-- Posted Thursday, 25 September 2003 | Digg This Article
The Daily Reckoning
Paris, France
Thursday, 25 September 2003
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*** Dow has a bad day...dollar falls...gold up...
*** Somebody hurts in America; Government moves...makes it worse
*** Seven old men...China's key vote...Hillary's call...and more...
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"We have a responsibility," said the U.S. president on Labor Day, "that when somebody hurts, government has got to move."
Judging from the unemployment, bankruptcy and foreclosure numbers, there are plenty of hurting people in America. But not to worry; government is on the move, typically - in the wrong direction.
The source of the great stream of hurt that drains the continental United States lies, we believe, in the Guns and Butter programs of the Johnson Era...followed by Richard Nixon's 1971 decision to break the world's monetary system away from gold. From these polluted headwaters comes the gush of cash and credit that now swamps low-lying consumers all over the 50 states - and beyond.
"I am more concerned about somebody finding a job than I am about a number on paper," George W. Bush said in August.
If the president really wanted to help people find jobs, he might want to concern himself with the following numbers:
Between 1997 and 2000, consumer debt grew by 27.3% - up $1.5 trillion. Disposable income rose only $1.1 trillion. In the 1960s, the ratio of new debt to new income was only 30%. In the 1980s it had grown, but was still below 50%. But in this mad, late bubble world, debt rose 131% faster than income.
The recession of 2001 should have forced a reduction in debt levels; that is what recessions are for. People typically pay down past borrowings, save their money and get ready for the next growth cycle. The happy people who describe the recession of '01 as the 'mildest recession in the postwar period' miss the point - it was not a mild recession, but a failed one.
Government moved. Dams were broken. Dikes cut. Sluices raised. Locks and spigots opened. Soon consumers were not just hurting, but drowning. Interest rates were cut further and faster than at any time in history. In just 6 quarters, the federal budget plummeted from a surplus of $306 billion to a deficit of $526 billion (annualized numbers). Consumers and businesses were soon up to their knees...and then their necks...in new debt and credit.
"During the two and one-half years since end-2000," explains Dr. Richebächer, "indebtedness of the domestic nonfinancial sector has surged by about $3.3 trillion and that of the financial sector by another $2.3 trillion, in total by about $5.6 trillion." During this same time, GDP only increased $416 billion, of which $185 billion came from government spending and another $100 billion from statistical adjustment of computer numbers. "In other words, more than two-thirds of it was rather phony growth," Richebächer concludes.
Consumers can barely keep their heads above water. Over the last 5 and a half years, they've added $3.3 trillion to their debts, while their incomes have risen only $2.15 trillion. And currently, debt is growing 3 times faster than income.
So far, in the 4 years we have been writing the Daily Reckoning, not once has a government economist called to ask our opinion. We will give it anyway. Advice to the Bush Administration: stand still.
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For the time being, they're a little cheaper at bn.com.
And now, Eric Fry, our man in the Big Apple with the latest goings on:
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Eric Fry on Wall Street...
- Yesterday afternoon, the Ghosts of Septembers Past finally emerged from their dank, eerie hollows...and investors took fright. Even the most intrepid members of the tech-stock-obsessed lumpeninvestoriat cowered at the sight of minus signs and down arrows. The Dow Jones Industrial Average slumped 150 points to 9,425 and the Nasdaq tumbled more than 3% to 1,843. The dollar also slipped again, falling nearly half a percent against the euro to $1.147.
- "One of those idiotic talking heads on TV called today's stock market selloff a 'healthy, orderly decline,'" chuckled Michael Martin, a darn good stockbroker and darn good friend of your New York editor. "But I can tell you firsthand, for the folks with actual money at risk, today's decline felt very unhealthy and disorderly."
- 24 days into the accursed month of September, the worst month of the year for stocks, the bulls have absolutely nothing to show for their efforts. The Dow has gained a whopping 10 points month-to-date, while the S&P is ahead one meager point.
- Of course, the bears have nothing to show for their efforts, either. Betting against this stock market has been even less rewarding than betting with it. However, the particular breed of bear that also buys gold stocks has plenty of cause for celebration. Since the last day of August, the precious metal has tacked on about $12, and the XAU Index of gold stocks has surged ahead by 7%.
- Yesterday, gold gained another $1.40 to $388.40. Not a spectacular showing, admittedly, given the stock market's steep decline. But gold's steady march toward $400 has been impressive and has an air of inevitability to it.
- Furthermore, gold's resistance to selloffs is a victory in itself. Remember, this is the same precious metal that for two decades forgot what a bull market looked like.
- But the new millennium has been kind to the yellow metal. A colossal stock market collapse helped to kick things off. And the ensuing dollar selloff - fanned by the never-ending stream of lame remarks by Fed governors and Treasury officials - has provided ample fuel for a sustained rally.
- Now that the yellow metal has soared more than $150 from its lows of three years ago, the message from the gold market seems pretty clear: avoid dollars. The dollar's slide is becoming the investment story of the year, which means that gold's rally is at least a fascinating sub- plot...And this monetary drama is becoming more interesting - and frightening - by the day...Particularly since it has become so fashionable in the corridors of power in Washington to advocate "market-based" exchange rates - code for "weak dollar". A weak dollar, it is widely believed, will lead to a strong economy. We have our doubts.
- Like a Greek tragedy come to life, the Fed and the Treasury - by seeking to weaken the dollar - are rushing headlong toward the exact fates they hope to avoid. As the monetary tragedy unfolds, we dollar-holders will likely avoid an Oedipal fate like sleeping with Mom or killing Dad. But we will not avoid much higher inflation and much lower economic growth.
- And the outcome could become even more tragic if, for example, our foreign creditors were to curb their appetite for American Treasury bonds. "Foreigners bought almost 80 percent of the net increase in Treasury and agency debt during the quarter," notes Floyd Norris of the New York Times. "They now own 38 percent of outstanding Treasuries, more than double the figure of a decade ago."
- We can't know, or even imagine, what hardships may befall us if foreign investors like the Japanese and Chinese reduce their exposure to U.S. dollars...but the results wouldn't be pretty.
- "Seven old men sitting around the room playing a sophisticated game of pin-the-tail-on-the-donkey can't make any of us richer," quipped Porter Stansberry in a recent essay for the http://www.dailyreckoning.com website. Porter was referring, of course, to the "old men" who comprise the Federal Open Market Committee.
- This august group of bankers, chaired by the esteemed Old Man Greenspan, has been praising the virtues of dollar devaluation for months...and now they are getting their wish. To be fair, the dollar's woeful condition is not entirely the fault of the FOMC or Treasury Secretary Snow. But it is not entirely NOT their fault either. The Fed and Treasury are engaged in a kind of collusion to lower the dollar's value. And that's a very dangerous game to play, especially for a country like the United States that relies so heavily upon foreign capital to finance its economy.
- It's true that the old men at the FOMC can't make us richer. But they are very capable of making us poorer...unless we own gold. [Ed note: for an overview of the argument in favor of the yellow metal, see:
The Case For Gold http://www.agora-inc.com/reports/905STCFG/W905D503/ ]
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Bill Bonner, back in Paris...
*** We remember urging you to buy gold when it fell below $350. We don't remember buying it ourselves. Now we don't know what to do. The price will go up and down. If it does what we expect, buying at $388 - today's price - will turn out to be a brilliant move; gold will go over $1,000 before this bull market is over. But if it falls back below $350, we will feel like idiots for buying at $388. On the other hand, we may never see $350 again.
*** Likewise, the euro. We suspect that the euro will rise to $1.50 or $2.00 before this cycle is over. We feel a little stupid buying euros at $1.14 when we could have bought all we wanted at 88 cents. But how much stupider will we feel when the euros hits $2.00?
*** Speaking of numbskulls, just how stupid are the Chinese? We are told, by Treasury Secretary Snow as well as by a number of steamy politicians, that the Chinese are shrewdly manipulating their currency (keeping it pegged to the dollar for almost 10 years) in order to undercut U.S. prices and steal American jobs. But what could be dumber? It is like selling good whiskey for half of what it is worth in order to get the business...or allowing a derelict to run up a huge bar tab for fear his will take his custom elsewhere.
The U.S. dollar has fallen sharply already. The price of gold has risen. These trends seem unlikely to reverse soon. Yet the Chinese central bank has only 2% of its reserves in gold. Nearly all the rest is in dollars. Holding the yuan down means that they still build up dollars in their vaults, just not as many of them. If the Chinese central bank calls us, we'll tell them it is dumb to hold so many dollars and so little gold. It is dumber to continue accepting dollars, in effect building up a huge credit with a country that can't possibly pay up. And it is dumberer still to take the dollars in at a fixed exchange rate, getting less for your products than they are really worth.
Some day, perhaps soon, Secretary Snow may get more than hopes for. The Chinese may wise up.
If they do, investors who have managed to get in on the Sino Bubble will watch their yuan holdings rise dramatically. Until, of course, the Bubble finds its pin.
[Ed note: The Oxford Club's James Boxley Cooke thinks he's figured out how best to profit from China's growth machine...
See: The Single Biggest Investment Opportunity of 2003 http://www.OxfordClub.com/DaiRec.cfm
More below...]
*** "My guess is that the Clintons encouraged Gen. Clark to run," began our friend Dan Denning as we sat together on the train to Cologne, "because they're beginning to realize that Bush is beatable. So they sent in Clark - who, from what I hear, is dangerously incompetent in any post - as a stalking horse. He breaks up the field of democrats and makes it tougher for Bush to posture as a military leader. If he does well, Hillary can join him on the ticket. If he does poorly, she can ignore him, and jump into the race at the last minute...making a grand and noble gesture out of it, saying that she is saving the party from certain defeat."
*** Who casts the key votes for next year's presidential election? George W. Bush has placed himself in a very unusual position; we can't think of any time in the past when a U.S. president's career was more in the hands of foreigners. His success next autumn depends on two things - neither of which is under his control. If the Chinese or Japanese want him out of office, all they have to do is sell U.S. Treasury bonds. The bond market would collapse overnight, interest rates would skyrocket. The U.S. economy would droop immediately.
In Iraq, it is the terrorists (often mis-identified in the foreign press as guerilla warriors or even freedom fighters) who may have the decisive vote. If they are as organized and well-equipped as the Bush team warns, they could mount a series of nasty attacks that might turn American public opinion away from its Iraq adventure.
But even if terrorists have the decisive vote, how would they use it? Terrorists might prefer to have Bush in office; there is nothing like the presence of foreign troops to radicalize an otherwise indifferent population.
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The Daily Reckoning PRESENTS: Pao Mo! Pao Mo! Now that we know the real way to say 'bubble' in Chinese, here's a way for you to get in on it before it pops.
THE NEXT EMPIRE By James Boxley Cooke
Everyone in the West has long talked about China in terms of its massive potential. But the future is now.
Many different elements - as you'll soon see - are combining forces. And China is beginning to realize its potential as a world economic superpower. Let's take a closer look at some promising developments in China over the past several years...
We've seen diplomatic breakthroughs, such as the U.S. designation of China as a "most favored nation," and its entry into the World Trade Organization. And just as importantly, we've seen Hong Kong's growing free-market influence on the motley politics driving the mainland economy. We've seen small businesses springing up from the Chinese countryside like mushrooms. In fact, we've seen every indicator that the people of China, including its huge middle class, are ready for a full-scale economic revolution.
China is not only the world's most populous nation, with over 1.3 billion citizens; it's also Asia's fastest-growing major economy. And has been for over a decade. Even with the current global economic slowdown, China is still likely to grow at more than 7% a year. That's a huge number for an economy this size. And it represents huge potential profits for us as investors.
I think the potential for the newly capitalistic Chinese economy is absolutely enormous. And while there are certainly political risks to keep less intrepid souls at bay, even a small investment in this region has the potential to make a big impact on our portfolios in the months and years ahead. Take, for example, the thoughts of legendary hedge-fund manager [and friend of the Daily Reckoning] Jim Rogers, who enthused last year that no country's economic prospects excite him more than China's. In a Barron's interview, Rogers said, "The 21st century is the century of China... Everybody should teach their children and grandchildren Chinese. "There is no question China is going to dominate all of Asia," Rogers added. "...and the whole world, eventually." Strong words. But I think he's right. As I've said often, the development of China may well be the single-biggest investment story of the decade ahead. I suggest investing now, rather than trying to play catch-up later.
One vehicle we recommend is the closed-end Templeton Dragon Fund, managed by Mark Mobius. It's traded on the New York Stock Exchange, and gives us broad diversification inside China with the best emerging-market manager in the business. As Oxford Club advisory panelist Lynn Carpenter writes, "One of the nice things about a closed-end fund is that - unlike a regular mutual fund - the assets under management don't fluctuate daily depending on contributions or withdrawals. Since the assets are stable, the manager of the fund can invest the assets for the long-term, without having to worry about redemptions." That's key. We want Mobius putting money to work when he sees opportunities, not when retail investors decide to send him cash. The same is true on the sell side. We don't want him pulling the trigger just to meet shareholder redemptions.
Yet for all its potential, many investors still blanch when it comes to investing in this part of the world, noting that China is still a communist nation with a notoriously corrupt bureaucracy and only a gradually evolving rule of law. Are there enough positives to justify risking his capital in this part of the world?
Yes, indeed. Sure, China is an area fraught with risks. It's no place for an investor for whom preservation of capital is paramount. But for more aggressive investors, it is a potential bonanza. Let me start with the basics. In 2001, China grew at more than seven times the rate of the U.S. economy, despite the fact that the country's population is more than five times as large. Yet the vast majority of U.S. investors remain oblivious to the investment implications, even though the economic story is front-page news. According to Andy Xie, a leading economist at Morgan Stanley in Hong Kong, "China's rise as a manufacturing base is going to have the same kind of impact on the world that the industrialization of the U.S. had, perhaps even bigger." In fact, China is already the world's fourth-largest industrial base, behind only the U.S., Germany and Japan. Already China makes:
* More than 50% of the cameras sold world-wide * More than 35% of the televisions sold world-wide * More than 30% of the air conditioners sold world-wide * More than 25% of the washing machines sold world-wide * More than 22% of the refrigerators sold world-wide These numbers allow you to see the enormous impact that China is already having. But that impact is only just beginning. China's entry into the World Trade Organization is accelerating these economic trends at light speed. Why? World Trade Organization membership cuts production costs, forces down tariffs, and removes obstacles to selling overseas. That, in turn, is drawing record direct investment in China.
Over $600 billion has been invested over the past two decades. And while individual investors and brokers are still asleep at the wheel, Fortune 500 companies are falling over themselves to take advantage of what's happening in the world's most populous country. For instance: * GM purchased more than $1 billion in spare parts from China in the last few years and plans to increase that figure dramatically in the near future. * Ford announced recently that it plans to boost its purchases of auto parts in China to as much as $1 billion annually starting this year (2003). * General Electric expects purchases from China - both parts and finished goods - to hit $5 billion annually in the next three years. * Wal-Mart concedes that more than $10 billion in Chinese- made goods are sold in its stores every year. * Motorola says its total investment in China will hit a record $50 billion this year. As you can see, the biggest investors in the U.S. - the Fortune 500 - are already plowing money into China.
With the exception of Hong Kong, however, markets inside China are too wild, unregulated and risky for us to gamble our capital there directly. For these reasons, the best 'safe' investment vehicle for our members remains the Templeton Dragon Fund. The fund is broadly diversified between Hong Kong, Taiwan and China and, as I mentioned before, managed by the world's leading emerging market manager, Mark Mobius. In my view, the Templeton Dragon Fund is the safest, most-liquid way to obtain a pure play on the growth of China.
I remember our Club's Investment Director, Alexander Green, speaking at an investment conference at which he called China perhaps the single-biggest investment opportunity of the decade ahead. At once, a hand in the audience shot up. "Everyone comes back from China awestruck about the growth that's occurring there. But, in my opinion, China will never become a real investment opportunity until it quits relying on exports and starts developing its own domestic market." Tell that to General Motors, I say. For the year ended December 2002, GM reported that it sold over 264,000 vehicles in China, a 325% surge over 2001. And its goal is to have launched at least four new models in the world's fastest-growing auto market by the time this year is through. "Growth potential remains enormous in China," said Phil Murtaugh, chairman of GM China. "We will respond with an unprecedented series of product launches and continue to seek additional opportunities." (Incidentally, industry experts estimate that GM's profit margins are at least twice as high on cars it makes in China as on similar models made in the U.S.) For years investors have talked about the enormous potential of China's gargantuan market. But, in the end, it always seemed to boil down to potential and little else. There's a good reason for this. China has a well-deserved reputation as a fickle and ornery place for foreigners to do business. China's enigmatic legal system has only recently begun to honor property rights. Chinese entrepreneurs have often distinguished themselves primarily by aggressively pirating Western products like software, compact discs and cell phones. And foreigners have often tripped themselves up by overpaying for licenses, industrial land and office space.
But things are changing, rapidly and for the better. Just a year after China joined the World Trade Organization, and two decades after it began allowing foreign companies to invest locally, multinationals are quickly capitalizing on China's fabled market. Chinese consumers - in droves - are now buying products from both domestic and foreign manufacturers. As the NY Times reported: "Already, the Chinese buy more cell phones than consumers anywhere else. They buy more film than the Japanese. They now buy as many vehicles as the Germans." * For companies like Siemens and Motorola, China has become the single-most important market for mobile phone handsets and other equipment, accounting for billions of dollars in annual revenue. * Japan's Toshiba now says it sells two-thirds of what it makes in its 34 China-based operations to the Chinese. Local sales were more than $2.5 billion last year. * McDonalds and Kentucky Fried Chicken have 700 China-based restaurants between them and open scores of additional stores each year. * Eastman Kodak controls an estimated 63% of the domestic market in China for rolled film. * Even Starbucks has found plenty of urban tea drinkers ready to spend $2.50 for a latte. Yes, foreign companies are doing very well in China. But, for most of them, it's still a small percentage of their total sales and profits. And the Chinese are too smart to let foreign companies rake in all the dough. There is tremendous opportunity for local Chinese companies as well. And American entrepreneurs are rapidly moving in. The Wall Street Journal confirms it. As Leslie Chang recently reported: "Last year China became the biggest recipient of foreign investment, for the first time surpassing the U.S. Foreign investment jumped almost 13% in 2002 to $52.74 billion. Even SARS, of which more than 60% of all reported cases worldwide appeared in mainland China, so far appears not to have dented the country's essential appeal: cheap labor, improving technology, and a fast-growing consumer pool." In the future there will come a day when investors everywhere wake up and recognize China as "the opportunity of a lifetime." Dozens of mutual funds will spring up, offering myriad ways to capitalize on growth in China. Stockbrokers will call their clients and pitch their new China products with enthusiasm. "Business Week" and "Fortune" will run cover stories about the phenomenal growth in Chinese capital markets. Even your friends and colleagues will start telling you about the unprecedented investment opportunity they see in this nation of one and a quarter billion. And that, my friends, is when we'll be getting out.
Sincerely,
James Boxley Cooke, for The Daily Reckoning
Editor's note: James Boxley Cooke is a former executive with T. Rowe Price, one of the oldest and most respected names in mutual fund management, with over $200 billion in assets under management. He is currently the Chairman of the Oxford Club.
In addition to the fund he mentions above, James believes he's uncovered a unique – but urgent – opportunity to capitalize on China's incredible growth prospects...in particular, its increasing demand for power. He's convinced that a small investment in this company will safely earn at least three times the amount originally invested within the next few years.
For more information, read James' report:
The Single Biggest Investment Opportunity of 2003 http://www.agora-inc.com/reports/OXF/WOXFD931/
-- Posted Thursday, 25 September 2003 | Digg This Article
