W's Latest Barney

As if America hadn’t enough wars – hot or cold – to fight, it is now taking the battle for re-election right to the Chinese heartland.

"One way to make sure that the manufacturing sector does well is to send a message overseas, [to] say, look, we expect there to be a fair playing field when it comes to trade. See, we in America believe we can compete with anybody, just so long as the rules are fair, and we intend to keep the rules fair."

– Dubya-Dubya-III in Richfield, Ohio

"Politicians and pressure groups representing the interests of U.S. workers in some manufacturing industries have been trying to draw presidential candidates’ attention to the Chinese currency.

"Their argument is – China has been manipulating the yuan to keep it at a low value. China’s aim, they allege, is to help Chinese-based exporters, whose inexpensive products have made lots of American workers jobless. The critics that believe China manipulates the yuan’s value assume that every currency in the world should be floated in the market undefined [but] this assumption itself is porous."

– China Daily Editorial

Protectionism: Milking the Crowd

Yesterday, in a shameless piece of propagandist posing, if not as egregious as his Mav’n’Goose carrier landing, president Bush, God’s Anointed Defender of Civilization, milked a crowd of Mid-West manufacturing workers, dressed in union cap and bomber jacket. Meanwhile, Treasury Secretary John Snow simultaneously raised hirsute eyebrows at his Oriental hosts over the value of their currencies. Yawn…

Haven’t we seen all this before? It’s the same weary old Protectionism to which politically astute, but economically illiterate and morally bankrupt office holders, usually stoop when things get tough at home.

The same whining tone has its counterpart in a bleating Washington Post story which bemoans the fact that governments elsewhere in the world are unwilling to fleece their taxpayers, or dragoon their sons into subsidizing or otherwise reinforcing the rapidly deteriorating situation in post-Conquest Iraq. Well, "Quelle surprise!" as those dastardly French enemies of freedom might say.

Whether the gesture is a completely empty one remains to be seen, but Dubya’s bright idea of appointing another un- elected bureaucratic meddler at the Department of Commerce, with specific responsibility for manufacturing, cannot otherwise possibly portend anything good. This unfortunate’s sole mandate will be to rustle up votes by blaming all those shifty foreigners, who have had the temerity to satisfy American consumers’ needs at a lower price than any one else, for the woes of the U.S. economy. The same shifty foreigners who then compounded their crimes by lending the U.S. government the money to fuel its war fleets and lending its citizens the cash necessary to keep their house prices on the rise.

Protectionism: Nothing More Inimical to Economic Recovery

The implications of this newly heightened emphasis on foreigners could be far-reaching.

First, there is nothing more inimical to economic recovery undefined as well as to personal liberty undefined than the doctrine encapsulated by Bush in the words: "We have a responsibility that when somebody hurts, government has got to move."

A fine sentiment, no doubt. But in practice, what it translates to is a policy of taking from those more successful in the ongoing struggle to adjust to the new realities of post-Bubble America and redistributing the spoils among the losers, with an ear always to where this commandeered largesse will make the most political noise. Whatever short-term palliative effects protectionist measures might bring about, you can be sure that, in the long run, they will be detrimental both to personal enterprise and to private capital.

Perhaps more immediately, like the spendthrift Medieval kings who invariably blamed Venetian bankers or Jewish money-lenders for woes very much of their own making, international concerns that America’s biggest creditors do not get a vote in America’s elections, which are already heightened…should heighten further. Cumulative money flows into the U.S. since the Bubble began in 1995 have come to close to $4.1 trillion. That’s nearly 70% of the $6 trillion remitted to the Imperium in the past 50 years – a fact that might give pause for thought in finance ministries and investment committees around the world.

At its simplest, we have the spectacle of a U.S. Treasury Secretary trooping around the Far East, effectively telling everyone the U.S. requires their acquiescence in a write- down of their painstakingly acquired foreign assets…simply because the Global Hegemon is unable to compete with them commercially in any other way.

Protectionism: Barriers to Trade

At its most damaging, we face the ongoing prospect of barriers to trade being erected by the world’s biggest market undefined but also by the world’s biggest debtor.

Given that international trade undefined not to mention international money flows undefined has expanded far beyond any underlying increase in output over the course of the past decade, and given further that a fragile global economy needs less, rather than more protectionist legislation to motivate investors and businessmen to take on risk anew, the desire for "government to move" could easily snowball.

With international relations already highly strained undefined thanks largely, if not wholly, to the unwontedly belligerent approach adopted by the current U.S. Administration undefined the clear peril here is that a series of escalating trade disputes could impair the ability of "free trade" to alleviate existing financial burdens caused by the collapse of the bubble. In fact, it should be recognized that exactly this process was a key feature in the appalling series of policy mistakes which turned the ’29 Crash into the Great Depression.

An America living wildly beyond her means at all levels of society may well get more of an adjustment in its currency than it bargained for. In fact, many of us in the West undefined not just in the U.S. – have been living too high on the hog on newly-printed money. We will all either have to perform heroics of productive endeavor to restore the balance or face the grim reckoning that we are not as wealthy as we currently believe. A drastic adjustment in currency parities may well be a part of that.

However, to the extent a major U.S. dollar correction is sudden and if, as will sadly be the case, it is not matched by greater thrift at home, import prices will suffer a greater share of inflation and the crumbling bond market will crumble further still. Foreigners repatriating their capital will simply rub salt in the wounds inflicted by the Fed’s own foolishness.

It is hard to overstate the risks that will accompany a rise in political xenophobia. That inveterate political trimmer and wannabe Ben Strong-beater, Alan Greenspan, is highly unlikely to do what should be done in that circumstance and administer the necessary purgative to expunge the poison as rapidly as possible. Rather, he will run true to form, continuing to fight the market by expanding credit yet further, and we would thus face the very real danger of him triggering a devastating inflationary runaway.

Warm regards,

Sean Corrigan,
for The Daily Reckoning

September 03, 2003

P.S. We have written recently that it looks as though major bond markets are only half way through their correction. We have talked about commodity prices in general and gold in particular as being in a bull market.

We have noted that this period after the U.S. Labor Day, as well as the end of the Continental holiday season, is often a crucial one for markets. And we have argued that there is a chance, albeit remote, of increased turmoil in fixed income and forex of precipitating a 1987-style event.

We’d have to say we stand by all of these thoughts.

Sean Corrigan, the Daily Reckoning’s "man-on-the-scene" in London’s financial district, is a graduate of Cambridge University and a veteran bond and derivatives trader. Corrigan is the founder of Capital Insight, a London-based consultancy firm which provides key technical analysis of stock, bond and commodities markets to major US, UK and European banks. He is also a co-manager of the Bermuda-based Edelweiss Fund.

The stock market is against us. So are bonds and the dollar. They’re all saying that the U.S. is entering a cyclical recovery – with rising corporate profits, falling levels of unemployment, and higher bond yields.

Either they’re wrong, or we are.

On the evidence, we might both be; the ‘facts’ could convict either one of us. Manufacturing is growing at its fastest pace in 8 months. Job losses are slowing. Homes are selling at the highest prices ever…with housing starts at a 17-year high. Almost all the financial newscasters, analysts, spin-meisters and economists would testify against us. Good times lie ahead, they say.

On the other hand, bankruptcy filings are at new records – up 9.7% in the last 12 months. Household debt ratios are at all-time highs…and current account and federal deficits have passed from merely grotesque to completely absurd.

Calling our friend John Mauldin as an expert witness, we ask him to describe the conflicting testimony. His assessment? We are in a ‘muddle through’ economy. John is much more of a pessimist than we are; despite all the confusion, he believes, somehow things keep moving forward.

We don’t dispute John’s point. But we offer a caveat: Things may muddle along…until, in a moment of clarifying terror, all of a sudden, they stop muddling.

There must have been such a moment for Hitler’s generals. Out on the steppes of the Ukraine or in the rubble of Stalingrad…sometime in early 1942…it must have struck them like a piece of shrapnel: they could not muddle through the Eastern Front. They were a long way from home. They lacked troops. They lacked tanks and ammunition. They lacked supplies and airplanes. And against them was the abominable weather…Hitler’s own incompetence…and the vast Soviet Union roused from its stupid sleep.

They could not muddle through at all. At some point, the illusions must have fallen away, like shards of glass from a broken window. All of a sudden, they must have looked out and seen clearly: The campaign was hopeless and imbecilic. They would fall back if they were lucky, or die if they weren’t…and then, what? Even if they got back safely to the other side of the Oder…how could they hold back the barbarians?

That clarifying moment is still ahead for investors – the moment when people realize that the U.S. economy cannot muddle through the collapse of the Dollar Standard system. How far ahead, we don’t know. But ‘not too far’ is our guess.

While stocks, bonds and the dollar tell us we’re wrong about this, gold stands behind us. The yellow metal itself says nothing, but its price screams; up about 40% since the beginning of the downturn on Wall Street, it has risen along with the dollar in recent weeks and now approaches its February high, closing yesterday at $371 an ounce. Even at that elevated price, it still takes 26 ounces to buy the 30 Dow stocks. Normally, and – we guess – eventually, it takes only 5 or 6 ounces.

Gold is in a bull market because a growing number of investors look out their windows and see disaster coming. Deflation, unemployment, bear markets in stocks and bonds, bankruptcies, defaults – it is all out there…and closing in on them.

But here is Eric with more of the latest news:


Eric Fry in the city of fear and greed…

– History be damned!…The Dow Jones Industrial Average bounded into September – the cruelest month of the year for the stock market – with a sprightly 116-point gain. All but three of the Dow’s 30 components traded in the plus column, as the blue-chip index ended the first trading day of September at 9,532. The Nasdaq Composite jumped 1.5% to 1,837. The dollar soared in sympathy with the stock market, gaining 1.3% against the euro to $1.082.

– As we noted yesterday, September is the most treacherous 30-day span on the Gregorian calendar for the stock market. "That said," Bloomberg News observes, "the new month tends to begin on a strong note, with the day after Labor Day tallying gains seven out of the past eight years. And the market’s outstanding performance to date may give stocks a bit of a cushion to tackle the September blues: the Dow, in fact, is up about 13 percent year-to-date, the Nasdaq around 35 percent and the S&P about 15 percent."

– One day into the accursed month of September, investors refuse to be spooked by any sort of historical voodoo. To the contrary, most folks have fallen in love anew with stocks. They want to cozy up to stocks each and every day of each and every month…and in each and every country. All 62 major world stock indexes have advanced this year, according to Bloomberg data.

– Meanwhile, investors are tossing out bonds like so many month-old bananas. U.S., Japanese and European government bonds all tumbled yesterday, apparently on signs that the global economy is rebounding. The U.S. Treasury market suffered particularly harsh treatment, as the yield on the 10-year Treasury note soared to 4.60% from 4.46% on Friday.

– Soaring interest rates, as we have noted ad nauseum, are a kind of financial kryptonite to the nation’s ‘Superlenders,’ Fannie Mae and Freddie Mac. But don’t bother trying to tell that to Merrill Lynch, or to the investors who scurried to buy the mortgage lenders’ shares yesterday.

– Merrill Lynch upped its rating on the shares of the mortgage lending behemoths to ‘buy’ from ‘neutral,’ based on the touchy-feeling hunch "that bottoms have been made." Incredibly, Merrill’s hopeful comments about Fannie Mae caused its stock to jump nearly 5% yesterday. This, on a day when interest rates soared to new one-year highs. Clearly, the exuberant investor is not a discriminating investor. Then again, during manic market phases, the exuberant investor gets rich while the discriminating investor watches.

– The fact that interest rates are soaring is hardly a surprise. The Iraqi occupation has become a semi-permanent $100 billion annual tax on our nation, the country’s budget deficit is mushrooming, the Fed is ‘succeeding’ in rekindling inflation and the economy is showing some signs of life.

– Hopeful economic news continued to trickle in yesterday, as the Institute of Supply Management’s manufacturing index rose to 54.7% in August from July’s 51.8%. Additionally, outplacement firm Challenger, Gray & Christmas announced that planned layoffs dropped 6% in August from July’s levels. Challenger also said that August was the fourth straight month with fewer than 100,000 announced job cuts, a trend not seen since 2000.

– So let’s offer up a heartfelt "Hip! Hip! Hooray!" for the economy, as it stampedes ahead like a herd of turtles. But maybe we should hold our applause for the stock market. At 20 times prospective earnings, the stock market would seem to be anticipating great things, if not minor miracles, from the economy.

– But maybe the economy will fail to fulfill the stock market’s elevated expectations. In which case we must ask ourselves, "What’s a turtle stampede worth?"


Bill Bonner, back in Paris…

*** The figures have been revised. Previously, it was thought that the U.S. accounted for 67% of global GDP growth from ’95 to 2002. Now the number is said to be 96%. This may mean two things. Either the U.S. really was responsible for nearly all the world’s GDP growth during that period…or the dollar is so high it distorts the true meaning of things. A 50 cent dollar, for example, would cut the value of U.S. GDP in half.

*** The dollar rose again yesterday. $1.08 will now get you a euro. This seems like a good trade. Later, it will probably take $1.50 or more to buy a euro.

*** "Claims of recovery very hollow to jobless," says a Detroit Free Press headline. "Paychecks getting pinched," says CNN. Another article explains that unemployment is growing among college graduates more rapidly than in any other group. The rate was only 1.6% when G.W. Bush took office. Now, the college-educated unemployment level is nearly twice as high.

Who’s finding work? The Cleveland paper tells us that employment is increasing among people 55 and older. Why? Most likely it is because they’re reliable and cheap…and they can’t make ends meet at such low interest rates.

*** "Californian wine makers under a cloud," says a headline in yesterday’s Financial Times.

As you know, dear reader, we dust every headline in the financial section for Richard Nixon’s fingerprints. We check every hair found at a crime scene against his DNA. It’s surprising how often we get a match.

Even the wine industry is now being rocked by the effects of Nixon’s 1971 decision to cut the dollar loose from gold. With no further need to settle their accounts in real money (gold), Americans began a spending spree that continues to this day. The cash and credit exploded out of the U.S. and set markets on fire nearly everywhere – but especially in the Far East. Then, the foreigners – with trillions in extra dollars on their hands – re-invested the money in the U.S., causing a blaze in the late ’90s which still has not been brought under control.

Nowhere did the flames shoot higher than in Northern California.

"In some respects," explains the FT, "California’s wine industry, which accounts for 95% of all U.S. production, has been a victim of its own success. The sky was the limit a scant few years ago when residents of San Francisco and Silicon Valley were flush with cash from the technology boom.

"Scores of new wineries cropped up in Napa Valley, Sonoma county and along California’s central coast…grape growers scurried to meet this surging demand by planting tens of thousands of acres of new vineyards."

Inflation begets deflation, we keep pointing out. So much new wine came on the market that prices dropped. Now, Americans can buy a bottle of decent cabernet sauvignon for only $2. ‘Two-buck Chuck,’ for example, from Charles Shaw, is grabbing market share and forcing other winemakers to cut their prices. Wine growers are responding in the typical way – they’re expected to destroy 6% of California’s total vineyard acreage this year alone.

So you see, dear reader, here is a positive development.

Yes, Nixon’s Dollar Standard system has ruined the American economy. But if you can get a good bottle of wine for $2… why should you care?

*** Housekeeping note: The Supper Club will be holding its annual update meeting in mid-November at the stately Broadmoor hotel in Colorado Springs. At this singular event, the Club will present and evaluate every venture capital opportunity it has uncovered over the past year. Some of them, we hear, have already proved impressively profitable.

The Daily Reckoning