The Trouble with the Whole World

October 29, 2003


*** Party time! Quick...before the hobgoblins come out!

*** Dow up 140...Fed does nothing...debt counseling clients in worse shape than ever...

*** Buffett sells the dollar...gold down...what recovery?...news from the savannah...and more!

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"Party like it was 1999," says a message from a friend. October is almost over...all that is left of it are the hobgoblins, demons and spooks of Halloween.

So why not enjoy it? The stock market partied yesterday - with the Dow up 140 points on news that the Federal Reserve had decided to do nothing at all.

One percent...not 1.5% nor .75% nor any other number...was deemed the correct level for short-term borrowing by the Federal Open Market Committee. Said the august group: "The committee judges that, on balance, the risk of inflation becoming undesirably low remains the predominant concern for the foreseeable future."

"Artificially Low Rates Will Cause More Future Grief," warns a headline in the Korea Times.

We don't know whether they are artificially high or artificially low. But we know they are artificial. And since there are a lot of possible numbers, the one chosen the Fed is more likely to be wrong than right.

We presume that the Korea Times is on the mark with its suggestion that rates are lower than they should be. Rarely do government appointees make it hard to borrow in advance of national elections.

We presume also that the Korea Times is right about the "future grief." Americans are undeniably adding to their debts. Rarely do people borrow in order to spend more...without regretting it. Myvesta, a credit counseling company, reports, for example, that its clients have increased credit card and unsecured debt by 50% over the last 12 months - to an average of $77,036. Mortgage debt has risen by 25% to $207,958.

Still, the prevailing mood is one of optimism, self- delusion and mass hallucination. Yes, Americans are going deeper into debt, say the kibitzers, but consumer spending is powering the U.S. economy to a strong recovery. We'll be able to work our way out of debt, says practically everybody.

Americans are hard-working people, as everyone knows. But so are the Chinese and the Indians. The problem for a nation working its way out of debt is that it has to do more than just moan and sweat. It has to make something it can sell. And as time goes by, Americans spend more and more money...but make fewer items that they can exchange for ready cash. In the past year, retail sales rose 6.3%, but manufacturing fell 1.6%.

How we will 'work our way out of debt' without actually producing anything is yet to be discovered.

We don't know what will happen, but at some point, if not this year, maybe the next, the zombies and werewolves are likely to be out in force.

Over to you, Addison...

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Addison Wiggin, writing in Paris...

- The Sage of Omaha said he never bought foreign currency - until now. Yesterday's BBC report tells us that Warren Buffett is worried about the dollar. The U.S. government deficit has "greatly worsened," he said, "to the point that our country's 'net worth,' so to speak, is now being transferred abroad at an alarming rate." The budget deficit this year is nearly twice the previous record.

- "Our country [the U.S.] has been behaving like an extraordinarily rich family that possesses an immense farm," Buffett warned in an interview with Fortune magazine. "In order to consume 4% more than we produce - that's the trade deficit - we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own." Continuing his analogy, Buffett goes on to explain that, as foreign ownership of the "farm" grows, income flows out of America in the form of dividends and interest payments.

- The U.S. trade deficit with China was a record $11.7 billion in August, according to U.S. government figures cited by Bloomberg. The trade gap with China, which widened to $77 billion in the first 8 months of this year, was a record $103 billion last year. "We have entered the world of negative compounding," laments Warren. "Goodbye pleasure, hello pain."

- Back in the bubble days - when New Era hero George Gilder and his ilk 'got it' - Buffett was crying wolf. When it came to investing in Cisco, Yahoo!, or Amazon, Buffett just didn't 'get it.' He couldn't understand the valuations...so he stayed away. And unlike the thousands - nay millions - of investors with the New Era light flashing in their eyes, Buffet still has his money. In fact, as we pointed out a few days back, Buffet has more money than he has investment ideas.

- "I am crying wolf again," Buffett continues, "and this time, I'm backing it with Berkshire Hathaway money. Through the spring of 2002, I had lived nearly 72 years without purchasing a foreign currency. Since then Berkshire has made significant investments in - and today holds - several currencies."

- Coca Cola announced another layoff yesterday. Nine hundred more people will get pink slips. Coca Cola was one of the companies that helped make Berkshire Hathaway shareholders into millionaires...and Buffett famous for it. Now he regrets not having sold the stock in '99...he wished he had got going when the going was good.

- Easy Al and his Fed pals decided after breakfast yesterday to further underwrite the rapidly swelling U.S. asset and housing bubbles; they left interest rates unchanged at 50-year lows. And there they will remain for at least another six weeks.

- "Surely it must mean something when U.S. house prices are up nearly 20% in two years," writes our London correspondent, Sean Corrigan, commenting on the Fed's decision, "pushing up medical costs, tuition fees and insurance premiums by double digits, too? Or that good, old, speculative equities are roaring - with Semiconductors up 136%, Internets up 142% and Networkers up 209%? Or that four major commodities indices - each with a different composition - are up between 37% and 55% from their late- 2001 lows?

- "Doesn't it matter that long bond yields on U.S. Treasuries have risen 1% from their lows...meaning a 14% drop in T-bill prices? Shouldn't economists worry that U.S. household credit continues to boom, as current and budget accounts yawn ever-wider to record gaps...?"

- Well, apparently not. The Fed's official communiquÈ stated: "The probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level. The Committee judges that, on balance, the risk of inflation becoming undesirably low remains the predominant concern for the foreseeable future. In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period."

- In plain English, the Central Bank of history's greatest debtor nation thinks it wise to keep on fuelling today's enormous consumption of capital.

- The lumps loved it...by the market's close, fools had rushed in to push the Dow up 140 to 9748, the S&P 500 up 15 to 1046, and the Nasdaq up 49 points to 1932. One wonders whether the greater fools will show up when those in question decide that buying stocks at these valuations isn't such a good idea.

- Select foreign currencies also loved the Fed's decision. "The Kiwi [New Zealand Dollar]," writes Chuck Butler, our friend over at the Everbank trading desk, "hit a 6-year high overnight, and hasn't stopped on profit taking! In December 1997, the Kiwi last traded at .6142, and again, it was going in an opposite direction then on the slippery slope down to 39 cents 3 years later! Both the Aussie [Australian Dollar] and Kiwi got a nice kick when the Fed left rates unchanged, which gives the positive interest rate differential that both of these enjoy, new life!"

Chuck also reports that the "Commodity Currencies" of Australia, New Zealand, Canada and South Africa remain the top performing currencies v. the dollar this year... [If you're interested in learning more, you can call Chuck Butler at 1-800-926-4922 (tell him Addison sent you), or go to:

Everbank World CurrencyInvesting ]

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Back in Ouzilly...

*** Recovery? "We completely fail to see any recovery at all in the United States," writes Kurt Richeb‰cher.

*** Rather than work their way out of debt, our guess is that Americans will default. Their debts are denominated in dollars. Sooner or later, the dollar will fall substantially, wiping out trillions' worth of obligations. *** The price of gold fell $4.80 yesterday. It is still $100 above its price in 1999.

*** Our correspondent in South Africa, Evan Pickworth, brings us the latest news from the savannah: "I don't see the Daily Reckoning opening an office in Harare any time soon. The political situation in Zimbabwe is now very bad. On Monday, police arrested four directors of the publishers of the country's Daily News.

"Only problem was, when they arrived to arrest the Chief Executive, they couldn't find him. Minor problem for the Zimbabwean gulag. They simply arrested his niece instead as some kind of a hostage.

"The reason for the arrests is that the government has accused the publishers of publishing the Daily News illegally without a license.

"A court, however, nullified the closure of the newspaper on Friday as they felt the commission which refused the license was improperly constituted and had exhibited bias against the paper.

"The government went ahead with their arrests on Monday anyway - what's a small court order to them? Apparently, in the swoop, they also arrested a retired high court judge - in my opinion probably to send a message to the 'recalcitrant' judges who made the ruling against the government-run media commission on the Friday.

"If convicted, the directors - including the CE whose niece was arrested as a hostage - face at least two years in jail."

*** Back in the States, the Financial Reckoning Day Brigade is out in full force.

"Greetings, Addison," begins a reader:

"I visited a local Borders in Tulsa, OK over the weekend and was able to find a single copy of Financial Reckoning Day. Since I am taking advantage of the 35% discount online, my mission was a simple search and rescue from the dark trenches of a bottom shelf in the business/investing section where I found the lone copy tucked ever so snug between various day trading and options investment books. "On a much more appropriate eye level shelf I managed to create my own display by moving aside the previous contents to prepare adequate space for my next move. Being careful not to over-handle the merchandise, I quickly placed the copy face forward on the shelf paying close attention to achieve a proper viewing angle. The book now stands out among all others in its section so I am fully confident my work there was not done in vain! "Until the Day Comes,"

Don Rozanski - FRD Scout

http://www.dailyreckoning.com/