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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

OUZILLY, FRANCE 
THURSDAY, 4 JANUARY 2001 

 

Today:  A New Era of Money

*** 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.

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Better yet, how do their covert decisions affect your 
money!?!

You can't afford to miss the answer. Click here for an 
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evaluating your holdings BEFORE you get swamped by the 
market slowdown.

(http://www.agora-inc.com/reports/RMRV/AllAboard)
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * *


A NEW ERA OF MONEY

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

 
 
 
 
About The Daily Reckoning:
The Daily Reckoning... "more sense in one e-mail than a month of CNBC."  That's what readers are saying about The Daily Reckoning.

Bill Bonner, recognized internationally as a brilliant writer, entrepreneur
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Bonner writes his email letter from Paris, France, each morning --
describing the wacky, wonderful world of investment, politics and everything remotely related. Irreverent. Sharp. Honest. Thoroughly, unabashedly contrarian. It's also among the fastest growing e-letter on the Internet.  It's a brand new service... but it has a distinguished history..

For nearly 62 year, The Fleet Street Letter, the oldest investment
advisory letter in the English language has consistently delivered
invaluable economic and political foresights to savvy investors. Current readers regularly enjoy impressive investment gains even as the market falters. Here's more from his online readers...

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Open your mind with the most stimulating e-mail newsletter that you'll ever read, The Daily Reckoning. To receive this free daily email newsletter click here now.

 
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Last modified: April 01, 2001

Published By Tulips and Bears LLC