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journal - JANUARY OBSERVATIONS
1-31-2002How Business Is Done
by Anonymous
Capitalism:
You have two cows. You sell one and buy a bull. Your herd multiplies, and the economy grows. You sell them and retire on the income.

Enron Capitalism:
You have two cows. You sell four of them to your publicly traded company, using letters of credit signed by your brother-in-law the auditor, then execute a debt/equity swap with an associated general partnership so that you get all six cows back, with a tax exemption for nine cows.

Transfer the milk rights of the fifteen cows via an intermediary to a Cayman Island partnership secretly owned by the Vice President of Finance, who sells the rights to all eighteen cows back to your listed company.

The Annual report says the company owns twenty eight cows, with an option to purchase fourteen more using a debt/equity swap. All cows are hedged with puts, including unpurchased cows.

Provide only selected portions of the Balance Sheet. All cows are pro forma.

Trade all fifty cows for the Presidency & Vice Presidency of the United States, leaving you with a negative number of cows.

The public always buys your bull. Leave it to the public to clean up your mess.

****
I got the above in an email today from a friend. Apparently from Eat the State.
1-29-2002Standing Position
It has been, and continues to be the standing position of Depression2 that the current (Y2.002K) recession will be more than a blip, longer and deeper than average, with no quick recovery. As noted below, the recession is already lengthening. We will likely slip into "depression," though that word seems to have been banished from our vocabulary. Much the way that the word "war" was, until recently, banished. Actually, the prior acceptable use of the word "war" was to refer to things that America only lost: Vietnam, the War on Poverty, the War on Drugs, etc.

Not that Vietnam was a war. No more a war than the Gulf War. Both were merely operations. Regardless, even though the Gulf War looked like a win at the time, it has proven to be yet another loss in 20-20 hindsight. Failing to do the job right the first time sowed the seeds of the current destruction.

Likewise, America is currently basking in the glory of victory in the war in Afghanistan, but little regard is given to the fact that it has scattered terrorists throughout the region and the world.

The schizophrenic government, after a brief shining moment of unity, has returned to partisan bickering, which was set aside tonight for the celebration of the mutual admiration society - W's first state of the union speech.
The Shrub
"As we gather tonight, our nation is at war, our economy is in recession, and the civilized world faces unprecedented dangers. Yet the state of our union has never been stronger." -GWB
1-29-2002HARD DOWN MARKET DROP START NOW
D2 respectfully disagrees. After a four day "winning streak" with minimal gains, the Big Three dropped hard today: Dow, SPX and Nasdaq all down over 2.5% on heavy volume, to two-and-a-half month lows:



What was up? The XAU up over 3%, HUI up over 4%, both within striking distance of 52 week highs and displaying solid up trends. The optimism is rolling over, and the averages are going back to the September lows. The market is worried. How many more Enron's are lurking?



*****

Global Crossing declared bankruptcy today - the 4th largest in U.S. history, and the largest telecom bust to date. The NY Times put it on the front page, but buried it under the fold, way down at the bottom. The Wall Street Journal didn't even deem it worthy of front page coverage. It wound up on page 3 of the Journal. It's as though they don't want to spook the market any more than necessary. Britain's Financial Times, plastered it front and center with a nice big headline, exactly how it belonged.

This market is being buffetted by so many crosscurrents, and there are so many vested interests wanting to keep it levitating. CNBC is running very bullish commercials with all their anchors imploring us not to count the market out. But folks aren't biting, as evidenced in the charts above.

*****

As I write this, the Nikkei is trading below 10,000 intraday. It remains to be seen if it will close at these levels... This is its lowest level since October 2001, when it was hitting fresh 17 year lows. If the Dow were to trade at 17 year lows, we would be around 1,500. Think it can't happen here? Think again. Just 12 years ago in Japan, the Nikkei was at an all time high of 38,000+. It has now lost about 75% of its value. A similar performace by the Dow would put it around 3,000.

Please understand that it brings me no joy to report these facts. I have family and friends in Japan who are suffering the consequences of the depression. I watched it unfold, and have seen its effects. The carnage is not though yet in Japan, and it has only just begun here.

1-17-2002Recession is Lengthening - Minitrue
On a personal note, I'm reading George Orwell's '1984'. The first time I read it was in high school - 15 years ago. I thought I might catch some similarities between his vision of a corrupt future and our current reality. These are dangerous times we live in, and it is important to stay alert.

In '1984' Winston Smith, as an employee of the Ministry of Truth (Minitrue in Newspeak)spends his day rewriting the past to conform to the Party's version of the present truth. He is changing the past constantly.

In our version of post-capitalist America, it is the future which is changed constantly. For example: Today, for the first time this cycle, I heard on television that recessions can last as long as 9 - 16 months! This is new. Previously, it was widely reported, often offhand as an aside (as to imply that this was something which is common knowledge) that recessions generally last nine months.

Why the switch? Well, you can't sing the tune that recessions only last 9 months if the one that we're in now is already going on 11 with no end in sight. I distinctly recall that before the recession was officially "declared," recessions were known to last a mere 6 months - two quarters. Six months was the working definition in the press: Two quarters.

That was all blown to hell when the start date got backdated to more than six months prior. It was backdated by 9 months +, which is where the 9 month definition spontaneously appeared, along with a twin piece of information that 'since recessions only last 9 months, this is nearly over.' Those two pieces were truly twins, for you never heard one without the other close in tow.

The twins were good for about 2 months, until now, when the 16 month figure will be in play. This buys us five months, until May, 2002. At which point if the recession is not over, people will begin to get restless. A new date will be set. "Long recessions can last as long as two years," it will be reported. Which would be March, 2003, with elections on the horizion.

Think we don't have a Ministry of Truth? The television our Minitrue.

The Shrub will never be reelected in a recession and he knows it. In the end, he is also powerless to end the recession. As two years pass and the recession drags on, a diversion will be necessary: more war. Wars are always dangerous, but we've won the last several so handily and completely (except for those two buildings), that they're not treated with much respect. Much like Clinton used the military as a diversion, a smokescreen, Bush will be tempted to as well.

At any rate, I digress. My point is that we don't need the traditional Ministry of Truth adjusting the past, because we forget about it immediately in post-capitalist America. And anyway, we have television, which is much more interesting.


WAR IS PEACE

FREEDOM IS SLAVERY

IGNORANCE IS STRENGTH

1984

Click the book to read the first half of the first chapter at Amazon. It is a warning of things to come.

***
We got the nice rally today that we were expecting. After the close came more good news: IBM and Microsoft "beat the street." Funny, because MSFT is down nearly $3, and IBM is down over $5 in after hours trades. This puts IBM down to it's lowest level since December. Tomorrow should be a round trip, at least, of today's gains, completing the dead cat bounce. With the market, however, you never know. In my experience, I've seen markets rally from the depths of hell in defiance of "bad news," and crash to pieces on supposed "good news." But the medium term picture remains: we're going back to the lows of Semptember.

Its nice to know that our Minitrue (television) is not all potent. Even with the good spin on the news, the market chose its own spin. Markets tell the truth. (Unless it's the gold market, in which case it lies against its will.)
***
Take time to remember MLK on Monday. He is a true American hero because he stood up for the truth.

Thank you to everyone has written me about the latest article, Counterfeiting the Dollar. It is very encouraging to hear the feedback.

I will be away for the long weekend, but will return on Tuesday.

Peace.

Michael

1-16-2002January Indicator / History of Money
With the big market drops, the major stock indicies have wiped out all gains for the year. The big 3 (Dow, SPX & NASDAQ) were all up after the first 5 days - a good sign for the bulls. How will they finish January? Looks like it may be a horserace, but very likely down.
***
Greenspan, cutting the ribbon on a new exhibit on the history of money joked: "I understand the history of money," Greenspan quoted his friend as saying. "When I get some, it's history."

Check the link.
***
The market took a big hit yesterday. We should see a real nice dead cat bounce today.
***
1-16-2002Old School: Dow Theory Sell Signal



Note: If you don't know what Dow Theory is, drop me a line. If enough people write, I'll write a piece, or do something, to demonstrate it. In the mean time, just know that it was invented by Charles Dow and has been around for over 100 years, and has been pretty accurate in catching long term trends. Because it aims to catch the long term trends, it also tends to turn up a little late in the game, after most (though not all) have already realized that the jig is up.
1-15-2002Turning Point
Since the September low, there has been a lot of optimism. In General. The tragedy brought out the best in humanity. Instead of focusing on the fear, and worry (though we did worry), we focused on hope. We remembered love for country and family and friends and good times and baseball. The market was a collective reflection of the emotions exhibited by individuals.

But time washes the sands of our emotions, shifting them imperceptibly day after day until things are completely different. The fear is gone. America has won the war with Afghanistan. The war is passé. No attack pictures means no fun for the news, means we don't pay attention anymore… We can be distracted by Enron…

…And (hey!) maybe a scandal with the president. His approval rating was at an all time high - 90%. There is only one way it can go from here. And the last few days haven't been good for the Shrub. First, there's the Enron debacle. He seems clean on that account, just because no one is talking, but just by virtue of his closeness to Enron - their shared Texasness ("Don't mess with Texas") casts a sinister shadow on Mr. Bush. The President of the United States, consorting with felons? Is this how one restores honor to the Whitehouse, as he promised?

Then, the pretzel. Choking on a pretzel while watching a football game, alone. This is the President of the United States! The President of the United States has this kind of time on his hands? I don't have time to watch Football on Sunday, and I don't have nearly as much work as he does…or should. He kind of seems like a boob.

Finally, news tonight that Bid Laden has gotten away. We smoked the caves, just like Bush said we would, but we didn't get him, like Bush said we would. That's two in the loss column for the home team in the game of Jihad vs. McWorld. First the buildings, now Bin Laden gets away.

As I said, this is a turning point. The turning point will take shape as emotions. The collected emotions will be manifested in the way we treat Mr. Bush, and in the way we make the market behave with our collective actions.

This week are the high profile earnings of some real Blue chips. IBM, Microsoft, Intel. My bet is whether the news is good or bad, it will get a bad spin.
1-14-2002Au revoir Dow 10K!
Until we meet again!
1-09-2002Pop & Drop - Market Makes a Round Trip - Bad News is Back
This morning it was off to the races on the major stock indicies. The bulls were running, with the dow up triple digits and the NASDAQ up over 2%. In the end it was all for naught, as the markets made a round trip and closed in the red across the board. The old pop & drop, as we like to call it. Bad news has made it's return. Layoffs are back, with Merrill Lynch cutting 9,000, Cigna cutting 2000, Ford cutting up to 20,000, GM 5,000 or more, and this is just off the top of my head, and just in the first few days of January. Where is the recovery in this?

The answer is that the recovery will have to be put off a little longer, and the stock market is realizing this and began adjusting to it today. Gold, on the other hand, had a stellar day. Spot broke above $280 with some real vim to close at around $283 for the day. As a result the HUI was up 4.7%, and the XAU up nearly 4%. Action in gold today is indicative of a continuing improvement and we should expect higher prices in gold in the coming months.

Gold has seen steady physical demand in major consuming areas, with reports of increased interest in the Far East. Then there is Tamisuke Matsufuji, former Salomon Brothers bond trader who wants to blow the lid off the gold price. He'll likely have a good shot at it. His theory is this:

"Japan is the world's largest creditor nation. Individual assets total more than 1,300 trillion yen. If just 1% of this money could be moved into gold, that would instantly account for five years worth of global production, and gold prices would skyrocket," Matsufuji said.

"Japan has the potential to really move the market," said Matsufuji, who hopes Jipangu will serve as the vehicle for pumping more Japanese money into the gold market.

There you have it. Once folks realize that the two largest economies in the world are a hair's width from technical bankruptsy (see news links on this week, the price of gold should really start to move.

Cheers. Michael
1-07-2002No Inflation - Who are you kidding?
On January 1st, 2002, the tax on cigarettes went up 60 cents in my home state of Washington. This pushed the tax on smokes to a nation-wide high of $1.43 per pack. Titled Initiative 773 on the last ballot, it drew overwhelming voter support, passing by a margin of 65% to 35%.

Its passage is generally viewed as a win-win solution for the citizens of Washington. The aim of the measure is to help balance the state budget by raising revenue and reducing tobacco related health care costs, while at the same time reducing smoking and saving lives. The additional revenue is earmarked for the funding of low-income health care, and tobacco prevention programs.

What is largely ignored is the economic impact of the massive price hike in the price of cigarettes. Cigarettes are a product used mainly by people in lower socio-economic classes. Prior to the tax increase, a pack of 20 cigarettes was already pushing $5.00. With the new 60 cent increase, this amounts to a 12% increase in prices. Prices on smokes range anywhere from $5.50 at discount smoke shops, to over 6.00 at some grocery stores.

While not inflation per se (D2 adheres to the strict definition of inflation as an increase in the money supply) it is an example of rising prices, a manifestation of inflation.

It is easy to dismiss the rising price of cigarettes as an anomaly not representative of consumer prices in general, nor affecting the local economy at large. To do so, however, would be to ignore a trend towards higher prices for goods and services for which there is no alternative.

We know that the government CPI figures show inflation as relatively tame, but these numbers clearly are not telling the full story.

A recent article in the Washington Post notes that AT&T, Sprint, MCI are all raising long-distance rates by as much as 43%. The article also notes, however, that the rate hikes may be hard to spot because they may be part of one or more surcharges telephone companies now commonly add to the monthly bill. Say hello to hidden price hikes.

Once again, this rather innocuous price hike is easy to dismiss, since long distance rates are so low. A 3c increase on 7c per minute may be a 43% increase, but the figures involved are so small

We got the first cable-TV bill of the year yesterday. It was up $4, to $38 per month for "basic cable." Basic cable means about 70 channels, with nothing ever good on. But the $4 hike on the previous $34 bill represents about a 12% increase in prices.

The United States Postal Service is increasing rates also, by an average of 9% Guess who will be paying for this? Look for magazine subscription rates to be rising soon. This will amount to $6 billion in increased revenue for the USPS, while sucking the same amount out of the private economy. Guess what this means? Higher prices across the board - for magazine subscriptions as well as those cheap books we love so much from Amazon.

Finally, insurance rates are going up as well. In the state of Washington, the largest rate increase for home and auto insurance in a decade has just been authorized. Auto insurance will increase by at least 5%, while homeowners insurance will be going up by 10% or more. The article I read cites the rising costs of medical care & car-repair costs as the chief reasons for the rate increases. Yet more signs of the manifestation of inflation.

D2 notes that all of these price increases are coming either from government, or large corporate monopolies, and all are in areas where consumers have little choice but to pay. Smokers are, unfortunately addicted to their product. The other instances are all in the service sector, which makes up the largest portion of our economy.

The money supply in this country is growing at approximately 10% per year. To this point, consumers have not noticed inflation because it has taken place mainly in the paper asset markets - stocks, bonds, and housing (mortgages are merely a paper asset). We have been trained to view rising stock prices & housing prices as "good," not "bad" inflation. Regardless of the qualifier, it is still a manifestation of inflation, which simply means that more money is being printed.

Additionally, consumers have not noticed inflation because the prices of manufactured goods in this country - things like TVs, computers, cell phones, etc have remained extremely low, and seem to be dropping all the time. How can this be?

If you've noticed, most of these goods are produced in China, Malaysia, Thailand or in other third world countries - countries with extremely cheap currencies relative to the dollar. China's economy is growing at almost 8% this year, at a time when the rest of the world is in recession. This is nearly equal to the growth in the U.S. money supply. Coincidence? How many of the goods you use on a daily basis are made in China? They are simply the low cost producer in the world today, supplanting Japan in that regard. Japan is no longer a low cost producer, and its economy is suffering as a result, having just entered a bona-fide depression.

Where does all this lead? The U.S. is flooding the market with dollars. The national debt is at an all time high and pushing up against the statutory debt ceiling. One thing is for certain: The more dollars that are printed, the less each one is worth. We are only beginning to see the effects of this inflation.

Where does it lead? Stay tuned. We'll be connecting the dots...

Michael
Links to most of the articles support this piece can be found in: this week
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