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why the us is in big trouble!!

  1. dlux

    13,328 Posts.
    well a few of the reasons in any case.

    The Age of Jordan

    The Daily Reckoning

    Paris, France

    Thursday, 23 January 2003


    *** Pension funds lose 10% of assets...Oh Deere!

    *** We're turning Japanese; I really think so...

    *** 110 economists can never be right...will the stimulus
    plan do any stimulating?...Microsoft and Michael Jordan on
    the same page...and more!

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    According to the mainstream, "Happy days are here again"...
    the fabled "recovery" is right on track.


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    The Bogus Recovery


    Bloomberg reports that pension fund assets fell 10% in the
    12 months up to Sept 30, 2002. The 1,000 funds Bloomberg
    reviewed lost about half a trillion dollars. Over the last
    2 years, they're down about twice as much - or about $1

    That's a trillion that will have to be made up somehow...or
    a trillion less retirees will have to spend.

    A trillion here...a trillion there. If that were all there
    was to it, we'd pay it no mind. But along comes our own
    Eric Fry, quoted by Alan Abelson in this week's Barron's
    with more gloom and doom.

    Eric noticed a $5.5 billion hole in the pension accounts of
    Deere & Co. The hole was camouflaged by an accounting
    ledgerdemain that has become common among major companies.
    As Eric explained to Barron's, much of the money was called
    "other post-employment benefit obligations" rather than
    "plain-vanilla pension obligations".

    "If you used the same accounting for the operations side
    that is used on pension funds, you would be put in jail,"
    Abelson quotes Ethan Era, chief actuary with Mercer HR

    If that weren't enough, most large pension funds are still
    using absurd assumptions to calculate how much money they
    need. IBM, to use an example cited by Abelson, recently
    reduced its expected rate of return on pension assets from
    9.5% to 8.5%. Based on the returns from the last three
    years, IBM should have put a minus sign before the last

    Before it is all over - that is, before the end of this
    slump - people will probably go to jail for accounting
    fraud. But not before the poor lumpeninvestoriat have lost
    a lot of money.

    These pension losses and hidden costs will take a lot of
    juice out of the U.S. economy in the next few years.
    Companies will have to sock away much more than expected to
    meet their pension obligations. The money will have to come
    from somewhere. Meanwhile, the boomers are thinking about
    retirement. As they give up on stocks, they're going to
    have to increase savings in a major way. Already, the
    savings rate rose 50% in 2002...from 2.3% of disposable
    income in January to 3.5% in November. Each percentage
    point equals about $70 billion.

    A rise in the savings rate to 6% would take about $200
    billion out of the consumer economy, probably pushing the
    U.S. into recession.

    In the long run, this is good news. The U.S. economy needs
    real savings. But in the short run - which could be for the
    next 10 years - it is disastrous. Savings take money out of
    the consumer economy...thus depressing sales, employment,
    and profits.

    Hey...I think we're turning Japanese...I think we're
    turning Japanese...I really think so...

    Konnichiwa...(hello in Japanese) Eric,


    Eric Fry, reporting from New York...

    - Now you see it, now you don't. We are referring of course
    to the stock market's splendid New Year's rally. After the
    first three trading days of 2003, the Dow had racked up a
    sparkling 5% gain. But yesterday's losses snuffed out all
    that remained of that early January advance. The Nasdaq
    slipped only 4 points yesterday to 1,359. But the Dow
    slumped 124 points to 8,318 - dropping the blue-chip index
    into the red for 2003.

    - So just like that, another bear-market rally bites the
    dust. This kind of dispiriting trading action can be pretty
    rough on the lumpeninvestoriat. Wall Street's finest had
    assured them - and reassured them - that stocks could not
    possibly fall for four straight years. But sadly, it looks
    like stocks can indeed fall for four straight years...maybe
    even five or six. The die is not yet cast for 2003, of
    course. Stocks may recover and validate the optimism of
    Wall Street's strategists. Then again, the market may
    continue falling, thereby solidifying the strategists'
    reputations for moronic and misguided forecasts.

    - We don't know what will happen any more - or any less -
    than the strategists. So we merely retreat to the
    simplistic notion that bad things tend to happen to
    investors who buy richly valued stocks, and good things
    tend to happen to investors who bide their time, waiting to
    buy inexpensively valued stocks. This sort of "tactical
    ignorance" causes us to draw near to gold like a suckling
    pig to a sow's teat. What else is a suckling to do? Gold,
    like the sow's milk, is reliable sustenance, at least...An
    investor could do worse.

    - Yesterday, gold proved itself to be quite nourishing
    indeed. The precious metal brushed up against the $360-mark
    by gaining $2.40 to $359.90 an ounce. The XAU Index of gold
    stocks jumped two and a half percent to 77.7.

    - When President Bush first announced his new "stimulus
    plan," we considered it no worse than any of the other tax-
    and-spend proposals that the knuckleheads in Washington
    dream up from time to time. But we now suspect it is a
    horrible idea. The reason: 110 economists think it's a
    terrific ides. The Washington Times reports: "A letter
    signed by 110 economists, including three Nobel Prize
    winners, urges Congress to support the main elements of
    President Bush's $647 billion tax-cut plan." Can any idea
    that's applauded by 110 economists NOT be a bad idea?

    - The President's big-time spending plan is but one of may
    deficit-spending proposals being cooked up by politicians
    from Bombay to Bonn. Deficit-spending is the hottest global
    macroeconomic craze. Not only is the U.S. hurtling toward a
    $300 billion deficit in 2003, Germany and France are also
    running big deficits. Both countries are violating the
    European Union's limits on budget deficits - 3% of GDP.

    - The deficit-spending craze is one of many reasons why
    James Grant matter-of-factly asserts, "The fixed-rate
    obligations of the United States government, and
    investment-grade corporate bonds, are for losers. It's a
    canard that the creditor class rules these United States.
    Debtors rule...Creditors willingly sacrifice the prospect
    of capital gains for security, a security that, often as
    not, is illusory. They are the saps of the
    world...Creditors have possibly less political standing
    than smokers in millennial America."

    - Grant continues: "Record-high ratios of indebtedness to
    GDP, record ratios of slow loans to loans outstanding, and
    1.5 million bankruptcies in the latest 12 months all point
    to the same conclusion: the United States economy must
    reduce its leverage, sacrificing top-line economic growth
    in the process."

    - "Debt repayment could be the dominant force in the
    economy, not only for 2003, but also for the next several
    years," bond fund manager Van R. Hoisington tells Grant.
    "This deleveraging will result in the stagnation of capital
    spending and moderating inflation, causing interest rates
    to fall."

    - The New York-based editor of the Daily Reckoning is not
    persuaded that long-term interest rates will be dropping
    substantially from current levels. But he has little doubt
    that "deleveraging" by American corporations and consumers
    will put a crimp in the sorts of consumption and capital
    spending that drive our economy. American corporations and
    consumers are both becoming a lot more eager to repay their
    old debts than they are to rack up new ones.

    - Given these trends, will the President's stimulus plan do
    any stimulating? We are dubious.


    Back in Paris...

    *** An ABC/MONEY poll shows consumer confidence falling.
    Only 24% of those polled think the economy is in good
    shape. The drop in confidence was the sharpest in 2

    *** 30-year bonds are near their highs. The bond market,
    too, seems to think the economy is sinking.

    *** But home construction is running at a 16-year high. Go

    *** In the popular mind, Wall Street is an industry that
    helps investors make money. It is nothing of the sort - it
    is an industry like any other; it makes money for itself by
    selling things at a profit. What does it sell: the HOPE of
    making money.

    That's why analysts typically recommend 49 'buys' for every
    single 'sell'. It's also why Wall Street strategists almost
    always expect stock prices to go up - how could they make
    any money if investors thought stocks would go down?

    Suppose that the Wall Street crowd really did have an
    investment that would produce above-market profits. Would
    the Masters of the Universe offer it to their
    lumpeninvestoriat customers? Or hold it for themselves?
    Wall Street professionals have access to all the capital
    they want. Why would they ever fail to take up an
    extraordinary investment? It follows that the investments
    Wall Street sells are the ones it doesn't want for itself,
    which is true of every seller.

    People who buy from the financial industry think that they
    are not consumers of Wall Street's products, but investors.
    They imagine themselves as mini-Warren Buffets or Carl
    Icahns. But they don't think like either of them. Both
    Buffett and Icahn buy businesses, not stock - often by-
    passing Wall Street altogether. They think like business
    buyers - analyzing the real assets and real profitability
    of the enterprise in order to figure out how they can make
    money with it. The typical stock-buyer, by contrast, hasn't
    a clue. He's just hoping the stock will go up...because he
    heard someone on CNBC say it would.

    Happily, they all get what's coming to them - Buffett,
    Icahn, Mom & Pop. What a wonderful world we live in, dear

    [Editor's note: If you've sent an e-mail to us in the past
    couple of weeks and we haven't responded...don't despair!
    We always like to here from you; in fact, it's one of the
    more pleasing aspects of our work. But as many of you know,
    we're working on a book to be published by Wiley & Sons,
    and the deadline draws near. We simply haven't had time to
    respond. Thanks for your understanding. Back on the job

    À bientôt,

    Addison Wiggin,
    The Daily Reckoning]

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    The Daily Reckoning PRESENTS: Sooner or later, today's
    giants must make way for those of tomorrow. The question
    is...when? If companies are no longer investing in
    themselves, James Boric contends below, it's probably time
    for capital-gain investors to look elsewhere.

    by James Boric

    Mark January 16, 2003 down in your calendar as a date to
    remember. I believe this day in history will prove to be a
    pivotal turning point for investors - a day of true

    At 4:48 P.M. on Thursday afternoon, Microsoft announced its
    first-ever dividend. I smiled when I read the announcement.
    I knew this was big. But not for the reasons you might

    Sure, Microsoft's stock has been in trouble for three
    years. After reaching a high of $119.13 on Dec. 27, 1999,
    it has tumbled down to just over $55 a share. The company
    had to do something to make its stock seem attractive to
    new investors.

    So it decided to pay its shareholders a measly 16-cent
    annual dividend (8 cents once the 2-1 stock split takes
    place on Feb. 14). That's a 0.31% yield - well below the
    S&P 500 average of just 1.7%. This is hardly the way to
    bolster a $55 stock back up to $75, let alone $100. And
    it's certainly nothing to get overly excited about - or at
    least it would appear that way to most investors.

    But most investors weren't able to recognize that Microsoft
    was a highflier in the 1980s. And I doubt most will
    recognize the importance of its Jan. 16th announcement.

    By issuing a dividend, Microsoft admitted it was getting
    old. It silently acknowledged it could no longer perform at
    the same level it did back in the early 1990s. It was like
    watching an aging Michael Jordan play for the Washington

    In his prime, there was no better player than Jordan. He
    could take a game over single-handedly. He could beat you
    off the dribble. He had a deadly fade-away jumper, an
    explosive move to the basket and killer instincts - that
    helped him rack up six NBA titles in the 1990s.

    What's more, in his prime, Jordan never seemed to labor on
    the court. He had the stamina of a marathon runner and the
    grace of a dancer. He was a winner.

    Throughout the late 1980s and all of the 1990s, Microsoft
    was the Michael Jordan of the investment world. Its stock
    made investors filthy rich. Microsoft was the epitome of
    all growth stocks. With a return on equity above 20%, there
    was no need for Microsoft to worry about dividends in the
    '90s. The company was reinvesting its profits in its
    business. And who could argue with the results?

    But it's not 1992 anymore. Both Jordan and Microsoft are
    older. And both have had to change the wining formula that
    made them great.

    Jordan can no longer rely on his athleticism to overwhelm
    his opponents. Instead, he has to outsmart the younger,
    stronger generation of NBA players. And that doesn't always
    work. Unfortunately, being smarter than your opponent
    doesn't put points on the board.

    Likewise, Microsoft isn't the growth company it was 15
    years ago. It isn't attracting shareholder dollars like it
    did in 1990, or even 1995. And it isn't investing in itself
    the way it did in its prime. That's why it is offering a
    dividend now. Microsoft is desperate to stay competitive in
    this tough market.

    I don't think either Jordan or Microsoft have much left in

    But that's life. Yesterday's legends are eventually
    replaced by the day's up-and-coming stars. But does that
    mean you have to lament the passing of an era?

    No. You can look at Microsoft as a mature company - and
    evaluate its promise to pay a dividend for what it's worth.
    Do you want income stocks in your portfolio? Then the
    world's dominant producer of operating systems might be
    right for you.

    On the other hand, if, like a new player making his way to
    the big leagues, you're still in the market for capital
    gains, you can look at Microsoft's history for a little
    instruction. How so?

    One way is to look at which companies are investing in
    themselves the way Microsoft did back in the late '80s and
    early '90s. In 1992, Microsoft invested $767 million in its
    own property, plant and equipment (PP&E). To put that in
    perspective, the software giant only brought in $708
    million in total net income for the year. Its PP&E to net
    income ratio was a robust 1.08.

    As a capital-gain investor, you want to own equity in a
    company when it is in the growth stage. And a company can
    only grow when it invests money in its business. That's why
    the PP&E number is an important one.

    For fiscal year 2002, Microsoft's PP&E to net income ratio
    was 0.2. The bottom line is Microsoft isn't investing the
    same amount of money, relative to the size of its business,
    that it was in the '90s. Why should you pay full price for
    a company that is growing at a fraction of the rate it was
    just 10 years ago?

    The answer is, you shouldn't. And don't let anyone fool you
    into believing that a 0.3% dividend yield will make up for
    a lack of capital investment spending. It won't.

    The next wave of highfliers are investing in their own
    businesses right now. They are building plants, buying new
    equipment and setting the stage for expansion. And I'm
    willing to bet you won't find any of these small, up-start
    companies offering a dividend. Instead, their earnings will
    be used to invest in their businesses.

    If you really want to make a lot of money in the next five,
    ten, or even fifteen years, look for the smaller companies
    (trading on the major exchanges for under $10) that have
    rising sales, net incomes and PP&E.

    These are your tickets to great profits. And trust me, when
    the bottom finally sets in and the next bull market comes
    around, I can guarantee you Microsoft won't be leading the
    way. The next wave of highfliers are no-name, small-cap
    stocks...busy investing in themselves...just like Microsoft
    did in 1986.

    Best regards,

    James Boric
    for The Daily Reckoning

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