Fantasies

The American majority, racing ahead of absurdity…

"I think we differ principally in that you assume the future is a mere extension of the past whereas I find history full of unexpected turns and retrogressions."

– Winston Churchill

The U.S. is fighting, we are told in the editorial pages, to make the deserts of the Mideast safe for democracy. George W. Bush, America’s conservative president, is conducting what Thomas Friedman has called a "revolutionary" and sublimely "idealistic" war. "Nurturing," he tells us; that is what the 4th Army is really doing. At the same time, on the home front, the Republican administration has put into place the largest budget and largest budget deficit ever…along with the most ambitious, most activist domestic spending program ever seen on this jolly planet.

Meanwhile, on the economic front, America’s ‘strong dollar’ policy seems to include allowing the dollar to take a dive in the early rounds against its main rivals – the euro and gold – and to lie there looking dead for the rest of the match. That doesn’t seem to stop central banks from betting on it; they see the gamble as a way to stimulate their own spectacles. We guess they think it is worthwhile to impoverish themselves so their nations can grow rich. How? By lending to people who cannot pay the money back….selling to people who cannot afford to buy…and by buying assets that cannot be worth what they pay for them.

The American consumer not only keeps pace with the absurdity; he races ahead, as if he wanted to be first in line at bankruptcy court. He has convinced himself that the more he spends, the happier he will be. A NY Times headline explains that he must continue spending – even if he has no more money. The economy depends on it, explain the geniuses at the Times.

Our head spins.

And along comes David Brooks, again in the NY Times, with more fantasy. He tells us that these all these ‘positive trends’ prove that government works! The Times really ought to include paper airplane bags for readers with sensitive stomachs and no sense of humor.

But we write today neither to put ourselves in earnest opposition to these trends, nor to offer constructive comment, nor even to throw up. Instead, we offer ridicule and nothing more.

First, we notice that the trouble with politics and economics is that the words lack precision. Talking politics with your neighbors is worse than asking a teenager about his personal life. The teenager gives you nothing you can use – just rough sentiment formed of half- shaped syllables interspersed with MTV groans. If you work hard enough, you can pry some useful data out of him – names, addresses, times, places. Given enough time and energy, you might even know something.

Not so with politics or economics. Almost all political statements are empty of meaning; nearly every word is a promiscuous lie. We know of no political leaders today – from the most craven to the most honorable – who do not claim to act in the name of prosperity, freedom and democracy. Yet, no one has any idea what the words mean. And if you peel off the layers of humbug, what do you find at the center? Truth? Not at all; you find a mountebank masquerading as an imposter. It is not merely a fraud, but a compound fraud, in other words – so dense and impenetrable that there’s practically no hope of making sense of it.

If by some accident, Saddam’s goons had failed to rig his 2002 referendum properly, and it had gone against him, we doubt he would have given up power. But if Osama bin Laden were elected president of Iraq, tomorrow, we have little doubt but that the Bush Administration would demand a recount. Neither leader honestly believes in democracy.

But underneath, the lie is even more profound…for the idea of democracy itself is such a scam that only a fool would take it seriously. Suppose a majority of voters should decide we should all speak ancient Greek at home and tie our shoelaces together and hop to work each day? Would you go along, dear reader? Suppose they should vote to exterminate Presbyterians or force vegetarians to eat pork rinds?

The majority is merely a big bunch of dunderheads; you have only to read the papers and watch the stock market to figure that out. Why should they get to tell us what to do? Which is why nobody who has ever thought about it actually believes in democracy. When people say they believe in democracy, what they mean is that they believe in Western- style consensual government, in which the voter is only marginally involved.

What really count are the institutions, customs, habits, and manners of a modern, civilized society. The voter gets to cast a ballot from time to time, but he is only dimly aware of what the vote is all about…and generally makes his decision on the basis of which candidate has the more likable mug and promises to dig deepest into his neighbor’s pocket. Despite him, government goes on its way – mismanaging the economy is the usual ways.

We only bring this up in order to reach for a point…not being too sure what we will grab: almost all discussion of political and economic issues is as futile as arguing with a goose about the Christmas menu. The poor goose is not likely to understand a word…and it doesn’t matter what he says anyway.

Instinctively, people know this. The big words merely fill the empty headlines, the empty space in campaign speeches, and the hollow cavities in the lumpencrania. People do not waste their time talking to geese. But they still need to explain what they can’t understand. They bring up GDP growth, democracy and freedom from time to time. And when things go wrong, they lay it onto wicked men and incompetent managers. If the dollar declines too sharply, they will blame Greenspan or the Chinese. If the war in Iraq turns sour, it will be the fault of evil Mohammedans.

Not since the Enlightenment have people been ready to concede that many things happen beyond their ken and beyond their control. Nor can they admit that they often live in a fantasy world – where their own credulity…and their own desires…bend light and muffle sound, so that all they hear and all they see confirms what they most want to believe. ‘The economy is recovering,’ they say to themselves. ‘Somehow, it will all turn out all right.’

"We are fooling ourselves if we think the world is going to wake up one of these days and merge the fantasy to the reality," writes Fred Sheehan in Marc Faber’s Boom, Doom and Gloom Report.

"When it hits," Peter Bernstein goes on to describe the gathering storm, "and whichever sector takes the first blow, the restoration of balance will be a compelling force roaring through the entire economy – globally in all likelihood. The breeze will not be gentle. Hurricane may be the more appropriate metaphor."

What will happen, will happen. Somehow, the war in Iraq will run its course…The deficits…debt…and dollar…will all meet in some fatal destructive collision. And one way or another, the goose will be cooked.

Bill Bonner

December 19, 2003 — Paris, France

P.S. More on this theme next time…

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the NY Times and international best-seller: "Financial Reckoning Day: Surviving The Soft Depression of The 21st Century" (John Wiley & Sons).

"Sans Souci" is the name of an expensive restaurant.

It might also serve to describe today’s incredible markets: without a care in the world.

Day after day, the carefree trends continue. Stocks go up. Investors should know better. Whenever prices get this high, it is extremely unlikely that the real return will be more than a percent or two – or more likely, it will be negative – over the next few years. But they’ve decided not to care. Someone told them stocks were going up. That’s all they needed to hear.

Meanwhile, the U.S. consumer – the world’s patsy-of-last- resort – continues going deeper and deeper into debt, in the belief that he is getting richer. It is not that he cannot add or subtract. He has just decided that this devil-may-care fashion becomes him. He tried it on during the last bubble 4 years ago and rather liked it. Now, he wears it wherever he goes…

And let us not forget the central bankers of China, who deserve special mention in this short history of insouciance. Who else would put their nation’s reserves in a currency that was falling almost daily…in the benighted belief that lending to deadbeat spendthrifts so they can buy your products is the route to riches?!

Are the Chinese stupider than other central bankers? We have no reason to think so. They just seem to have picked up the zeitgeist of the times – yes, they are probably headed to their own special corner of economic hell, but why worry about it?

Of course, here at the Daily Reckoning, we are the last ones to want to take any of this seriously. It is all entertainment as far as we’re concerned. We take it in a lighthearted spirit, just as we would a bedroom farce. But we still gasp for air from time to time when we think of it.

The last few weeks have brought headlines to help sustain the fantasy. Unemployment numbers have been edging down. The Detroit Free Press explains that the decrease, in their area anyway, was a result of taking people off the list who had not been able to find a job. They are no longer merely jobless, it would seem; they no longer exist. The other big reduction in the jobless numbers has come from "restaurant hiring," in which well-paid computer engineers take jobs as busboys while they wait for the ‘recovery’ to gather itself together.

They may wash a lot of dishes before the recovery actually arrives. Economist Joseph Schumpeter, quoted by Marc Faber, explains why:

"Our analysis leads us to believe that recovery is sound only if it does come from itself. For any revival which is merely due to artificial stimulus leaves part of the work of depression undone and adds, to an undigested remnant of maladjustments, new maladjustments of its own."

New maladjustments come to light every day. Stocks rise even higher, debt increases, house prices go up. But the news is still positive…and the great majority of the unthinking, unknowing and uncaring are free to dream on. At least, for a while…

Eric Fry, our man on Fantasy Island, New York, with more news:

Eric Fry, on the corner of Wall and Broad…

– "A perfect combination" is powering the stock market, says one of Wall Street’s many bullish strategists. What, we wondered, might that perfect combination be? Might it be America’s record current account deficit, combined with a plummeting dollar?…Or maybe it’s our record household indebtedness, combined with our negligible household savings?…Or could the perfect combination be soaring commodity prices, combined with runaway health-care costs?

– No, says the bullish strategist, the perfect combination is benign inflation data combined with strong economic data. We would not quarrel with the strategist’s assessment, but we would point out that the operative word is "data." It’s true that the inflation DATA are benign, but commodity prices and health-care costs – to name just two important business expenses – are soaring. It’s also true that the economic DATA are strong, but the economy’s statistical strength is producing an abysmal lack of job growth.

– But why quibble about joblessness when GDP is growing at an 8.2% annual clip and the stock market is booming? Nothing is perfect, after all. Even an economy enjoying a perfect combination of low inflation and strong economic data has its imperfections. But a rising stock market – like new love – has a way of making imperfections seem utterly irrelevant. So let’s call the glass half-full and enjoy ourselves for awhile.

– The Labor Department kicked off yesterday’s parade of pleasing economic data by announcing that initial claims for unemployment insurance dropped 22,000 this week to 353,000. Next up, the Conference Board said the U.S. index of leading economic indicators increased in November for the sixth month in seven. Next, we learned that U.S. industrial production jumped nearly 1% last month, the biggest increase in four years. Topping it all off, the Philadelphia Fed announced that the City of Brotherly Love is booming. The December Philadelphia Fed’s manufacturing index rose to 32.1 in December from 25.9 in November – the highest level in a decade. The report also showed that factories in the region hired more workers than at any time since 1973.

– Yesterday’s deluge of delightful data wowed the lumpeninvestoriat, who wasted not time bidding the Dow Jones Industrial Average to a new 19-month high. The Dow jumped 103 points to 10,248, while the Nasdaq Composite gained 1.8% to 1,956. The robust economic data took a little luster off the gold price, but failed to add any sparkle whatsoever to the tarnished dollar. February gold fell $1.60 to $411.10 an ounce. But the dollar barely budged, falling very slightly against the euro and rising slightly against the yen.

– If we can believe the latest economic stats – and can ignore certain inconvenient facts like a surging current account deficit and a plummeting dollar – the American economy is in pretty darn good shape. At least it’s in good enough shape to entice the lumpeninvestoriat to buy stocks…and to keep buying stocks, even as they climb higher. And because the lumps are buying stocks, the market averages are rising, IPOs are making a comeback and Wall Street brokerage firms are flourishing. Yesterday, Morgan Stanley and Goldman Sachs both reported strong fourth- quarter net income. Goldman reported almost a doubling of net income.

– "Providing further proof that confidence in the stock market is on the mend," says USA Today, five initial public offerings stormed Wall Street on Wednesday, making it the biggest day for IPOs since the dying days of the Internet boom." It’s no wonder then that year-end bonuses are on the rise in the securities industry. "Wall Street bonuses are back big time," says the New York Post, "giving Wall Streeters an average bonus 38% bigger than a typical New Yorker’s entire year of pay."

– Boom-time conditions have returned to Wall Street, but the boom is much more subdued than the 1999 and 2000 vintages. Manhattan’s high-end restaurants are thriving once again, but investment bankers are not engaging in exotic, 1999-style acts of extravagance like flying friends to Turks and Caicos for the weekend, or ordering hand- tailored suits made from the foreskin of llamas. But signs of resurgent prosperity are again evident in Manhattan.

– "’The one-month wait for reservations at certain restaurants is back," says Tim Zagat, publisher of the Zagat survey. He relates that the famous Nobu sushi bar in TriBeCa had been easy to get seated in during the recent slump. "They’re back to one-month waits for reservations," says Zagat, "if they answer the phone at all," Zagat said.

– The wait for a Starbucks cappuccino also seems to be getting longer. Your editor has never dined at Nobu, even though he loves sushi…Some luxuries are simply beyond his reach. But, on occasion, he does buy a triple tall cappuccino at Starbucks. The crowd of folks buying $5 cappuccinos and lattes at the Starbucks on Union Square is much larger than it was last year. Almost every weekday morning, your editor arrives at the Starbucks to find about 20 people queuing up for pricey java.

– And every weekday morning, millions of Americans queue up to buy pricey U.S. stocks…Evidently, the recovery has arrived.

Bill Bonner, back in Paris…

*** The inflation indicator – the gap between inflation- adjusted treasuries, known as TIPS, and regular 10-year notes is narrowing. It has shrunk by about 10% in the last few months – signaling DECLINING rates of inflation ahead.

*** It is a confusing picture. Things that can be manufactured and shipped – such as cars, clothes, furniture – are falling in price. Things that are produced locally – often with much government interference – such as health care, education, and housing are rising. Commodities are also going up – presumably because the dollar is falling…and because China is buying so much of the stuff. Oil is almost $34 a barrel. Cattle have risen 36% in the last 12 months. Scrap steel is up 42%.

Go figure.

Could these trends could continue – falling prices for manufactured, globalized goods…rising prices for commodities? Yes.

*** Housing has outpaced inflation by about 35% since 1995. But housing, like stocks, could fall sharply – even if commodities continue to rise.

What would happen if house prices stabilize…or fall? Millions of people would find their lives harder than expected. Already, with the lowest interest rates in 45 years, foreclosures and bankruptcies are at record levels.

From Denver, for example, comes news that foreclosures have hit a 15-year high. And "the worst is not over," says a local economist. "People have refinanced so many times, they’ve taken the equity out of their houses."

*** We would like to give you a little present for Christmas, dear reader. We would like to tell you what will happen in the New Year so that you may prepare for it. But in our humble condition of near total ignorance, we have not the means to do it. All we can offer, and it not even wrapped in a bow, is this modest insight: That which is – and upon which so many hopes and mortgages depend – will probably not be forever.

It is not necessarily a mean, mean world. But neither is it the Fantasy Island that most people now expect. In short, dear reader, we give you the gift of a worry. A souci. A gnagging, gnawing, gnatty, gniggling care in the world. Have a care, dear reader, have a care. You might need it.

*** "I can see it now," writes Dan Ferris, editor of Extreme Value. "Stark, fluorescent lighting in an old classroom. White styrofoam cups of coffee in every hand. New faces. Old pros. The meeting begins…

"’My name is Bob. I’m an institutional investor, and I’m bearish…’

"Bob is the newest member of Bearaholics Anonymous, the new 12-step program for investment managers who sell more stocks than they buy.

"Bob is about to share a wonderful experience, offering his co-bears a ray of hope. You see, he recently received a call from Brendan Wood International, a research group.

"Bob was one of 3,000 institutional investors surveyed anonymously by Brendan Wood International. When Brendan Wood finished, they made a list of the ten stocks that investment managers like Bob had the least confidence in…

Qwest Ford TXU Energy Sears Computer Associates Lucent Technologies Interpublic Group (A former Warren Buffett holding) Schering-Plough Sun Microsystems Safeway

"Due to the anonymity of the survey, Bob was able to come clean about the stocks he used to own. He admitted that some of his bearishness came from watching what the smartest, or at least most informed, money in these stocks is doing.

"The most visible example of that would be Philip Anschutz, founder and chairman of Qwest, who just unloaded 19 million shares on Nov. 17, for proceeds of over $66 million. Bob figures Anschutz ought to know what his own company is really worth.

"2,999 other investors came clean in the Brendan Wood survey. They cleared their consciences about those ten stocks. And there was a lot to clear, too.

"Last quarter, institutional investors…

…sold about 1.9 million shares of Ford. …sold 68 million shares of Sears. …sold 47 million shares of Lucent. …sold 83 million shares of Sun MicroSystems. …sold 16 million shares of Schering Plough.

"Thanks for sharing, Bob. Of course, Bob filed all his transactions with the SEC. So he’s not really anonymous at all. But he knows all the shareholders in the mutual fund he runs think that it’s a waste of time to read all those filings. There’s nothing about Volume and Momentum in them. And that’s all they seem to be interested in."