*** Spectacular increases on Wall Street! A bear market
rally...or has the Big Bottom finally been seen?
*** Mortgage delinquencies and foreclosures on the
rise...retail sales 'chilly'...even Wal-Mart shivers...
*** Panic on Wall Street, and in the poultry yard...dollar
up...gold down...and more!
*** The Committee to Save the World went into special
session yesterday - and decided to act. Specifically, Alan
Greenspan exercised his put option.
*** In a surprise move, the Fed cut its Fed Funds rate by
half a percent. The announcement was made during business
hours - which caused a wave of panic buying on Wall Street.
*** The Nasdaq rose 18%, 325 points. The Nasdaq 100 drove
even higher - up 19%. Record increases for both.
*** The Dow rose almost as much - up 306 points. GE, for
example, a stock destined for big losses - rose 9%.
*** Why did the Fed act? Because economic conditions seemed
to be deteriorating more rapidly than expected. December's
manufacturing figures dropped to their lowest levels since
'91. The National Purchasing Managers index dropped for the
5th month in a row. Auto sales by U.S. automakers fell 15%
in December.
*** Reuters reports that both delinquency and foreclosure
rates on residential mortgages are rising. More than 4% of
residential loans are now delinquent.
*** "Holiday Season Chills Retailers," announced a headline
from the Atlanta newspaper. Even Wal-Mart shivered as sales
figures failed to reach its 3% to 5% growth targets.
*** And then, of course, there was Wall Street. Last year
was disastrous for many investors. And Wall Street's big
brokerages and investment banks would like nothing better
than to see a vigorous upward move in stocks to start the
New Year off. Yet, the first day of trading was
disappointing. And yesterday began poorly, too - with bond
yields and stocks falling.
*** But after the Fed's announcement, of course, it was a
whole new ball game. The Internet sector hit a home run -
up 21% for the day. And the Big Techs got a much-needed hit
or two - with Cisco, for example, up 24%, to $41.
*** Three times as many stocks rose as fell on the NYSE.
More than 10 times as many hit new highs as hit new lows.
*** But by the close of trading, the panic seemed to be
subsiding. Inktomi, a software company, announced weaker-
than-expected sales and its shares slumped 23% in after-
hours trading.
*** Still, the Fed action looks like a big success. The
shorts were caught; many were surely wiped out. And the
dreamers and schemers were given cause to suit up, get out
their gloves and get back in the game.
*** With a little luck, the rally will continue for a few
weeks. Who knows, maybe the Dow and Nasdaq will be driven
back near last year's highs. But it is unlikely.
*** "Rate cuts are not a panacea," comments the Prudent
Bear's Lance Lewis by way of the Daily Reckoning web site.
"Rate cuts will not make all the bad debts of bankrupt
Internet and telecom companies good. Rate cuts will not
bring back the millions of brokerage accounts that have
declined 50 to 100 percent over the last year as the stock
bubble collapsed. The only thing accomplished here today
was a short-term change in psychology that could be very
short term indeed. This was clearly a panic move on the
part of Uncle Al, and there are already nervous rumblings
among market participants that it was just that."
(See: Holy Drunken Rate Cuts)
*** The big risk is that the rally will peter out and
stocks will fall. Then, the last fantasy of the New Era
will be extinguished. When investors realize that Mr.
Greenspan and the Committee to Save the World have lost
their magic, the way will be cleared for another major move
to the downside. More below...
*** Oil rose 79 cents yesterday. Gold lost 70 cents,
falling to $269.
*** The dollar recovered some of the ground it had lost to
the euro. March euro contracts had the currency at 93
cents.
*** "The New Economy Was Foolish Optimism" says a headline
in the International Herald Tribune. The article, by Robert
Samuelson, explains what few seemed to notice at the peak
of the bubble - profits matter.
*** Another IHT article - this one by economist Paul
Krugman - notes that "2000 was the year when virtual
reality - companies without physical assets, without
profits, and sometimes without products - lived down to the
expectations of the skeptics." Krugman gives WebMD,
formerly Healtheon, as an example. Last year at this time,
a single share of the company would have purchased 1.5-
megawatt hours of electricity in California at wholesale
prices. Today, you would need more than 100 shares.
*** "Ohhh, Monsieur Bonner," said Mr. Deshais this morning
with a very sad look on his face. "Did you see what
happened? A fox must have gotten in the poultry yard. He
killed a turkey, two chickens and a duck. I thought all the
ducks had been carried off, because I saw only the dead
one. But then I saw them out on the pond."
*** There must have been panic in the chicken house. The
birds must have felt like short-sellers - trapped, with no
way to escape.
Closer inspection revealed that it was probably not a fox
at all. The animals had been bitten on their necks and bled
- as a weasel might do. None had been eaten.
*** "Well, at least we can still eat them..." said the
gardener, later...dipping a dead duck into a vat of boiling
water, "and I was going to kill them anyway." Waste not,
want not.
How does a small, almost never talked about group of
presidential advisors - appointed, not elected - guide the
White House in almost every major financial and economic
decision ever made?
Better yet, how do their covert decisions affect your
money!?!
You can't afford to miss the answer. Click here for an
expose of the Insiders Behind The Market. Plus, four money-
saving strategies based on over 30 years of economic
forecasting at the highest levels; including 6 Ways to
Bullet-Proof Your Portfolio Now - a must-have checklist for
evaluating your holdings BEFORE you get swamped by the
market slowdown.
We left off yesterday thinking about the dual nature of
gold - a reflection made more urgent by the Fed's action
yesterday.
Gold's schizophrenia frustrates gold bugs, economists and
central bankers. If it is a commodity, it goes down as
'money' becomes dearer. If it is money, it goes up. Which
is it?
By October of 1979, in the Post-Nixonian era of inflation,
consumer prices were rising in the U.S. at the rate of 12%
per year. Gold had risen too - to $500. It is almost
inconceivable to us now, but comedienne Bette Midler made
news when she asked to be paid in South African gold coins
rather than U.S. dollars.
In January of the following year - on the first two
business days of the year, exactly 20 years ago - gold
reacted in a big way. It rose $110 an ounce to $634.
Central bankers began to wonder if gold should be returned
to its role as the foundation of the world financial
system. U.S. Treasury Secretary G. William Miller announced
that the U.S. would hold no more auctions of its gold. "At
the moment," he told the press, "it doesn't seem an
appropriate time..."
Thirty minutes later, the price of gold had risen $30 to
$715 an ounce. The day after, it rose to $760. And finally,
on the 21st of January, two decades ago, gold hit its record
high of $850 per ounce.
Was gold reacting as a commodity? Or as money?
In the 12 years leading up to January 1980, gold had risen
at an average annual rate of 30% per year. But the
inflation rate was only an average of 7.5% during that
period. The 12-year return on gold exceeded the return on
stocks in any 12-year period in history. And at that end of
it, there was more money invested in gold than in the
entire U.S. stock market.
By 1980, many investors were convinced that gold was the
only true money and that it would go up forever. "Gold is
indestructible," they would say. "Gold is forever," they
chorused. "Remember the golden rule," they chided: "He who
has the gold, rules!"
And so, they bought gold...and have regretted it for the
last 20 years.
Not that there weren't many episodes during those 20 years
that gave cause for hope. The dollar crash of '85...the
crash on Wall Street of '87, the Gulf War...the LTCM
crisis...the Asian currency crisis...
"In 1998 the world was suffering a deflationary collapse,"
Porter Stansberry writes, embellishing his 'gold-is-no-
longer-money' argument. "Prices collapsed for commodities,
prompting credit defaults. We'd seen this happen many times
before in history. But the difference this time was the Fed
stepped up to the plate and eased the crisis. And yes...I
know that in the long run this will have consequences...
resources that should have been forced into bankruptcy will
continue to produce marginal products, making it difficult
for new, more efficient producers to survive. See Japan for
the last 10 years."
"But the question remains," Porter continues, "if the Fed
is able to produce liquidity...how can the world spiral
into a deflationary crisis? It would seem to me that the
real risk will always be an inflationary crisis because
this is something that the Fed cannot immediately solve."
Porter's view is probably the dominant one. The Fed can
'immediately solve' a deflationary crisis. How? By
increasing the money supply. That is what the Fed began to
do yesterday.
If it succeeds, there will be no need to remove the cobwebs
on gold supplies. Stock prices may continue to rise on Wall
Street...the dollar may recover...and gold can rest
disturbed. As Floyd Norris put it in a headline from the
N.Y. Times, May 1999, "Who Needs Gold When We Have
Greenspan?"
Ah, how nice it is to live in this New Era - when the
fears, mistakes, and buffooneries that have plagued mankind
for so many centuries have finally been eliminated. It was
only 2 decades ago that investors thought the dollar was
finished. Now, we see that it is gold that is finished,
because the Fed can 'immediately solve' a deflationary
collapse.
And inflation? Paul Volcker showed us how to beat that.
Volcker cut off liquidity - bond yields soared to 18%...and
inflation was finished. The day after gold hit its $850
high, it plummeted $145...and now stands, nearly a
generation later, at $269 per ounce.
Is gold washed up? Maybe not. "Gold will be part of the
international monetary system in the 21st century,"
predicted economist Robert Mundell in March of 1997. Then,
accepting his Nobel Prize a year ago: "The main thing we
miss today is universal money, a standard of value, the
link between the past and the future and the cement linking
remote parts of the human race to one another...The absence
of gold as an intrinsic part of our monetary system today
makes our century, the one that has just passed, unique in
several thousand years..."
Have Richard Nixon and Alan Greenspan created a permanent
New Era in monetary history? Or just a temporary one?
We will see, dear reader, soon.
Your servant,
Bill Bonner
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