Contributed by Bill
Publisher of: The
Fleet Street Letter
THURSDAY, 10 MAY 2001
Dreams of Avarice
*** Gold up $5! Gold stocks up 10%! Inflation?
*** What do the productivity numbers mean? The end
of the new paradigm...18 years to get even in the
*** 401k assets fall, for the first time ever...tech
in a depression...who says it can't get worse? And
more on war...
|*** Hmmm...what's important today? The big news|
yesterday was the movement in the gold market. The
price of the yellow metal rose $5.10. And the gold
mining stock index, the HUI, rose 10%. The XAU Gold
and Silver Stock Index rallied a robust 6.5%.
Bellwether Newmont Mining showed the way with a 10%
*** The sages of CNBC repeatedly expressed their
collective surprise that the barbarous relic could
become a relevant financial asset - even for a
single trading day. What does it mean?
*** John Myers' aptly named Outstanding Investments
anticipated the surging gold price. "Gold Set to
Soar" the May issue predicted. Explaining his
bullish stance, Myers argued that gold is
extraordinarily cheap. "Factor in inflation and gold
is cheaper today than it was in 1974." Myer expects
that the Greenspan Fed's easy monetary policy may be
just the thing to help gold become less
extraordinarily cheap. "The Fed will take its
chances with inflation as opposed to letting the
nation fall into depression. Simply put, the '70s
are acceptable. The '30s are not."
*** The Fed may prefer the '70s to the '30s, but
does it have the power to choose? Milton Freidman
says 'yes.' Kurt Richebacher says 'no.' More
*** Gold investors "who woke up and checked the
graph for Anglo American were probably on the verge
of a heart attack yesterday...as was I," John wrote
to me. "Several graphs on the Net showed the price
plummeting from $60 a share to $15 a share. Not even
Bre-X collapsed like that! But there is a simple and
calming explanation - the stock had a 4 for 1 split.
Unfortunately the company did a poor job of
announcing it. All the great fundamentals that
existed on Monday are still in place today. We
haven't taken a whipping...we just have 4 times as
many shares!" (For more on investing with John Myers
please see: Outstanding Investments
*** Cisco fell 6% yesterday - giving back all of
Tuesday's gains. The Dow fell 17 points. The Nasdaq
*** So far, the biggest story of the week is the
drop in productivity. We're not as productive as we
used to be, the Labor Department tells us. But what
would government bureaucrats know about
productivity? The irony could only be thicker if we
asked retired bureaucrats to do the calculation:
that is, people who never did anything useful during
their working years, and in retirement no longer
need to keep up the pretense.
*** The falling productivity story is so awkward few
financial commentators have touched it. It doesn't
fit into the neat "2nd half recovery" story they've
fashioned for their readers. It's as if a guy had
shown up for a funeral dressed as a clown - the
falling productivity number calls into question the
event's emotional premise: They don't know what to
make of it.
*** "What we are witnessing," writes Dr. Kurt
Richebacher, "is far more than the bursting of the
Great Bubble. It is the bursting of the whole new
paradigm myth claiming that widespread and
aggressive investment in new information technology
created profit and productivity miracles." Without
the new paradigm, there is nothing to explain (or
justify) stock prices that are still twice as high
as the historical average. And no reason to expect
earnings growth beyond the ordinary.
*** Investech Editor Jim Stack calculates that the
recently vanishing wealth is equal to about 1 1/2
times the total value of ALL stocks in existence in
January 1991, when the final phase of the great bull
market began. Further, Stack notes, "To recover the
highs of last year, assuming a 15% compound annual
growth rate from their recent lows...
...the NASDAQ would require 8 years.
...Cisco Systems would require 13 years.
...Priceline.com would require over 26 years!"
*** But as Warren Buffett points out...15% annual
growth is 'dream land." When the P/E of the S&P 500
exceeds 22, as it does now, the ordinary return is
no more than 5% annual growth over the next 10
years. "What would the numbers be if you used a 5%
annual rate?" I asked my side-kick statistician
*** "At that rate," he replied, "you'll wait 18
years for the Nasdaq to recover...27 years for
Cisco...and Priceline? Let's see, 30 years from now,
it's still down more than 60%...ah, never mind."
*** Another major premise of the 'Dow 36,000' crowd
is that the flood of money coming in from baby
boomers' 401k accounts must raise prices of
financial assets. But Cerrulli Associates report
that 401 k assets fell - for the first time ever -
in 2000. What's more, 77% of the growth in 401k
assets came from stock market gains, not from
*** "California's well-publicized energy crisis is
just the tip of the iceberg," the Oxford Club's C.A.
Green tells me. "Many industry analysts feel New
York State is likely to be the site of the next big
energy shortage...and while potential solutions to
the ever-increasing energy crisis are being
advanced, there are few realistic alternatives.
Enron - a natural gas producer - is perfectly suited
to benefit from the crisis...net revenues rose 25%
- on 55% higher sales." (see: The Energy Crisis Is
Far From Over)
*** Blue Service reader Fendall Marbury writes: "The
whirlpool Charybdis may be mythical, but it still
exists. On navigation charts of the Straits of
Messina, it can be found close to the Italian shore.
It is said to be tidal, and to be weakening. In the
early 18th Century, a British frigate got into it
and was turned around, but not swallowed as
described in the Odyssey."
*** Since I've been writing about war...Doug Casey
sends this quotation from Gen. Smedley Butler, USMC,
1933, a two-time Medal of Honor winner:
"War is just a racket. A racket is best described, I
believe, as something that is not what it seems to
be to the majority of people. Only a small inside
group knows what it is about. It is conducted for
the benefit of the very few at the expense of the
"I believe in an adequate defense at the coastline
and nothing else. If a nation comes over here to
fight, then we'll fight...I wouldn't go to war
again as I have done to protect some lousy
investment of the bankers. There are only two things
we should fight for. One is the defense of our homes
and the other is the Bill of Rights. War for any
other reason is simply a racket."
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Caroline Baum quotes Chris Low, chief economist at
First Tennessee Capital Markets: "'Greenspan has
become completely reactive. Either we'll have a
recession, and he'll get blamed for being slow to
ease, or he'll engineer a recovery, which will be
accompanied by an inflation problem. Take your pick.
Steering a middle course would be a miracle.'"
Caught between the Charybdis of inflation and the
Scylla of recession - there is no doubt about which
way Mr. Greenspan will push the tiller. He would
rather risk the whirlpool of escalating prices
than be eaten alive by recession.
Habit and experience...as well as theory...tell us
what Greenspan will do.
The Fed chairman has few tools in his workshop. He
can regulate the quantity of money, or its price,
says Jim Grant, "but not both at once. For the past
20 years, the Fed has chosen to regulate the price,
i.e., the federal funds rate. The quantity, i.e, the
monetary base, is what it doesn't control."
Faced with the onset of a business slowdown, falling
stock prices, and the possibility of a recession,
the Fed did just what everyone expected - it reduced
the price of money. In fact, it did so more
aggressively than any other time in history.
Greenspan explains: "Because the advanced supply-
chain management and flexible manufacturing
technologies may have quickened the pace of
adjustment in production and incomes and
correspondingly increased the stress on confidence,
the Federal Reserve has seen the need to respond
more aggressively than had been our wont in earlier
"The Fed is doing what it said it would not do," Jim
Grant remarks, "easing policy in the teeth of rising
Why? Because it believed inflation would not be a
problem. Rising levels of productivity - providing
more and more goods and services per unit of input -
were supposed to offset increases in the supply of
And because Milton Friedman says that that's what
you're supposed to do in a slump. Before Friedman,
economists believed in a Newtonian economic world. A
boom could be expected to produce a nearly equal and
opposite reaction. The more people got carried away
in the up part of the cycle - that is, the more they
borrowed and spent unwisely - the more they would
have to suffer in the ensuing downswing. Economics
and moral philosophy were in harmony. The Great
Depression was seen as an inevitable repercussion of
the '20s boom - made worse by governmental interference
with the market's corrective mechanisms.
But with the publication of their book, "A Monetary
History of the United States" (1963), Milton
Friedman and Anna Jacobson Schwarz re-interpreted
the Great Depression. They offered policy-makers and
investors the hope of resurrection without
crucifixion...Easter without Lent...gluttony without
fat...boom without bust....
"The U.S. economy's collapse from 1929 to 1933 was
by no means an inevitable consequence of what had
gone before during the boom," wrote the future Nobel
prize winning economist. "It was a result of the
policies following during those years. Alternative
policies that could have halted the monetary debacle
were available throughout those years. Though the
Reserve System proclaimed that it was follwing an
easy-money policy, in fact, it followed an
exceedingly tight policy."
Friedman/Schwarz: "The monetary authorities could
have prevented the decline in the stock of money -
indeed, could have produced almost any desired
increase in the money stock."
Mr. Greenspan is determined not to repeat this
mistake. But what if Friedman is wrong?
I had lunch with Mr. Friedman a few years ago and
attempted to engage him in a conversation on this
point but was soon lost in the details and returned
to small talk. If only I had had Kurt Richebacher at
my side. [Friedman's explanation for the Great
Depression, writes Dr. Richebacher, "has but one
little snag. It completely belies the facts!" The
good Doctor then goes on to provide more facts than
you and or I care to know.]
Dr. Richebacher's argument is that the Crash and
Depression were not merely monetary phenomena, but
market and economic ones. "It was not the banking
crisis that caused the losses in the markets," he
writes, "rather the losses in the markets produced
the banking crisis."
After having spent too much...gone too deeply into
debt...and invested too much in business plans that
couldn't succeed - people had to cut back. This
reaction was inevitable - equal and opposite to the
preceding boom. Changing the price of money would
have made little difference.
A lower fed funds rate - the rate that the Fed
charges member banks to borrow money - allows the
banks to lend at lower rates too. In a deflationary
downturn, money becomes hard to get. People lose
jobs, the values of stocks and other investments
fall, sales and profits decline...and there are
still big debts to pay. Lowering the price of money
may have some effect, but not necessarily the
desired one. People who are out of work and owe too
much money do not make good candidates for
additional lending. Nor do businesses want to borrow
for capital improvements when the price of capital
itself is in decline.
In Japan, the price of borrowed money has been
reduced to zero - with little effect. In America,
Fed policies were so accommodating and the bull
market so enriching that the real cost of borrowed
funds could be said to have been below zero for many
years. An investor could borrow at 8% on a home
equity line, and invest the money in the stock
market for an 18% return. The net cost of money -
But, if you put the price of money low enough, it is
argued, people will see that it is worthless and
want to get rid of it quickly. The government can
always "crank up the printing presses" it is said.
But this is a little like ending a war by committing
suicide. What's the point?
The Fed has vast power. "But it's not magic," writes
Doug Casey. "Greenspan...is the subject of laudatory
paeans like 'Maestro.' A generation ago, when
interest rates and reported inflation were 12%, the
previous Fed Chairman, Paul Volcker, had reason to
fear for his life. Was Volcker an idiot? I think
not. Rather he was just a victim of the business
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The Daily Reckoning:|
author Bill Bonner
Bill Bonner is,
in spite of himself, a natural born contrarian. Early each morning, Bill
writes The Daily
Reckoninghis take on the financial markets and whats going
on in the worldand sends it off by e-mail before most Americans
alarm clocks have buzzed. Many readers say it's the first thing they want
to read when they get upnot only because it's informative and thought
provoking, but also it's inspiring, in its own quirky and provocative way.
Of course, there's
much more to Bill than his daily market commentary. He's also the founder
and president of Agora Publishing, one of the world's most successful
consumer newsletter publishing companies. Bill's passion for international
travel and big ideas are reflected in the company he's successfully built.
In 1979, he began publishing International Living and Hulbert's
Financial Digest . Since then, the company has grown to include
dozens of newsletters focusing on health, travel, and finance. Bill has
vigorously expanded from Agora's home base in Baltimore, Maryland since
the early 90sopening offices in Florida, London, Paris, Ireland, and
subsidiaries include Pickering
& Chatto, a prestigious academic press in London and Les
Belles Lettres in Paris, best known as a publisher of classical
literature in bilingual editions.