Stocks bite The Big One

Social Security Privatization: Stocks Bite the Big One
by The Mogambu Guru
The Daily Reckoning
Paris, France
Monday, February 7, 2005

The Mogambo Guru talks about economic cycles and springboards from a Jeff Ferguson essay into a discussion about Social Security Privatization and how things are worse than you think they are.

*** Hitler's last stand descends into public
spectacle…Adam Smith's 'Invisible Hand' and Alan
Greenspan's interpretation of it…

*** At the current rate, more new money would come into the
system in a single year than the value of all the gold
above ground…

*** Two approaches to world improvement…be a light unto
the world…a small church in Normandy…the vanity of
brute force…and more!

(We apologize for his longish edition of the Daily
Reckoning. We had a lot on our mind over the weekend. We
might still have written less, but we didn't have time.)

Every public spectacle begins in deceit, develops into
farce, and ends in disaster.

'I have devoted my entire life to making the world a better
place,' said Adolph Hitler, or words to that effect. 'For
the last thirty years, every breath…every waking
moment…has been used to try to improve things.'

'But, mein Fuhrer,' explained one of his generals. 'Berlin
is nearly surrounded. We have no more ammunition. The
people have no food. We must try to negotiate.'

'You too? I am surrounded by incompetents and traitors,'
came the reply. 'We can never surrender. I'd rather put a
bullet to my head. Do you hear? We have done all we could,
so far. We must go all the way…to the end if that is what
is coming.'

'You want me to have compassion? I have never permitted
myself to be moved by compassion. My work was too important
to let compassion or any personal motives interfere. So,
don't expect me to be compassionate now. And besides, the
German people deserve to die too…they let me down. They
aren't worthy of the great new world we were offering
them."

We saw the two approaches to world improvement almost
standing side by side this past weekend. One wore the Nazi
uniform on the silver screen. The other wore a simple
priest's frock in Normandy.

But first we turn to the financial news. There, too, we saw
the world improvers at work. Alan Greenspan gave a speech
this past weekend in honor of the first modern economist -
Adam Smith. The Fed chairman journeyed to Fife College, in
Kirkcaldy, Fife, Scotland, where Smith was born in 1723.
There, he commented on Smith's work:

"Most of Smith's free market paradigm remains applicable to
this day," said he. In particular, the world seems to have
discovered that independent buyers and sellers are better
at delivering the goods than government planners.

This would have come as a shock to George Orwell. Writing
at the beginning of WWII, Orwell expressed the belief of
millions:

"I began this book to the tune of German bombs…What this
war has demonstrated is that private capitalism - that is,
an economic system in which land, factories, mines and
transports are owned privately and operated solely for
profit - does not work. It cannot deliver the goods."

Orwell was wrong. Capitalism delivered the goods better
than socialism, a fact that even near-sighted journalists
and central bankers were eventually able to see.

After the fall of the Berlin Wall, continued America's most
celebrated central banker, there was 'no eulogy for central
planning."

Adam Smith had proposed a useful metaphor to help explain
how a system of private, individual decision-making - which
must have looked chaotic to the top-down observer -
actually functioned to the betterment of all. A rise in the
price of pigs, for example, sends a signal to the hog
raisers to produce more. Thus is the market guided by an
'invisible hand' to produce exactly as much of a thing as
people really want and can really afford.

Our quick-witted Daily Reckoning readers will already be
gurgling with indignation and insight. First, because they
will notice that the world improvers are no more than
central planners - armed with lethal weapons and determined
to turn the world into a place more to their liking.
What's the alternative to central planning? The contrary
approach must be the moral equivalent of a free market - a
system in which each person does his best to make his
private world better…and thereby improves the whole
world. "If everyone swept his own doorstep," said Goethe,
"what a clean world it would be."

Readers must also be gagging on Mr. Greenspan's remarks.
Markets work best without the heavy hand of regulation, he
acknowledges. But he seems to exempt, conveniently, the
credit markets. The maestro's speech seemed to hit a false
note; rather like President Bush's approach to evangelical
democracy, it seemed to miss the point.

Instead of letting lenders of credit and demanders of it be
guided by an 'invisible hand,' the Fed chief has for years
drawn them together himself. Mr. Greenspan's 'Open Market
Committee', not the open market itself, has determined the
rate at which lenders will lend, short term, and at which
borrowers will borrow.

We noted a few days ago that two heads are better than one.
Groups of people can be smarter than individuals. A market,
theoretically, can do a better job of finding the right
price for a thing. A market is supposed to aggregate the
private opinions and independent judgments of thousands of
individuals. But in practice, the market often slips into
crowd-like behavior - whipped up to greed or fear by the
financial media or the financial industry. And sometimes
the whole market is deceived by its own central planners,
namely Alan Greenspan and his sidekicks at the Federal
Reserve.

Rather than allow lenders and borrowers to decide for
themselves what rates they would accept, the feds decided
for them. Arguably, they fixed short-term interest rates
too low - and thus sent the wrong signal to everyone.

The low rates told consumers, producers, sellers,
homeowners and investors that there were billions in
savings rushing into the market, so much that they pushed
down lending rates lower than they have been in the last 40
years. It looked like a new boom coming. It looked like
good times. Even on the other side of the Pacific,
suppliers took it for a huge increase in demand. Asset
prices rose. Lenders lent. Borrowers borrowed. Spenders
spent.

But there were no savings. There was no real demand. It was
just a mirage, caused by central planners who have given
the wrong cue.

And so today's public spectacle in the economy is not so
different from public spectacles in politics. It began with
a lie. It has become a farce. And it will end in disaster.
How and when are the questions we pose everyday.

"The buying of the dollar was strong, and swift, before
dollar bears knew it the euro had fallen below the 1.29
level, and remained there the rest of the day. It's still
trading with a 1.28 handle this morning…I'm not really
going to rail on it any longer…It just frustrates me to
no end!"

*** The jobs report came out on Friday. "Job numbers soft
again," says TheStreet.com

Bonds rose on the news. Mortgage rates have been
falling…for almost as long as the Fed has been increasing
rates. What this tells us is that the economy is
sinking…not dramatically, but slowly, softly…almost
unnoticed. It suggests also that the Fed's rate increases
are a feint, a fake-out. They are supposed to be
'normalizing' rates…gently easing the economy back into
balance after an 'emergency.' But the rate increases are
insignificant. Short rates are still below the inflation
rate.

Meanwhile, in the most-recent 2-week period, the money
supply, M3, increased at an astounding rate. More than $50
billion was added; if it were to continue growing at that
rate more new money would come into the system in a single
year than the value of all the gold above ground. It is
dangerous to extrapolate from a couple weeks, but our guess
is that the Fed is privately still desperately concerned
about a slump…about deflation.

And so, the lower mortgage rates will help add more air to
the housing bubble. As long as rates remain low, and
housing prices keep rising, people will be convinced that
they have more money than they really have. The phony boom
continues…for now…

[Ed. Note: What is a phony boom? What happens when the
shroud is lifted? Why the value of your property may
decline? If you opted for mortgage financing, you need to
read this urgent memo…

*** On Friday evening, we went to see the new German film,
"The Fall." It is a masterpiece; it is everything that
"Alexander the Great" is not. Both leading men are
portrayed as world improvers. But Alexander was made to
look ridiculous and absurd. Adolph Hitler looked very
real…and pathetic.

"The Fall," takes place in Hitler's bunker in the last days
of the war. We see the 'Thousand Year Reich' coming to an
end 990 years ahead of schedule. We see also how easily
people are caught up in extravagant delusions…and how
hard it is for them to free themselves. Hitler's
secretaries, cooks, deliverymen…even his generals…seem
like fairly normal people. But they have been enlisted in a
great campaign. They can see no other future but to see it
through - even after it has become apparent to most of them
that it leads to ruin. We see mature, battle-hardened
generals, for example, who cannot bring themselves to
disobey. They are soldiers, they tell each other, and have
sworn to follow orders. They can see for themselves that
Hitler is mad. They know his orders are foolish. There will
be Hell to pay…but they soldier on anyway.

*** On Sunday, we went to the little church in Normandy,
near where we have bought our latest folly. The service was
held not in the church itself, but in a tiny parish hall
nearby.

We introduced ourselves. The priest apologized for the
small turnout…and the humble circumstances.

"There are so few of us…and the church is not heated. You
know, we Christians sometimes seem like a dying breed," he
explained.

Looking around at the handful of the gray-haired faithful,
it appeared that death was not only inevitable but
imminent. There was hardly a person under the age of 70.

"We Christians are urged to be a 'light unto the world.'
But what does that mean? Does it mean we have to change the
government? Or that we have to change the way people
worship…or the way they act?

We interrupt the sermon to offer clarification. There are
two ways to build a better world. The world improvers such
as Hitler and Alexander propose to do it by force. They
apply a top-down method, effectuating 'regime change' in
various foreign countries…and making a public spectacle
of themselves to boot. The problem is that their ideas of a
better world are no more than vanity - they have no better
idea what a better world might look like than anyone else.
And as soon as they take out their weapons to force the
issue, the campaign sinks into barbarism; for what is
barbarism except the use of force over persuasion? The
whole thing is a fraud, beginning with a lie…developing
into a farce…and ending in disaster.

The other type of world improver hardly even dares to think
about improving THE world. He is much more modest. The
best he can do is to make small private gestures in his own
world. And not by packing heat.

"We are called to be a 'light unto the world,'" continued
the priest, "by lighting up our own little world…by
rendering service to those in need. By offering a kind
word. By visiting the sick. By welcoming strangers and
newcomers to the community. By caring for the poor. By
comforting those who suffer from sickness of the body…or
the spirit. We light up the world simply by being the
decent people that Christ showed us how to be. By showing
compassion, in other words…and by loving our neighbors as
ourselves."

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The Daily Reckoning PRESENTS: Is a secular bull market
inevitable? Mogambo wants to know. He looks at the last
bear market in stocks and concludes: if you bought stocks
in 1969, you'd still not have made your money back. Sounds
unlikely? It's not…

Invisible FBI guys riding around my house on their
invisible bicycles - which is not exactly the same thing -
and I can also see invisible government helicopters
hovering over my house, and over YOUR house too, but don't
tell them I tipped you off.

But, Jeff Ferguson defines a short-term cycle as something
that lasts two to four years, as opposed to a secular (30
to 40 year) cycle, in his essay, "Is a Secular Bear Market
Inevitable?"

He writes, "Contrary to a common belief, equities didn't
simply move sideways through the 1970's before moving to
new highs with the great bull market starting in 1982. This
illusion is caused by the inflation, which plagued the
period. Deflating the S&P 500 with the CPI reveals that the
market peaked in 1969, not 1973, before falling 64% over
the subsequent 13 years, ultimately bottoming in 1982."

I will pause there to let the significance of that seep
into our brains, as I am not sure that I comprehend the
full significance, although there are several rude audience
members who can't restrain themselves, and who blurt out
that I am such an idiot that I can't comprehend the
significance of a twist-off bottle cap, which is probably
true, but beside the point.

But if they had privatized Social Security in 1969, how
would you feel if your retirement had lost 64% in buying
power, as you got poorer and poorer, until 1982? In effect,
you can afford to buy slightly more than a THIRD of the
basket of stuff you could have bought in 1969!

But it gets worse than that! He goes on to say, still
adjusting things for inflation, "Stock prices failed to
exceed the 1969 peak until 1993, 24 years later, and didn't
move convincingly through the 1969 level until 1995."
That's 26 freaking years in a row that you failed to break
even in the stock market, i.e. before the 1969 level was
reached. And how long will it be before the guys who bought
at the exact bottom actually make a profit? Don't ask.

I know what you are thinking: "Wow! The Mogambo was right!
When adjusted for inflation, stocks bite the big one (BTBO)
from time to time, like all the other investments BTBO from
time to time!"

If you were really thinking, and not sitting there on the
couch sucking down another beer, you might even say, "Hmmm!
Let me see! The Mogambo was right that there are long
periods of time when stock are NOT going to increase your
actual, inflation-adjusted wealth! And right now the stock
market is still waaayyyYYYYyyyy higher than it has been,
and is very, very expensive, and so is this really the best
place to be putting my money right now?"

But can it get worse than that? Yes. I close my big blue
Mogambo eyes (BBME) and I concentrate, concentrate,
concentrate, and I am tapping into your brain, probing your
subconscious, and I can tell that you are asking yourself,
"How can it get worse than that?"

Well, for instance, I could come over there and try to
borrow your barbeque grill, and then keep getting in your
face until you just give me the damn thing just to get rid
of me. I am sure you agree that would be worse!

But the authors were probably not referring to that. And
sure enough, they go on to say, "At this point the weary,
and rather aged, investor still faced capital gains taxes
on a phantom 300% gain wholly due to inflation. Covering
this tax liability likely extended the true recovery period
to within shouting distance of the bear market in stocks
beginning in 2000, the most recent peak in equity markets."

So, net of inflation, and net of taxes, the investing dudes
and dudettes in 1969 NEVER actually showed a profit from
their investing in the stock market! And the two authors
did not even mention the fees and commissions and costs
that their hypothetical investor would have had to pay to
the greedy, grubby financial services industry all these
years, nickel-and-diming you to death, including
"inactivity fees" which you have to pay because you don't
do enough trading to suit the guys who charge you fees for
that trading.

And, depending where you live, they neglected to deduct
state taxes on the gains, and/or the value of the holdings!
What a racket! And they call this "investing" Hahahaha!

And now we are talking about putting Social Security money
into privatization? The Mogambo tilts his head back and
roars, which sounded a lot like "hahahahaha!" only with
more spittle and an unmistakable undertone of contempt.

But of course the privatization of Social Security, or some
tamer variant, will be passed, or they will simply increase
taxes, or reduce benefits, or all three, as there is no
other way. We are here with a gigantic, bankrupt system,
strictly attributable to the stupidity of Congressional
boneheads, which not only ratified FDR's New Deal idiocies
in the 30's, but kept expanding them, year after year after
year, letting more and more people gobble money from the
Social Security fund, and increasing-increasing-increasing
benefits for current beneficiaries.

And when that predictably caused shortfalls, they increased
the Social Security tax, adding the Medicare surtax, and
then spending spending spending the resultant Social
Security Trust Fund surpluses. And now here we are again.

The Congress that we have now is more stupid, arrogant and
corrupt than any other in the history of Congress, the
Leftist morons on the Supreme Court have destroyed the
Constitution by letting them do it, and a brain-damaged
Federal Reserve has provided every dime of financing for
the whole enchilada and destroyed the dollar for their
efforts. Since nothing has changed, except to get worse, I
am sure that taxes are going to be increased. Again. And
again. And again. Ugh.

The Mogambo Sez: Too many forces are in play, and like any
system with too many variables, unintended consequences
will erupt. And it will be bad news all around.

Editor's Note: Richard Daughty is general partner and COO
for Smith Consultant Group, serving the financial and
medical communities, and the editor of The Mogambo Guru
economic newsletter, an avocational exercise to heap
disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron's, The
Daily Reckoning and other fine publications. If you're
inclined to read more, you'll find the whole Mogambo here:

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