Throughout history we see heroes. But we don’t know if they were smart, virtuous or just lucky. Bill wonders where Greenspan’s luck will take him…
"Give me lucky generals," Bonaparte used to say. The emperor did not trust skill, or training, or brains. He didn’t really know why some generals won and some seemed to lose. He chose the lucky ones. But on this day, 189 years ago, their luck ran out. Grouchy had not kept the Prussians back. Ney had failed to take Quatre-Bras. D’Erlon never quite got into the fight.
Arthur Wellesley, Duke of Wellington, retired from the battlefield on the 18th of June 1815 as a great hero. He fought the greatest military genius of his time – Napoleon Bonaparte – and won. Never beaten by the French, Wellington then became the head of allied forces occupying France. He was generous, organizing loans to the get the nation back on its feet. Then, he returned to Britain in 1818 and became Prime Minister in 1828.
"It was a damned close thing," he recalled of the battle. Mistakes were made. Communications were missed. The weather complicated things. It might have gone either way. But in the end, it went Wellington’s way…and Napoleon was beaten.
Luck favored the Allies. It rained. Bonaparte had to wait for the ground to dry before launching his attack, giving his opponents time to get into defensive position…and time for the Prussians to come closer.
Looking through the long lens of history, we see heroes. Vercingetorix, Washington, Wellington, Jackson. We don’t know if they were smart, virtuous…or just lucky. Looking at today’s wars up close, would-be heroes often turn into villains, blunderers, and scalawags. We see too much.
Alan Greenspan: From War to Finance
But money is our beat here at the Daily Reckoning. So we turn away from war to finance…where the stakes are lower and the characters are funnier.
The present chairman of the Federal Reserve is the most famous bureaucrat since Pontius Pilate. He is also probably the luckiest.
And like Pilate, he merely gave the mob what it wanted. Not blood this time, but bubbles.
Alan Greenspan came to the Fed when a very long cycle of falling interest rates and falling inflation was just beginning. For the 38 years until 1981, bonds had been in a bear market that peaked out with average yields on Treasuries over 14%. Paul Volcker had already done the hard work; he had slugged the inflation monster so hard it remained asleep for the next 2 decades. When Greenspan came to the Fed, inflation was out cold…interest rates were falling…and bonds were going up. All he had to do was nothing. Most likely, the great trend would continue throughout his tenure in office. The last bull market in bonds had lasted 26 years. It began in 1920 and continued through the ’29 crash, through the Great Depression, through WWII until it finally came to an end in 1945 with a Treasury yield below 2%.
Greenspan might have been a hero – just by being lucky. But there seems to be some failing, some pernicious gene that drives the lucky to acts of self-destruction.
Alan Greenspan: Napoleon and Greenspan Overreached
Bonaparte could have stayed on Elbe…written his memoires and enjoyed a satisfactory retirement. Greenspan could have done nothing.
Instead, each over-reached.
Mr. Greenspan cannot be blamed for Japan’s bubble of the late ’90s – even though it happened during his watch. Nor is he the real culprit behind the LTCM blowup or the technology bubble in America in ’98-2000.
But surely he, more than any other human being, is responsible for America’s current real estate bubble, its consumer debt bubble, and even China’s capital spending bubble.
A predecessor, William McChesney Martin, once remarked that the real job of the Fed was to "take the punch bowl away" before the party got out of control. It would have been easy; just follow the rules – take the punch bowl away. Volcker had done it; the mob burned him in effigy on the capitol steps, but he retired with dignity. When he speaks in public, people do not snigger behind his back.
Yet Mr. Greenspan did not remove the punch; he spiked it with the high-proof gin of easy credit. Each time the former gold-bug faced a problem, he eased over to the punchbowl and dumped more in, until Americans were wobbling under the influence of the lowest interest rates in 45 years…and a 1% key Fed lending rate for only the second time in history.
According to the central bankers’ code, Greenspan has committed neither sin nor crime. He is seen as a paragon of virtue, not vice. Yet, as Talleyrand once remarked to Napoleon, "Sire, worse than a crime, you have committed an error."
The Fed chairman’s error was to offer more credit on easier terms to people who already had too much – including consumers, business, and the government.
During Greenspan’s reign at the Fed more new money and credit has been created than under all the rest of the Fed chiefs combined. Consumer debt rose to its highest level in history…the ratio of debt to income also higher than it has ever been. The effect was not only to inspire bubbles all over the world – but to make Americans poorer.
"A taste of the looming fiscal disaster is provided by the fact that, in the space of just one year, the trustees [of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds] have moved up the expected date of ‘asset exhaustion,’ writes James Grant. What he refers to is commonly known as Medicare. And ‘asset exhaustion’ is another way of saying ‘going bust.’
Alan Greenspan: The Government Goes Broke
Senator Joseph Liebermann summarizes: "the entire U.S. government is going broke."
Mr. Greenspan’s error seems to be catching up to him. In the West, the armies of inflation are approaching. The CPI is advancing at a 7% annual rate…came a dispatch last week. This week, the PPI – producer prices – are moving up at a 10% rate (also annualized from May figures.)
In the East, the forces of worldwide deflation are stalking him too. Mortgage rates are going up; consumers are backing off. Asian factories continue to spill out goods. Wal-Mart keeps offering, every day, lower prices than the day before. Oil, gold, copper, and bond yields – all seem to have peaked out.
Our man is caught in a giant pincers movement, his bubbles could be pricked any day. He has no room to maneuver. He cannot cut rates much further; there is little left to cut. Nor can he increase them – to do that would be to bring crashing down the entire proud tower of debt he built up.
The day Mr. Greenspan’s luck runs out cannot be far off.
for the Daily Reckoning
June 18, 2004
Another wonderful day of nothing.
Except for one disturbing bit of news (more about that in a moment), nothing happened.
No movement in the Dow. The dollar remains where it has been for months. Nothing much happening in the gold market; the price of gold rose $4.30 yesterday, but is no higher than it was last week.
In real estate too, it is business as usual. People keep buying and selling houses to each other…and the builders keep building more of them, as if demand were inexhaustible. Building permits are at a record high.
Nothing is what people want. As long as nothing continues, their houses become more valuable. In Orange County, California, the median house now goes for more than half a million dollars. [Ed. Note: See Anecdote #2, below…] You may earn $40,000 per year. You may already owe thousands of dollars on your credit cards…and have a huge mortgage. After bills and expenses, you may not have a dime in your pocket. But with a house like that, why not live a little?
Besides, everything is as it should be. The Asians produce, we consume. The Asians save, we spend. The Asians export, we import. The Asians lend, we borrow.
‘This symbiotic relationship has gone on for a long time,’ wrote an inquiring Daily Reckoning sufferer. ‘Why would it have to come to an end now?’
But the relationship may not be as symbiotic as it is parasitic. U.S consumers have become like a giant leech, sucking up 80% of the world’s savings. At some point, we keep warning, the foreigners are going to want to dump on a little salt to get rid of us.
Not if Alan Greenspan can stop it, though. He’s determined that nothing should happen to disturb the fantasy world in which we live. A week ago, he warned that he would do what was necessary to control inflation. Then, when May’s figures came out this week, it looked like the Maestro was trussed up in his own words. The CPI rose at a 7% annual rate in May; surely the Fed chairman would have to make good on his word and raise interest rates significantly.
But no. This week, Alan Greenspan wiggled free. Yes, the CPI was rising, but when you strip out food and fuel, the ‘core’ rate was only increasing at 2.4% annually. There would be no need, he assured the world, to raise interest rates in a serious way. Money and credit would continue to be made available by the Fed…at a lower rate than even the ‘core’ inflation…for the foreseeable future and possibly forever.
Ah ha! Nothing will happen. Nothing will change. Nothing will keep the good times from rolling along.
But what’s this? Today’s press reports explain that Producer Prices rose 0.8% in May…or at nearly a 10% annual rate! Not to worry, again the ‘core’ rate is much lower. Those enterprises that need neither energy nor food find their costs up only 0.3% in May.
Nothing continues…at least for now…
Over to Baltimore, for more news from Addison…
Addison Wiggin, from Charm City…
– Today we ask the question – has the bubble popped? We are not referring to stocks this time, or even bonds. Today, we delve into the murky world of real estate.
– Of course, we don’t know the answer. Your editors are nothing but humble observers. We enjoy the absurdity. Like little birds picking fleas of the elephants back, we enjoy the ride, and take in the view. And when there are no more fleas, we flit over to the next elephant.
– But as you will be all too well aware, dear reader, we have opinions too – and we are not afraid to brandish them…even where they are not welcome. Today, we arrive at our opinion – not through "hard analysis" as some readers would prefer – but by way of anecdote. Three of them in fact:
Anecdote #1 takes place on I-95. "This is classic," begins James Boric, reporting back to HQ, "I took a cab ride up to Towson – to the Heritage Honda dealer on York Road. It was about a 20-minute drive – mainly because the cabby drove at 47 miles an hour on the highway. Several times I encouraged him to speed up. I was in a hurry."
– "But he didn’t seem to care," continues our roving reporter, "he just wanted to talk about real estate and his landlord (or ex-landlord, I should say): ‘Yeah, I just moved out of my old apartment in Baltimore City…mainly because my old lady wanted to move out to the country. But it was a dump. The floors wee rotting. And it smelled…like sewage. I wouldn’t rent that hole again if it was $100 cheaper a month. No sir.’"
– "’You know,’ he went on, ‘the guy who bought the apartment complex paid $280,000 for it. Can you believe that? When interest rates start to rise (and you know they will – you’re in the business to know that) that place won’t sell for $140,000! I mean, seriously, that bastard won’t get half what he paid for it. And you know what, he wanted to raise rent from $400 to $700 a month. What a joke.’"
– "As I sat there and listened to this guy go on and on," James went on, "I realized one thing: we are at the top of the real estate bubble. Even my cab driver knows it."
– Anecdote #2 takes us across the country…to California, the epicenter of the bubble, perhaps. Today’s little story comes courtesy of a West Coast correspondent, Peter Schiff…
– "Recently, I visited a house that was advertised for rent in the Orange County Register," writes Peter. "The house was approximately 15 years old, 2,600 square feet in size, and located on a 10,000 square foot lot in a gated community called Coto De Gaza, about 30-40 minutes inland from the Pacific Coast. They wanted $3,900 per month in rent."
– "There was nothing particularly special about this place…sure, it had a nice view of the hills, but there was no swimming pool, Jacuzzi, upgraded flooring, elaborate stonework or even an in-built barbeque. This was just a typical middle-class residence. When I arrived, the real-estate agent, who was representing the owner, greeted me. This is a guy who needs to be fired…"
– Anecdote #3 is much closer to home, so close in fact, that we think we can hear the hissing sound of escaping air…anecdote #3 comes from right next door.
– The two-bedroom house next to ours would be suitable for a retired couple perhaps. It’s an elegant waterfront property with two decks and a self-contained garage. "Kind of swanky," was the description we heard from another nosy neighbor. On April 5, we enquired about the price tag when we noticed the house was on the market, and were quoted $850,000 by the agent. Would the reader care to guess what quote we were given yesterday when we bumped into the same estate agent on our way to work?
– $1 million perhaps? Or even $1.1 million, given this region’s torrid sellers’ market? Not even close…in just 10 weeks, this property has DECLINED in value…by $90k or nearly 11%. It’s now on the market for $759,000. Is this a sign that the market is beginning to collapse…? Could be. And what are the real dangers?
– One danger is that ARM applications continue to break records. April witnessed the greatest number of ARM applications ever recorded in a single month, while the last week of May laid claim to the most weekly applications. At the end of May, ARMs routinely made up over one-third of all weekly mortgage applications…
Bill Bonner, back in Paris:
*** Why do energy and food make such a difference to the CPI? We are told that it is because terrorists are blowing up oil pipelines. Oil is up sharply…but perhaps, not permanently. But there is another reason. India announced that its oil consumption rose in May by 10%. India, China, and other Asian producers buy food and fuel. They sell autos and refrigerators…and many of the other components of the CPI.
That is the current effect of globalization, dear reader. We now compete with the whole world for primary commodities, such as oil. Nor does the supply of cheap labor help much in dropping prices. Oil, for example, is a capital-intensive industry…not labor intensive.
But the output from Asian factories is labor intensive. As more and more of the world’s factory output shifts to Asia, low wage rates bring down prices on finished goods.
If American consumers stopped buying, finished goods would go into freefall. Construction of new factories and infrastructure would slow or even come to a halt. Primary commodities would fall too.
But what’s this? Copper and many other raw materials are falling in price. Copper is often referred to as the ‘metal with a Ph.D. in economics.’ It’s used in everything. So, when demand for it goes down…it signals a decline in economic activity. Copper sold for $1.37 a pound in early March. Now it is less than $1.20.
And what’s this? The world’s biggest seller of goods from Asia is Wal-Mart. ‘China’s factory outlet’ it is sometimes called. Wal-Mart shares seem to have peaked out.
Are consumers finally…really…actually…honest-to-god…slowing down their spending?
*** Pao Mo? Go long rice!
A week ago, our small-cap-cum-India sleuth James Boric, after touching down in Mumbai, reported that the price of rice was skyrocketing in India because of rising demand in China. And now comes word from the Vietnamese News Agency that Thailand is suffering the same fate. We are sending our wayward world traveler, Dan Denning, to Thailand to find out.
Dan will arrive in Bangkok on Monday and be moving onto Koh Samui later in the week. Apart from investigating the impending global rice shortage, he is open to meeting with local economists, bankers, analysts, politicians, entrepreneurs, businessmen, ex-pats, in-pats, wayward travelers, taxi-drivers, smugglers, thieves, pickpockets, harlots, street urchins…and even readers of the Daily Reckoning. Got any ideas? Send an email to Tom Dyson (firstname.lastname@example.org) and he’ll get you set up.
If you are interested in following Dan on his Asian adventure, he has set up a travel blog to which you can subscribe to for free, right here:
On the Ground, On the Case and Always in Trouble
*** What a glorious day!
Today is the anniversary of the Battle of Waterloo in 1815…and of Winston Churchill’s "Finest Hour" speech.
If the empire should last 1000 years, said Churchill…people would still look back and say ‘this was our finest hour.’
It was a fine hour for the British. Valiantly did they resist the Nazis. But the empire dissolved anyway…it survived only a few years after the destruction of Hitler’s 1000-year Reich.
*** Meanwhile, our own sad and inglorious war continues. We have not criticized the War against Iraq for a long time. The news reports did it for us. And what can you expect? It has been a sordid affair from the beginning, invented by fools and sold to the public with lies.
"We cannot guarantee victory," said George Washington. "But we can deserve it." We wonder what America deserves now?