Tyranny of the Here and Now
Having noticed that democracy and popular markets listen only to the living, whilst ignoring the dead, Bill Bonner wonders who will speak for the not-yet-alive?
Today’s newspaper tells us that 86% of the French favor the ‘freedom to die.’
We were surprised. We always looked upon it as an obligation. Sooner or later, we figured, at a time of his own choosing, The Man, would come around and we’d be on his list.
What a tragic moment! We’d lose the ability to refinance our house and the right to vote in national elections. Suddenly, no one would have to listen to our views on the Mid-East peace process, the war against terrorism, or the origin of irregular verbs.
Many are the times we have railed against this injustice. That is the problem with democracy and popular markets, we have pointed out; only the living get to express an opinion. The poor corpses lay mute, still, and lifeless as a senator.
We tried to give them voice, for we were curious. What would the old-timers think of us? We wandered over the cemetery and bent our ear to the ground. We thought we heard the old men wheeze:
The Poor Unborn: Beware!
Beware paper money. Beware foreign wars. Beware expensive stocks. Beware debt. Beware! Beware! Beware!
But who cared what the poor stiffs had to say?
La, la, la, la…live for today, said the breathing ones.
But if the empty husks of the dead are treated as second class citizens, the seeds of the not-yet-living get even worse treatment. The not-yet-born have no lobbyists; no trade group represents them. No PR agents try to spin the news in their direction. No slush funds drip towards friendly politicians. Not only that, while fortunes are spent to keep Democrats and Republicans alive…fortunes are spent with the aim of making sure the unborn stay that way. Much of the two greatest fortunes in the world — that of Bill Gates and Warren Buffett — are already earmarked for ‘population control.’
The poor unborn! No one even stops at a lonely grave on a windy Sunday evening and says an ‘Ave’ for them. And no one imagines that any crisis could be more urgent that the present one…and no opportunity more attractive than the one in front of us right here and now.
The Poor Unborn: Loading up Our Children with Debt
We will spend a fortune on the war against terror — loading up our children with debt — because we can’t imagine that they will face problems of their own…even more dangerous ones. And we will buy stocks today, hardly thinking that our children and grandchildren might find even better stocks at even better prices.
"They are unwilling to bet that future opportunities will arise," wrote Seth Klarman, speaking of his fellow fund managers, "although they acknowledge that existing names could become cheaper. Implicitly investors intend to make room for any future bargains that do arise by selling other investments to make room at that time. This logic causes them to hold even significantly overvalued positions, preferring them to cash."
A wise man, looking at present stock prices, might want to hold back some cash. He might even bury some gold in his back yard…and leave a note to his descendants. Perhaps they will find better places to invest, he might suggest.
But the tyranny of the here and now screams against it. If you have money, spend it…or invest it today. If you have no money, borrow some and spend it. Let the unborn take care of themselves.
How can we resist, dear reader? Today, we give them voice. Today, we speak for the foetus as well as the corpse.
And we come right to point, laying his major grievance right on the table. There was a time, and not so long ago, when a very-young American could look out at the world with a dirty face and a clean slate. He had no money in his pocket…to speak of. But neither did he have to crawl out on the great stage of life with a heavy burden on his back. He could stand up as soon as he was able and howl.
Now, after the biggest boom in American history, the little fellow’s face has been wiped clean by order of the child welfare busy-bodies and upon his back have been piled the largest sack of debt and obligations the world has ever seen. No one — not a Pakistani, not a Pole, not a Peruvian or a Paraguan — enters this life with a sorrier looking ledger. On the left side, his debits surpass the imagination. For there you find a total of $26 trillion in private debt, according to Michael Hodges, or about $90,000 for every tot who makes his way onto this tattered ball. And below that number is an even bigger one. Former Treasury Secretary Paul O’Neill convened a group of economists to compute the actual debts and liabilities — beyond expected revenues — of the U.S. government. The astounding figure they came up with was $44 trillion….or another $130,000 per person. This gives him a total debt figure of about $210,000, growing by at least 5% per year.
Against these liabilities, of course, is the facing page of credits — including, primarily, the value of businesses, capital equipment and real property. Alas, the very same forces that have made America such a paradise for the living…may make it a sort of purgatory for future generations. Existing technology will be obsolescent in a few years. Existing capital equipment will be rusting away. And globalization may have taken American wage rates down closer to levels in rival nations. By the time the unborn realize what has happened to them, the E-Z credit and Dollar Standard system may be already history; the consumer society may find that it has consumed itself.
The Poor Unborn: Ratio of Workers to Retiree
According to The King Report, 350,000 retirees from General Motors are supported by 118,000 workers, half of whom are expected to retire in the next 5 years. As time goes by, the ratio of workers to retiree becomes more and more out-of-whack. By the time a currently not-yet-alive worker takes his place on the assembly line, he will be supporting an impossible number of old lay-abouts. The math is similar, though not so dramatic, for public retirement systems, not only in America, but throughout the developed world.
But who cares about the unborn? If his own parents and grandparents are happy to leave him with a drawer full of unpaid bills, why should we care? And if he cannot pay off the Chinese or the Japanese…what’s it to us?
We don’t know.
But trying to understand it, we found the words of a dead man, Eugen von Bohm-Bawerk, writing before the outbreak of World War I, describing the condition of the Austro-Hungarian empire a few years before it fell apart:
"Our passive trade balance…those theories brought forth to explain the persistently negative trade balance [of the empire] — such as a surge in industrial strength and its attractiveness to foreign investment — do not stand a more profound analysis. These arguments would imply that the ‘passivity’ would be transitory…"
Bohm-Bawerk pointed out that the persist trade deficits, negative trade balance, lack of domestic savings, and ‘wasteful consumption’ had their source in a ‘change of mind’ of the people themselves which reflected a "lack of morality."
"We slithered from surpluses into a phase of easy-hearted and willing expenditures, and we continued to slither even after the surpluses were long gone."
Almost 100 years later, America slithers further and further into a hole of debt and easy-hearted spending. The corpses twist and turn in their dusty boxes and whisper: Beware. The not-yet-alive curse… and weep.
The Daily Reckoning
October 24, 2003 — Paris, France
Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the Wall Street Journal best-seller: "Financial Reckoning Day: Surviving The Soft Depression of The 21st Century" (John Wiley & Sons).
"If we had any guts we’d be selling the techs short," noted a friend yesterday.
Stocks began their bear market rally a year ago. Since then, they’ve recovered roughly half their losses on the Dow.
But the techs on the Nasdaq did even better — doubling and tripling…going right back into wild blue yonder whence they came. Amazon.com now trades near 95 times suspicious earnings. Yahoo’s P/E is 112.
Anything is possible, but it is extremely rare for the leading shares in a stock market bubble to bounce back to their previous highs.
"We know from past bubbles," writes Marc Faber, "that ultimately they don’t end with the prior winning stocks leading us out of the bear market. Rather they end with the laggard stocks from the bubble years being the object of investors’ desire."
"Tech stock rally deflated yesterday," states the New York Post. The headline appeared the day after we (by genius or dumb luck) suggested it was time to ‘sell the techs.’ "Investors worry that the most recent market bubble is ready to burst," continues the Post. Cisco lost 2%. Computer Associates lost 8%. Amazon, that great big river of no returns, lost 9%. Microsoft lost 46 cents per share, after it announced the slowest growth in 3 years.
Most likely, the techs will continue falling until they reach sensible prices or go out of business. Kodak — a great tech company — made its high in the "Nifty-Fifty" bubble of 1968. In real terms, it never again traded at such a high price. And Polaroid…another great tech company — recently went bust, a victim of innovation. It never exceeded it bubble-year price of the early ’70s. That is the problem with new technology; there is always newer technology…and always a price to pay for an excess of enthusiasm.
Investors, buying these tech companies at absurd prices, are practically giving money away. Why not take it? You will be doing God’s own work…dear reader…helping to teach valuable moral lessons to those who need them. You might also be paid well.
Over to Addison with more news:
Addison Wiggin having a look at the days stock news…
– "The world is volatile enough without a loose cannon at the US Treasury," an editorial in the Financial Times. "Bush’s second Treasury chief is also a dud," writes the economist Paul Erdman in CBSMarketWatch. Whatever else may be said of John Snow, his job is as visible as a cheerleaders mid-riff and equally eyeballed.
– Yesterday, Erdmen called him on the carpet for statements made earlier this week: "Here we have the secretary of the Treasury of the United States, who is going to have to borrow a half-trillion dollars a year to cover the nation’s deficit, plus a whole lot more to refinance the enormous debt that’s outstanding, telling us he will b ‘frustrated and concerned it long-term rates do no rise.’ Did anyone tell him that if he gets his wish, the additional interest cost on new government borrowings would be staggering?"
– Indeed. Citing the White House’s own numbers, Dan Denning shows in a report we’ve prepared for our European readers, that a 1% rise in interest rates would add $8.7 billion in interest expenses for the remainder of the 2003 calendar year… $21 billion in 2004… $30.5 billion in 2005… $36.6 billion in 2006… $41.8 billion in 2007… and $47.2 billion in 2008… for a grand total of $154 billion in the next five years. That’s just a one point rise in rates.
– It’s not likely that the Fed will raise rates anytime soon. The financial is been all agog this morning because 4,000 fewer jobless claims were filed this week than last. But the economy will need to ADD a heckuva lot more jobs to the till, before the Fed will consider revising its easy-come-easy-go rate stance. "What matters," Goldman Sachs chief economist William Dudley told the Washington Post, "is not so much the growth rate [of the economy] buy how many jobs it creates. The necessary conditions for the Fed to consider tightening are enough growth to generate 150,000 to 200,000 jobs a month for several months…"
– But that doesn’t mean the market can’t force rates up. Regardless of conventional wisdom, "with its enormous debt," writes Denning, "the US government is a credit risk. Its bonds are no a safe haven. Therefore, the yields must rise. Bondholders must get paid for the risk of owning the assets of a country whose currency is weakening."
– And in light of "the other twin towers" undefined the nations burgeoning fiscal deficit and its historic trade deficit (now gobbling up 1.5% of the world’s GDP!) – Snow’s position on the dollar doesn’t make much sense, anyway. The man publicly states he favors a strong dollar… but wistfully urges China and Japan to allow their currencies to float undefined rise undefined against the dollar; kow-towing no doubt to the political winds at his back.
– "This guy should be fired right away," writes Erdman, "before he does even greater harm to the standing of the United States as the financial powerhouse that the world looks to for economic leadership. The nation’s reputation has already suffered enough as a result of the growing fiasco of our occupation of Iraq."
– With yahoos running amok in Washington, we have been wondering what would happen if foreign investors began seeing the US Government as the banana republic its acting like and downgrade its debt. Yesterday, Mr. Denning treated us to a proprietary indicator – the BED spread undefined which measures the spread between a basket of "risk-free" US government backed debt and a similar basket of the emerging market type. As Denning noted, the spread has been getting thinner.
– Today comes word from Yahoo! Finance that "emerging market bonds are trading at a premium of less than 450 basis points, the narrowest spread in more than five years."
– "Governments from Manila to Mexico city," the article explains, "are moving quickly to take advantage of cheap financing that’s being fueled in large part by loose monetary policy and rock-bottomed interest rates in developed economies." Venezuela, for example, issued $470 million in international bonds last Thursday… the same day that the Philippines offered up $1.05 billion to the bond gods.
– Holders of sovereign Brazilian debt are sitting on total returns of 54% year to date. Investors in the ‘benchmark’ JP Morgan Emerging Markets Bond Index Global, which holds 31 countries in its sites, have enjoyed a 21% gain this year.
– What does Mr. Market think about all this? Nothing, really. Following Wednesday’s route, the Dow gained a skosch… up 14 to 9613. The S&P 500 whispered ahead 3 to close at 1033. Our favorite index, The Nasdaq, slowed its moon-shot trajectory, and slid back 12 to 1885.
Bill Bonner back to Paris…
*** Countrywide Financial, a leading mortgage lender, reported earnings for the 3rd quarter 4 times greater than those of a year ago. The boom — or bubble — in residential real estate continues.
In the Bay Area, according to San Francisco Gate, house sales are running at a 15 year high, with the median house up 8% over the last 12 months to a price of $465,000.
*** "It’s like Ireland," said a friend at dinner last night. "You pay half a million dollars for a small, 3-bedroom ‘detached’ house on the outskirts of Dublin. The place is ugly as sin and it takes you an hour to get to work. It’s crazy. I wonder how much longer this bubble can go on…"
*** Gold fell $1.80 yesterday, coming to rest at $385. That is a long way from our current buying target of $370…and even further from our previous target of $350. But it is still below our next target of $400.
The old prostitute carried her little white lapdog. She was leaving the Paradis café, saying goodbye to friends at the bar.
"Salut," one replied.
"Why do you say, ‘Salut?," she came back. "Why don’t you say ‘Bonjour’.’ I hate ‘Salut."
"What’s the matter with you? You seem to be a bit touchy."
"Well, I don’t know….maybe it’s the weather. I hate standing around in the cold."
"Why don’t you retire?"
"Are you kidding? Then, what would I do? Sit around all day watching television? I’d get bored and drop dead."