Monetary Makeover

The Daily Reckoning Weekend Edition
September 25-26, 2004
Baltimore, Maryland
By Addison Wiggin and Tom Dyson

"There is virtually no intelligent economic discussion in the U.S. today!"

"In the ’80s," remembers Dr. Kurt Richebächer, "it was different. Economists debated the merits of "cost-push economics" and the Supply Side theory. Those days are gone."

Dr. Richebächer will turn 86 this month. Most of his contemporary economic thinkers – the ones who learned, cared about and argued over economic theory – are gone. And with them, the days when altruistic economists drove economic debate. Today’s meager fare we call economic discussion is nothing more than hot air designed to sell products. And today’s economist – he’s more like a salesman – he’s paid by Wall St. to produce hot air.

And now that the U.S. economy is so dependent on the stock market, America’s purse strings have become tightly wound around Wall Street’s fat little finger. The investment banks and brokerage houses pay the wages, so it’s no real surprise economic reporting remains almost uniformly optimistic and modern economists are but mere shills for big sales departments.

But not Dr. Richebächer. From his digs in southern France, he can afford the luxury of independence…

So we sent International Man, Thom Hickling, on a special Daily Reckoning mission to Cannes with a video recorder and a microphone.

"According to Dr. R.," writes Thom in his latest correspondence with the Baltimore HQ, "the U.S.A. and China are the two most imbalanced economies in the world: The U.S. with its credit and consumption bubble, and China, with its extreme levels of over-investment. Both are on the path to mutual economic destruction, because when Americans can no longer afford to consume, the Chinese will also go broke."

"The world economy is at a more critical juncture today than in 2000 when the tech bubble crashed. Then the U.S. economy was flush with cash from the boom. It cushioned the storm that followed. Now economic indicators show great weakness, but there is no cushion left to ease the fall. Monetary stimulus has little room to move. Deficit spending by the government is tapped out. Consumers have over-borrowed and there is no wage growth. The refinancing boom is over."

Did he say ‘refinancing boom?’

We’re sure Dr. R didn’t miss this week’s big news: "A government regulator accused top executives of the mortgage giant of mismanagement and serious accounting misdeeds!" says AP.

"Regulators at the Office of Federal Housing Enterprise Oversight who investigated Fannie Mae’s books said the problems they found, at least in a key area of accounting, were more serious, far more complex and wider in scope than those at rival Freddie Mac – which was fined a record $125 million in a settlement with the agency."

Fannie’s stock opened the week over $77, but by Friday, had crumbled down to $65.51 for a loss of 15%.

Oil compounded Wall Street’s misery by bursting higher. The goo tacked on $3.29 from last week’s close to reach $48.88 late Friday. That’s 73% higher than a year ago.

And how did stocks react? They fell of course, distinctly. The Dow succumbed to a 237-point drubbing, washing up at 10,047 for a loss of 2.3%. The Nasdaq lost 31 to 1,879 and the S&P sputtered too. It coughed up 19 points to 1,110.

Gold floated gently higher, coming to rest at $407.6 on Friday afternoon. It closed the previous week at $405.4 per ounce.

In the currency markets, the dollar/yen rate moved in the dollar’s favor by about 0.8 yen to 110.79. And against the euro, the dollar gained almost one cent, moving 97 points to 1.2272 from 1.2175.

"The Brits having dinner next to us with their daughter – who was in town with an international yacht company for the Festival de la Plaisance (pleasure – meaning pleasure boating) – remarked to us that the yacht business is great and that the economic news from the U.S. was even rosier," Thom’s report continued: "Great news to them."

"There are $60 million yachts for sale. Some rent for $250,000 euro a week. These guys need the rich showoffs of the world to stay rich and keep showing off. But to Richebächer, it was simply economic nonsense…short-sighted extrapolation of current trends."

"And talking of showoffs, yesterday, while eating dessert (raspberries and ice cream) at Plage d’Ordine, Dr. Richebächer’s favorite restaurant in Cannes, a cute girl decided to sunbathe topless near our table. That’s something you don’t normally see while discussing trade deficits."

"C’est la vie de France!"


Tom Dyson
The Daily Reckoning
September 25, 2004

P.S. He actually has the gall to call it a money making machine!

And last week, he couldn’t stop rubbing our noses in the fact that, of his last 13 recommended trades, 12 were winners!

But James Boric gets away with it, and this is why:

48.8% profits in two weeks…
50% profits in 5 days…
23.4% profits in 12 days…
62.1% profits in less than 24 hours…
37.5% profits in 7 days…
45% profits in less than 8 hours…
40% profits in a single day.

Hard to believe, but true.

— Daily Reckoning Book Of The Week —

Greenspan: The Man behind the Money by Justin Martin

Tom Dyson read this book because he wanted to know where long-term Treasury rates were headed. He thinks betting in the bond market is betting on the Fed. That’s because Fed policy will probably determine when we eventually slide into deflation.

And if you knew the answer to the inflation/deflation puzzle, you could predict the remaining macro trends with precision and ease.

What did he glean? A short position in the 30-year Treasury market…and he loved the book.



"…But wages are not rising as fast as prices, which means that people buy less with their static paychecks, which means that factories sell less, which means that factories produce less, which means they don’t need as many workers, which means that there is a glut of labor, which means that wages are not increasing…"


"…Without the world’s oil tanker fleet, the global economy would come to a standstill. And for the first time, the stock market is about to take notice…"


"…Like in a casino or lottery, some players who are particularly skilful or lucky will leave with huge profits, while the majority will end up with losses. I suppose that, eventually, even the casino will lose money…"


"…Evidence is rampant that financial markets remain in their own levitated world. Sure, like most services, the financial sector grows faster than the overall economy. As U.S. business expands, financial services become more widespread and more complex and make up an increasing share of economic activity…"


"…But never was there a problem under the bright sun of America 2004 that didn’t have some sort of fraud creeping in the shadows of its debt bubble. Reading about Ms. Naughton, economists are likely to see a threat…"



The Monetary Economics of Thurston Howell III
by B.K.Marcus

"…In early episodes, we see Mr. Howell hiring various services from other castaways. We eventually learn he’s been writing checks on a mainland (and therefore inaccessible) bank. This works while the group consider their condition temporary, but the checks are quickly devalued and eliminated when the castaways begin to prepare for the possibility of an indefinite stay on the island…"