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    It Just Doesn't Matter

    Mark M. Rostenko

    The Sovereign Strategist

    Welcome to the land of milk and honey, America 2005, a wondrous place where problems are no such thing and nothing really matters. We're on course for unending growth and military triumphs whenever and wherever we desire them. In our world, houses only increase in value over time, despite the fact that everything within them degrades over time. Interest rates may rise and fall but are destined to remain with a range that makes everything affordable for everyone, always. We've reached ultimate economic equilibrium and economic pain & suffering will be relegated to a tiny footnote referencing the charming but improperly managed pre-21st century world.

    Am I so off? Before the crowd chimes in with the usual chorus of "He's on another one of those hysterical rants," consider the world we really live in.

    The dollar has been in decline for years. But we're told it doesn't matter. A weaker dollar, according to any Econ 101 textbook "makes domestic goods more competitive in overseas markets." Interesting then, that our trade deficit stands at yet another record high, the gap wider than ever. Apparently foreigners aren't as much in the market for Britney Spears action figures and "Oprah" magazine as we'd like to think.

    The economic brainiacs at CNN/Money, that bastion of cutting edge economic thought and financial insight, stated last November that "manufacturers such as U.S. automakers typically cheer a weaker dollar..."

    Tell that to the 8,000 GM workers which will be losing their jobs this year, and joining the tens of thousands who have been canned over the past three years. Four consecutive years of job cuts while the weakening dollar was supposed to sell more cars. Reuter's reports: "Weak dollar hanging over U.S. automakers." And they DON'T mean that there's an abundance of dollars falling from the sky in Detroit.

    The trade deficit stands at a record, well beyond the level that would quickly have triggered a panicky flight of assets from just about any other country. The November deficit hit an astounding $60 billion dollars, the biggest deficit ever, in all of history, in any nation. Ever. Period.

    But we're told it doesn't matter. Treasury Secretary John Snow informs that the huge gaping chasm between imports and exports simply demonstrates that foreigners just plain love us and can't wait to invest more money in the U.S. Oh, that and the fact that "The economy is growing at such a fast rate that it is generating lots of disposable income... some of which is used to buy goods from our trading partners."

    That must be all the disposable income left after the average American family banks its average $80 of savings for the year. I find it fascinating that with all the disposable income this steamy fireball of a recovery is generating, household debt stood at 115.3% of disposable personal income in the third quarter of 2004. That's an all-time high for that figure. Funny that Americans, with a hyper-abundance of disposable income are borrowing to make ends meet.

    Never mind, folks. Snow says it's ok. It doesn't matter. In the land of milk and honey, debt is wealth, war means peace and a dollar sailing towards hell in the proverbial hand basket is a good thing. Who says George Orwell's dead?

    The budget deficit is at a record high too. And destined to swell still further as our "swift and decisive victory" in Iraq will soon enter another year of multi-billion dollar expenditures. Private foreign investment in U.S. assets is now virtually non-existent relative to the huge inflows of foreign capital we used to see. No one in his right mind invests money in a bankrupt government.

    (Foreign governments have been forced to pick up the slack in an effort to keep their currencies from surging higher relative to the dollar. See? It doesn't matter! Someone will always step in to fix the problem!)

    But, like good 'ol Vice Prez Cheney says, "deficits don't matter." They don't matter because as good 'ol Keynes told us, deficit spending boosts the economy. Apparently it's true because in the wake of all that deficit spending let's remember that the economy is "growing at such a fast rate that it is generating lots of disposable income."

    Bill Fleckenstein makes some great points for the "nothing matters" issue. "The fact that Google could have a $50 billion valuation is a sign of the times." It doesn't matter that shares are priced at 240 times earnings. "...I see Fannie Mae at $71, barely flinching after the discovery that the company manipulated their earnings. So, I just shake my head and say, there's not one pocket of insanity, it's everywhere."

    It's not insanity, Bill. It JUST DOESN'T MATTER in the land of milk and honey where Uncle Al and the merry band of market manipulators can smooth everything over with a soothing word and a lullaby. It doesn't matter that Fannie Mae is flubbing the numbers because someone will find a way to fix the problem. That is, if there really is one. But there probably isn't. Because if there was really a problem the market would react. But it hasn't. So there's obviously no problem. Got it?

    When nothing matters, when the markets appear unconcerned about any of the frightening imbalances, the contrarian in me has to presume that at some point, EVERYTHING will matter. Perhaps all at once.

    Of course, that view won't sit well with the general populace and politicians whose infantile attention spans and utter incomprehension of anything that happened before Oprah first got her show on the air, ensure a steadfast faith in the notion that whatever trend has been present for the past few weeks will continue indefinitely into the future.

    Stocks are up again and will thus climb forever. The weaker dollar hasn't hurt us and it never will. Housing will continue to climb forever (just like stocks did in the 90s, plus or minus a few millennia). The twin deficits can continue to expand indefinitely because after all, they haven't hurt us yet.

    The fact is that all these chickens will come home to roost and the complacency present in the markets and the attitudes of the powers that be seem to suggest that roosting will commence sooner rather than later. Longer-term credit markets aren't spooked by anything anymore. Volatility in the stock market has repeatedly probed multi-year lows. Everybody's pricing in the most wonderliscious fantabulous future that anyone could ever hope for. Which is a dreadfully good sign that it's not especially likely.

    How do I reconcile this grim outlook with my relatively benign forecast for 2005? Because I've learned not to discount the wildcard of human psychology and the utter and total disregard (perhaps even contempt) the powers that be hold for the future.

    Human beings like good news and will continue acting as though all is good for as long as someone tells them that all is good. (Which, along with my vile personality, reprehensible social skills, and devastatingly handsome looks, explains why I'm not asked to appear on CNBC all that often. In fact never, if memory serves...) They'll continue acting as though all is hunky dorey as long as there's still some money left to borrow. I don't know how long that will be, but so far it's been going on longer than I thought so what's another year?

    A while back I discussed how the powers that be will do "whatever it takes" to keep this overweighted barge afloat. Greenspan meets every problem with the same solution: more liquidity. Print more money. Easy, easier, easiest money. Whatever it takes, just load up every American with a fistful 'o' dollars and send them off to the mall. Flood the markets with liquidity. Never mind the collapsing dollar and a legacy of debt that our children will drown in. Whatever it takes to keep the game going for just a bit longer.

    It doesn't need to be much longer. Greenspan's likely to retire once this term is up. You think he cares much for his legacy? The man is old enough that he'll likely never see the ultimate fallout. In the meantime, he and his ilk will do whatever it takes to keep things APPARENTLY moving forward, even if it's at a great expense to the future of this country. Because after all, it just doesn't matter...

    Mark M. Rostenko
    The Sovereign Strategist

    January 17, 2005

    Mark M. Rostenko, a veteran of Chicago's commodity exchanges and editor of The Sovereign Strategist, spends far too much of his time enthralled by the never-ending procession of inane prattle emanating from Wall Street. Nonetheless, it hasn't stood in the way of accurately forecasting the dollar's top, the beginning of the gold bull market, and nearly every significant turning point in the stock market since the bear market began. Please visit www.sovereignstrategist.com for a free sample issue and more commentary. And while you're there, feel free to join our international family of well-informed and successful investors.


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