Weekend Edition: Waiting For A Metaphor Change

With the president’s announcement of the successful conclusion of the War On Iraq, we welcome the return of economics to the Daily Reckoning… at least, our own home-spun version of the “dismal science.” Not that we didn’t appreciate the countless reminders we received over the last few weeks that our boys in uniform are defending our rights to publish this “garbage”… and that we ought to be grateful. Just that we don’t, otherwise, like being told what to think.

In economics, at least, opinions are like armpits undefined everybody’s got ’em. We are not beholden to take a loyalty oath to the Austrian school, for example, though we might agree with its practitioners regularly. That’s said, let’s take a quick stroll around and survey the improvements in the economic picture since the hostilities ended…

What’s new… what’s different? Hmmnnn… well… not much. The current account balance, running at roughly $2 billion a day, still suggests the American consumer is the bastion of global consumer capitalism. Greenspan, now firmly ensconced at the Fed, is up to his old tricks. He suggested to Congress on Wednesday, that “now that the war in Iraq has been won”, the economy would resume modest growth. Pundits, analysts and shills on Wall are shrugging of dismal economic numbers and a lackluster earnings season with the familiar refrain: “Maybe the Fed will cut rates again,” as if the past 12 had given the economy the juice it needed at the time. Indeed, even the markets rallied from overvalued against this week… the NASDAQ closed over 1,500 for the first time in nearly a year. The Dow tacked on 128 on Friday to close out the week at 8,582.

“With the war in Iraq successfully concluded and with oil prices falling and interest rates at record lows,” Anatole Kaletsky reported in the London Times, after chairing the opening panel of the OECD conference on world growth and prosperity here in Paris on Monday and Tuesday, “economic growth is likely to pick up strongly in the months ahead. If this happens, the world economy could soon find itself enjoying a long period of sustained expansion similar to the 1990s. This would set the scene for a golden age of global capitalism and intensified globalization.”

From a quick and dirty review of the financial press this fine Saturday morning: those seem to be the facts. But perhaps “as Norman Mailer said,” your founding editor Bill Bonner is fond of reminding his colleagues, “it’s not so important to get the facts right, as it is to understand the metaphor.”

With the media and investors so hypersensitive to “bad news,” however, the world economic metaphor appears to be about ready for a change. Unfortunately, we may already have a view into which metaphor is likely to gain the upper hand in the months to come. If we we’re in a rock and roll band, for example, and had to pick a number to open the next set on the economic world stage, we might call it: the post-bubble blues.

The “cost” of closing investments out of non-productive businesses, suggested F.A. Hayek way back in 1931 following the last great credit-goosed maladjustment fest, and putting the money in the hands of those who can produce a decent product undefined and decent profits – is easily absorbed during a policy-induced boom. That is, when credit is cheap and profit expectations are high, you can sweep your mistakes under the ‘pro forma’ rug.

But after the bust, the costs of undoing bad deals piles up… one upon the other… and results in business losses, bankruptcies and rising unemployment. Joblessness rose in the US fell for the third straight month in April, and the unemployment rate skidded over the 6% mark undefined and 8-year high. The last time the jobless rate rose three months in a row was 1952 undefined during a steel industry strike.

According to a report put out by the WTO last week, Japan and Germany, sagging further into their own post-bubble malaises are looking at zero to negative growth for the year 2003 and an equally dismal employment picture. Southeast Asia, specifically China, thought by luminaries like Marc Faber and Jim Rogers – or even non-luminaries like your grumpy editors here at the Daily Reckoning – to be a bright spot on the global economic map, has yet to even factor in the economic consequences of the SARS virus. (Some friends of ours recently returned to Paris from a six-week stay in Thailand, reporting food and service in restaurants were excellent undefined because they were all but empty!)

“If a recovery [in the US economy] does not happen soon,” writes Kaletsky from the OECD forum, and sounding an awful lot like commentary we’d been hearing before the War on Iraq, “the financial markets will probably plunge into another crisis, dragging the world economy into a long period of stagnation.”

If that period of “stagnation” assumes its position as the new metaphor… the lens through which governments and investors see the future… “the entire global system of free trade,” suggests Kaletsky, “free capital markets and free movement of people will be at risk…” in spite of military adventurism and all its attractive counterparts.

Bon weekend,

Addison Wiggin,
The Daily Reckoning
Paris, France
May 3-4, 2003

P.S. For investors who see this week’s rising stock market as indication of a return of a new era of prosperity, its worth reprising a note we published Wednesday courtesy of Richard Russell’s Dow Theory Letters:

It reminded us how long, hard and frustrating the path to a bear market bottom can be. The numbers show the progress of the Japanese stock market from its high in 1989 to its low of last week.

12/25/1989 38,916
9/25/1990 20,984 -46.08%
4/19/1991 26,542 +26.49%
8/10/1992 14,820 -44.16%
8/30/1993 21,116 +42.48%
8/29/1994 20,658 -2.17%
6/12/1995 14,703 -28.83%
6/17/1996 22,531 +53.24%
12/22/1997 14,803 -34.30%
10/5/1998 12,879 -13.00%
7/12/1999 18,248 +41.69%
4/10/2000 20,434 +11.98%
3/12/2001 12,232 -40.14%
9/17/2001 9,554 -21.89%
5/20/2002 11,976 + 25.35%
4/21/2003 7,699 -35.71%

You’ll note that the Nikkei Dow rallied more than 25% on 5 separate occasions…while still continuing its death march.

Despite the rallies, over a 14-year period Japanese stocks lost 80% of their value.

More “Daily Reckoning” below…



By Bill Bonner

“…Americans’ can-do optimism seems to depend on the ability of its central bankers to do what the Japanese could not – successfully wage war on deflation. If only there were not so many paradoxes, dear reader. Wouldn’t it be just peachy if the Fed really could control the money supply…so that people would have money to spend when the Fed wanted them to spend? But therein hangs a tale…”

MAY DAY, MAY DAY (05/01/03)
A DR Classique, by Bill Bonner

“…May 1 is the big day for the proletariat. Back when people still believed Marx’s class theory – that is, back when there was a proletariat – huge parades were organized throughout much of the world. Communist countries used them to show off military hardware. In the West, they were used to demonstrate the voting power of the demented. But May Day no longer brings out the proletariat. Today, the big parade is for the intellectuals…”

BLIND FAITH (04/30/03)
by Eric J. Fry

“…The recent rally on Wall Street has been a classic triumph of faith over fact…of hope over substance. No stock better exemplifies misguided faith at work than Dow component General Motors. GM’s frightening investment profile should inspire far more fear than greed. And yet, the automaker’s shares have rallied a sparkling 18% since early March, contributing handsomely to the Dow’s 1,000-point rally over the same time frame…”

by Dr. Marc Faber

“…I am not suggesting that the current SARS scare will have a long-lasting and major impact on the global economy, but if this highly infectious disease spreads unchecked, or if another even more virulent infection emerges sometime in the future (as is likely, according to some experts), then we should at least be aware of the risks involved…”
by Christian DeHaemer

“…As France-bashing spilled from late-night comedy shows acrossthe United States following the French government’s theoretical ‘support’ for Saddam Hussein’s Iraq, France’s wine exports to theU.S. fell noticeably in March. Wine exports to the U.S. in 2002 were almost $28.5 billion. This week, wine producers are holding emergency meetings in Paris. If you’re stocking or replenishing a wine cellar, here’s the opportunistic thing to do: buy 2000 Bordeaux…”


Carving Up the Homeland Security Pie
by Llewellyn Rockwell

“…When historians look back at the amazing spectacle of government in the post 9-11 era, they will see a process fraught with the lowest form of grubbing. And so long as we are accounting for the work of special interests, consider the billions and billions doled out to defense-industry contractors to make bombs and planes used in wars supported by large industrial interests…”

Value Investing On Trial
by Dan Ferris

“…As effective as value investing has been over the past several decades, its critics are legion. Rather than quote a series of no-name fund managers, who are likely to disappear from sight anyway, I’d rather focus on one critic of Ben Graham’s who has – to his credit – remained stubbornly in, or at least near, the limelight. I’m speaking of none other than Victor Neiderhoffer…”

The Daily Reckoning