily Reckoning for a while, you may have already guessed our hidden prejudice…our secret Major Premise…dear reader:

It is simple enough: we don’t think people get what they want or intend…but what they deserve. Usually, they get it good and hard.

We do not pretend to know God’s Own Plan for the world…but we think a smart man conducts himself as if He had one. Not for nothing does it say to ‘love thy neighbor (or spouse) as thyself,’ even if he or she is wrong on macro-economic issues. A man loves his wife whether she has read his Daily Reckonings or not. It is simply a part of the Way Things Ought To Be.

It would be more convenient for your editor to be married to a different woman – one with no macro-economic opinions; he could enjoy his evening meals in peace.

Marriages of Convenience: They Fall Apart

But convenient, calculated marriages have their drawbacks; when they become inconvenient, they fall apart.

These are the thoughts that lurked in your editor’s head as he listened to his wife elaborate Alan Greenspan’s case:

"Economies are always evolving…but not everyone has to make shoes. Look at the Swiss, they don’t have to manufacture shoes either. But they are still very wealthy. They offer services, like banking, to the rest of the world."

Your editor had to win the argument. His children, his mother and his mother-in-law were looking on; if he could not put his wife in her place they would lose all respect for him. Still, even when he coated his words in olive oil, he could not seem to squeeze into the conversation.

"Trade anger grows," said a headline from Reuters earlier in the week. And there it was…growing in our own household:

"And you know something else," Elizabeth continued, "you are always saying that things are going to hell in a handcart, but they never do. America has a very dynamic, innovative economy. It will find a way to make money…

Marriages of Convenience: Providing Services

"Besides, you believe in the division of labor…not every country has to make shoes. Some can provide services. Americans can perfectly well specialize in high, value- added services…and movies…music…software…"

If America could produce enough hit songs or software programs to pay its way in the world, your editor countered, the nation wouldn’t have a trade deficit. What’s more, it’s all very well for, say, Singapore or Zurich to specialize in financial services…but not for a nation of 280 million people.

He also pointed out that even in the service industries, Americans have no natural monopoly nor ready advantages. Indians can write software programs as well as Americans. And cheaper. The same globalization trends that have ‘hollowed out’ U.S. manufacturing over the last 30 years might very well do the same to the service industries in the next 30. We read in today’s news, for example, that health care is so good and so cheap in India that Americans are beginning to take advantage of it. Apparently, $300 million is already spent each year by Americans on health care services in India.

"The ranks of American knowledge workers are being systematically thinned by American corporations anxious to outsource offshore, or to temporary visa holders, knowledge work such as information technology and engineering," writes Paul Mendelsohn in a letter to Barron’s. "These jobs are going the way of the blue-collar work of the past 20 years."

Meanwhile, whatever it is that Americans are using to trade for foreign goods and services – they are not making enough of it. About half a trillion is the annual gap…and it’s getting bigger.

Marriages of Convenience: Don’t Worry about It

"Don’t worry about it," says the distaff half of the Bonner couple, "we’ll find something we can sell."

‘Don’t worry about it,’ comes a curious echo from across the Atlantic. Our very own analyst in London described the relationship between America and China in symbiotic terms. It is ‘like a marriage,’ he said, in which the husband works and the wife spends. In other words, we Americans don’t even have to worry about having something to trade; our job is to consume! We are the world’s mouth; that is our role in the world economy. As long as the relationship works for everyone, he concluded, why should we worry about it?

Of course, we do not worry about it. We merely make a prediction: this marriage of convenience will not last, at least not on the same terms.

It is not as if the U.S. gives nothing in return for Chinese support. It bestows its favors on its trading partner at a fixed rate against the yuan…and a floating rate against gold. Two years ago, each dollar the Chinese received in exchange for their labors would buy them 1/260th of an ounce of gold. Today, it buys only about 1/360th. All of a sudden, the marriage of convenience has become 40% less convenient.

America has spread her favors so promiscuously…her dollars are everywhere. Almost anywhere you look, you will find a man who has had his hands on them. How much longer will her lovers stand for it?

We wait to find out.

Bill Bonner

August 08, 2003

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of "Financial Reckoning Day: Surviving The Soft Depression of The 21st Century" (John Wiley & Sons) due out in September.

Thursday’s numbers inspired hope. Retail sales, productivity, unemployment – all looked a little better. A white pigeon flew into Wall Street with a green twig in its mouth. The Dow rose.

After three years at sea, economists, analysts, and commentators think they can see Recovery Island on the horizon. It is merely a speck…barely visible…but it is all they need.

So far, this voyage into the unknown hasn’t been that disagreeable; it has been more like a trip on the Caribbean Princess than on the Niña, the Pinta, or the Santa Maria. Passengers continued to enjoy three solid meals a day, and a rich variety of entertainment by night.

For action lovers, there was the War Against Afghanistan followed by the sequel, the War Against Iraq. Both big hits.

And there were the stand-up comics…Alan Greenspan, Paul O’Neill, John Snow, Ben Bernanke, Abby Cohen, Lou Rukeyser, and Ed Yardeni.

We laughed and laughed.

And now here’s Ed Yardeni with another side-splitter:

"The recent rebound in mergers and acquisition suggest that business managers are starting to think more proactively and positively about the future. If business planners are becoming more optimistic about the future, then the prospects for both the economy and stock market should improve."

Ha. Ha. Get it? The punch line is that if businesses are doing more M&A (rather than actually investing in new plant and equipment or hiring new workers), the economy should improve! Ha…ha…ha. We love this guy.

And so reliable! All it takes is for Ed to say something, and you know the exact opposite has to be true. Of all the major financial trends of the last few years, we can’t think of a single one he hasn’t been wrong about.

And now he’s come through again. Mergers and acquisitions are not a sign of an improving economy…but one that is juiced up on artificially low interest rates.

Marc Faber explains:

"A typical symptom of excessive speculation is a flurry of takeovers and mergers, because a quicker profit can be achieved from such activity than by building up one’s own business through large-scale investments in new manufacturing facilities."

Yardeni and the other entertainers look out from the bow and think they see good things. Of course, they always see good things; and good things always happen after rate cuts, they say. If not after the first, well, certainly after the 13th.

Here at the Daily Reckoning, we think good things always happen, too. We look around and we do not see many good things happening. But that is not what bothers us. What bothers us is the lack of bad things.

Such is the soft, reflexive tissue of the human heart that we need a spell of bad things from time to time, in order to put the good things in the right light. A man who has never seen an ugly woman cannot really appreciate a pretty one; he has no point of reference. Nor can a man who has spent his whole life in America enjoying the pseudo wealth of the Dollar Standard period ever really understand prosperity. He needs to live for a while in Nigeria – or West Virginia – in order to appreciate California.

We make no secret of it, dear reader; we would like to see some bad things happen – say, the Dow at 3,000…P/Es of 8…the dollar down 50%…the bond market wiped out! Then, we could look out at the bulge on the horizon with greater equanimity. After a spell on the tempest-toss’d sea, we would be ready for Recovery Island, and could enjoy it with a clear conscience.

As it is, we quote the title of a recent report from Andrew Smithers and Stephen Wright:

"The Real Bear Market Hasn’t Happened Yet."

We have a suspicion that what awaits across the waves is not low-hanging fruit and bare-breasted maidens, but rocks, reefs, whirlpools, and sandbars.



Eric Fry in the Big Apple…

– The Dow Jones Industrial Average put in a solid 8 hours of work yesterday – in only 6 1/2 hours – by gaining 65 points to 9,126. But the Nasdaq slacked off for the for the fifth straight day, slipping half a point to 1,652.

– The Dow gained its vim and vigor from the various economic reports yesterday suggesting that the economy is improving a bit. For starters, the Labor Department announced that second quarter productivity (whatever that is) rose a hardy 5.7%. Next up, initial jobless claims dropped 3,000 to 390,000 in the latest week, marking the lowest level since Feb. 8.

– Then the Commerce Department chimed in with the news that sales at U.S. wholesalers rose 1.5% in June, while inventories were unchanged. Lastly, the Federal Reserve revealed that consumer debt actually fell last month. It seems that the newly thrifty U.S. consumers reduced their total indebtedness by $400 million in June to $1.76 trillion. Monthly declines in consumer credit are such a rarity that they have occurred only three times in the past five years.

– Meanwhile, the one notable economic item in the negative column was the news that mortgage rates continued their upswing, rising for the seventh straight week. Freddie Mac said the benchmark 30-year mortgage rate hit a national average of 6.34% in the week ending Aug. 8, a 52-week high.

– This new mortgage rate is a whopping 123 basis points above the 5.21% rate prevailing about two months ago. So these new (much) higher rates aren’t going to be any friend to the economy.

– Half a world away, some more good news for the precious metals markets. "One year after a crippling drought, plentiful rains are sweeping across India – and delivering a flood of good news for its economy," the Wall Street Journal reports. "Agriculture still sustains two-thirds of India’s billion-strong population and contributes a quarter of its GDP, which economists predict will expand by as much as 6.5% in the fiscal year ending next March."

– How does India’s seasonal rainfall relate to gold and silver? Just this: since a good monsoon means a strong economy, it also means strong demand for precious metals as a means of safeguarding household savings against the ravages of inflation. Demand also tends to climb this time of year because autumn in India "’tis the season" to buy holiday gifts and wedding presents. (And what newlywed couple wouldn’t want an extra gold ingot or two to see them through the dry years?)

– "Marketers are looking forward to the October and November period immediately after the monsoon," says the Journal. "Packed with traditional holidays, the months are India’s equivalent of the Christmas shopping season in the U.S. and Europe, a time for gift-giving and major purchases."

– We Westerners might consider the Indian affinity for gold to be a quaint anachronism. After all, we financial sophisticates here in the world’s most powerful economy transact our business using the world’s reserve currency. So what use have we of the barbarous relic? None, is the answer…unless, of course, the dollar’s global reign comes to an end.

– "Men and women of the world will accept the existing monetary arrangements for what they are," says James Grant, editor of Grant’s Interest Rate Observer. "They will not waste precious time while the stock market is open trying to dream up improvements. However, practical people most of all will take a lively interest in the art of monetary evolution. They will want to know where the existing system came from and where it might lead to. We believe we have the answers. The international gold standard (1870-1914) begat the gold exchange standard (1922-44), which begat the Bretton Woods demi-semi gold standard (1944-71), which begat the dollar standard (1971 to date). The dollar standard will end in competitive devaluations, international recriminations and worldwide inflation. Timing, uncertain."

– Meanwhile, off in another corner of the global monetary house of cards, the Chinese yuan is busily fortifying itself, in the process becoming an unwilling challenger to dollar hegemony. Economic fundamentals suggest that the yuan ought to be stronger. But China’s eight-year policy of fixing the yuan to the dollar suggests that the giant Asian nation is happy to keep the yuan right where it is, thank you.

– The Bush administration is busily goading the Chinese government to allow its currency to strengthen by widening its trading band against the dollar. And it seems a reasonable bet that the Chinese will accede to such gentle coercion, particularly because the yuan seems, in fact, to be undervalued. When the yuan does finally break free of its artificial restraints, it will likely climb considerably high against the U.S. dollar.

– "I think it’s time to buy Chinese yuan CDs," a stockbroker friend declared to your New York editor recently. "I can’t believe I have to resort to this sort of thing to make a buck for my clients, but I just can’t force myself to dump my clients money into Round II of the tech bubble…Worst case, the yuan seems highly unlikely to fall against the dollar. So buying these things seems like a reasonable speculation to me…"

– We would not argue with the man. But we would point out one relevant bit of disclosure from Everbank, a company that offers yuan-denominated accounts: "Because China is considered an emerging market, investments in its currency are considered HIGH RISK. For example, if the Chinese government were to impose severe exchange controls, then loss of all principal is possible."

– But hey, if you don’t mind the risk of losing all your money, yuan CDs seem like a pretty decent idea.

Or…even easier…you can call 1-800-926-4922 and talk to Chuck Butler or Frank Trotter at the Everbank trading desk. If you do, make sure you tell them Addison says ‘hello’…our publisher may receive compensation if you open an account. Cheers, Addison.]


Bill Bonner, back in Ouzilly…

*** At least, for once, Americans don’t look so stupid. Typically, in the month of August, they stumble through Europe’s most sophisticated city as if they were crossing the Sahara – in shorts, white running shoes, and baseball caps – carrying bottles of water, just in case.

But now, Europe is in the midst of the worst heat wave since 1947. Old people, who can’t take the heat, are checking into graveyards, like tourists into the Holiday Inn. And now, crossing Paris in the midday heat really is a little like crossing the Sahara.

"You’re supposed to drink 3 liters of water a day," said a colleague, passing on advice from the television.

"And a bottle of chilled white wine…" he added.

We decided to reverse the prescription and found it worked quite well. We may have been hot; but we can’t remember.

*** "They laughed at me," added another colleague from the worldwide Daily Reckoning headquarters in the Paris inferno.

"I walked into the store and asked if they had any more fans…they laughed and said there were no fans left in Paris."

A major conceit of the New Economy was that neither businesses nor individuals needed inventories. Whatever you needed, or so they believed, you could get ‘just in time.’

Now, people are discovering that it might have been a good idea to keep a fan in the attic, ‘just in case.’ *** In our inbox, we found a letter from another colleague today: "My dad has been torturing me for weeks about a matter that is all your fault.

He wants to buy some gold…GOLD! Not coins, but nice little bricks of gold. He doesn’t want to pay the extra for the minting….he wants to pay the price you are quoting each day. He wants to go somewhere in Baltimore preferably to buy it. If he can’t do that, is there a reliable place that takes mail order?

"I looked in the Baltimore yellow pages and could only find coins for sale.

"His frustration is that there is never any mention of how to buy the stuff.

"I am presenting this question as something your DR readers may have also asked themselves. It is very intimidating for those not in the know. It’s not something advertised in the SUN or readily available at the local Wal-Mart."

How do you buy gold? The question comes as testament to the investment itself; so out-of-favor is the yellow metal that no brokers call at dinnertime urging them to buy it. And if they choose to buy it without provocation, they are on their own. Such is the charmed state of the nation that in major cities, it is easier to score an ounce of illegal ‘Acapulco Gold’ marijuana than an ounce of the legal variety.

When we buy gold, we buy the bullion coins. They are easy to find…and give a reassuring feel when stacked up in a safe place. We simply call an old friend, Bill Bradford, also the editor of Liberty magazine, and place an order. Bill ships the coins through the mail. No muss, no fuss.

The Daily Reckoning