Snow Job, II

is full of strange and curious things; it is home to bouffante hairdos,
the Formstone Preservation Society and other wonders. Filmmaker John
Waters makes the city his home, he says, because it is the tackiest
metropolis in America. He is inspired by it in the way that other
artists are moved to poetry by Paris or Rome.

what caught our eye last night was not art but advertising. A block or
two from the huge billboard with the provocative headline – Who’s the
Father? DNA Paternity Testing… – sits another intriguing sign of the

BANKRUPTCY! Chapter 7 — $50 Chapter 11 — $100

America, in the springtime of the third year of George W. Bush’s rule,
we conclude, bankruptcy has become as popular as weight-loss.

sign is not merely an invitation, but a reproach. Bankruptcy rates are
hitting records despite the best efforts of those who manage the

Bankruptcies: A New Era

his Congressional testimony last week, Alan Greenspan sailed through
his customary delusions – that additional mortgage debt is good for
consumers…that technology has brought a New Era to the economy…and that
modest productivity increases have some exceptional quality as yet

He was cruising
in the wake of John Snow, U.S. Treasury secretary who made the
following remarkable comment to the G7 finance ministers:

United States is not growing fast enough and neither are you, but we
are growing a lot faster than you…We get complaints from our friends
around the world who say, ‘your current account deficit is so high.’
And our response is: ‘Yeah. You know why? Because you don’t buy enough
from us. And because we provide the highest risk- adjusted returns on
capital in the world, so your capital flows over here. So why don’t you
take steps to improve your domestic economy so you’ll be stronger and
buy more from us? And you might think as well about steps to improve
return on invested capital, and then capital would flow your way as
well as to the United States.”

fact is,” and the head of the Treasury department may have been tempted
to toss his head back a few degrees as he made this point, “the
American economy is strong. The underpinnings are good.”

yet, on the corner of Charles and Lombard streets, bankruptcy is such a
good business it is worth advertising for new clients.

Bankruptcies: Business Profits Fall

are other signs that the underpinnings of the U.S. economy are not as
good as Mr. Snow thinks. In addition to bankruptcies and unemployment,
business profits as a percentage of GDP have fallen to their lowest
level in about 40 years.

mention of this has been made by either the Treasury secretary or the
Fed chief. And yet, without profits, why would people invest in new
machinery, new ventures, new employees? How could the economy grow? Why
would stocks go up?

question worth asking: what is going on? How is it possible for an
economy to be ‘strong’ with people going broke at a record rate…and
businesses unable to make any money?

And why would profits decline – even as productivity increases and technological marvels proliferate?

Bankruptcies: The Gold Standard

Hearing no answer from the authorities, we offer one ourselves:

Reckoning readers may recall from last week that the world’s central
banks’ reserves increased only 55% in the last 20 years of the Bretton
Woods/Gold Standard period – ’49 – ’69. But then, the Gold Standard was
replaced by the Dollar Standard. Dollars being easier to replicate than
bars of gold, central bank reserves rose 2000% in the next 33 years.

kind of money was bound to tempt people; all over the world bankers,
consumers and investors gave way to an orgy of credit excess like
looters at a liquor warehouse. Soon, they were all drenched in the

The Nixon
Administration put a final end to the Bretton Woods/Gold Standard in
1971. Four years later, stocks bottomed out in America and the Great
Boom began.

Trillions of
dollars sloshed around the world, creating booms…and then busts.
Japanese companies – selling to Americans – were the first ones to get
soaked. Then, Japanese share prices sprouted…followed by kudzu-like
growth in Japanese real estate…and bonds. Then, other Asian nations
boomed – and busted. And then, it was America’s turn. Stocks had begun
to pullulate in the late ’70s…by the late ’90s they burst into
spectacular, intoxicating full flower…succeeded, as in Japan, by real
estate and bonds. Since 2000, U.S. stocks have wilted somewhat, but the
heady growth in real estate and bonds continues.

had what appeared to be a big advantage; they were the ones who got to
create ‘money…out of thin air.’ But there was a price to be paid for
being so close to the source of such stimulating libations; Americans
dipped their cups in more deeply than anyone. And while they drank, the
source of their wealth slipped away.

Bankruptcies: Consume Less Than You Produce

generations it has been an economic truism and a matter of simple
common sense,” begins Dr. Kurt Richebächer, “that in essence, a person
or a nation can only become richer if it consumes less than it

America produced and exported was cash and credit. Trillions of
dollars’ worth. Foreigners produced cars, televisions, food, vacations
– anything and everything that they could trade for dollars. This is
the trade of which Secretary Snow is so proud. It has resulted in a
mountain of empty containers at U.S. ports (they come in loaded…they do
not leave, because America has little to export, except money) and
mountains of dollars piled up overseas.

treasury secretary seemed not to notice it, but it also ruined the
profitability of U.S. businesses, stifled real incomes of American
workers and pushed millions of jobs overseas. American businesses pay
their workers in dollars. Normally, they could expect the money to come
back to them – as the employees spent it on the goods they produced.
Instead, it goes into the hands of foreign producers, who do overseas
what might have otherwise been done at home – build factories, hire
workers and make profits.

what did they do with their profits? As Mr. Snow tells us, they bought
U.S. dollar assets – thus enabling Americans to keep buying. In the
late ’90s, they bought stocks. Recently, especially for the Japanese,
the buying has shifted to U.S. bonds.

the effects of so much apparent prosperity continue to splash here and
there, the world begins to wonder about the source of it. The dollar
has lost 31% of its value against the euro in the last 18 months.
Against gold, it has lost a similar amount. Has the Great Boom of the
last quarter century already turned into a Great Bust?

George Soros told CNBC recently that he had sold the dollar and bought gold. Other investors might be wise to do the same.

Bill Bonner
May 30, 2003


“This Recovery Feels Like a Recession,” says a headline in the Wall Street Journal yesterday.

a million jobs have been lost so far this year. More than two million
since the slump began two years ago. There are now five times as many
people out of work as there are in jail. And yesterday’s news brought
word that another 424,000 filed unemployment claims last week.

Wanted ads continued to decline. And various industries, as well as
state and local government, say they are planning more layoffs.

Stock market investors may be hoping for a greater fool, but the fools may be running out of money.

prices may not be in a bubble (more from Eric, below)…but refinancing
houses definitely is. The chart of refi activity, 2003, looks like the
Nasdaq, 1999. Only more absurd.

does the money go? Mr. Greenspan says he has evidence that consumers
are using the low-interest mortgage debt to pay off other debt. Still,
many cannot resist “taking out” a few dollars’ worth of “trapped
equity” and spending it. And yet, retail sales…and auto sales…are soft.

Debt just doesn’t seem to titillate the economy the way it once did. More below…

Eric, could we have your report, please…


Eric Fry, checking in from New York… 

“If the stock market closes up, I’m going to jump out the f***ing
window!” a frustrated trader volunteered to your New York editor
yesterday, while pacing nervously back and forth in our offices. “I’ve
been reading and studying and analyzing…and for what? To get blown up
by the market?”

– The
trader, who is a friend of mine despite his frequent use of the
“F-word,” and who has been trading options successfully for more than
three decades, is currently “short the market” in anticipation of an
imminent selloff.

Yesterday, afternoon, he got his wish, or at least the part of it. The
Dow dropped 82 points to 8,711, although the Nasdaq gained 12 points to

– Moments after
promising to jump out the window (which, by the way is 26 stories above
the pavement below), the trader scurried back into my office and said,
“Hey, I’ve got a trade for you…You see how quickly I bounce back!…Sell
Hovnanian Enterprises [NYSE: HOV]. The stock spiked higher on the
opening, and that was it. The thing’s been reversing off the opening
high all day…All these homebuilders look the same. The group is
monolithic. They all look like shorts!…My guess is that if you short
’em right here you won’t lose too much money,” he said with a wry
smile. “How’s that for a ringing endorsement?”

We here at the Daily Reckoning do not know whether the homebuilding
stocks are better bought or sold. We do know, however, that many
unsuccessful short-sellers – like ill- fated infantrymen at Verdun –
have charged into battle against the housing stocks, only to meet with
disaster. (For perspective, the S&P Housing Index, which hit a new
all-time high yesterday, has gained a hefty 38% year-to- date).

We also know that Dr. Steve Sjuggerud, editor of True Wealth, told
those of us assembled at last week’s private Amelia Island investment
conference, “There might be a real estate bubble in some parts of the
country (such as the Northeast and California), but across the country
as a whole, housing prices (after being adjusted for inflation) have
gone almost nowhere in the past 13 years.”

Steve reminded the audience in Amelia – made up of home price skeptics
– to look at the numbers. “In August of 1989 the average home price in
the U.S., adjusted for inflation, was $178,000. And, even more
importantly, the supply of homes is at a 30-year low (just 4.1 months),
according to the U.S. Census Bureau.” [To learn more about Steve’s view
on housing,
click here.]

Meanwhile, the housing market’s best friend, the bond market, gained
ground for the first time in four days, as the yield on the 10-year
treasury note dipped to 3.34% from 3.42% on Wednesday. The bond market
seemed to “catch a bid” when the disappointing news crossed the wires
that weekly initial jobless claims topped 400,000 for the 15th straight
week. In other words, the job market isn’t recovering yet.

Neither is the US dollar. The beleaguered greenback tumbled more than
1% yesterday to $1.189 per euro. For those keeping score at home, the
dollar has dropped 21% against the euro over the last 12 months.

If it is true that “imitation is the highest form of flattery,” we
Americans should be very flattered about what’s happening up in Canada.
Their pension plans are as bad off as ours!

“The underfunding of corporate pensions in Canada has reached an
estimated $225-billion – about one-fifth of Canada’s annual gross
domestic product – according to a joint study for the Association of
Canadian Pension Management,” the National Post reports. “The total
estimated shortfall of $225-billion for the entire pension system would
require 2% of Canada’s GDP each year for the next 15 years to close the
gap…For most companies,” the National Post continues, “this will
represent a serious drag on earnings. And for some, coming up with the
cash to close the funding gap will likely prove impossible.”

– …and that’s a very unflattering position to be in.


Bill Bonner, back in Baltimore…

Another GUDD day. Gold up. Dollar down. Gold shot up to $369.60 (June
contract) yesterday. The dollar fell against the euro. [To learn more
about profiting from the GUDD trend – or simply about investing in
gold, see:

The Case for Gold]

Speaking of house prices…The Economist magazine was right, three years
ago, when it said the U.S. stock prices would collapse. Now it says
house prices are next. Our South African correspondent, Evan Pickworth,
sends this report:

prices in the U.S., the U.K. and four other major economies will drop
‘dramatically’ in the next few years, leading some of those nations to
slip into recession, according to a report by the Economist magazine.

home values in the U.S., Britain, Spain, the Netherlands, Ireland and
Australia have created a ‘property-price bubble,’ the magazine said in
an e-mailed release. It collected data going back to 1975 from sources
including estate agents, lending institutions and government agencies.

all those countries house prices are seriously overvalued,’ said Pam
Woodall, economics editor at the Economist. ‘At some stage in the next
few years, house prices in those countries will fall, and when they do
the consequences will be far nastier than the stock market burst.’

magazine advised homeowners in the six countries identified as having a
‘bubble’ to sell up and rent until prices drop. People considering
buying a home should hold off until prices have fallen,” the magazine

“‘Most homeowners
will have to stick it out and watch their wealth dwindle,’ Woodall
said. ‘Where they went wrong was in expecting double-digit returns to

Economist’s survey also showed that London is the most expensive city
in the world to live in followed by New York and Tokyo.”

We called home yesterday for an update on the family. Maria did an
audition for a theatre school in Paris; the show went well and she was
accepted. Her 2-year modeling career is coming to an end.

was pleased, and perhaps surprised, to find that he had passed into the
next grade in his French school. Despite all his worrying and
grumbling, he actually seemed to do okay.

he has already decided to switch to the American School of Paris
anyway. His father got the bill for tuition just this week; he had to
grab the back of a chair to steady himself.

The Daily Reckoning