BULLS' REIGN & THE SCHOOL OF OUGHT

10/12/03

Bulls' Reign & The School of Ought

The Daily Reckoning
Weekend Edition
October 11-12, 2003
Paris, France
By Addison Wiggin and Eric Fry

A table top display in the Lower Manhattan Borders bookstore… a giant poster of the cover at the Frankfurt book fair (one of Europe's largest)… bn.com requests their order of multiple thousands of copies be shipped by Fedex…!?!

For your editors the writing of Financial Reckoning Day was simply a way of manhandling our ideas down into a coherent - and hopefully enjoyably readable - pattern… the writing was not easy, especially given our daily publishing schedule. But now… oh la la… the marketing of the book has seemingly taken a life of it's own. The above details are just some of bits and pieces of information trickling our way by eyewitness sources. We've managed to make our way to #4 on the Wall Street Journal Business best-seller list. (Bill, as you might guess, is rather modest about the whole thing… I'm ecstatic. Together, we hope you're enjoying the spectacle of it all, at the very least.)

We've also received the first of several serious reviews… "…the 'Ought to' school of economics suggests the trade deficit should stop," writes our good friend John Mauldin "and that governments should stop manipulating the values of currencies. If this continues, it will create a significant and painful correction.. The dollar should be allowed to fall in value. But they were saying that years ago, when the deficit was half of what it is today, and the parade has yet to end…" You can read the rest of John's review on the Daily Reckoning website:

Thoughts On The "School of Ought" Economics

Meanwhile, Eric Fry, our man on the scene in Lower Manhattan, and guest host of CNNfn's 'Market Call' this week, wraps up the sizzling markets… just below…

Cheers, and hope you're having a great weekend,

Addison Wiggin
The Daily Reckoning

P.S. BN.com assures us they will have books next week, in the meantime you can still pick up your copy of Financial Reckoning Day, at Amazon or wherever books are sold… thanks again for the support!

P.S. Reader and colleague David Bradshaw, of Swiss America Trading Corporation, also sent us his 16 favorite quotables from Financial Reckoning Day. I've included them in this week's Flotsam & Jetsam section, way below… thanks David!

MARKET WRAP: Bullishness Reigns
By Eric Fry

The stock market enjoyed another delightful week, as the Dow gained 102 points to 9,675 and the Nasdaq added about 2% to 1,915. Investors seemed to relish every tidbit of positive economic news that crossed the wires, while ignoring worrisome phenomena like the dollar's continuing weakness or the "surprising" signs of a budding inflation.

The bullish hordes of stock investors did not display the slightest twinge of anxiety over the dollar's 2% slide to $1.18 per euro, nor over crude oil's 5% price spike to $31.97 a barrel, nor over an unexpected jump in wholesale prices. But the gold market acknowledged the dollar's troubles - and the nascent signs of inflation -- by recouping some of the ground it lost the week before. The yellow metal jumped $4.10 to $374.10.

The stock market's stellar performance last week was a fitting tribute to the bull market's one-year anniversary. One year ago, as CNN/Money's Justin Lahart reminds us, many investors were "rocking back and forth in the fetal position under their desks, trying to think happy thoughts about what it was like before the big bad bear came and ruined everything."

On Oct. 10, 2002, the Dow hit a 6-year low of 7,197. But then the blue chips stopped falling.and started rising. They have been rising ever since. The Dow has jumped a hefty 34% over the last 12 months, while the Nasdaq has soared an astounding 72%.

Today, investors worry no more about falling share prices or economic weakness or geopolitical troubles. And they realize now that they should not have been worrying about anything one year ago.except about investing too little money in the stock market.

Bullishness reigns.

While playing the role of "guest host" this week on CNNfn's "Market Call" program, your New York editor listened politely to an unending stream of bullish predictions from various Wall Street luminaries.He was not persuaded.

The bullish opinions expressed on the show feature the typical - and predictable --refrains like: "The economy is recovering".because."The consumer is feeling more confident and consumer spending is robust".which is why."We like the market at these levels and expect it to move higher through the end of the year."

But the bullish opinions expressed also featured atypical observations like: "Do you realize that the stock market has produced a positive year every time the Boston Red Sox have made it to the World Series?"

It's true; the stock market has chalked up a winning year in each of the four instances since 1918 that the Boston Red Sox have participated (and lost) in the World Series. But it's also true that the Red Sox have not yet made it to the World Series. They must first defeat the formidable New York Yankees, and success is not guaranteed.

We would also point out that the dollar has lost more than 90% of its value since 1918. Thus, Boston's latest attempt to advance to the World Series reminds us of two of America's immutable financial trends - stocks tend to rise and the dollar tends to fall.

But stock market investors are too preoccupied with the delirium of rising share prices to worry about the sorrow of a falling dollar. They are content to see the prices of their stocks go up, even if the value of their dollars is going down.

Americans are optimistic and confident. That's why they will eagerly pay 50 times earnings for Nasdaq stocks and blithely draw down the equity on their homes to buy plasma TVs. They do not lack for confidence - not to buy stocks selling for 50 times earnings and not to buy things they don't need with money they don't have.

But sometimes, a little fear is a healthy thing.like when you're about to put your hand into a fire.

Eric Fry,
The Daily Reckoning

P.S. As always, you'll find This Week In The Daily Reckoning below…

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THIS WEEK in THE DAILY RECKONING

POOR HOUSE II (10/10/03)
by Bill Bonner

"…Last week, we established an important point: that the house itself - the physical thing - couldn't possibly increase in value. All its components deteriorate, depreciate, fade and decay - just like everything else. [This week,] we contend that houses have not really made people wealthy at all…in fact, they've made them poor. And now we call our star witness. 'Mr. Alan Greenspan, would you step up to the witness stand, please?'…"

PRODUCTIVE DESTRUCTION (10/09/03)
by James Davidson

"…Seen in the light of economic logic, the politician who could accelerate productivity growth and make more jobs redundant would be doing the most to raise living standards for his constituents. Jobs are a cost of production. You are better off when you reduce your costs. Hence a truly 'jobless recovery' would be a great thing. Too bad this isn't one…"

FAT TAILS (10/08/03)
by Bill Bonner

"…Things that are extremely out-of-whack eventually work their way back into whack. But then they diverge again and the tails fatten. Sometimes prices diverge from the mean. Sometimes they regress towards it. Give yourself enough leverage, and you can go broke in either direction. The geniuses at LTCM lost $4.5 billion - much of it their own money. You or I could probably never have lost anywhere near that much - even with a computer, we're not that smart…"

THE SCARIEST SCENARIO IMAGINABLE (10/07/03)
by Steve Sjuggerud

"…While the 'smart money' sells tech stocks in record amounts…the 'dumb money' is taking on debt to buy these stocks on margin. By my studies, the 'dumb money' is at an extreme of optimism not seen since, well, right before the 1987 crash…When optimism reaches extremes, as it has right now, quite frankly, there is nobody left to buy…there is no 'greater fool' left to buy and hope for a higher price…"

YOU PAY, WE PROVIDE (10/06/03)
by the Mogambo Guru

"…Earth to Mr. Stiglitz! Yes, the President, the Secretary of the Treasury, and especially the Fed Chairman CAN be blamed for the bubble mania, and I, the Mighty Mogambo, blame them with every fiber of my being, and with every decibel of my loud and irritating voice, and I point my long and bony finger at them and say 'Shame! Shame!' Their every action was in reckless pursuit of expanding and exploiting the bubble economy via growing government meddling…"

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HEADLINE, NEWS And INSIGHT: Mauldin on Financial Reckoning Day and the "School of Ought" Economics… Stansberry on baseball and investing… Denning on Debt, Debt and more Debt… Plus David Bradshaw's 16 favorite quotes from The Book…

Thoughts On The "School of Ought" Economics
by John Mauldin

"…the 'Ought to' school of economics suggests the trade deficit should stop, and that governments should stop manipulating the values of currencies. If this continues, it will create a significant and painful correction.. The dollar should be allowed to fall in value. But they were saying that years ago, when the deficit was half of what it is today, and the parade has yet toend…"

How Baseball Games Are Won… And Fortunes Made Investing
by Porter Stansberry

"…For those of you who don't follow baseball, the Beane- led Oakland A's have won more regular season baseball games in the last five years than any other baseball team ever before. But, even more impressively, they did this with only the 12th largest payroll -- one of the poorest teams in the game. Beane's accomplishment is similar to the track records of great value investors. Value investors ignore market sentiment and what's popular. They buy only what's safe and cheap, no matter how ugly it might be. Beane literally does the samething…"

U.S. Debt - A Sword of Damocles
by Dan Denning

"…On the one hand, Uncle Sam is spending more and more. This is clearly unsustainable, even with more "productivity" growth. This will eventually put bondholders into the unprecedented position of questioning the creditworthiness of U.S. bonds. And on the other hand, the fate of the entire dollar standard now rests with the U.S. consumer. As long as he keeps spending money on foreign goods, foreigners are happy to rack up big trade surpluses and invest dollars back in the U.S.markets…"

FLOTSAM & JETSAM: 16 of my favorite quotables from "Financial Reckoning Day"
by David Bradshaw,
The Idea Factory Press

#1 "One of the great marvels of life is not that fools and their money are soon parted, but that they ever got together in the first place."

#2 "The bust phase of an investment mania comes about when reality begins to nag, profits are not realized and confidence turns to trepidation.and then fear."

#3 "Newton's Third Law applies to economies as well as physics.a bubble produced by borrowing and spending collapses into an anti-bubble of exaggerated thrift, bankruptcy and debt cancellation."

#4. Chart - "Great bear markets take their time . and their toll. Stocks as an asset class are likely to lose their popular fascination for the next decade or more. Japanese stocks returned to their 1984 trend line - 17 years later. The U.S. bear market began in 2000. If the U.S. were to repeat the Japanese experience, stock could return to their 1995 trend line, with the Dow below 4,000, in the year 2017."

#5. "Rep. Ron Paul of Texas handed Greenspan a copy of "Gold and Economic Freedom" posing the question: Would you like to add a disclaimer?" "No," said the man who created more unbacked paper money than any man in history ."I wouldn't change a single word."

#6. "Like the difference between real profits and virtual ones, the transformation of data and information requires time and effort. Wisdom can take decades, rules and principles can take centuries."

#7. "In short, democratic government was no longer a spectator . it had become the biggest participant in the supposedly free markets of the Western world."

#8. "In 1960, there were nearly 7 working age people for every person over 65. In 2000, that number dropped to 4.5. By 2030, the OECD expects only 2.5 people working for every dependent elderly in the developed world."

#9."Three little numbers at the end of the world: 1) Average age of American baby boomers on Jan.-1-02: 46. 2) Average amount in retirement plan $50,000. 3) Number of years at 6% growth to reach comfortable retirement income: 63. Eighty per cent of the population has no more than eight months worth of financial reserve."

#10. "After the terrorist attacks, the calls for consumer spending began to sound as much like patriotic jingos as economic analysis. Thrift came to be seen as an enemy of the state, almost as diabolical as Osama bin Laden."

#11. "Wouldn't it be nice if people really could cure their financial troubles by spending more money? Nothing comes from nothing; adding zeros produces no positive number. For the individual it is obvious that borrowing and spending will not produce enduring wealth. But for an economy, it almost seems possible."

#12. "Thus, it is the aim of good government to stimulate production, or bad government to encourage consumption." - Jean-Baptist, 1803

#13. "Spending beyond your means does not produce economic perfection but an economic dead end, just as might have been predicted by a moral philosopher but missed by an economist."

#14. "Modern economists no longer believe in 'ought.' They do not appreciate her moral tone.to them, the economy is a giant machine with no soul, no heart . no right and no wrong. It is just a matter of finding the accelerator."

#15. "Against the sorry record of managed currencies is the exemplary one of gold. Gold is found on earth in very limited amounts - only 3.5 parts per billion."

#16. "The world as we have known it is coming to an end. But what do we care? We smile and vow to enjoy it. The secret to enjoying all mass movements is to be a spectator, not a participant. America will have to find a new economic model, for it can no longer hope to spend and borrow its way to prosperity."