REASONABLE EXPECTATIONS
By Bill Bonner
In the last 2 work days, we have looked at the stock market
and the economy. In neither case did we try to guess about
what will happen, but only about what ought to happen.
Ought is good enough for us; it's the best we can do.
Stocks may or may not go down in 2003, but you ought not
buy them, dear reader. They are already trading at prices
that are two to three times the average, based on P/E. They
may go up...but it would be unreasonable to expect it.
The economy ought to go down, too. Perhaps Mr. Bush's
stimulus...or Mr. Greenspan's stimulus...will be enough to
keep it growing. Perhaps the economy will continue to
expand - thanks to the furious pumping of hot air by public
servants - for the next year or two. We don't know. But it
is unreasonable to expect that such a big boom would not be
followed sooner or later by a bust worthy of it. Sooner or
later, somehow or other...the errors of the bubble must be
fully corrected.
A reasonable man expects things to happen that ought to
happen. A fool ought to be separated from his money. A
thief ought to go to jail. A man who abuses a child or
double-crosses a friend ought to roast in Hell. Whether
they do or not, is not up to us, of course...but we can
hope. And what better way has a man of running his own life
than of figuring out what ought to happen, and then making
his decisions as if they really did? In all the systems,
secrets, formulas, charts and graphs and models that help a
man invest, we have found none more rewarding than this:
assume that what ought to happen will happen...buy low/sell
high...and don't worry about it too much.
But what ought to happen? Alas, it is not always easy to
know...
"The great judge of the world," wrote Adam Smith in his
Theory of Moral Sentiments, "has, for the wisest reasons,
thought proper to interpose, between the weak eye of human
reason, and the throne of his eternal justice, a degree of
obscurity and darkness...[which]...renders the impression
of it faint and feeble in comparison of what might be
expected from the grandeur and importance of so mighty an
object."
Today, we take a feeble look at the dollar. What ought it
do, we ask ourselves?
In the interests of making it easy for Daily Reckoning
readers, we give our verdict before any evidence has been
presented: it ought to go down.
The lumpeninvestoriat, that is, the hoi polloi of common
investors, tend to believe things that are not true. In the
heydays of the great boom, they believed they could get an
18% return on their money invested in stocks - even though
they had no idea what the companies really did or how they
operated. They believed they could trust corporate
executives to make investors rich, rather than just making
themselves rich. They believed that stocks always went up
and that Alan Greenspan would not permit a major bear
market.
They believed that the American system of participatory
capitalism, open markets, and safety nets was the finest
ever devised...and that it represented some sort of
perfection that would remain on the top of the world for a
very long time.
They believed also that the U.S. dollar was as real as
money gets and that it would be destroyed in a orderly,
measured way. A little inflation, they had been told, was
actually good for an economy.
Of all the lies that the new investoriat took up, none was
more provocative than the dollar. In order for anything to
retain any value - particularly a currency - it must be in
limited supply. If there were millions of paintings by
Manet or Rembrandt, for example, they would be worth a lot
less than they are today. Back in the 19th century,
currencies were backed by gold. This had the effect of
limiting the quantity of money - for there was only so much
gold available.
After getting in the habit of accepting paper backed by
gold, people barely noticed when the paper no longer had
any backing at all. Government still printed and
distributed the new, 'managed' currencies. Governments
would make sure that they didn't print too much, or so
people assumed.
Besides, there were times when printing too much money was
actually welcomed. The 1990s was one of those time. Alan
Greenspan created more new money than all previous Fed
chairmen combined. But who complained? The money found its
way first into stock prices...and later into real estate.
People looked at the house that just sold down the street
and felt richer, not poorer - just as the Japanese had 10
years before.
And yet, it was not possible that the central bank could
create trillions in new money - out of thin air - without
affecting the value of the currency itself. "The dollar
ought to fall," economists began saying as the '90s passed.
Finally, last year, the dollar did fall - against other
currencies, particularly the euro...and against gold,
against which it went down 19%.
What ought it to do now, we ask again? Here we add two
complicating details.
First, for as much as the American lumpeninvestoriat was
deceived by the dollar's apparent strength, foreigners were
even bigger dupes. They couldn't get enough of them. "You
can count the empty shipping containers at America's
saltwater ports," suggests James Grant. "Ships laden with
imports arrive full; those departing with exports leave
less full."
How could a country balance its books when it was buying
more from foreigners than it was selling? It had to make up
the difference by bringing the money back home as
investment funds. Foreigners didn't dump their dollars for
their home currencies; instead, they used the money to buy
dollar assets - U.S. stocks, real estate, businesses. By
the end of 2002, the total of foreign holdings of dollar
assets had risen to a Himalayan high of $9 trillion - an
amount almost equal to the nation's entire annual GDP.
With the dollar now falling...and U.S. stocks also
falling...foreigners ought to want to lighten up on their
dollar holdings. And even tossing off a small percentage of
them could have a devastating effect on the price of the
dollar. The dollar fell only about 12% against foreign
currencies in 2002. In the '80s, with far less provocation,
it dropped nearly 50%.
The other complication is that in addition to the $9
trillion worth of existing foreign holdings, the current
account deficit adds another $1.5 billion every day.
However successful the U.S. has been as a military super
power, it pales against its success as a monetary super,
super power.
For every day, Americans strike a bargain with foreigners
in which the latter trade valuable goods and services for
little pieces of paper with green ink on them, of no
intrinsic value, whose own custodians have pledged to
create an almost infinite supply of them, if need be, to
make sure they do not gain value against consumer goods!
"There is a crack in everything God made," Emerson reminds
us. The crack in this bargain is that it undermines the
profitability of U.S. companies. Spurred by the Fed,
consumers spend their money at full gallop. They even spend
money they do not have. But profits at American companies
continue to fall. In fact, as a percentage of GDP, profits
have been falling ever since the early '60s, not
coincidentally as the percentage of the economy devoted to
consumer spending...and the current account deficit...have
increased.
What is happening is obvious. Americans are spending money,
but the funds end up in the pockets of foreign businessmen.
U.S. businesses have the expense of employing U.S.
workers...but the money does not come back to them.
Instead, it ends up overseas.
Profit margins at U.S. businesses fall. They are currently
at a post-WWII low. This is not a trend that can go on
forever. And as Herbert Stein pointed out, if it can't, it
won't.
The dollar ought to fall further this year...maybe a lot
further.
Bill Bonner |
