The Daily Reckoning
Tuesday, 29 April 2003
dailyreckoning.com
The sun is shining. Azaleas are in bloom. Stocks are, finally, rising. What more could
you ask for?
Will you forgive us, dear reader, if we worry about the dollar once more?
Not that we have anything new to say about it. But what we've been saying just
seems so important we can't help but say it again; it makes us feel clever.
Everything we buy...and every asset we own...nearly our entire lifetimes of
schlepping and saving...rest on the value of the dollar. If it is worth a lot...we are
worth a lot. But if it suddenly turns out to be worth less than we think - we could be
ruined.
And yet, hardly anyone bothers to think about it...so confident are we of the 'can do'
mechanics at the Fed. If there is a breakdown, in the dollar or the economy, we can
count on them to get out the ratchet set and fix the problem.
The Fed has proven that it can be an "inflation fighter", boasted Fed governor J.
Alfred Broadus Jr. two weeks ago. Now, it needs to show the world that it can be a
"deflation fighter" too.
But the Fed's record as an "inflation fighter" is more deserving of a court martial than
a medal. Since the Fed's founding in 1913, inflation has gained so much ground
against the defending Fed that a man who kept his money in gold rather than dollar
bills would have nearly 20 times as much.
What's more, a careful look would show that the Fed did not so much fight inflation
as cause it.
Yet we come not to blame, but merely to worry. The current account deficit - the
difference, roughly, between the money the nation takes in and the money it pays out
- leaves a "financing gap" approaching 6.5% to 7% of GDP. The Federal deficit
alone is projected to reach into the trillions in the years ahead. The trade deficit is
already nearly $2 billion per day. This outflow of dollars has left nearly $8 trillion of
dollar assets in foreigners' hands.
"The more U.S. assets are held by foreigners," writes Marc Faber, "the more the
U.S. becomes vulnerable to the whims of foreign investors, and not just in terms of
the value of dollars, but also in terms of all asset markets, since foreigners hold
approximately 30% of U.S. Treasuries (excluding U.S. Treasuries held by the
Fed)...13% of U.S. equities, and 23% of corporate bonds."
Here at the Paris headquarters of the Daily Reckoning, we have long lived among
foreigners and have gotten to know their ways. They are decent people, for the most
part, but they are no fools. One day...we wish we could say which one...they will get
tired of holding so many dollars. Then, all of a sudden, we Americans will be a lot
poorer.
"I would be concerned as a foreigner about holding very significant financial assets in
the U.S.," Faber continues. "Given the dependence of the U.S. on foreign capital
lows, the imposition of foreign exchange controls at some future date would seem to
be, in my opinion, quite a probable event."
Over to you, Eric...
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Eric Fry in the capital of the foreign-held asset: New York City...
- A spectacular spring day arrived in Manhattan yesterday, and the trading posts on
the New York Stock Exchange sprouted buy orders like peach blossoms. The Dow
Jones Industrial Average climbed 165 points to 8,482, with all 30 components
heading higher, and the Nasdaq added nearly 2% to 1,462. Does the recent
advance on Wall Street herald the springtime of a new bull market?
- Almost anything is possible, of course - this year's winter in Manhattan lasted
about 15 months - but we suspect that today's buyers of Dow 8,482 will fare little
better than the buyers of Dow 10,060 one year ago.
- No matter how balmy the conditions on Wall Street may appear, we at the Daily
Reckoning still consider it a bad idea to pay 30 times earnings for stocks in a
slow-growing economy. However, it easy to see why the bulls are so excited: the
war is finally over. We are referring, of course, to the war between Wall Street's
research department and the Securities and Exchange Commission (flanked by New
York Attorney General Elliot Spitzer).
- In an "historic" agreement yesterday with the SEC, Merrill Lynch, Credit Suisse
First Boston, Citigroup's Salomon Smith Barney and seven other Wall Street firms
agreed to pony up $1.4 billion in fines as recompense for issuing fraudulent research
reports. The 10 firms neither admitted nor denied wrongdoing, but paid the $1.4
billion anyway. We would observe that innocent parties - much less 10 innocent
parties with gaggles of lawyers on their payrolls - rarely agree to pay $1.4 billion in
fines...But let's not jump to any conclusions.
- "I am profoundly saddened - and angry - about the conduct that's alleged in our
complaints," said SEC Chairman William Donaldson. "There is absolutely no place
for it in our markets and it cannot be tolerated."
- We too are saddened. But we are also amused...As King Solomon once
observed, "There is nothing new under the sun." And certainly, there is nothing new
on Wall Street...the rules may change a bit from year to year, but the game never
changes. Yesterday's settlement merely signals a rule change, which means that Wall
Street will need to devise creative new ways to fleece its clients...Don't
underestimate Wall Street's ingenuity.
- In order to continue playing the game, Wall Street firms understand that they must
offer up sacrificial lambs from time to time. Enter Internet analysts Henry Blodget
and Jack Grubman. By epitomizing bubble-era excess, these two über-analysts were
made-to-order sacrificial lambs. As such, they have also come to personify
post-bubble recrimination. Their former employers tried to distance themselves from
their celebrity analysts, at the same time that individual investors sought retribution.
- Yesterday, the SEC announced that the two former analysts have agreed to pay
$19 million in penalties and have accepted a lifetime ban from the securities industry.
(Do I hear $20-million book deal with movie rights?)
- Interestingly, Mary Meeker, the star analyst of Morgan Stanley, escaped any
charges or penalties in Monday's settlement. Who says chivalry is dead?
- So now the financial markets are safe once again for widows and orphans, right?
Not so fast. Reported earnings might be more honest now, but they are honestly
meager. What's more, the "era of honesty" on Wall Street is unlikely to last
long...The capital markets are a phoenix of duplicity.
-----------
Bill Bonner, back in Paris...
*** What's this...another American complaining about the French? But this time it's
not foreign policy, but farm policy, that's the source of the irritation. Ingrid Newkirk,
president of a group of animal lovers, doesn't like the way the French make foie
gras, says today's Le Figaro newspaper.
The geese and ducks probably don't like it very much either; enormous amounts of
food are stuffed down their throats, using a funnel in order to enlarge their livers. The
ducks never complain, but Ms. Newkirk has a big beef with the practice and has
decided to give her own liver to the French, after her death, of course, in a form of
symbolic protest. She's also bequeathing other parts of her body...such as her ears
to the Canadians, "so they'll finally be able to hear the cries of animals caught in traps
in their country..."
"We don't know what she's doing with her brain," concludes the Figaro report, "but
to tell you the truth, if we had the choice, we'd prefer it to the liver...we'd like to see
how it works."
*** We read in the International Herald Tribune that Donald Rumsfeld, speaking to
troops in Iraq, compared the taking of Baghdad to the liberation of Paris in WWII.
What must WWII vets think, we chuckle to ourselves? They died by the thousands,
fighting a determined, well-armed, disciplined enemy in order to free a country from
an invading army. Now, Rumsfeld, at the head of the world's most puissant army,
invades a wretched, third-world hell hole and imagines he is Patton. |
