Must Have Done Something Right
Nothing comes from nothing
Nothing ever could
So somewhere in my youth or childhood
I must have done something goodFrom the Sound of MusicToday, I wonder what it is that Americans have done so that they might be showered with such blessings as we now enjoy. Employment so full that there is scarcely room for a layabout. Even the most shiftless and dysfunctional personality is being lured into the job market. Promises of sign-up bonuses, options, free pizza and Coke, gymnasia — hardly an illiterate or felon could resist. Street corners in bad neighborhoods, so recently guarded and befriended by winos and the unemployable, will have to fend for themselves.
Kathie Peddicord, who visited this week, told me of her travails trying to locate someone for the best job in the world — traveling around the world and writing about it. She also seeks correspondents willing to live and write in the places she’s identified as the most desirable in the world. But even the appeal of paradise is not enough. (Readers interested in applying should contact Kathie directly at firstname.lastname@example.org)
But it is not only the employment picture that is rosy. The whole gallery of everyday economic life is tinted rose. Inflation is low. Productivity is high. GDP is growing. Crime is shrinking. Life expectancy is increasing. And the streets of Paris are jammed with American tourists spending dollars that are near the peak of their purchasing power. Just about everything, if you ignore politics, is swell.
Just how did this come about? Is it real? Not wishing to make it too easy for you, I pose an additional question: when will it end? And how?
May 19, 2000 — that may turn out to be the answer to one of those questions. That date may mark the beginning of the “end of greatness” — as I will explain.
I was intrigued by an editorial in the “International Herald Tribune,” written by a director of Tudor Investment, Robert Dugger. “From the 1950s onward,” Dugger writes, “Americans encouraged European and Asian economic progress by making themselves the consumers of last resort. Shopping, to put it bluntly, was an important aspect of the American strategy to counter communist advances beyond the Iron and Bamboo Curtains.”
For the last 50 years, Americans have been doing something good. We have been buying what the world produced. The post-war economies of Europe, and even more so, Japan, were helped not by U.S. interference, nor by U.S. beneficence — foreign aid is mostly harmful — but by Americans’ willingness to consume rather than save.
And since we have had the benefit of the world’s leading currency — the world’s reserve currency — we enjoyed the ability to consume more than we produced for long periods of time. That was the story of the 1960s — which I recounted here yesterday. It is also the story of the 1990s.
The `60s story ended badly. After de Gaulle caught on to the fact that the United States could print as many dollars as it wanted…the rest of the world soon caught on, too. Foreign nations took advantage of their ability to redeem dollars for gold — until so much gold was leaving the country that Richard Nixon felt it necessary to “close the gold window.”
The dollar fell and the price of imports rose. Dollars were dumped. Inflation rose sharply. And by the Carter Administration, the rose-colored tint on U.S. economic and financial affairs had been replaced by a somber gray.
Could that pattern repeat itself?
You may recall my quote from yesterday: “The strong dollar is the only thing left underpinning a wildly over- priced stock market.”
The strong dollar is the only thing left because all the other underpinnings have been knocked down.Richard Russell describes this process as the “Top Out Parade”:
Daily new highs topped out on Oct. 3, 1997 Advance/Decline ratio topped out on April 3, 1998 Transportation stocks topped out on May 12, 1999 NYSE Financial Average hit its peak the next day Utilities registered their high on the 16th of June 1999 NYSE composite topped out a month later The Dow itself hit a high of 11,722 on Jan. 14, 2000 The Nasdaq peaked on March 10 at 5,048 The S&P topped out on the 24th of March at 1,527
What’s left? The dollar.
The value of the dollar is, it turns out, tightly linked to U.S. financial assets.
Traditional models of economic progress required some form of sacrifice to get ahead. People had to work extra hard or save their money and invest it. But, in recent years, Americans have benefited from a virtual paradise – – in which consumption appears to make us rich.
Here’s how it works: On world markets, Americans continue to buy much more than they sell. As the bull market morphed into a bubble market, the current account deficit (which measures the difference between how much we sell overseas and how much we buy) rose from a big number to a grotesque one. It is currently more than $2,000 per family per year.
This money does not disappear. It ends up in foreign hands — in Euroland, for example, where $200 billion now rests. But the Eurolanders and Japanese have a habit of saving rather than spending. So instead of buying U.S. goods and services — they invest the money in U.S. stocks and bonds.
The money comes back. But not as earnings or profits. It comes back as capital investment — which pushes up U.S. asset prices. Our stocks and bonds go up. We are richer. We have suffered no pain; but we seem to have realized a gain. We must have done something good.
And here is the important point: as long as U.S. asset prices were rising, the foreigners were happy to send their money to Wall Street. But all the major indexes are now falling. A bet on U.S. investment assets is no longer a sure thing.
But there is still the dollar. As long as the dollar was rising, even if the markets themselves were no longer going up, U.S. asset investments still looked pretty good. Even a bond paying 6% was attractive if you also got another 10% gain in the currency markets.
If the markets fall — the dollar will fall, too. If the dollar falls — the market will fall, too. If both fall – – ooh la la.
The dollar hit a cyclical high on May 19. Since then, the dollar index is down 7%. The euro — considered a hopeless currency just two weeks ago — has risen in 15 of the last 16 trading sessions. Yesterday, after the European Central bank raised key short-term rates, the euro rose to 97 cents, before falling back to 95.
Euroland, by the way, is running a $50 billion current account surplus, compared to America’s $400 billion deficit. Inflation is 2% in Europe, compared to 3.7% in America, the highest inflation rate among industrialized nations.
“The risk that we regard as paramount,” writes Dr. Kurt Richebacher, “is the one that is most neglected…a plunging dollar… Confidence in a strong dollar has played a crucial role in fostering the conditions for the stock market bubble and the bubble economy. A savage bear market in stocks implies a savage bear market in the dollar.”
It is too early to say that the dollar has definitely joined the “Top Out Parade.” But it is getting its sneakers on. The end is near.
Best wishes for a nice Pentecost weekend.
Paris, France June 9, 2000
*** I continue to watch as the Dow balances itself at the 50% retracement level — that is, halfway back from its losses after hitting an all-time high of 11,722 on Jan. 14 of this year.
*** Yesterday, the Dow once again fell below the halfway point — 10,759. In fact, it closed a big 89 points below. The seesaw game may or may not be over. But right now the Dow is pointing to more losses ahead.
*** As reported yesterday, there have been four rallies since the Dow fell below 10,000. Each one has been weaker than the previous one.
*** The rallies signal the obstinate optimism built into the market after nearly 20 years of rising prices. But the fact that the rallies fail to carry the Dow to higher levels signals that the bull market — at least for now – – is over.
*** This residual optimism lasts a long time. For many years after the Tokyo market crashed in 1989, investors remained bullish. Each rally was a signal, to them, of a new bull phase. Of course, things just got worse and worse. A similar pattern took place in the gold market. After the highs of 1978, bullishness among the “goldbugs” lingered in the air, like the smell of a bum in a subway car, for many years after. The goldbugs are a nearly extinct species now. But there are still a few bulls on Japan left.
*** A Bloomberg survey plumbed the depths of today’s optimism. It found that more than 75% of respondents thought the economy would remain at least as good in the months ahead as it is now — or get better; 61% expected continued Fed rate hikes. And 56% said they lived from paycheck to paycheck with no savings.
*** The Nasdaq fell, too, but only by a trifling 13 points.
*** And more stocks fell than rose — 1,589 to 1,332. There were about the same number of new highs and new lows.
*** Oil fell. And gold, too. Gold dropped $3.20.
*** The big news today will be the release of the latest PPI data. If the number is good — meaning the producers are paying lower-than-expected prices — the amateurs will buy, and it could be another “big day” on Wall Street. If the number is bad — indicating more inflation than thought — it could be a very big day in the other direction.
*** I don’t know if it will be a good number or a bad one. Goldman’s commodity index is up 10.5%. Oil is up 13.8%. The ingredients are there for a bad number. But throw in a little hedonic hocus-pocus, and who knows?
*** But I do know that the risk is on the downside. After four stalled rallies…each weaker than the last…the stage is set for a Big Bad Bear day. We’ll see.
*** Another thing that is very worrisome is the dollar. Japan’s economy is growing — the news came out last night. But it isn’t growing as fast as expected. “I had expected the dollar to climb more on the news,” said Tetsuya Takahashi, a raw fish eater at the Bank of America. But the dollar was a disappointment. Look for bigger disappointments ahead…an issue I take up below…
*** Either as a measure of the foolish optimism in the market…or the short interest…MicroStrategy has doubled in the last four days. This is the company whose chairman, Michael Saylor, has lofty ambitions for the Internet. He aims to make information flow like water…and to flood the arid fields of our brains. Sell.
*** Meanwhile, Microsoft fell $1.50. It’s now down 50% from its high. Investors are being told “not to worry.” Stocks always come back. There is short-term volatility, chant the bubblemeisters, but no long-term risk.
*** Markets are cyclical. Eventually, this level of bullishness may recur. But there is no guarantee that any individual stock will come back. Maybe Microsoft will come back. But how about MicroStrategy with its delusional chairman or the flaky dot-coms that are currently running out of money?
*** You will recall that President Putin of Russia has proposed a 13% flat tax. The measure has been passed by the Duma, but not yet by the upper chamber. If enacted, Russia will have one of the lowest tax rates in the world…and by that measure at least be a far freer country than the United States. How things change.
*** Having been a tobacco farmer in my youth, I sympathize with anyone who has to earn his living growing the plant. So I have followed events in Zimbabwe with some interest, where “Comrade Bob” Mugabe’s openly racist government is stealing the land of the white tobacco farmers in order to hand it over to his political supporters. Mugabe said on Wednesday that if he didn’t take all the land, it would be because of “our own charity.”
*** Speaking of Africa, Doug Casey has found some unique investment opportunities there. See “Into the Heart of Darkness”
*** I am getting ready for another long weekend. Let the heathen roar — we’re celebrating Pentecost. Few of those taking the day off on Monday have any idea what Pentecost is — but it is a legal holiday here in France.