A Long Day's Journey Into Retirement Night
The Daily Reckoning
London, England
Wednesday, 19 November 2003
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*** The gift of prophecy...
*** Trade wars... the BED Spread converges...
*** 14,000 cops for the imperial visit... 'A republic, if
you can keep it'...
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We live in a nation of clairvoyants, dear reader.
"Yesterday, the Commerce Department reported that retail
sales were disappointing. The big chain stores are also
reporting lower-than-expected sales. People seem so
negative now... " said the Bloomberg interviewer, "with all
these corporate scandals and this lingering unemployment...
and now sluggish consumer spending... don't you think that
stocks will move up when people turn more optimistic and
become more confident?"
Just as people put on a bright face when they feel
worried... we would have said, if we'd thought of it... they
often put on a gloomy one when they feel most confident.
Not only have Americans rarely been more positive on the
future... they have never been so sure about it. Everyone
seems to think he knows what will happen... and most people
take action to make sure things turn out even better than
expected.
How else to explain buying stocks at today's high prices?
The danger is on the downside, a veteran investor might
say, simply because there is so much more of it. But
today's callow punters are not worried. They've looked into
the future; they know prices will go up, and they've bought
shares to take advantage of it.
How else to explain mortgaging your house... or running up
credit card bills? In a normal world, people are reluctant
to borrow and reticent to spend; they save money 'for a
rainy day' or 'just in case... '
But today's super-confident residents of Squanderville need
no savings; they've looked into the future. They know it
never rains. And they have no need of a cash reserve for
'just in case'; the cash comes along 'just in time' to make
the monthly payments, and that is all that matters.
The Wall Street Journal surveyed 53 economists. Squinting
to see tomorrow's Commerce Department reports, these
fellows could make out not only the headlines... but the
small print, too. GDP will grow by 4% this last quarter,
they said. Next year, in the first quarter, it will grow by
4.2%.
Meanwhile, the Soothsayer in Chief tells us that he may not
read today's newspapers; but he must read those of the
future! How else could he know what kind of world we would
have had if he had not taken action against Iraq when he
did? He would do it again, said he yesterday, because the
"safety of the world" depended on it.
And so does the safety of the world economic system depend
on a special trait of the U.S. Federal Reserve: its
mystical ability to pass through some sort of magic mirror
and stroll around in the future.
Of course, Fed governors could sit back and let lenders and
borrowers work out for themselves what rates to pay. But
that would betray a humble ignorance and remarkable
restraint. Fed governors love the world created by the
'free market,' but with their special talent for
foretelling the future, they believe they can create a
better one.
It is almost too marvelous to believe, isn't it? We mean,
that so many people have been given such a gift - a gift
not usually granted to humans - the gift of prophecy. What
a comfort it is to know that so many Americans are capable
of it.
Over to Addison with more news:
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Addison Wiggin in Paris...
- What's this... the day of reckoning so soon? We were just
getting used to toiling alone in despair over the bear
market rally.
- And then, last night, gold goes and does a head fake over
$400 in Asian trade... and traders feinted a run on the
dollar. The greenback skidded to an all-time low against
the euro at $1.20, if only briefly. Both moves were beaten
back... but for the first time, the critical resistance
points at $400 and $1.18 were crossed.
- Upon hearing the news this morning, your Parisian editors
suffered a wave of mortal fear for our benchmark Red Wine
indicator. And but for the Bank of Japan, we might have
seen our elixir spike to unimaginable highs of 10 dollars a
bottle!
- "Overnight, in the Tokyo session," writes Chuck Butler
over at the Everbank World Currency trading desk, "the Bank
of Japan stepped in and wrapped a tourniquet around the
dollar and stopped the bleeding, by buying [our] currency
and selling theirs. Yes, they intervened once more... The
BoJ buying of the dollar brought the dollar back to $1.19."
- Of course, we'd like to raise a glass to our friends at
the BoJ. But if this is a strategy they've developed to
help keep their trade balance in the black vis à vis the
U.S... .we suspect they've got their work cut out for them.
- First of all, here's some big news we here at the Daily
Reckoning have been suspecting would arrive soon enough:
Foreign investors and central banks currently propping up
America's credit-bubble - and with it, the international
Dollar Standard itself - have begun to lose faith. Figures
released by the U.S. Treasury show net capital inflows to
the U.S. fell more than 91% in September, from $50bn in
August to $4.2bn.
- The government took a hit, too, as foreigners bought just
$5.6bn in Treasuries, down from $25.1bn the previous month.
Drew Matus, an economist with Lehman, states the obvious in
the FT: "It appears foreigners may have tired of U.S.
treasuries."
- The current account deficit that the U.S. sports with the
rest of the world requires foreigners to sink $1.5 billion
into the homeland every day. What happens when foreigners
decide not to sign the checks? Well... the dollar falls.
Fast. Hard.
- As if that weren't enough, we got word this morning that
the BED spread has converged below the 5% level. You'll
recall the BED spread is our colleague Dan Denning's
proprietary "doomsday clock"... measuring the riskiness of
U.S. government debt versus that of the emerging market
variety. Denning: "The yield on GVT (our basket of Uncle
Sam's debt) rose to 4.57% by Monday's close. At the same
time, the yield on EMD, our basket of emerging market debt,
fell to 9.21% for a spread of 4.64%. That's the narrowest
the spread has been since I began tracking it, and down 12%
in just two weeks.
- "It's bad enough," writes Denning, explaining the
implications of a converging BED spread, "that the Federal
government runs monstrous deficits. That's bad fiscal
policy. But as Richard Russell said in his remarks in New
Orleans, it's also immoral. To rack up enormous debts you
know you will never pay and to burden your children with
them isn't just lacking in foresight. It's selfish. It's
greedy. And it's the kind of thing to make foreigners look
at your currency like they would at spoiled meat."
- Adding even more fuel to the fire, the knuckleheads in
Washington appear to have declared trade wars on the rest
of the planet, in addition to the hot ones they're already
trying to finance. The ink isn't even dry on the WTO ruling
that declared George W. Bush's steel tariffs illegal - and
the U.S. has just shot off a few warning rounds to the
Chinese textile industry. The EU is threatening retaliation
against the U.S. by December 15th if the administration
doesn't revoke its steel tariffs.
- Lobbyists for the American Textile industry, which has
lost about 316,000 jobs since the "recovery" began, wants
to "put a lid on virtually all Chinese textiles," according
Reuters. One brain-dead senator has officially proposed a
27.3% tariff on all imports from China.
- Makes us wonder if they have history books inside the
beltway. A shapely White House intern wouldn't have to lick
her fingers and leaf too far back into the 20th century to
discover a similar instance... when another group of
numbskulls tried using tariffs to stave off the inevitable
after the last credit-goosed spending-binge went bad. It's
a certain little episode in history, which time sleuths
like to call: THE GREAT DEPRESSION! Oy.
- Despite it all, a Merrill Lynch survey of fund managers
reckons 78% expect the current U.S. 'recovery' to continue
into 2004, 58% reckon shares are at fair value, and 50%
think bonds over-priced. State Street's new index of
investor confidence is also bullish; it's up nearly 1% on
the month, at its highest level for a year. And a recent
poll of economists working for major U.S. brokerage houses
found that 100% of them expected rising share prices over
the next 12 months.
- "The real problem with fund managers isn't their
dishonesty," wrote Michael Lewis in Barron's yesterday,
"it's their incompetence." But the U.S. authorities
disagree. On Monday, Morgan Stanley had to agree to pay
$50m to settle an SEC investigation into its mutual fund
business.
- Yesterday, Securities and Exchange Commission chief
William Donaldson told Congress he may ban so-called
'market-timing,' whereby big institutions trade mutual fund
shares after-hours, costing the lumpeninvestoriat dear.
- The SEC also arrested 48 foreign exchange traders on
suspicion of fraud yesterday. It had the FBI drag them out
of their Wall Street offices in handcuffs. Today, it seems
to us, the problem neither institutional dishonesty nor
professional incompetence... it's that the lumps keep buying
at the top, and selling at the bottom.