A Recession in Pink

The Daily Reckoning

Vancouver, British Columbia

Tuesday, August 17, 2004


*** The clocks tick...and the bullish tide ebbs...

*** Gold above $400...Dan Denning speaks at the

*** warming...Farmington... aliens
invade New Mexico!

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Gold is over $400 again.

For months now, the yellow metal has been on a teeter-
totter with $400 at the fulcrum. Meanwhile, the economy
continues to stumble along, giving the impression that it
might fall down at any time. The tax cuts have given
whatever stimulus they were going to give. The Fed is
increasing rates...but by such tiny "baby steps" it is
getting nowhere. Employment numbers are uninspiring.

What's ahead, no one knows. The clocks tick...and the
stream of news carries us along, day after day, without
revealing where we are going. Stocks rise; stocks fall. One
sentiment indicator says this...another says that. Housing
starts rise...then fall. Every day we read the news for
some surprising new trend. Then, when there is no
change...we are surprised that things continue as before!

Wherever we are going, most people are sure it will be a
better place. They keep prices up on houses and stocks -
confident that, wherever we go, financial assets and real
estate will be worth more in the future than they are

We have no reason to think so. But markets make opinions.
Stocks are still 10 times higher than they were a quarter
century ago. Who can blame the poor lumps for expecting
them to rise another 1,000% in the quarter century ahead?

It will be a first, of course. After a long upswell,
typically the bullish tide ebbs away - returning to where
it began. Investors, who waited years for their hour to
finally come round, are surprised and delighted when it
finally does. Then, years later, they are surprised again
when their easy money disappears...and annoyed with
themselves for not having stopped the clocks.

Here's the news from the East Coast...


Tom Dyson, from British Columbia...

- "Should I sell my house, then?"

- Addison had just frightened another unsuspecting
punter with his prognostications of doom and gloom.

- "That's exactly the point I was just making," replied
Addison. "We have become a nation of unwitting speculators.
If you enjoy living in your house, why on earth would you
sell it? The price appreciation should be irrelevant to

- There are lots of things we could base today's edition of
The Daily Reckoning upon...we could discuss the much-
anticipated Google auction - "For $35 billion," quipped
Chris Mayer, "you can design a damn fine search
engine...and you'll still have $34 billion left over!"

- Or we could discuss how the oil price topped $46 a barrel
on Friday...

- Or we could discuss inflation...the latest CPI numbers
come out today and are expected to show inflation receding
- excluding energy and food of course. "Inflation," James
Gray, editor of Contrarian Speculator, reminded us,
borrowing a famous quote from a Dutch central banker, "is a
little bit like wetting your pants. At first it feels warm
and comfortable, but after a short while it becomes cold
and regrettable."

- Or we could discuss the news of an unexpectedly wide
trade surged to a new all-time high of nearly
$56 billion in June, absolutely confounding the consensus
of opinion.

- Now the Commerce Department has to reduce its estimate
for second-quarter growth...the math boffins included a
lowball estimate of the trade balance in the calculation.
"There is going to be a significant downward revision,"
said the chief economist at Societe Generale in New York.
"We have a huge deficit that needs to be financed, and
getting that financed could be a question."
- But as interesting as these stories are, dear reader,
today we would prefer to discuss one of the more salient
points from one of last week's more salient speeches. The
speech was given by Dan Denning, one of the most brilliant
big-picture thinkers and investment minds on the planet.
Dan gave a masterful performance to boot.

- "We are not in a real estate bubble." Dan surprised the
members of the audience who had assumed that Dan was a real
estate bear. "No, we are in a massive mortgage debt

- "In the 1982-1998 period, stocks came to represent 60-70%
of the household balance sheet," Dan explained. "Americans
on paper were rich. But the dot-com crash took this wealth
away. Now, it's property that represents 60-70% of
household net worth."

- "Low interest rates," argued Dan, "have enabled many
people to get into the real estate market when, frankly,
they are not wealthy enough to be there. The marginal
buyers have bid up real estate prices and now they are

- Dan recommends that real estate speculators should look
to profit from falls in the share prices of homebuilders
and declines in the two "poster children" for the mortgage
debt bubble, namely Freddie Mac and Fannie Mae.
Furthermore, he thinks house prices are only vulnerable in
certain areas of the country. If you don't live in one of
these locations, and if, as Addison remarked above, you
enjoy living in your house, Dan sees no reason to sell.
[Ed. Note: For a complete understanding of Dan's
predictions, we suggest you take a look at this report on
the mortgage debt bubble:

Let's Get Freddie to Rumble
- "So you wanna push the bet?" A colleague won a small
wager with your editor on the Nasdaq's ability to bounce
last week and wanted to lighten your editor's pockets some
more. He wants us to reassess our short-term views and put
$50 on the prediction.

- Only this time we have no idea if the market will be up
or down next week. We had thought the market was looking
soggy, but as stocks are wont to do, they confounded us
again and rallied vigorously...the Dow gaining 129 points
yesterday, reaching 9,956 by the bell. The S&P, in
percentage terms, fared just as well; it rallied 1.4%, or
15 points, to 1,079. And the Nasdaq, leading the
turnaround, boosted itself to 1,783 with a 25-point charge.

- Your recently humbled editor was tempted by his
colleague's offer, but rejected it...for now. His
colleague, meanwhile, rejoiced in his newly acquired wealth
and poked another bill into the closest lacy garter...


Bill Bonner, also in Vancouver...

*** Canada is different from the United States. When you
cross the border, you barely notice. People still speak
English; the accent changes only subtly. But something more
has changed.

Vancouver is cleaner, neater and tidier than American
cities. We saw no inner city ghettos, no trailers, no
suburban squalor. There are more flowers, too.

Arriving in Vancouver, you get into town without driving by
much trash. Then, once in the center of town, you think you
are in Hong Kong. Half the population - probably the better
half - seems to have come from China in the last 15 years.

"The old guys who ran the city prior to 1986 were of
Scottish ancestry," a Vancouver friend explained. "But then
China took over Hong Kong and the Hong Kong Chinese thought
they should get a toehold in North America...just in case.

"The Chinese brought a lot of money and life to the city.
Almost everything you see - all the bright, tall apartment
buildings, offices and hotels - were built by the Asians
with Asian money. The local guys have been left behind."

It is an old familiar to Americans, both north
and south of the 49th parallel. Vigorous immigrants arrive
and push out, exterminate, or simply bypass the "natives."
Then the settlers grow soft and lazy...and a new batch of
invaders comes in. Each group brings new energy, ideas and
traditions - and leaves the last natives in the dust.

Africa was once the "dark continent" - unknown, unexplored,
benighted. Then came the Europeans...Asians...and Indians.
For awhile, the lights went on...Africa really seemed to be
making progress. But after WWII, jealous natives pushed the
immigrants out. Now most of Africa is dark again.

In America, European immigrants moved in and practically
annihilated the natives. Then, the Anglo-Saxons settled
into the hollows of Appalachia and the tidewaters of
Virginia and backwaters of New Hampshire and became almost
as shiftless as the natives they had replaced. Fortunately,
the original invaders were refreshed with new waves of
immigrants - and still are. The cities of North America
that seemed to us most alive and most interesting were
those - such as Boston and Vancouver - where city life is
dominated by new arrivals.

*** "You want to see somewhere where there's a real bubble
mentality, look at Southern California," said a woman at
our conference in Vancouver. She handed me a copy of a
magazine called Coast.

"People down there really do think that real estate only
goes up. There are SUVs all over the place. And shopping

What we noticed in our brief visit to Southern California
was that there were a lot of ways to spend money - new
houses, new shopping malls, golf courses, resorts - but
very few ways to earn it. We did not see a single new
factory under construction in our entire six-week stay in

Goods were shipped, stocks were sold - there are trucks on
the road, retail stores and warehouses. But not once - not
even on our train ride up the industrial corridor between
Baltimore and New York - did we see anything new that
looked like it was intended for making things. And many of
the places that were once factories have fallen into
disuse, or been converted from production to consumption.

Up and down the Eastern seaboard, old factories have been
turned into "loft" apartments. Along the Amtrak line -
factories are rusted out, windows are broken, and junked
machinery sits in the rain.

We looked through Coast to see what was on offer. At the
top of the line, we discovered something new: properties
described as "personal resorts." One of them, in Laguna
Beach, a "gate-guarded community," boasts a wine cellar, a
saltwater pool, and a custom-built movie theatre. No price
was quoted. But a similar property in the same area is
listed at $19,950,000.

We stared at the photos in disbelief. Our jaws dropped.
There was nothing particularly spectacular about the
houses. What could make them worth so much money?

You could go upscale...or downscale, upmarket, or down-
market. Wherever you go in the pages of Coast, you cannot
find anything with much style or charm. Those at $2 million
were as unprepossessing as those at $20 million. For $2.6
million, you get a common split level in Laguna Beach with
"ocean views."

*** A reader's comment on "global warming":

ever read in the DR - which I've been reading for well over
five years now and have found on average to be of great
value. I could write a BOOK on this subject, and I have a
30-year career as a professional meteorologist, including
weather researcher. I could point to 100 articles,
publications and studies for every one you can that clearly
demonstrate that we are experiencing a GLOBAL WARMING event
far more intense than anything in recorded history.

The greenhouse effect is a CONTRIBUTING factor - the only
question left in the REAL scientific community is the
percentage of the warming effect due to man and that of the
normal shifts in the Earth's climate. But there has been
acceleration in the rate of Arctic ice melt in the last 3
years that is scaring the hell out of REAL scientists.

This will have an enormous impact on the world economies
and could easily lead to wars as a result of the changes in
rainfall patterns and overall growing seasons, etc. Running
out of oil? Try running of FOOD!

If you want PROOF (when I've cooled off), let me know.
Until then, watch what YOU SAY when it comes to scientific
data - because you have no clue!"

*** Another dear reader, with a comment on Farmington, NM:

"Farmington is a wonderful town! I lived there for my
summers at college - I worked for a mission. It was a big
change from the Midwest. I climbed the lava wall at
Tse'Bit'Ai' (aka Shiprock) and watched the sun set, I sat
and watched a Navajo woman weave, I visited the Aztec
(Anasazi) museum, hiked along rivers, sat atop the bluff at
night and marveled at the lights of the city, learned how
to do beadwork, learned how to speak the language
(somewhat, anyway)...I learned more in my three summers
there than I thought was possible. I learned that my great-
great-grandmother was, in fact, Navajo. I connected with
the culture and found 'home' for the first time in my life.
I long to go back there! What I would give to live in or
near To-Tah (the Navajo name for Farmington) again! Yes,
you certainly did miss its charm."

*** And another:

"Dear Bill:
"I have been enjoying your trip report on New Mexico!
"Since you are a world traveler, you probably hear the 
'locals' talk about UFOs and aliens from time to time.
"I believe that extraterrestrial beings have been slowly
integrating into the world's societies for some time now.
"The New Mexico outback seems a perfect place for these
aliens to gain an easy foothold in the human population.
The hippie segment of the population would be easy prey for
these aliens and their hidden agenda!
"Did you notice anything unusual about the people and
environment in the outlying areas of New Mexico? I believe
that the aliens tend to abduct humans in remote areas more
so than densely populated city areas.
"You might want to keep this info in mind as you continue
to travel around the world. Your view and sense of reality
will change as you start to hear stories from the 'locals'
about their unexplained experiences in the outback areas of
the world!"

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The Daily Reckoning PRESENTS: Here's an interesting theory
for you, dear reader. Could the color pink be signaling the
imminent arrival of recession? As usual, John Mauldin backs
up the fluff with some real sense.

by John Mauldin

Recessions and depressions are usually the result of a
catastrophic event, either natural or man-made. Wars and
droughts, plagues and governmental stupidity have all been
a cause for economic hardship.

But sometimes it is simply the rise and fall of the
economic tide, each wave either bringing us closer to the
shore of prosperity or further away. Looking at long
periods of economic history, we can see those waves.
Especially since the industrialized period, those waves
have become quite pronounced.

This weekend, I was with my 10-year-old son, sitting rather
awkwardly on a surfboard at La Jolla Beach, listening to a
young surfing god (Ralph West) teach my son about catching
the wave. They come in sets, and it is important to wait
for the right wave - to look out over the horizon and see
what swells are coming.

The swell determines the nature of the waves. Is it a New
Zealand or a Hawaiian swell? Will it break to the right or
to the left? Do you need a long board or a short board? Do
you need fins? Will the swells be 5 or 15 minutes apart?
Will you be able to find the green room, that special place
where the wave curls and you ride through the tube? Will
you be stuck in the whitewash, a garbage day fighting the
wind and weather?

Or will the surf be so small and timid that only the very
good or the very light can catch a wave, and for only a few
seconds? Such was the case last week, and thus I felt
comfortable going into the surf with my son. Six-foot waves
would have kept this old body on the shore. One must know
one's limitations.

And thus it is with economic patterns. Is it an
inflationary or deflationary swell? Is it a secular bear or
a secular bull wave? Knowing where you are in the cycles is

Taking a long-term view, we are in a secular bear cycle.
The stock market will eventually, over the coming years,
find its way to below-trend valuations (P/E ratios)
probably somewhere in the low teens, if not lower.

On the intermediate term, we seem to be in a range-bound
trading cycle. As Bill King noted today: "Most everyone
realizes that stocks have traded sideways for 2004. The
DJIA's 8% range for the past seven months is a historically
tight range. The venerable Richard Russell recently noted
that the 8% range equates to the 1972 market. Mr. Russell
adds that the historic bear market of 1973-74 ensued. The
Amex, which then housed the speculative issues and small
caps, lost 89% of its value.

"... Comstock Partners sees a similarity in some of the
major indexes' 2004 actions with their respective 2000
action. Comstock acknowledges that 2004's range is tighter
because it is a mini-bubble, compared to the 2000 grand

There has never been a true long-term bull market that
started from the valuation levels at which we find
ourselves today. You can get substantial bear market
rallies, as we did in 2003. As I have noted before, the
market goes up 50% of the years within a secular bear

As Russell noted, the nasty 1973-74 bear market followed
that tight trading range-bound market of 1972. The trigger
for that bear was an oil shock and a nasty recession.

We could, and probably will, see a range-bound market for
some time. But the next major turn of the market will be
down, pushed over the cliff by a slowing economy and/or a

On average, the stock market drops 43% in a recession. That
means a Dow in the 6,000 range. The Nasdaq will be ugly, as
it is the most overvalued of the indexes.

In the "for what its worth" department, my friend Gary
Scott sends me his daily letter, full of interesting ideas
on investing and the occasional odd tidbit.

He likes looking for trends, so in yesterday's letter, he
reminded me of a very serious group called the Williams
Inference Center, which sifts through mountains of reports
and data looking for disparate anomalies that taken
together may tell us of some new trend. They have a good
track record of drawing attention to trends before they
become mainstream.

He shared some of their current thoughts, like a slowdown
in U.S. business around the world due to unfavorable world
opinion and reaction to Iraq; that individuals will
overtake corporations as the drivers of change; that there
will be a surge in demand for genetically modified grain
crops, especially in India and China, etc., where the
middle class is rising and restrictions are few; and growth
in low-cost sensor technology (such as radio tags).

They also mention that Saudi Arabia (the major source of
U.S. imported oil) - not Iraq - will present the most
problems in the Mideast: big debt...a handful of aged
ruling families...a shrinking middle class and declining
per-capita income. Any problems there could easily and
drastically impact U.S. oil interests.

I find myself nodding with interest, as these all seem
reasonable enough, and indeed, I also think they are true.
Then we come to the last one: "The rise in the popularity
of the color pink may foretell a harsh stock market
reaction - pink (psychologically) symbolizes delusion and
denial. Pink is the equivalent of rose-colored glasses."

Not remembering any pink shirts in my closet, I asked my
daughter, who works across the hall, if pink was showing up
any more than usual. "It's really big now, especially
overseas," Tiffani reported, just coming back from six
months in Cypress and Eastern Europe.

Intrigued about this unusual inference from what is a
rather scholarly, staid and usually skeptical outfit, I
called James Williams and asked about the danger in the
color pink.

"Pink," he says, "is regarded in the psychiatric literature
as the color of denial. And we have been seeing a rise in
the use of pink in clothing for the past few years. People
are buying pink clothes for their dogs. I even have a
clipping where men are buying women's shoes so they can
wear pink shoes." So far, that latter trend has skipped
Texas, but when I am in London and Paris next month, I will
keep an eye out and report back to you.

(I just turned around and saw Jim Cramer on Kudlow & Cramer
(CNBC) wearing a pink shirt - at least it was pink on my
set. Yet another confirmation anomaly for Mr. Williams. Is
Cramer in denial? Or maybe it's his wardrobe manager? He
did look good in it, though.)

Williams then drew my attention to three areas of denial:
debt, age and law. People deny they are in debt, and add
more. They deny they are getting older. And they deny the
law, breaking it with no compunction. He has cabinets full
of stories confirming the tsunami of denial breaking over
our collective minds.

In the '90s, people ignored risk. After the market crash
and the recession, they now verbally acknowledge risk, but
essentially deny it is there. They press forward as if the
denial of a secular bear market will cause it to go away.
The biggest trend in TV, Williams notes, is now reality TV.
We seek our reality in our entertainment and deny the
reality in our lives.

"It is all quite entertaining," says friend Bill Bonner,
"watching the masses create another bubble, denying the
risk, telling themselves they are getting rich as their
paper wealth grows along with their debt."

But it will not be so amusing for those in denial come the
next recession, whenever that takes place. It takes two,
and sometimes three, bear markets to bring reality back to
a bubble-intoxicated market. At least that's what the
psychologists who study such things tell us.

The next recession may bring the end of denial, at least
for this cycle. It will also destroy a lot of paper wealth
in the process.

Surf's up...or is it down?


John Mauldin
for The Daily Reckoning