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commentary on bush stimulas

  1. dlux

    13,328 Posts.
    a free commentary for subscribers & worth a read.

    Reasonable Expectations

    The Daily Reckoning

    Paris, France

    Tuesday, 7 January 2003


    *** Big fiscal stimulus package sets investors a-tingle...

    *** Fiscal stimulus did nothing good for the Japanese...or
    the Argentineans...

    *** Dividends may be back in style...a bird in the hand is
    popular, too...gold at 6-year high...housing could be a
    bubble...New York loses jobs...and more!

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    The Bush family must hate recessions the way others hate
    the Devil or the IRS. A recession in the early '90s cost
    the elder Bush an election. The younger Bush is determined
    not to let it happen to him.

    Thus, did word come yesterday that the president is
    proposing a huge new fiscal stimulus package. Already,
    "fiscal policy changes have produced a stimulus exceeding
    4% of GDP - the largest since those of the early Reagan
    years and WWII," writes economist David Hale. This new
    round of stimulus is expected to titillate the economy even

    Alert Daily Reckoning readers may already be asking
    themselves: 'where's the money come from?'

    We don't like to be a wet blanket...nor can we help it if
    we drip a little on the floor. But we feel obligated to
    point out that in attempting to avoid the footsteps of his
    father, George W. Bush has found the prints of Tomiichi

    The Japanese tried fiscal stimulus, too. Lots of it. In
    fact, they did so much of it, the entire nation tingled all
    over...and then shook, roughly to the rhythm of cement
    mixers. Between 1993 and '94, Japanese government
    expenditures stunned the world by rising a breathtaking

    The apparent effect was to create jobs and spending and
    keep the ruling politicians in power. The real effect was
    to steal away valuable resources that might have helped the
    economy stage a real recovery. Unlike their American
    counterparts, the Japanese were always good savers. Even at
    the peak of their mania in the late '80s, savings rates
    never fell below 10%. This money represented real resources
    that might have been used to create new products...hire new
    people...and make new profits. Instead, much of it was
    sucked up by public works projects and squandered.

    As reported here yesterday, the Japanese economy declined
    in the midst of the biggest fiscal stimulus program in
    history. By the year 2000, GDP per person was no greater
    than it had been 7 years before.

    Now the Bush administration proposes to squander money
    Americans have never saved, an amount equal to 6% of GDP.
    Where will the money come from? How long can the nation
    depend on the kindness of strangers to fund it spendthrift
    habits? Will the day come foreigners decide to spend their
    money themselves? And then what?

    Perhaps then George W. can pick up the trail of another
    figure who got himself in a similarly tight spot - Carlos
    Menem. The Argentinean president tried a program of fiscal
    stimulation, too...but without domestic savings or foreign
    lenders. The result? The Argentine currency crashed and
    continues to disappear into the ground. The CPI in
    Argentina is rising at 41% per year...the economy is
    collapsing by 10% this year...and people are starving to

    Eric Fry, our man on Wall Street, gives us the market's
    reaction to Bush's proposal:


    Eric Fry from New York...

    - 2003 has been a great year for the stock market...and
    there's only 12 months left to go!

    - The S&P 500 is already ahead 5.5% so far this young year,
    which would qualify 2003 as the best year for stocks since
    1999. But there are no "byes" in this league; investors
    have to play all 12 months before the game is over...or do

    - An investor who cashed in this early 5.5% gain and rolled
    the proceeds into a very short-term bond fund could wake up
    on December 31, 2003 with a portfolio gain for the year of
    more than 8%. But what fun would that be? Anyone who sells
    his stocks now will miss out on all the excitement that Mr.
    Market may have in store for us! It's been a pretty darn
    exciting year already.

    - Yesterday, the Dow charged ahead 172 points to 8773,
    while the Nasdaq advanced 34 points to 1,421. The market
    soared higher on the news that President Bush hopes to
    spend $600 billion over the next 10 years trying to
    stimulate things. We think he can do it...spend the $600
    billion that is. As for stimulating the
    economy...well...that's a whole other matter.

    - More than likely, the economy will do what it wants to
    do, no matter what the President does. But most Presidents,
    like most investors, feel that they should always be doing
    something, even when doing nothing would be the wiser
    course of action.

    - Of course, there's no "d,jeuner gratuit," as they like to
    say in the Paris office. All this spending and tax-cutting
    will end up costing somebody some money. For now, we'll
    keep borrowing it from foreigners like we always do, which
    means our federal budget deficit will likely top $250
    billion this year, up from $158 billion last year. And as
    surely as boredom follows passion, a rising federal deficit
    will lead to rising interest rates. Yesterday, U.S.
    government bonds lost ground again, as the yield on the 10-
    year Treasury note rose to 4.06% from 4.02% late Friday.

    - One of the most interesting features of the Bush "growth
    and jobs" package is the proposal to eliminate the taxes
    individuals pay on stock dividends. Ironically, very few
    corporations still pay a dividend that's large enough to
    bother taxing. But the select minority of companies that do
    pay a hefty dividend attracted some hefty interest from
    investors yesterday.

    - The shares of JP Morgan, for example, which pays about a
    5% dividend (at least for now), jumped $2 yesterday to
    $27.98. The shares of numerous other companies that pay
    plump dividends jumped a similar amount. And just like
    that, dividends are the hottest new, old thing on Wall

    - In a recent issue of Grant's Interest Rate Observer,
    James Grant makes a compelling case for dividend-paying
    stocks, no matter what the tax treatment. "Dividends were
    everything that a regulation New Economy bull didn't need
    and couldn't use," says Grant. "With the market averages
    ascendant (and with capital gains taxed at more favorable
    rates than income), a significant dividend yield was taken
    as the sign of obliviousness on the part of the management
    paying it out."

    - But times have changed - at least a little - and most
    investors are at least willing to consider the idea that
    receiving dividends might be not be a bad idea.

    - Grant continues citing a new study from International
    Strategy & Investment: "...dividends have contributed an
    essential portion of the stock market's total return
    through the years - more than 70% in the decades of the
    1940s and 1970s and almost 39% in the 1980s. In the 1990s,
    as you will not have forgotten, capital gains carried the
    performance ball; dividends contributed just 23.2% of the
    spoil...Never does the adage about a bird in the hand seem
    so apt as during a bear market. In such times, cash is the
    highest good. Investors prefer it to forecasts, estimates,
    promises, predictions and CEO interviews. And, in most
    circumstances, a stockholder in receipt of a dividend check
    is ahead of the game."

    - If Bush gets his way, and dividends escape taxation
    altogether, the stodgy old dividend may become the hottest
    thing on Wall Street since dot.com IPOs.

    - Who's grinding amphetamines into Mr. Gold Market's orange
    juice? Despite the big rally in the stock market - an event
    that usually pressures the gold price - the yellow metal
    tacked on 50 cents yesterday to $352.10 an ounce. Earlier
    in the day, gold had climbed more than $4.00 higher, before
    fading into the end of the New York trading session. The
    gold market "acts well," but many of the short-term
    sentiment indicators in the gold market are registering
    extremely bullish readings.

    - In other words, gold has gained a lot of fans in a hurry.
    That's usually a sign that the market is on the verge of a
    short-term drop. We still love the stuff, whether as one-
    ounce ingots or as pierced naval ornamentation, but we
    wouldn't be surprised to see a sharp sell-off in the yellow
    metal very soon.


    Back in Paris...

    *** While we think the fiscal stimulus idea will actually
    retard America's economic recovery, we have no quarrel with
    the Bush administration's proposal to eliminate taxes on
    dividends. We never met a tax cut we didn't like.

    *** Gold is at a 6-year high. We've been urging readers to
    buy the metal for the last three years. So, if you don't
    own gold, dear reader, it is your own fault.

    *** The BBC reports that economist Roger Bootle expects a
    20% drop in UK house prices, which would trigger a major
    recession, he believes.

    *** The U.S. home market has the look of a bubble, too. Not
    that prices are so high - increases in most parts of the
    country have been modest. But the methods used to lure
    marginal homebuyers into mortgage debt reveal the problem
    of increasing consumer demand without increasing consumer
    means; they are bound to blow up.

    If we have read the Wall Street Journal article correctly,
    as many as 20% of new buyers get "Down Payment Assistance"
    money indirectly from the builders. These feeble credit
    risks end up as proud homeowners without having put up any
    of their own money. Default and foreclosure records are
    already hitting records - even as the economy grew by a
    healthy 3% last year. What will happen when the going gets
    tough? We think we know.

    *** You can increase a consumer's demand by giving him an
    extra hundred dollars. It seems so simple; why not boost
    all consumers' demands....by sending them all checks for $1
    million dollars? "Just print more money," says Milton
    Friedman. But what would be the effect? Would a single
    consumer actually be better off? They would all be
    millionaires, but prices should rise immediately too.
    Central bankers can create pieces of paper and call them
    'money' - but they can't create wealth.

    *** New York will lose 300,000 service jobs over the next
    12 years...says a report in the NY Post. The jobs - mostly
    in sales, call centers and customer service - will be
    exported overseas, thanks to lower labor rates in foreign
    countries and lower telecommunications costs worldwide.

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    The Daily Reckoning PRESENTS: One more look at...not
    necessarily what 'will' happen in 2003, but what 'ought'
    too - at least - and especially to the dollar.

    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

    "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

    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

    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

    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

    The dollar ought to fall further this year...maybe a lot

    Bill Bonner


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