The End Of Greatness

Amid the fed-watching and Gates-watching…and Anna Kournikova-watching…

Who has time to watch the dollar?

Yet, “the strong dollar,” wrote a correspondent on the SiliconInvestor website yesterday, “is the only thing left underpinning a wildly overpriced stock market.”

And the Bank of International Settlements frets, perhaps prematurely, that the biggest risk to the world’s financial system is “coping with the reversal in the fortunes of the dollar.”

After a flurry of articles about the weakness of the euro – predicting its demise – the euro has done the predictable thing; it has risen. The dollar has fallen. The euro has been climbing a wall of worry for the last week or so. My lunch today will be marginally more expensive than it was yesterday – even if I order exactly the same thing.

Meanwhile, a report in today’s International Herald Tribune informs us that a robotic telescope in Australia has confirmed that even “cosmic structures have a maximum size, a limit called ‘the end of greatness..'”

Could it be that the world’s greatest currency has limits too?

An American, at home in Des Moines or Sun City, has little interest in the foreign exchange value of the dollar. Only when on vacation overseas is he either delighted or annoyed – depending on the circumstances. Delight or annoyance, I should warn you, tend to be cyclical phenomena – not permanent ones.

And yet, for the past few years, the dollar has been so strong and durable that it seemed that it would rise forever. Maybe not against the yen. But the yen is in a class by itself. The bank of Japan is not playing by the same rules. Its officials must not even breathe the same air (they eat raw fish, after all). Even taking interest rates down to zero and running the biggest government deficit in the industrial world does not seem to lower the value of the yen. Instead, the yen also rises. And rises. And rises.

The dollar, meanwhile, does not so much rise as expand. It is America’s number one export. It is the brand of choice for billions of money consumers all over the world – even in places where the local brand is in good competitive shape. Trillions of dollars have been shipped overseas over the past few decades. Not only have they been accepted, they’ve been welcomed like a tourist with a fat wallet.

So welcome has the dollar become that it has encouraged a U.S. current account deficit larger than the world has ever seen. Every day, Sundays and holidays included, about $1 billion more of goods and services is sold to America than America sells to the rest of the world. That $1 billion deficit hole is filled with dollars – one billion of them, to be precise. And the willingness of the world to continue to accept this paper – in return for products of real worth – is both one of the wonders of the modern world…and the subject of today’s letter.

The dollar is, after all, the world’s leading reserve currency. Central banks, corporate treasurers and individual investors throughout the world hold the dollar – instead of, say, gold or euros – as a reserve asset. There is, however, no law that requires them to do so. They might decide one day that they would rather have euros. In a trice – actually at the speed of light – they could convert their dollar holdings into yen or euro positions. Or even gold.

Why don’t they do so?

It is a matter of faith. Like an Internet stock, the actual value of the dollar is a hard thing to figure. How many are in circulation? What is the effect of derivatives? Against what assets is it a liability? What earnings?

Lacking tangibles, the currency markets rely on intangibles – such as confidence, an emotion as subject to ups and downs as an elevator.

Back in 1965, the American economy was nearly as robust as it is today. James Grant, excavates a passage from an issueof Business Week which appeared almost exactly 35 years ago,but which might have been written yesterday:

“Some European central bankers and economists have been watching the U.S. economy with utter amazement, some apprehension, and not a little jealousy.

“By all their rules, the U.S. economy should have started long ago to show the signs of strain that are the inevitable prelude to a bust. Yet despite an expansion that has carried gross national product up a startling 30%…over the past 4 « years, the economy remains generally free from inflationary pressures and imbalances. And the businessmen who run the show fully expect their trouble-free prosperity to continue.

“The underlying factor behind this remarkable performance, so baffling to the European traditionalists, has been a sharp rise in productivity. Measured by output per man- hour, productivity in the private economy has increased at an average annual rate of 3.5% during the past four years, compared with average rates of 2.5% in 1953-57 and 2.7% in 1957-60.”

Bringing the comparison up to date, “in the period from 1961 to 1966,” writes Grant, “output per hour in the nonfarm economy climbed by an average of 3.7% a year vs. 2.3% a year for the period 1995-99.”

Nevertheless, once again, strong productivity is thought to be the source, or perhaps the expression, of the U.S. miracle economy.

Alan Greenspan, to the Senate Banking Committee in February: “It,” he said, referring to the American economy speeding along with the pedal to the metal, “is characterized by a really phenomenal change in technologies which are inducing not only a high rate of growth and productivity but an accelerated, accelerating productivity.”

I have already bored you with the logic and figures behind what Dr. Kurt Richebacher calls the “U.S. productivity hoax.” Using the helium of ‘hedonic’ measures, government number crunchers have managed to balloon GDP output numbers by as much as 700%.

No one knows what the real output or productivity numbers should be. But whatever they are, they are no guarantee against financial decline.

“The Achilles heel of the apparently perfect economy of the early and mid-1960s,” Grant continues, “was the dollar.”

Charles de Gaulle had caught on to the mysteries of a world reserve currency as early as 1965. “[W]hat the United States owes to foreign countries it pays – at least in part – with dollars that it can simply issue if it wants to.”

Then, as now, the US was running a huge current account deficit. Then, as now, Americans were allowed to continue spending more than they earned as long as confidence in the dollar remained strong. Then, as now, the dollar eventually came to “the end of greatness,” and was forced back.

More on this tomorrow…

Your correspondent…still searching for the beginning of greatness…

Bill Bonner

Paris, France June 8, 2000

*** The big news today, screaming from every headline and website, is that Judge Thomas Penfield Jackson has ordered the breakup of the most successful new business in history. Judge Jackson excoriated Microsoft in his judgement for failing to admit that it broke the law.

*** What law? Whom did Bill Gates & co. murder? From whom did they steal? When did they bear false witness? Ah, but it was not the law of Moses nor any provision, big or small, of common law that MSFT transgressed. It was the law writ by politicians and interpreted by bureaucrats – that is to say, the law of fools and knaves – that Judge Jackson applies. Anti-Trust, it is called. A refuge of legal humbuggery if there ever was one.

*** Had Bill Gates been a big contributor to political campaign coffers…and spent his time currying favor in Washington rather than providing the world with useful products…no case would have ever been launched against the company and Judge Jackson might be spending his time locking up people for, say, littering federal highways.

*** The Dow rose back above the critical 50% retracement level of 10,762 again yesterday. Mr. Market seems unable to make up his mind. Or, perhaps he is just toying with investors the way a cat toys with a mouse, before eating it that is.

*** The Dow rose 77 points. The Nasdaq rose 82 points.

*** “The Dow has had four rallies since April, EACH WEAKER THAN THE LAST,” reports Richard Russellin yesterday’s commentary. “The first rally ended on April 11 with the Dow at 11287. The second rally ended on April 25 with the Dow at 11124. The Third rally ended on May 16 with the Dow at 10934. The fourth and most recent rally ended on June 5 with the Dow at 10815.”

*** There are signs that the market wants to go up. For the 7th day in a row, the Advance/Decline ratio has improved. More stocks are going up than down, in other words. Yesterday, 1606 rose on the NYSE. 1296 fell. 60 stocks hit new highs. Only 41 hit new lows.

*** Up or down…one way or another…some day or another…stocks have to find more solid footing. It may be a long, hard, twisted and confused path they use to get there…but until further notice, we are still in a bear market and prices are still going down.

*** Of course, there are some prices that are already so far down they represent decent value. James Grant mentions American Greetings Corp., the #2 greeting card company in the world (after Hallmark). American Greetings is one of the “Old Economy” companies that is thought to be in danger of disappearing under the assault of free Internet services – that not only send out digital greetings for you, but also remember the appropriate occasions.

*** Nevertheless, getting an emailed birthday remembrance is not exactly the same as getting its analog equivalent. Maybe it’s the thought that counts. Or maybe, unlike pornography, anniversaries and weddings are things we are happy to be reminded of through the mail…and we don’t mind displaying the cards on desks and mantels. American Greetings is selling at about 50% of sales, 90% of book value and a P/E of 7.6.

*** Gold gave up some of its recent increases – falling $1.80. Oil, meanwhile, rose 20 cents.

*** According to CNBC, Tax Freedom Day was unofficially May 2nd this year. But for people in the highest brackets it is June 9th. Tomorrow.

*** But it’s all relative. James Davidson: “Someone who graduated from college in 2000 with no net worth, earned $2 million from day trading in Texas during the year, confined his expeditures to $120,000, and then was killed in a traffic accident on New Year’s Eve, would owe an additional $550,000 to the federal government. The total tax take out of $2 million earned – $1,430,000, or 72%. For this fellow, Tax Freedom Day would fall on Tuesday, Sept. 19.”

*** Why do shareholders allow companies to buy back their own shares? Gary North: “A temporary employee — let us call him a CEO — can use the money generated by the company to buy back shares, which increases the CEO’s stock option portfolio almost immediately. Pouring company money back into the company [instead of buying back its own stock] might produce long-term profits for investors, but, as Keynes said. . . .

“The question is, why do investors accept this policy? Because it makes them look smart. ‘I bought 100 shares of Capital Consumption, Inc.,’ [the investor says to himself], ‘and look how well I’ve done.’ I call this the ‘love me, I’m a genius’ syndrome. Investment genius needs confirmation before the next quarterly report”

*** Another hot item in today’s news: Jon Corzine, a Wall Street moneybags, called the “human ATM” by his opponent, won the NJ democratic primary. He did it by spending $137 per vote. That doesn’t seem like much to pay for a vote that could give you permission to take somebody else’s property. But, it’s depressing to think that this spending goes into the GDP along with real products, like haircuts, razor wire and whiskey.

*** Commentators are calling for Campaign Reform. Immodestly, I repeat my reform suggestion: Choose members of congress by chance rather than by fraud. By lottery, that is, as juries are selected.

*** It would cost nothing…nor would political campaigns continue to interrupt the taste and dignity of the regular MTV programming…and the resulting congress would be far more representative of the American people. Not only that, its members would have no incentive to act like potentates rather than citizens. After their terms were up – they’d have to go back to honest jobs.