 A Week with Richebächer
in Cannes
Jim Willie
CB
September 15, 2003
In the final
week of August, I had the rare privilege of meeting Kurt Richebächer
on invitation. He had read my "Ass-Backward Economics"
series of articles. In a trans-Atlantic telephone call, he stated
his appreciation for my grasp of the gravity of the situation.
We each believe a breakdown in the US Economy is a certainty,
our government statistics are replete with deceptive fraud, current
imbalances are beyond remedy, and the world investment community
is being drawn into a trap. He extends his view, expecting a
catastrophic outcome for the world economy and its financial
markets. All this time, in the back of my mind, I harbored a
little voice telling me that I am a kook. In my recent article
series, I had referred to Herr Richebächer as a "savvy
former German banker, longstanding banking critic, and consistent
maverick." I was flattered when he confirmed the legitimacy
of my thought process and analysis. Now that little voice speaks
in hushed tones. We are both mavericks, it seems. In the next
few months, we will work on a new pursuit.
When in Cannes
on the famed French Riviera where he has lived in a resort home
away from his native Frankfort, I took ample notes in a diary.
It was clear after the first day that our conversations would
be voluminous, touching on diverse economic topics, some political
areas, cultural issues, personal backgrounds, and views of the
world we live in. Although benefiting from a strong memory, I
felt the need to record daily discussions, major events, mundane
events, and personal observations in a diary. I am glad I did.
This article will crystallize many thoughts and memories in a
way that will stand in time more effectively, enabling others
to gather in his many pearls of wisdom. At the same time, in
no way will I compromise Kurt's privacy. So many humorous and
other occurrences are etched in my mind, only a few to find their
way to a printed page. I respect him too much, and besides, his
anger is not what I wish to incite. I greatly appreciated his
generosity and shared experience, with deep wisdom. This was
a contrast in style to be sure. A continental patriarch with
a serious demeanor came face to face with an irreverent (but
adaptable) iconoclast, forced to suspend all slang of diction
and off-color slings of language. Despite a gulf of culture between
us, we saw eye to eye on almost everything. Imagine explaining
the nickname of "Golden Jackass" and my description
of official economic policy as "ass-backwards." On
more than one occasion, I found myself to be the only person
laughing. He warmed up to my style soon after I fell in line
with his.
Neither of
us possesses high regard for the United States insofar as its
economy and monetary system are being managed by truly inept
leaders, unaware of where they direct this nation. We also share
a deep concern for a trend underway within the US toward greater
state power, erosion in personal freedoms for its citizens, and
deceitful use of military force. We each expect conditions to
worsen. After reading several of his past "Richebächer
Letters," I was simply amazed how much our economic analysis
is in concert, on the same wavelength. At one time leading up
to my trip, I suspected that some readers might actually have
suspected that I stole and plagiarized material. In early August
for the first time in my life, I realized the benefit of reading
some of his famed Letters. They are incisively written as though
by a surgeon, with sound arguments, ample supporting data, focused
logic, and defensible conclusions. I knew I was to meet genius,
and was not disappointed. Within his many stories, I learned
of the origin of his Letter publication.
We have each
converged on totally counter-productive economic policy, faulty
economic analysis, citing similar evidence. He delves deeper
into supporting data, with a specific focus on the US arena.
I cover the world, and offer less depth of data. The parallel
is so uncanny, that we drive the same model car. But let nobody
be mistaken. I am a young pup in this trade with some measure
of acumen armed with an active pen, and a certain brash style.
This man is a mastermind over the years, a gentleman with a track
record of foreseeing calamity that will go down in history. I
hope to learn from this man, and did just that in my week with
him. I learned plenty, and will record it here. However, to my
pleasure, I exposed him to a few things. It was certainly a 90-95%
tilted flow of wisdom and knowledge, with ample meeting of the
minds. I was able to help him to understand the American mindset,
and the fear factor within the American worker. There are certain
advantages to living inside the developing inferno. At least
one analytic position was sold to him with a solid line of reasoning.
In what follows,
I will attribute to Kurt several quotes. If they are not exact
verbatim, they at least capture his beliefs closely. His words
were repeated often and in varying contexts. The meaning will
be clear to the reader. I will do my level best to properly represent
his thinking, although I may err in small ways that are unintentional.
I will be especially careful in portraying his views on America
and its present path. I am only human, most of the time. Also,
my account cannot be complete, but it will contain most of the
essential marrow of our many conversations.
Economic principles
and erroneous thinking :
KR: "The
idea of an economic recovery with such a huge trade imbalance
is utterly ridiculous"
This
refrain was heard at least a dozen times, sometimes out of left
field, from Kurt's lips, spoken with dismay, even disgust. By
the third day, the quote evoked my laughter, from mere repetition.
By the fifth day, I reminded him that it had been over 24 hours
since he last uttered the line, which evoked his laughter. How
on earth can a nation expect or realize an economic recovery
when $500 billion is sent abroad to pay its trade bills? The
cost can support millions of jobs. Since the jobs are not returning
to our shores, how can the economy recover? It cannot, yet Americans
buy into the nonsensical notion of a "jobless recovery."
He sees debt rising, consumption continuing, and jobs that are
generated going to Asia. I called it a hemorrhage of capital,
with jobs following the capital flow. He agreed. We talked about
how Americans have been conditioned to regard trade gaps as normal,
big federal deficits as normal, large debt levels as normal.
I made an analogy regarding debt, whereby American households
sit on living room couches, with the water level rising to within
one foot of the ceiling. The couch floats up, but the breathing
room is severely restricted. He nodded. I told of stories in
the mid-1970's when the first $100 billion trade deficit was
registered. Back then, economists warned that the capital loss
was dangerous, while foreign dependence possibly could lead to
instability. Such concerns are not now evident.
KR: "There
is no foundation for recovery, which is made impossible by a
huge trade deficit, balance sheet destruction, over-emphasis
of the financial speculation, poor capital equipment investment,
and monstrous imbalances"
In
his September "Richebacher Letter" a final section
title stands as "No Foundation for Recovery" which
was the result of banter back and forth, pushing a title to the
top. For fully three years the US consumers, leaders, and bankers
have systematically resisted the natural process of cleansing
excesses and rectifying imbalances. Far from it. Instead, the
trade deficit has increased. Corporate balance sheets are every
bit as much loaded with debt. Household balance sheets are burdened
by greater debt. Financial speculation has produced a Treasury
bond bubble, a mortgage bond bubble, and its flipside housing
bubble. A consumption bubble continues unabated, fed by debt.
Capital investment is lacking in the face of idle antiquated
mfg plant. Economic structures are horribly out of balance, perhaps
to a greater degree than in 1999 and 2000. We talk incessantly
about a recovery without preparing for one. With little thought,
we await a knee-jerk reaction to federal stimulus and monetary
stimulus, without the results. Instead of questioning why the
last two years of stimulus failed, we prescribe even more extreme
measures of the same, inviting disaster. We have no foundation
for anything but a more monumental bust, this time led by the
much larger bond markets.
KR: "Workers
spend what they earn, and business profits only when they spend"
This
is a central principle of Friedrich Hayek, whom Kurt respects
highly. I can go out on a limb and claim that he admires and
follows Hayek's principles of economic thought, and not so much
his tolerance for state power. Kurt was remarkably apolitical,
except for certain deep concerns which will be addressed later
in this article. Americans believe, quite mistakenly, that if
consumption levels can be elevated, resuscitated, that business
spending and investment will come back to life and complete the
economic recovery. No way, he says. In the 19th century United
States, the railroads were not constructed after demand encouraged
investment. Other way around. Savvy industrialists felt the conviction
that if the nation's shores were connected, commerce and distribution
would lead the way toward historical development of the New World.
Investment could lead and create demand. They were right. In
a similar fashion, the information highway was built in the 1980
and 1990 decades. Fiberoptic lines, high-speed internet, and
vast computer networks all witnessed demand catch up to supply.
For sure, imprudent debt extension had to be checked, and it
was in 2000. In parallel, long-distance telephone connections
were established across nations, traversing ocean floors, complemented
by wireless telephone tower coverage across the continents. That
too had to be called into check, as colossal debt brought about
a correction and natural selection process. The lesson here is
that American businesses are still spending on capital investment,
but not very much. Demand must catch up to supply. The reality
is that profits and business expansion drive more profits. But
worse, what investment we do commit to is largely devoted to
Asian plant and equipment. The stories of expansion into China
and India are everywhere, which produce jobs there, not here.
KR: "Savings
and investment, not consumption, will ensure a true lasting economic
recovery"
Somewhere
around the mid-1980's, we allowed the opposite cancerous notion
to invade and find a home in the Americans mindset. Since then,
debts have risen out of control, savings have disappeared and
are actually negative, and consumption has taken root as a national
addiction. Furthermore, jobs have disappeared, and a gigantic
trade gap has appeared. Yet our national leaders, our press,
our media continue to parrot mindless pop culture pseudo-wisdom
that we must keep consumption strong. We must do the exact opposite.
Our investment capital is all borrowed capital, thoroughly dependent
upon Asia. A nation's wealth can be traced to its propensity
to save and invest, to build engines of wealth in the form of
manufacturing plants, mines, drill rigs, farms, service centers.
These are not springing up in our nation for many reasons. The
cost structures are unfavorable inside the US. Our Fed Chairman
implores the populace with irresponsible advice to raid home
equity in order to perpetuate a spending pattern that is both
unsustainable and highly destructive. His words are wholly inappropriate
for a central banker, and represent grounds for dismissal. Meanwhile,
our savings rate has turned negative, if you remove fraudulent
govt adjustments to income. We as a nation are gradually achieving
an impoverished condition, and in no way are creating the foundation
for a recovery. Our consumption has gone completely out of control,
and will invite disaster. We cannot continue to issue credit,
extend debts, and expect foreign nations to supply the necessary
capital to maintain the system. This is bona fide insanity that
will end tragically.
KR: "The
real economy always exerts its dominance over the financial economy,
all in time"
This
present ominous development is a major concern of his. The principal
beneficiary of recent debt extensions is the financial sector,
for mortgages, for car loans, for speculation in financial instruments,
both ordinary and exotic. This anomaly depicts the distortion
within our economy. No capital investment is required. Jobs which
are created can easily disappear upon a downturn in the bond
markets. Growth evident is confined within the great casino.
Significant portions of profits for large corporations are now
coming from financial operations. Fully 75% of General Motors
profits come from their mortgage operations in a recent quarter.
Many corporations are following this pattern. The nation has
largely foregone its mfg capability, in order to join the casino
driven by Fed liquidity. This wholly aberrant development is
hailed by press pundits, ignorant of the galloping cancer that
it represents. When the bubble grows beyond its ability to find
funds, and beyond what prevailing inflationary expectations will
allow, the financial sector will contract naturally. For a time,
alchemists at the Federal Reserve appear to have the upper hand,
but that will change before long. The real economy, where businesses
are built, jobs are performed, and products are made will eventually
prevail. It always does.
Kurt stressed
the importance of the car mfg industry, where American firms
are unable to make any profits. It acts as a good indicator to
watch for the real economy, in fact a vital sector since it employs
so many workers in vertical integrations. With all the vast new
Fed-driven liquidity flowing into the economy, the US firms not
only cannot make a profit, but are losing market share steadily
to the Japanese. I tried to add that apart from not benefiting
from liquidity infusions, US firms have competitive problems
owing to poor reliability, higher labor cost, huge debt load,
pension obligations, and union strangles.
KR: "Americans
will soon learn that in a housing bubble, there are two losers
the borrower who purchases the property, and the lender who
underwrites the mortgage contract"
In
the sale of stocks at the peak, one wins with collecting a high
price, one loses as buyer. With the housing bubble, not only
is the market five times larger than the stock market, but each
side of the transaction becomes a loser if property prices go
sour from rising rates. The combined effect would be ten times
as great as with the stock bust. Owners of the properties would
see their equity eroded. Any heavy leverage in the debt extended
against the property used as collateral would lead to amplified
losses. Further credit drawn would not be possible. If housing
prices badly falter, negative equity cripples the owner to cause
stress. On the mortgage holder side, it is a simpler story. The
bond investor watches the investment security decline in value
as mortgage rates rise. The silver lining is thin, as reduced
refinance activity would not enter the equation to disrupt value
of the bonds.
KR: "American
economists have absolutely no concept of macro-economics. The
US is attempting to re-invent macro-economics, instead of applying
it from proven history. In time, results will prove to be absolutely
disastrous because of the accumulated debts involved."
Kurt
had only contempt for the Harvard crowd, whom he called worthless,
producing rubbish. He says they have no idea what is going on,
totaling missing the effect of debts, and overlooking the extreme
vulnerability in the US Dollar. US policy bears no resemblance
to the work of Keynes. Instead, US economists have implemented
a "Destructive Keynesian" theory which John Maynard
Keynes himself would disapprove of. I talked about Milton Friedman,
and his absurd theory which states that monetary expansion control
can be used to anticipate inflationary demand, thereby offsetting
it with a surge in supply, employing newly created money. To
this Kurt shook his head, laughed in disrespect, and said "he
has no idea what inflation is all about, he knows nothing."
He believes
the United States is conducting a highly destructive experiment
with the world monetary system. It is theoretically deviant,
aberrant, unsanctioned by other nations, rebellious, defiant,
makeshift, made up as they go along. New Fed liquidity is released
primarily toward the financial sector, which actively promotes
speculation, not production and jobs. This is a key point missed
by American experts and the media which follows. We talked about
how the Austrian School of Economics is the only source whose
theory and teachings can adequately explain the current conditions
and justify the futility of monetary expansion. We are attempting
to use monetary devices to rectify structural problems, met with
the effect only "to spin gears." Kurt had not heard
this metaphor before, which I explained. He thought it was appropriate,
earning a nod. He concluded that in 1930, the US had falling
money supply. So the effect of pushing the monetary buttons was
met with success. But now in 2001-2003, we have monetary expansion
at levels never witnessed before, incredible debt levels, and
extraordinary trade imbalances which have created structural
problems. As a result, the monetary buttons are rendered useless.
American economists are unable to discern why, since they subscribe
to the discredited Harvard School approach instead of the Austrian
School. The magnificent money supply growth now creates a higher
cliff from which to fall.
KR: "Instead
of a second-half recovery, the US Economy will stall, then decline,
then accelerate downwards. With Iraq fading as economic news,
no more excuses for poor US recovery now."
Kurt
believes that rising interest rates and choking levels of debt
will gradually erode the foundation pillars keeping the US Economy
alive. Refinance operations has gone into decline, which tips
the balance for imminent real estate property price declines.
He had no firm opinion on any rapid reversal of interest rates,
but did acknowledge the significant degree of derivative gearing
on rates. I pointed out the GSE agency unwinding of hedge activities,
and discussed their convexity problem which is exacerbated by
reduction in cash flows from refinance payoffs. This forces closing
out and sales of TBond futures contracts. He believes any rise
in interest rates will be gradual at this point. Nonetheless,
the effect will be corrosive, as it continues to kick out the
pillars holding the economy up.
Then came his
dire forecast "within 12 months, the US Economy will simply
collapse, along with the US Dollar." For half an hour we
discussed this threat. I wondered aloud how increasing desperation
by the financial leaders would contain the decline for a time.
He agreed. I was clear that I expected truly unprecedented and
extraordinary policy changes in response to deterioration in
the face of still greater money supply expansion. We covered
how it took $5 of new money and credit back in 2001 in order
to generate $1 in new GDP activity. Now that figure is $6.5 to
one. Some measure it to be $8, with an alternate definition.
I stated my belief that the figure would rise to $10 as desperation
set in, confusion reigned, and banker authority was called into
question on a widely disputed basis. His reply was as ominous
and it was brief "probably yes." When I asked if the
12 months could be stretched to 18 instead, he agreed and said
something about how to expect extreme responses that will simply
fail to produce any remedy or positive results. He anticipates
the euro will gain over 20% in the next year versus the US Dollar.
When the FOREX dust clears, he expects the US Dollar to have
lost at least half its value.
This brief
conversation brought a chill to me. I have come to envision the
US Economy not as a supertanker, but rather as a fully loaded
B52 flying fortress which is suffering engine failure even as
it takes on additional cargo. In the late 1990's we often spoke
about the danger of a typical recession turning into a depression.
If a stall occurs, the B52 will fall like a stone. Kurt calls
ours a "bicycle economy," one which falls when it stalls.
KR: "America
is pre-occupied by low-cost solutions, which will be the death
of America. In cutting costs, shedding workers, US firms put
themselves at great risk. They can no longer service debts as
they reduce cash flow with such cutbacks."
Kurt
bristles at the suggestion that low-cost solutions have solved
anything. Quite the opposite. The effect on cash flow has been
and will continue to be very detrimental. He has no respect for
US understanding of macro-economics, managing nationwide aggregates.
He has almost as little respect for their micro-economic comprehension
of policies to put into practice at the firm level in order to
generate business, create growth, produce jobs, and earn profits.
Going to Asia with large tracts of contracts is damaging. Shedding
the very workers which provide leverage of skills is damaging.
He believes firms should seek the highest paid and highest skilled
and most proficient workers, from whom to gain leverage in the
same manner as they would seek the finest and most versatile
machine. Do we purchase the cheapest machines? No. My firm held
onto two much lesser skilled workers, as it shed me in August.
Those two workers will not be capable of bringing in new business.
They are good people, but young and possessing skills limited
to rudimentary statistics. So where is the gain? Pursuit of low
costs brings about low flows and low potential to service debt.
Just another economic belief which is truly backwards. Kurt cited
the "Fallacy of Decomposition" which states that what
is good for a single firm might be disastrous for the aggregate,
if practiced widely or universally. The pursuit of low-cost solutions,
the dispatch of mfg operations to Asia for over 20 years, these
are such disastrous practices. It has resulted in colossal trade
imbalances, foreign dependence, horrible debt, and a great weakening
of our nation. Rather than progress, this is dismantlement.
KR reply:
"The Chinese are the real capitalists now, not the Americans"
I
related a conversation I had with one sharp fellow about Chinese
machine tools, my friend Jay from Hong Kong. A delegation from
the US Congress visited a series of Chinese machine tool factories.
Most American reps viewed the trade with these firms as positive.
A few regarded the trade as detrimental to US jobs. The Chinese
firms harnessed the next generation robotic control systems,
one level ahead of US firms. This state-of-the-art equipment
comes from Japan, which enjoys a hefty trade surplus with their
new trade partner China. The machine tool firms require fewer
workers than US firms, and pay their most expert workers less.
These firms float almost zero debt, having grown organically
and gradually, converting profit into new equipment over time.
The US competitors simply cannot stand against such competition.
At the end of the tours on location, the American contingency
was very impressed, sobered by the experience, convinced of the
extreme situation. We are only talking about one sector, machine
tools. To which, Kurt replied what is cited above.
KR: "Japan
has the most primitive mercantile economy in the world"
Kurt
was visibly upset when talking about the subservient Japanese,
who willingly and eagerly debase their yen currency, thus perpetuating
the destruction of their economy. He claims that Japanese businesses
could weather a currency appreciation with a minimum of cost
via futures contracts in hedge programs. The cost incurred would
be 3% of the unhedged consequence if subjected to the harsh winds
of the FOREX market. The Bank of Japan on almost a monthly basis
commits large sums of their own counterfeit money in order to
purchase USTBonds. This is a horrible waste, and does damage
to their economy. Clearly, Japan still buys into the notion that
their fate is tied to continued profligate American consumption.
In this respect, Japan is part of our problem. An aside, he wonders
why few are aware that Germany boasts three times the export
trade as Japan, on a %GDP basis.
KR: "I
am not an expert on gold, politics, or complex derivatives"
I
had asked him about the inverse relationship between the US Dollar
and gold, which will surely benefit in a great way as our currency
badly falters. Kurt admitted that he did not possess much knowledge
of the details behind gold vis à vis derivative gearing
and currency stabilization schemes. When I expressed suspicion
of massive gold dumping to subsidize USTBond purchases throughout
the Rubin reign at the Dept of Treasury under Clinton, he admitted
again not to have followed the gold trails of evidence. I claimed
that perhaps half or more of the US gold treasure has been depleted.
He did not summarily dismiss this possibility. I went on to describe
the derivative links between bonds and the dollar, between bonds
and gold, all complicated by Treasury spreads and corporate spreads
and corporate rate swaps. He is aware of these derivatives and
their heavy gearing, and realizes the danger if they all begin
to turn on their creators. I shared some of my opinions, but
not all, concerning how these engines of growth can turn destructive.
He agreed in principle. He regards gold as a reserve asset commodity,
but in no way a critical medium for commerce. When I asked why
he was so genteel in his Letter toward our politicians, never
an insult, he said he refrains from politics.
JW: "Despite
all efforts by the Bank of Japan, the yen will surprisingly rise
against the US
Dollar later this year, and bring attention to rising import
prices"
Kurt
had many times stated that the US Economy and US Dollar would
be in much worse shape right now, if not for the BoJ intervention
efforts. I agreed completely, but mentioned that the incurred
cost was rising with each episode. With an American trade surplus
amounting to 2.5% of its entire Japanese GDP, a tidal flow becomes
harder to fight with official BoJ action. I claimed furthermore,
the first nation to feel the harsh effects of systemic price
deflation is the most likely candidate to emerge as a nation
into a legitimate and sustained economic recovery. With moderate
bank reform, with enormous personal savings, with two decades
of liquidation if not absorption into keiretsus, this nation
has recently endured a bond revolt which could be the precursor
to a fledgling recovery. Capital is finally arriving into the
Japanese financial markets from abroad. China has its largest
trade deficit with Japan, sure to add strength to any yen revival.
Kurt heard my arguments, which he was free to shrug off. He nodded
in contemplation, implying credence.
JW: "Much
of American commerce and culture is part of an addiction system"
Kurt
used the description of Chairman Greenspan as "a monetary
drug dealer" in his September Letter. This was at my suggestion,
which he enthusiastically accepted in agreement. I extended the
analogy much further. The Federal Reserve supplies the credit
drug. The enablers externally are the Asian creditors, who supply
capital lent. Immediate gratification leads to quick gains in
financial securities and leveraged instruments, otherwise labeled
as gambles. Street "drug pushers" are the brokerage
houses and the press & media, whose self-serving motives
are at times questioned, but usually embraced. Current bond bubbles
are a sanctioned creation in response to the 2000 stock bust
and the experienced "delirious tremens" symptoms. Official
denial comes in reporting data, directly in opposition to the
statistical reality. Worse, denial might come from not opening
monthly account statements, or not bothering to listen to reports
of fraud in accounting for the national economy. Little or no
investigation into depth of details, or adjustment distortions.
Stirred fears of deflation deflect attention away from continued
monetary inflation, which can be identified as propaganda by
the drug dealer himself. Kurt listened, heard, and gave it thought.
I believe it sunk in. That is one big bitter pill to swallow.
I went on to identify parallel consumption indulgences. Nationally
we have large federal and trade deficits, leading to foreign
credit dependence. Our corporations went crazy with mergers &
acquisitions, in addition to much prudent debt issuance, leading
to heavy debt loads. Households consume material goods and products,
filling basements, attics, and garages. This has led to heavy
debt. We consume fatty foods, leading to a prevailing 40% obesity
rate, even among adolescents. We purchase 45% of new vehicles
in the form of sport utility vehicles (SUV), which leads to excessive
gasoline fuel consumption. It is all consumption excess, with
damaging consequences. Our national addiction is in an advanced
stage.
Deceptive representation
of US Economy :
All through
the 1990 decade, the financial and corporate leaders badly misrepresented
productivity, profitability, as they promoted a "New Economy"
myth. The effort was a charade. Productivity has led primarily
to lower product prices, that is, the actual productivity, when
excluding the fraudulent hedonic lifts for faster computer equipment.
Profitability has been in decline for 20 years among US firms.
During the expansion, any productivity rise contributed little
to increased profits. During the contraction within the economy
in recent quarters, productivity measured went hand in hand with
a shedding of jobs on a large scale. The heavily distorted economic
statistics supported the myth, which was founded upon American
arrogance and claims of technological superiority. The entire
fraudulent lure would not have been possible without the very
real burst of technological developments. Claims of financial
engineering were largely founded on accounting fraud, off-shore
concealment, which masked executive theft and stock option dilution.
Greenspan was the chief spokesman of the great con game crime.
He talked about reduced risk from rapid information flow, and
higher justified stock valuations. Talk of such risk-related
valuation made Kurt laugh openly as he spoke. The deception continues
to this day, as the economic recovery is greatly exaggerated.
Japan, on the other hand, admits to its sluggishness honestly.
He handed me a report on Japan which was clear, honest, and not
very encouraging. The contrast with American deceptive reports
is stark and clear. The Japanese are very open in their admission
of failures, ineffective govt stimulus programs, and heavily
distressed banks. The United States, in sharp contrast, perpetuates
an image of efficiency, productivity, systemic capitalist advantage,
and superiority that may have little basis in reality. Corruption
remains rampant among US corporations and govt alike. This misrepresentation
angered Kurt to a great degree. He was incensed that Daimler
Benz fell victim to a purchase of Chrysler, that Vivendi went
on a mindless acquisition spree, much of which was motivated
by the lure of superior American assets. I cited Time Warner
and their purchase of AOL. Each venture proved horribly disastrous.
He had angry comments that implored Germany to develop more of
a backbone to stand up to American pressure tactics, and false
claims of superiority.
Current threats to
US Economy and financial markets :
Kurt did not
have in mind any specific fault lines which would prove to be
crucial cracks in the system. Maybe he was feeling me out, but
such would not seem his style. He is certain of the outcome,
but has no vivid preconceived notion of its pathogenesis, as
far as I know. My words must be chosen here very carefully. I
shared my view that with a bond bubble, the USGovt would defend
the Treasury securities, perhaps with some obstacles. The mortgage
bubble would be far more difficult, as such extreme leverage
and risk is concentrated in the govt agencies. Their foundation
is severely undercapitalized. Their structured finance is built
upon a system containing woefully insufficient controls and audit
transparency. The combination of heavy leverage gearing, poor
controls, and rising rates makes for a witch's brew which could
annihilate Fanny Mae or Freddie Mac overnight. He tended to agree
that the mortgage agencies were the weakest link in the entire
bond system. I cited a 40-yr low in interest rates, but a 40-yr
high in both mortgage delinquencies and defaults. I mentioned
the aggressive marketing of home equity credit lines, alarming
even mortgage industry experts. He countered that in Europe,
people are not given the chance to extend credit in such ways.
We were in agreement as to the agency primary risk location.
The same day we discussed Fanny and Freddie, his evening CNBC
news wrapup mentioned the Fitch downgrade of Freddie Mac debt.
Great timing, made me look good for sure.
I shared my
other view that an external risk lies with Asia holding such
a large slice of our debts. They also are depended upon for supplying
the needed capital on an ongoing basis. Acting in their own best
interest, they might slow their supply, which would cause our
rates to rise. Worse, reacting to our trade and currency objections,
they might retaliate and sell enough of our debt securities to
make the point that the creditor is the true master. Now we have
Trez Secy Snow on a mission to Beijing to relieve some stress,
to no avail. Congressmen are talking tough, as they grandstand
on rickety soapboxes fashioned on debt. Two threats, implosion
of mortgage debt inside our framework, and denied supply outside
its borders, these are most probable powers to force the cracks
that I believe are most likely to shake the perilous American
financial system.
Perceptions of nations
of the world :
Kurt has seen
much in this world. He has seen many cycles. He survived the
war. He has seen the rise of dangerous political leaders, who
gain popular support, but who also undertake reckless and destructive
paths. He believes the current American president has embarked
on a course which will be difficult to reverse, and easy to develop
into a much more dangerous pattern of behavior, both domestically
within the United States, and externally within the Middle East
and the rest of the world. The American Empire is over-extended,
in every imaginable respect. Troops are in nations too numerous
to count. Currency and bonds are held in reserve in countless
central banks. Our influence is in extension to a degree totally
out of proportion to the foundational strength traceable in our
financial system or economic health. He believes the United States
leaders have quickened their pace on a path to fascism. This
man knows fascism. Most Americans have no idea what fascism is.
The challenge to capture and contain terrorism, their agents,
their funds, their activities, this will enable govt leaders
to sacrifice citizen rights to a degree unexpected in the future.
He expressed concern that "Americans will become the last
Fascists." The Soviet Union no longer can thwart abuse by
the other superpower.
On Asia, he
believes China has become and will become a greater obstacle
to economic progress in the United States, only to the extent
that Americans allow it, encourage it, and actively assist it.
By this he means that Chinese corporations and mfg plants have
received willing help from American firms. Our firms have climbed
over each other to exploit the lower wages from Chinese workers,
who are virtually limitless in sheer number. The only limits
are on training and skills. Recent burgeoning trade deficits
by the US versus China will result in friction, all in time if
not already. This is the consequence of American eagerness to
exploit China. The longstanding destructive practice has sought
out low-cost solutions, only to find the pursuit wreaked incredible
damage in aggregate to our economy. He discussed the "Law
of Decomposition" in this context, pointing out that nowhere
has the backfire been more damaging, more rapidly, than with
China since Most Favored Nation status was granted in 1999.
He made numerous
comments about how the United States has forgotten what capitalism
is, how capitalism works, and how to produce wealth. The result
has been that Asia is now the center for capitalism, wealth production,
and real growth. The great exception is Japan, which is reeling
from their own bubble aftermath, and which remains subservient
to their American masters, despite continued destruction which
might be coming to an end, just possibly.
The Richebacher Letter
:
When Kurt was
with Dresdner Bank many years ago, he was outspoken on policy
matters. He opposed official German economic positions, even
his own bank positions. This man speaks his mind, relying on
high ideals such as truth and sound economic principles. At one
point in 1973, his adversaries took their stand and enlisted
support from the bank's executives. Certain vice presidents wanted,
as Kurt put it, "to have me sacked." A compromise was
struck, wherein his views, opinions, and analysis would be confined
to a newsletter under his control, with full freedom. Eventually,
due to accuracy in forecasts and soundness of analysis, the letter
flourished. He was very pleased, felt vindicated and liberated.
Thirty years later, his letter continues, with over 360 issues
being written and released. On a couple of occasions, I heard
"work is the first priority." It certainly is, witnessed
by a record that Cal Ripken would be envious of.
Friends and contacts
:
Kurt remains
personal friends with former Fed Chairman Paul Volcker, a contemporary
of his. He was an invited guest of Richard Russell a couple years
ago to LaJolla California for a meeting of minds. He has many
friends and contacts still in Germany and England, including
the central bank for each nation. His is a personal friend of
Martin Weiss, the defender against teetering banks and debt-burdened
corporations. He expressed admiration for Paul Krugman, who used
to post editorials in the New York Times. He also respects Stephen
Roach, whose work he reads regularly. He has not met either Krugman
nor Roach. In the 1940's and 1950's, he knew as friends all the
Austrian economists who emigrated in earlier years to the United
States, Jews one and all. He expressed sadness and dismay that
their sound and clear expertise failed to permeate the walls
of economic policymakers. The post-war years saw a departure
from counsel amidst development, as expansion was the name of
the game in reconstruction. Fast forward many more years, and
most if not all of Kurt's elder statesman members of the European
economic community have passed away. Doug Noland once worked
with him, but moved on to the Prudent Bear. I asked if he knew
the prominent and expert Frank Modigliani of Italy. He knew of
him, but not personally. Kurt is now the person whom people turn
to for his perspective and opinions, even counsel. He feels alone
at the top as the elder patriarch. He did not seem unwilling
to sit in this post, only very aware of the lack of peer-to-peer
collegial opportunity, and unavailability of counsel which he
himself might find. So he turns to his timeless books written
by the masters who taught him well.
My friends
make up an army of soldiers, but no executives. I explained a
lulu of an avenue recently brought to my disposal. I have been
invited to indirectly pose questions to Alan Greenspan himself.
A college roommate of mine used to work under House Rep Bernie
Sanders in Vermont. He has urged me to write a white paper for
Sanders, accompanied by 3-4 pointed questions. The time has come
to put maximum pressure on our Fed Chairman. We mavericks must
stick together. The topics Kurt and I arrived at for grilling
Greenspan during the next Humphrey-Hawkins testimony would be:
1. hedonic
pricing of computer system spending to distort and elevate GDP
growth
2. money supply growth rising over 6 times faster than GDP, evidence
of futility
3. dominance of financial sector debt growth, which yield no
real economy benefits
4. concept of economic recovery with 5% trade gap is utterly
ridiculous
Our interaction and
relationship :
From the first
day, I put on my game face and was very serious, thoughtful in
my choice of words. Kurt made it simple though, as he would introduce
one topic after another for free flowing discussion. The US Govt
and Federal Reserve offer up ample material to discuss and sharply
criticize as either absurd or insane. We talked at great length
about a long list of topics over five days. I made him laugh
on numerous occasions, which was neither an easy task nor my
main objective. It is my style to mix levity with profundity.
People tell me I do it well. At lunch on our first day together,
I told Kurt that a few friends had expressed concern that I might
react badly, overly sensitive to criticism of the United States,
out of national pride. We both laughed hard. We talked easily
together, roaming from one topic to another. I asked about his
early years, and he eagerly shared. His past is not without mild
firestorms. Such is the price to be paid for functioning as a
system gadfly. On the second day, I told him about the California
tragic comedy, where Schwartzenegger has a real chance at governor.
Warren Buffet now offers to give financial counsel to Arnold.
I related a Buffet quote, another in a long list of great quotes.
Warren was asked about the recent economic signals of promise,
to which he replied, "give me a trillion dollars and I will
show you a good time also." Kurt erupted in laughter.
He could sense
the unusually odd American political climate that would allow
a former Austrian athlete and Hollywood actor to attempt a parallel
path to Ronald Reagan. I called the state a travesty, and cited
to him the numerous fiscal examples of irresponsible spending.
I claimed that our political arena was a blend of an advertisement
promotion, a well-heeled fund raiser, a media blitz, and a beauty
contest that usually resulted in an inexperienced man at the
helm. I claimed that the next president will be a man whom the
public knows the least about, a claim he found to be a curious
phenomenon. See Kennedy, Carter, Clinton, Bushy, and next Dean
(a virtual unknown who leads the polls). I said America elects
what they deserve, since most pay no attention to politics, but
reserve the right to complain anyway. We easily discussed the
circus culture, carnival atmosphere, consumption craze, with
no defensiveness on my part. No way; I am a harsh critic myself.
I sat at his side as he punched out paragraph upon paragraph
for his September Letter. He would check with me for clarity
of his point, inquire on choice of a word, seek a stronger one,
and sit back to reflect on the next point to make. I appeal to
the MSWord thesaurus. He pulls out a threadbare worn thesaurus
book. At one point, he backed off on strong word choices. I shook
my head in dispute as he looked my way, and said to him, "I
have yet to see you hedge in your choice of words." He nodded,
then laughed, later to tell me "in this Letter I shall make
the strongest possible warning." We were getting along comfortably
now. I dared to request the house keys one evening, eager to
enjoy some freedom, seek a nightclub, walk, unwind, whatever.
He took me aback with "here are the keys, let yourself in
if you lose them, I shall have to kill you." To that I laughed
and he grunted.
After a couple
days of attempting to negotiate the promenade and restaurants
and shops, I admitted to Kurt over dinner that "I can speak
some French, but unfortunately these people keep replying to
me in French." His capable French has allowed him to manage
reasonably well in the area. When locals serve up a speedy tongue,
he misses some words. I asked him if he thought in English, knowing
he thought in German. Yes, he can think in English, which is
remarkable. I found his English to be outstanding, but not so
far as to include slang or certain imagery. One evening before
going out to dinner, I chose to dress in slacks, a short-sleeved
patterned shirt, and sandals. I reported for inspection, and
said "I am trying to look more European tonight. We Americans
stick out too much. How did I do?" He burst into laughter,
realizing I put away my shorts with cargo pockets. I preferred
those shorts since I could pack a passport, US bills, Euro bills,
and valuable notes I kept, all in the ample pockets. I knew I
stuck out as an American since shopkeepers or ice cream vendors
would speak to me in English before I opened my mouth.
One afternoon,
I wanted to stress a point firmly, and showed him how to backup
his few critically important files onto a diskette. Well, how
shall I say? He lost interest, which is typical of a man of certain
age (as the French so tactfully describe). He looked my way as
I proceeded, and said "I trust you do nothing stupid on
my computer." I could not resist, shooting back with "I
do plenty of stupid things, usually spaced about a year apart,
but nothing stupid today." He smiled back at me in full
trust. That day Kurt showed me the Peutz Letter, which often
cites Kurt's work. I inquired as to whether he minded that other
writers sold newsletters which cited his ideas. "No, never"
was his reply, to which I said "a man could make a good
living citing your main thoughts." Kurt laughed and uttered
his usual "ya ya" known to roll off many a German tongue.
I came to love hearing "ya ya" even when I was not
nearby, since it meant Kurt was feeling quiet satisfaction or
agreement with something. He had a couple favorite little restaurants,
each offering a personal touch, and first-rate food. They offered
outdoor tables, which I loved, not too common in the US. We were
at dinner another evening, and with deadpan face I set him up
for what came next, "Kurt, my only disappointment here is
expecting to marry a nice young woman before I return home."
His initial look was of total disbelief, what one could expect
to see when questioning sanity. Yes, Kurt had finally met a jackass!
We dealt with
more topics with each passing day. But after two dozen hours
of deeper conversation, our attention was directed toward personal
lives. He could see the pain I endured in the year 2000, as my
pension was destroyed and a large stock account was decimated
in tech stocks. He asked a good question, whether my anger was
in response to the personal loss, or instead more toward the
perpetrators on Wall Street and the USGovt statistical laboratories.
I answered honestly, that sadness and occasional depression was
the response to loss, but the anger was to the fraud that seemed
endless, escalating, showing no signs of letup. He was surprised
to hear that I had been aware of infotech hedonic fraudulent
amplification of GDP and growth rates since the mid-1990's. I
shared with him my background of 13 years with a major computer
firm, the object of IT hedonics being my own business sector.
He revealed some of his past, fond memories of his deceased wife.
He told of his love to work with his three children running and
playing under foot. He shared with me his old home of one year
Valbonne, a truly picturesque locale. He ventured another afternoon
with me to share St Paul de Venve, urging me to go walk for 30
minutes, enjoy myself, peruse the historic little fortress town,
and maybe see the church at the summit. I did, and bought a gift
for a friend back home. He relaxed with some cocktail in a cozy
outdoor restaurant out of the hot sun.
This man really
understood my distress when I admitted that at times I felt ashamed
of my nation for its reckless leaders, its prevalent corruption,
its incessant advertisements, its widespread obesity. We openly
discussed the inner turmoil I feel. Our land grab in Iraq, our
lunge for oil fields, under false pretenses, it all disgusts
me, national interest or not. I own an Irish dual passport, a
privilege from my mother's birthright. I might someday rely on
it for employment abroad in the European Union if our greatest
fears come to pass. The United States might sooner than we know
turn its anti-terrorist legislation on its own citizens, denying
civil liberties like never before. One might someday risk US
citizenship by having an acquaintance with an Arab who is not
what he seems. Kurt is now aware of the Patriot Act, as well
as its more controversial Act II. The whiff of diminished freedom
is in the air. It in all likelihood will get worse, as the economy
falters, more wealth is lost, military adventures are met with
retaliation, and security concerns come to the fore with even
greater urgency.
Kurt and I
have talked by telephone a few times since my return home. Something
is clearly missing in the nature of the exchange. The distance
is difficult. The lack of opportunity to sit near him and talk
with ease, that is missing. This is a remarkable man with a great
gift, who shares his keen view and vision to the world. With
me, he shared much, and I am grateful. What a treat and privilege!
I felt a growing warmth develop which was nice. I could never
be a son to him, but a trusty understudy would be more than a
rewarding path.
My impressions of
France and Cannes :
No report from
France would be complete without mention of four big items ---
friendliness, natural beauty, food, and visible health. I was
informed that the French people are basically friendly, far more
helpful to struggling tourists than in past decades. This was
clearly the case, as numerous attendants helped me deal with
the difficult Paris train system. One young fellow spent 15 minutes
willingly with me, located a handy map of the trains and metro
for me, and sent me on my way with a smile of satisfaction. Hospitality
was not perfect. After a nice lasagna dinner in Paris, I asked
for some directions from the restaurant waiter. A simple request,
after a generous tip placed on the table. He helped initially,
then after a followup question, he snapped "assez."
I grunted, shook my head, and walked off, computer on the left
shoulder, bag on the right. The bastard had said rudely "enough."
With pigeon
French at the ready, I managed to succeed in finding my way to
the Eiffel Tower after two train transfers. I must be the only
man in the annals of history to ascend by foot the first two
stages of the tower, roughly 25 floors, loaded down with a laptop
PC on one shoulder, a bag of clothes and belongings on the other
shoulder, and 20 lbs of Richebächer Letters a balanced burden
to each parcel. There were no lockers anywhere, so my daily workout
was laid before me, with a sweaty outcome the certain wage. The
Eiffel Tower was breathtaking and spectacular.
I purposely
took the high-speed train to Cannes for the experience, never
having traveled on such a vehicle. It runs at 185 km/hr, which
is about 115 mph. It is fast, sleek, and smoooooth. From my bedroom
window at Kurt's home, I could hear the TGV (très grande
vitesse = very great speed) each night. The TGV gives off a tremendously
powerful, low-pitched roar, which is not loud, but is absolutely
awesome to behold. The word "awesome" best describes
it. It contains perhaps 20 cars, four locomotives, and epitomized
sheer power with the grace of magnetic levitation. It leaves
parallel highway car traffic standing still. Nothing like it
can be found in the US. From the train I could see the beautiful
uncrowded countryside, the well-kept villages, terra cotta roofs,
the lack of trash, absent billboards, the orderly little farm
plots.
Cannes was
gorgeous. It reminded me of a more laid-back Palm Beach, Florida.
Comparisons to US sites bothered Kurt, so in time I kept the
comparisons to myself. He would bark at me "enjoy it as
France, and no more comparisons." He was right, but it is
only natural to picture a new place against a backdrop reference
from a native land. Cannes was full of beautiful orchids along
the main boulevard, La Croisette. The promenade was wide. Throngs
of people walked the promenade by the beach. Many attractive
people walked every day, young and old. The beach was clean and
wonderful. Being more a family area, the beaches were occupied
by far fewer topless women sunbathers than I would have preferred.
But I managed to scout several shapely women who dared the sun's
rays. The hotel and apartment buildings all stood under ten stories
high, each with distinctive and elaborate architecture and markings.
Most shop attendants spoke at least a little English. At hotels,
they spoke excellent English and did not hesitate to help. One
particular ice cream vendor was absolutely effusive in her sexual
appeal, a young blonde far too young for me. I went back to her
at least 6-8 times, craving her product. Heck, it is a free country.
I sincerely doubt she is aware that the dollar is suffering from
oversupply. She much preferred euro slugs and tokens to American
versions of the same counterfeit. On my second night in Cannes,
the town treated the people to a wonderful fireworks display
in commemoration of the liberation of Paris at the end of WW2.
The duration and quality was every bit as fine as what I have
seen on Memorial Day and Independence Day celebrations.
Language is
a challenge, as always. Once upon a time, I won a high school
award in French. Two college courses fortified the conversational
side, but not much. There is no question of the inadequacy of
such education for the challenge of daily life immersion. I forgot
my dictionary on this trip, where economics was the main course.
Next time, I will want to be better equipped and in more control
of the interaction. I will also want to see if I can meet up
with that lovely Aurelie from Nice, whom I met on the train heading
south. So many superlative traits. What a pleasant surprise to
receive from her a reply to my recent email, curious about my
return. They don't make them like her in the ole USofA, at least
none that I have met in many years. A nation of friendlies.
In the course
of one week's time, I must have crossed paths with at least 2000
people --- tourists, regular people, workers, mothers, fathers,
teenagers, children. I was astonished that I only caught sight
of 4-5 fat people in all of my paths in France. In the US, one
can spot 4-5 two-legged free roaming buffalos in no more than
ten minutes, even with the observer half asleep. Men and women
alike, almost without exception, kept themselves in good physical
shape in France. The food was somewhat expensive, but all excellent.
The attendant vegetable arrays on my dinner plates were delicious.
These French people put a premium on food and health. We in the
USA eat fried food, burgers, pizza, beer, and mainly talk about
health.
Marlboro cigarette
packs were by far the #1 brand in litter on Cannes streets. Philip
Morris would be proud. In fairness to the city, the litter was
perhaps one-tenth as prevalent as in my native land. They can
rest assured that I added not at all to their litter, and disposed
properly of many items that lay on my path. I like to leave the
place nicer than how I found it. Such is true of my parking lot,
malls near my home, wherever convenient to lean down and retrieve
trash.
When I arrived
at my airport boarding lounge in the Paris Charles de Gaulle
Airport, I came across a man who tipped the scales at approximately
280 lbs, of height less than mine. I stole a short snooze under
the seats for another hour with my big bag used as a pillow.
When I awoke, I saw a woman on a cell phone jabbering loudly,
at least 60 lbs overweight. In line as we boarded, a man huffed
and puffed under the burden of moving both body and baggage,
perhaps close to 80 lbs overweight. It struck me. I can rest
assured that, yes indeed, I was close to home in America. Myself,
I am of slender dimensions, somewhat blessed with muscles draped
on my 175-lb and 6-foot frame, with a waist size the same as
in my college years. But then again, I have abstained for 20
years from the American national fruit, french fries. In plain
terms, I find American obesity to be a national disgrace. A friend
calls the US "the land of hippos and cows." We have
become a laughing stock to the world. Aboard the Air France jetplane,
the obesity issue came close once again. An oversized woman caddycorner
to me got into a heated dispute with her neighbor in front, who
wanted to tilt her own seat back a little. The American woman's
massive girth did not allow it. An argument erupted. The French
man next to me shook his head and said "in France, it is
a crime to treat your body in this way." I made a comment
how the American obese require the world to adjust to them, and
wear their excess baggage as an entitlement. Oh, the unaddressed
problems of the United States. I sincerely hope someday to say
"je suis un Cannois." (I am a Cannes native).
Jim Willie
CB
September 12, 2003
 Jim Willie CB is a statistical analyst in marketing
research and retail forecasting. He holds a Ph.D. in Statistics.
His career has stretched over 22 years. He aspires to one day
join the financial editor world, unencumbered by the limitations
of economic credentials. Since his trip to France, he is somewhat
less a jackass. Visit his free website to find articles from
topflight authors at www.GoldenJackass.com.
_______________
321gold Inc ref; 4944
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