New Year's Resolutions, Part I
Advice and conviction for the New Year…
"My Administration is making America safer, more prosperous, and better. We are meeting the challenges of our time," says George W. Bush in his end-of-the-year message.
"Our armed forces, joined by our allies, are on the offensive against terrorist enemies around the world. Saddam Hussein is no longer in power and we are hunting down al Qaeda leaders and al Qaeda terrorist cells and bringing them to justice. Fifty million people in Afghanistan and Iraq have been liberated from tyranny and our homeland has been made more secure.
"So people could find work, I proposed an economic stimulus package. Our tax cuts returned money to the people who earned it. They have put it to work in our economy, which is growing again and beginning to generate new jobs, but we won’t rest until everybody who wants to work can find a stable, productive job.
"The country is better off because we passed historic education reforms that will provide all our children a quality education, beginning with teaching every child to read. We took on a tough issue and fulfilled a promise to seniors by providing prescription drug coverage and more choices in a stronger Medicare system."
Flypaper Strategy: Revolting against Fate
Americans, at the beginning of Anno Domini 2004, are a happy and contented race – but in revolt against Fate. The president’s description may not be accurate or prescient, but it is probably not far from what most Americans believe. They have little doubt that they have liberated the desert tribes from tyranny, rather than imposed a tyranny of their own. They do not worry about the softening dollar; they hardly notice it. Nor do the biggest deficits in history, the weightiest debts, or the highest bankruptcy levels seem to bother them; they borrow more and think they are getting rich. They even support the biggest government and fastest growth in bureaucracy since Franklin Roosevelt…and do it in the name of liberty!
Readers of the Daily Reckoning sometimes think they detect an anti-American attitude in these reflections. We deny the charge, but face the facts. At the beginning of the year, we look in the mirror and see sags and wrinkles we would ignore in an Albanian or a Fiji islander. Our amour propre forces us to look more closely at ourselves than at others. We expect more. At least, we hope for more…and are more bitterly disappointed when we turn out no better than other men.
"I think you Americans are making a mistake," began a conversation with a gray-haired Frenchman yesterday. "As I understand it, you’re using a variety of the ‘flypaper’ strategy in Iraq. The idea is to pin down the enemy by attracting him to you where you can control the terms of the fight. There are two great examples of that in French military history. Neither of them turned out very well.
"At the battle of Alésia, for example, Vercingetorix fortified himself in on a hilltop. His idea was to force Caesar to come to him…and while the Romans were facing his troops on the hilltop, they would be encircled and attacked from the rear by other Gallic tribes.
"It almost worked. But Caesar figured it out and brought in the Germans. While the Gauls were surrounding Caesar’s troops, the Germans surrounded them. Caesar won.
"Much more recently, we tried it at Dien Bien Phu. There, as in Iraq, the problem was that the enemy could roam around freely and attack wherever he wanted. We needed to pin him down and force him to fight a conventional battle – which we were sure we could win. So we put our troops down in the valley of Dien Bien Phu, and like George Bush, we invited the communists to ‘bring ’em on.’ Well, they did. We never thought they were capable of rolling up artillery. But they did. And we were sitting ducks.
"Maybe Americans are better than we were. Maybe the mistakes others make don’t bother them. I don’t know…"
Flypaper Strategy: Americans Against the Gods
We will find out. If any trick can be found to cheat Nature or defy the gods…Americans will find it. Otherwise, we will suffer the consequences of their own errors, just as all mortals do.
After the long party of 2003…and the festive years that preceded it…we checked the looking glass on New Year’s day and thought we saw deeper creases…darker eyes…and a palsied shake. Had we been partying too hard? Too long? Looking closer, we think we see 2 strains of delirium tremens in the contemporary American. One is likely to be fatal to his finances. The other may be fatal to his soul.
We chronicled the Great Delirium of the late ’90s in these pages. The end of it came not in a bang of revelation, but in a whimper of self-delusion. All of a sudden, as the 21st century began, the future seemed less sure. Stocks proved they could go down as well as up. The economy itself shrank in the recession of 2001. And then a tiny group of fanatics delivered a stunning and spectacular blow – driving commercial airliners into New York’s Twin Towers.
But these setbacks did nothing to change the current of American sentiment. Instead, they merely increased the jolt. Never before were Americans so sure they were right – about everything. Their army was unbeatable. Their system of government represented not merely a spark of temporary success…but permanent democratic perfection. Nor could they imagine any improvement in their economic model. America has been the ‘engine of growth’ for the entire world. They could not imagine that the little engine would fail.
Americans look in the mirror this New Year’s and like what they see. They think they see superior men, with a superior system…men with such big feet they will not fall into life’s pits and traps…men who know how to get rich and how to run the world. America’s economists and intellectualosos used to admire the Germans – in the ’30s…then, the Japanese in the ’80s…Now, since they have no one to look up to but themselves, they do with double the adoration and three times the fidelity.
"What he knows that isn’t so." That’s the steel-toed boot that really hurts a man, not the soft shoe of what he doesn’t know at all. Americans think they know almost everything they need to know. Hence our advice and New Year’s resolution: Cover your derrières.
At the end of the ’90s, the similarities between Japan and America stood out like two Republicans in a police lineup. The two economies seemed so close to one another, an ambitious prosecutor could have gotten a wrongful conviction. And what difference would it have made; both were frauds.
But in years 1 to 5 following the peak of the Japanese stock market, investors and economists still couldn’t believe it. Japan would soon bounce back, they said. By year 13, they had given up. Japan would never bounce at all, they maintained.
We are now nearing the 4th year of America’s great correction. So gentle has it been that it seems like no correction at all. Indeed, little has been corrected. The errors not only persist, they get worse. The Fed’s flypaper strategy has brought the borrowers out in force and stuck them so deep in debt they may never get out. Consumer spending continues – even through a recession. Deficits get bigger. Speculation replaces investment. Lines of credit replace savings. Jobs get shipped overseas. The dollar falls.
Americans don’t seem to be able to imagine that things could go wrong. They still buy stocks at 30 times earnings, confident – to a fault – that no Dien Bien Phu nor Alésia is in their future.
More to come…
January 2, 2004
Editor’s Note: Bill Bonner is the founder and editor of the Daily Reckoning. He is also the author, with Addison Wiggin, of the NY Times and international best-seller: "Financial Reckoning Day: Surviving The Soft Depression of The 21st Century" (John Wiley & Sons).
It was the best of times…and the worst of times.
We have written so much about 2003 that we bore ourselves with the thought of it. Still, we glance over our shoulder one last time before turning our attention to the years ahead. (Below…)
The great recession/correction/bear market took time off in 2003. There was nothing especially surprising about that; Mr. Bear is a good shepherd. He so loves his sheep, he cannot stand to eat them all at ounce.
The Feds did what Feds do – they made things worse, offering more and cheaper dollars to a world already suffocating in them.
And investors? The poor little lambs thought it must be a kind of Second Coming…a deliverance from all their debt and financial troubles. Jobs were scarce. But houses and mortgage money were plentiful. So what if it made them poorer in the long run? In the long run we’re all dead!
The worst stocks – techs – were full of passionate intensity. While the best could barely keep up with the falling dollar. The greenback ended the year as low as it has ever been against the euro. Compared to British pounds, it is at an 11-year low. Against its Canadian cousin, it has sunk to a 10-year low.
The fall in the dollar knocked down the value of U.S. stocks, real estate, and other assets by 40% over the last two years – roughly costing Americans $10 trillion in 2002 and another $10 trillion in 2003. Real property rose at nearly 10%…but the dollar fell twice as fast. Americans, who measure their wealth in dollars, ended the year deep in the hole. But who bothered to notice?
And thank God for the Chinese. Two heads may be better than one, but even a billion heads cannot seem to figure this one out. While Americans think they can get rich by buying things they can’t pay for, the Chinese think they can do the trick by lending money to their deadbeat customers. Without lending from the central bank of China, interest rates in the U.S. would rise…and the jig would be up. Sooner or later, of course, the Chinese will come to their senses. But by then, who knows what shape the world might be in?
Meanwhile, gold continued to rise as if somebody, somewhere knew something.
And now, surely some clarifying moment is close at hand. Surely, the fix is in…Surely, it can’t go on this way for much longer…
Awaiting ‘The End,’ we turn to Eric Fry for more news…
Eric Fry in the big Apple…
– On New Year’s Eve, your New York correspondent strolled uptown to Central Park to watch the midnight fireworks display. Although less publicized than the frenzied New Year’s fanfare in Times Square, the fireworks display is much more impressive. As one rocket after another flashed across the night sky, your editor recalled Wall Street’s dazzling pyrotechnic display of 2003…Day after day, bursts of buy orders rocketed share prices skyward and elicited "Oohs!" and "Aahhs!" from the adoring lumpeninvestoriat.
– The Dow Jones Industrial Average finished 2003 with a gain of more than 2,000 points, or 25%, while the Standard & Poor’s 500 Index and the small-cap Russell 2000 Index each gained a similar amount. The resurgent Nasdaq Composite Index jumped a breathtaking 50% – returning to the 2,000-level for the first time in almost two years.
– With the benefit of perfect hindsight, the Nasdaq was the right place to be in 2003. But who could have – or would have – predicted that speculative stocks would outpace their blue-chip counterparts? Who would have dared to guess – much less to put money on the idea – that shares of the lowest-quality, most heavily indebted, least viable companies would outshine all others?
– "The greatest appreciation within the Nasdaq 100 was Research In Motion with a jump of more than 412 percent," notes CBSMarketwatch. "The next closest gain was by ATI Technologies, which saw a rise of almost 228 percent." Thanks to racy issues like these, the Nasdaq’s year-end close of 2,003 represented a near-doubling of the index from its bear market low of 1,108 in mid-October of 2002.
– After such a sensational year, the stock market’s biggest problem may be its seeming perfection. Most investors expect the recovering economy to continue recovering and the rallying stock market to continue rallying. But that’s when share prices are most vulnerable to disappointment.
– "One year ago, stocks were in a deep freeze and bonds were as sexy and sizzling as Rio de Janeiro," we noted earlier this week. "Stock market investors were gripped with fear, worried that three years of falling stock prices would become four and fretful that the imminent invasion of Iraq would snuff out our nation’s budding economic recovery…Today, investors find themselves in precisely the opposite situation. Stocks are sizzling and bonds are room temperature, at best. Accordingly, almost everyone expects stocks to rise and bonds to fall.
– "That’s because almost everyone expects the economy to continue growing in 2004, while almost no one worries that the dollar’s decline will become a freefall. We hope that ‘everyone’ is right. But we wouldn’t be surprised to be surprised."
– Unfortunately, stocks tend to fall after they’ve been rising…just like they tend to rise after they’ve been falling…
– "Now that the gruesome 2002 campaign is finally over," we observed in this column one year ago, "it’s time survey the battlefield and tally up the casualties of this financial Little Big Horn. For starters, the Dow fell 17%, the S&P 500 tumbled 24% and the Nasdaq collapsed 32%…And as widely reported, the blue chips dropped for the third straight year – the first time this has happened since 1939-41, back when Alan Greenspan was but a mere lad, day- dreaming about the spectacular bubble he would create some six decades hence. The carnage in the semiconductor sector was particularly horrifying to behold. The Philadelphia SOX Index tumbled 44%, as all 17 stocks in the index declined. Intel, the iconic leader of the SOX Index, collapsed nearly 50% during the year. Will the technology sector’s woes never end?"
– The answer would be "yes," as the Sox Index rebounded 75% in 2003 and Intel shares more than doubled. (Therefore, for those keeping score home, the SOX Index is down only 2% over the last two years, while Intel is ahead 2%. A 2-year CD would have beaten them both.) The Dow also rebounded sprightly from its 2002 malaise. In 2002, only 3 out of 30 Dow stocks ended the year with a gain. But in 2003, 25 out of 30 gained ground, while an amazing 96 of the 100 stocks in the Nasdaq 100 Index of non-financial stocks finished the year in positive territory.
– Clearly, the misery of 2002 spawned the sort of widespread bearishness that enabled share prices to surge last year. What will the ebullience of 2003 produce? We are not optimistic. As noted above, share prices tend to fall after they have been rising for a while…especially when the currency in which they are denominated tumbles 20% per year.
– The ailing dollar, which dropped 18% against the euro in 2002, stumbled another 20% against the European currency in 2003, closing out the year at an all-time record low of $1.26 per euro. Perhaps stocks will fall when – without any advance warning – the lumpeninvestoriat awakens one to the realization that the dollar’s decline is not a "bullish" item…except for the gold price.
– The yellow metal jumped $68 an ounce to $416.10, besting its $66 dollar gain in 2002. "With this year’s [20%] gain and 2002’s 25% jump," Bloomberg News reports, "gold had its biggest two-year rally since 1979 and 1980."
– John Myers, editor of Outstanding Investments, expects the dollar to continue struggling throughout 2004. One year ago, Myers predicted: "The weakening dollar and continued global tension will keep pushing commodity prices higher for a long time to come."
– John’s prescient call – and unwavering bullishness toward gold – made a lot of money for his subscribers last year. So we checked in with him again this year. Says Myers: "A continued meltdown of the buck is almost certain to stir inflation. When that happens – as we expect it will in 2004 – the resource bull market will continue to rumble, while the Wall Street bull market will crumble…Pull up a chair and watch the show." Thanks, John. We will.
Bill Bonner back in rural, forgotten France…
*** The Indian economy is rocking. It grew by 8.4% in the second quarter.
*** In California, house prices rose 17% in 2003. The median house sells for $369,500 – a number that is out-of- reach to 75% of the state’s inhabitants.
*** "Debt today is 360% of GDP," notes Hugh Hendry. "Not just in America, but elsewhere. We’re ill-prepared for a rise in savings. And so he’s done everything to prevent a rise in savings.
"If the Fed succeeds in re-inflation, then the good news is that the Dow is going to be at 10,500…in 2020.
"The other scenario that we can envisage is a situation where it becomes possible that the tail can wag the dog. The stock market today is capitalized at 100% of GDP and debt is 360%. Here we are with the U.S. gross domestic product recently having shown 8.2% growth, a classic economic recovery. But history suggests that if growth continues, then 10-year bond yields will have to go to 6%- 7%. But that debt level – i.e., mortgage refinance-based consumer spending – can’t accommodate such high interest rates. That’s why the Fed keeps saying that it will be putting the short rate up; it’s desperate to control the long rate. This is a bear-market rally."