-- Posted Thursday, 4 December 2003 | Digg This Article
The Daily Reckoning
Paris, France
Thursday, 4 December 2003
- Out of sarcasm...we're speechless! A more perfect world...
- GDP up...productivity up...speculation up - Americans ruin themselves more efficiently...
- Why Americans don't revolt...Templeton warns of real- estate collapse...Nurturing with an AK 47...and more!
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We don't know what to say. The good news is overwhelming; we don't have enough sarcasm left to do it justice.
Yesterday brought word that revised numbers showed productivity rising at a 9.4% annual rate in the 3rd quarter. Isn't that remarkable? The numbers were crunched into their present shape, say the economists at Dismal.com, after a revision of GDP figures showed the economy growing at more than an 8% rate.
It all sounds vaguely scientific, but we repeat our warning of last week: don't take it too seriously. Americans are working longer and harder than ever...We cannot recall the exact figure, but it appears that an American couple works about a month or so more each year than a couple in Old Europe. (A Belgian perspective on this follows in the notes below.) With productivity up so sharply, you might think that workers would be earning a lot more money - because they're producing so much more. Not so. On the evidence, real wages have gone nowhere for the last 3 years...and nearly nowhere for the last 30 years. Household incomes are up - but only because more people work longer hours.
And why is GDP up? Because people who don't have any more money...but spend more time at work...are willing to go into debt more quickly! If you cut your own lawn, you add something to your home's beauty, but nothing to the GDP. But if you're too busy working to cut your lawn, you pay someone else $10 to do it. The GDP goes up. He then spends the money to buy things he desperately needs - everyone now lives hand to mouth - and the GDP goes up some more. But what real wealth has been added? Not a bit.
"Compared to past generations, there has been a radical, general change in mentality concerning money affairs," writes Kurt Richebächer. In the old days, a guy without a lot of money would have cut his own grass. But now he thinks he can afford to pay someone else to cut it - after all, isn't his house going up in value? If he runs short of cash, he can always get another credit card or extend his equity line.
Never before have people been so ready to borrow and spend. They work night and day to make the payments. As long as interest rates are low...and credulity is high...the GDP booms. But GDP growth no longer clocks the rate at which people get rich...but the pace at which they rush to ruin.
Meanwhile, wages barely budge. How could they increase? There has been little real investment in new factories or new facilities. And there are one billion Chinese to compete with...and another billion Indians. No wonder real earnings go nowhere. And no wonder productivity goes up. No wonder we run out of sarcasm.
So, we turn the stage over to Eric Fry, with more news:
Eric Fry, on the ground in Manhattan...
- "Nasdaq 2,000, Baby!...Here we go!" whooped a stockbroker yesterday from the office adjacent to your New York editor's. The guy was giddy that the high-tech index had finally reclaimed 2,000 - a level through which it tumbled nearly two years ago, en route to a low of 1,108 late last year. But alas, the Nasdaq could not hang on to 2,000, as it slipped throughout the afternoon to record a loss of nearly 20 points at 1,660. The Dow gained almost 20 points to 9,873.
- The dollar, meanwhile, fell to another record low against the euro at $1.211. For those keeping score at home, the dollar has slipped about 13% against the euro this year and has lost about a third of its value against the euro since the middle of 2001. The dollar index, which charts the currency against a basket of six major foreign currencies, now sits at its lowest level since January 1997...What is becoming of our beloved greenback? Is it on track to becoming a museum piece?
- The bond market fell for a third day in four, sending yields on the benchmark 10-year Treasury note up to 4.40%. Two months ago, the 10-year Treasury yielded 3.91%.
- The Nasdaq's brief foray above 2,000 yesterday marked a dubious achievement. At the 2,000-level, the Nasdaq is up a sparkling 50% year-to-date. That's very good. However, Nasdaq 2,000 is a far cry from the Olympian heights the index scaled nearly four years ago. The Nasdaq has tumbled a stunning 62% from its record-high of 5,132.
- In other words, celebrating Nasdaq 2,000 is like throwing a party because a fire destroys only two thirds of your house. But hey, at least one third of the house is still standing, and we, like our fellow optimists, would consider that reason enough for celebration...if only the fire were extinguished. Unfortunately, we think we still smell a little smoke.
- The Nasdaq's ridiculous valuation is but one of many smoldering embers. As my colleagues in Paris pointed out Wednesday, "Madness is back in style on Wall Street...The Nasdaq 100 is up more than 70% in the last 12 months. It now trades at - get this, dear reader - 97 times this year's earnings. Yahoo trades at a P/E of 112; Amazon, that great River-of-no-Returns stock, trades at 93 times earnings. These are not merely optimistic numbers, MoneyWeek quotes a pair of analysts, 'they're hallucinatory.'"
- Another smoldering ember is the speculative fervor for the stock market's riskiest shares. For example, trading volume on the OTC bulletin board - a kind of Skid Row for stocks - now exceeds trading volume on the New York Stock Exchange.
- "We're seeing a lot of speculation again," the president of a Manhattan-based brokerage firm told your New York editor yesterday. "We're seeing a lot of crazy sh**...not quite like 2000, but close."
- David Bonderman, principal and general partner of Texas Pacific Group, agrees. "Speculation is rampant," he opined at the recent Grant's Interest Rate Observer conference. To support his claim, Bonderman presented data showing that stocks selling for less than a dollar on January 1, 2003, have gained about 29% this year, whereas stocks that began the year selling for more than $50 a share have gained only about half as much.
- Clearly, signs of speculative excess in the stock market are easily visible...at least to those who care to look. But the fact that the current bear-market rally has propelled many investors to sizeable gains seems to encourage throwing caution to the wind. If you're willing to stomach an extraordinary amount of risk, you can indeed profit in an overvalued market (see: 'The 22 Rules of Trading in a 'Fictitious Economy' ) - but for our taste, the risk outweighs the potential reward.
- Signs of speculative excess in the bond market may be even easier to see...to those who care to look. James Grant, editor of Grant's Interest Rate Observer, has been looking at the bond market very carefully for more than three decades. And what he now sees makes him very nervous.
- "Convertible bonds and junk bonds are priced for a more perfect world than the one you read about in the Wall Street Journal," Grant asserts. "To judge by today's low yields, the corporate debt market has relocated from planet Earth to a far better place. In this paradise, companies don't default, interest rates don't rise and rating agencies don't downgrade. Today, highly speculative, triple-sea-rated companies are borrowing at just about 8%. [Whereas], the average yield for all high-yield bonds with 10-year maturities is just about 7%...within 18 short months, a panic to sell low-rated bonds has given way to a stampede to buy them...
- Grant continues: "The stock market, like the speculative- grade corporate bond market, is overvalued, and risk almost certainly overshadows reward at prevailing multiples. At least, though, stock gamblers can hope that the market will easily make them against another two- or three-bagger. There is no such possibility in straight corporate debt. Much more can go right and wrong, from which it follows that the burden of proof for buying a low-rated bond at a fancy price properly falls to the bulls."
- So there you have it, stocks and bonds are both overpriced...Next.
Bill Bonner, back in Paris...
*** John Templeton, interviewed in Equities Magazine:
"It would be unlikely that the bear market is over when the American stock market is only down about 30%, when in the biggest boom ever, it had been up 10 times over where it had been years earlier...Following such a large increase, a 30% decrease is small." "Every previous major bear market has been accompanied by a bear market in home prices...This time, home prices have gone up 20%, and this represents a very dangerous situation. When home prices do start down, they will fall remarkably far. In Japan, home prices are down to less than half what they were at the stock market peak. A home price decline of as little as 20% would put a lot of people in bankruptcy." "Emphasize in your magazine how big the debt is...The total debt of America is now $31 trillion. That is three times the GNP of the U.S. That is unprecedented in a major nation. No nation has ever had such a big debt as America has, and it's bigger than it was at the peak of the stock market boom. Think of the dangers involved. Almost everyone has a home mortgage, and some are 89% of the value of the home (and yes, some are more). If home prices start down, there will be bankruptcies, and in bankruptcy, houses are sold at lower prices, pushing home prices down further. After home prices go down to one-tenth of the highest price homeowners paid, then buy."
*** With our reserves of sarcasm depleted, we were ill- equipped for the editorial page obiter dicta of Thomas Friedman and David Brooks in the International Herald Tribune. Both columnists approve of American troops stomping around Iraq; but neither seems to have the stomach for real war...nor the heart to give the honest soldier the respect he deserves. Instead, they send him off to do their sordid errands and then, when he comes back flat, they cannot bear to open the bag and look the poor grunt in the face. They would rather imagine troops as they have never been and as no serious man would ever want to see them - dressed up in black turtlenecks with Birkenstocks on their feet and glasses of chardonnay in their hands.
American soldiers are not in Iraq as conquerors or warriors, say the two; nor are they fighting for glory, nor for revenge, nor even for national defense, nor any of the things soldiers are trained to do. Instead, they're "idealists" and "committed democracy builders" sent, alas, by a "non-healing administration" on the "most important liberal, revolutionary U.S. democracy-building project since the Marshall Plan... "
"Nurturing," says the cuddly Friedman, "that is our real goal in Iraq."
We gasp for air. The largest, most sophisticated and most lethal military force ever assembled - at a cost of, what, a quarter of a trillion dollars - was sent to 'nurture' the desert tribes?
We would like to point out that the Marshall Plan was not exactly intended to build democracies. All the major combatants in WWII were already democracies...and even Benito Mussolini got a larger percentage of the popular vote than George Bush.
*** "I don't understand why Americans don't revolt. Middle- class Americans. They put up with so much...but they seem so docile."
The woman speaking was from Belgium, but one who has been living in the U.S. for the past two years. We were seated together on the train from London to Paris.
"People in Europe think Americans pay a lot less in taxes...but it's not true. We pay a lot of taxes in Maryland. Plus, we have pay for health care and education. I really don't know how middle-class Americans do it. If they want to have children...it's so expensive. In Europe at least, a middle-class family can live reasonably well. Medical care is nearly free - and usually very good. So are the schools. And everybody gets at least a month off.
"But even more amazing is that Americans think they are so privileged. I am doing my best to avoid becoming a European snob...and my husband, who is American, hates it when I criticize things, so I don't do it...and also, I love America...it is very interesting...fascinating, really.
But Americans go deeply into debt trying to keep up with their lifestyles...They eat badly. They dress badly. They often don't look very healthy. They don't really live very well. They have no time...always running from to something...But they think they have the greatest lives in the world. It is this attitude that I find most incredible. Americans seem to have no sense of humor or perspective about themselves... They seem unable to look closely at themselves and criticize. At least...I don't see it. In Belgium, by contrast, we criticize everyone and everything. We're known for our sarcasm."
"Hmmm...we'd probably like Belgium," replied your editor.
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THE GOLDEN MEGATREND
By Mary Anne & Pamela Aden
Some very important changes in the international investment markets have occurred since 2000:
* Stocks ended their 19-year bull market. Since peaking in 2000, the S&P 500 declined nearly 50%, although a major bear-market rally is now underway.
* Gold ended its 20-year bear market. From its low point at US$255/ounce in 1999, gold has now gained more than 50%.
* The U.S. dollar ended its seven-year bull market. From its peak in 2001, the U.S. dollar index has declined more than 24%.
From a technical standpoint, these changes are large enough to be considered investment "megatrends." Megatrend changes don't happen often, and when they do, the new trend is likely to last for many years. (See: http://www.adenforecast.com/article_mega.htm )
Profiting from megatrend investing boils down to one factor: going with the trend. This is one reason why we recommend investing in gold, gold shares and foreign currencies. These markets have been where the action is in recent years...and there's more to come.
Gold has been in a solid bull market since reaching its lows in 2001, almost three years ago. Now, it hovers over $400 an ounce - a seven-year high in U.S. dollar terms - and it's likely to be headed higher, probably until at least next year and possibly longer.
The demand side for gold is very revealing. We believe a 'golden era' is starting, which in many ways is similar to the early 1970s. In India, home to a billion people, gold is more than a traditional store of value, but an inseparable part of the culture. As India develops an increasingly prosperous middle class, investors are purchasing gold.
In China, home to 1.3 billion people, private gold ownership has been outlawed for generations. But in 2002, the Shanghai Gold Exchange opened and started free trade in gold for the first time in China's history. Even more recently, China legalized gold investment by private citizens.
Considering the high savings rate in China, gold is a logical investment. It's estimated that the equivalent of US$36 billion in Chinese private investment could move into gold in coming years. Plus, the Chinese government is moving to increase its low 2% gold reserves. If these predictions come to pass, China alone will consume 40% of the world's entire gold production for years to come.
Right now, however, the primary factor driving gold's advance is the weak U.S. dollar. Gold and the dollar generally move in opposite directions. And interestingly, the U.S. is now in a position where it needs and wants an even weaker dollar.
The global economy has created huge imbalances as the world is increasingly divided between countries that pay high wages versus countries where workers earn low wages. Since low-wage countries are able to produce cheaper goods, the rest of the world has been buying up these products like mad, especially U.S. consumers. Wal-Mart, for instance, imports billions of dollars in Chinese goods each year.
A similar phenomenon is underway in the service industries. For instance, with global telecommunication networks capable of delivering a message anywhere in the world, for a fraction of a cent per minute, companies are moving service jobs from the United States and other high-wage countries to India and other low-wage centers.
The end result is that China is now becoming the most popular location for foreign investment and jobs are moving there. This has led to the greatest elimination of U.S. jobs since the Great Depression, with bankruptcies at record levels and poverty on the rise.
In the meantime, the U.S. consumer keeps spending, which has helped keep the world and U.S. economy afloat, thanks to low interest rates and the housing boom. But it's also created a worsening trade (or current account) deficit, now by far the largest in U.S. history.
At over 5% of GDP, the trade deficit is at a breaking point that typically triggers a currency drop. The last time the deficit reached a record was in the mid-1980s during the Reagan presidency. This produced a 57% dollar fall starting in 1985.
But today, the imbalances are much larger. Most economists agree the dollar must decline 15%-35% from present levels, on a trade-weighed basis, to reduce the current account deficit to a more sustainable 3% of GDP. Even if this happens, it may not resolve the trade imbalances, but it will be a step in the right direction.
The bottom line is that the trade deficit combined with the federal budget deficit, which is also the largest in U.S. history, will keep downward pressure on the U.S. dollar.
A weaker dollar would allow the U.S. to compete by providing cheaper goods, which would help reduce the trade deficit. It would also seem to help the economy, boost job creation, reduce deflationary pressures and ease the debt burden by cheapening the dollars owed. These factors are all a political positive from a U.S. perspective, and with an election coming up in 2004, everything seems to be pointing to a weaker dollar.
Looking at the big picture, we believe the dollar could make a decline similar to those in 1972-78 and 1985-87. The dollar has been in a major decline since 2001. So far, the dollar index has declined 24%. But if the current bear market is similar to the last one, we could see the dollar fall to the 1995 low or to the bottom of the channel, which would be a new low.
That alone would push gold sharply higher. And since the precious metals generally move together, it would further boost those markets too, as well as gold and silver shares, and the foreign currency markets. These are the areas where we see the best profits going into 2004.
Good investing,
Mary Anne & Pamela Aden,
For the Daily Reckoning
P.S. Gold's current trading range is between US$330 and US$415, the prior peak in 1996 and the peak in 1999. With gold reaching a new high in October 2003, the market is getting closer to the higher side of the band. As long as gold stays above US$345, our next target is US$415. A clear break above US$415 means gold is moving into an even higher level, which could signal prices as high as US$500.
In other words, gold is still cheap. It's NOT too late to buy.
Editor's note: Mary Anne & Pamela Aden are internationally known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts and recommendations on gold, gold shares and the other major markets. They are also members of The Sovereign Society's Council of Experts and contributors to The Sovereign Individual, the Sovereign Society's monthly letter detailing opportunities for foreign/alternative investments and financial privacy.
To learn more, see: The Sovereign Society
A version of this essay, including specific recommendations, first appeared in the December issue of The Sovereign Individual.
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-- Posted Thursday, 4 December 2003 | Digg This Article
