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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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PARIS, FRANCE
WEDNESDAY, 16 MAY 2001 |
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Today:
An Unlikely
Conspiracy, An Entirely Likely Swindle
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*** The Fed dropped rates, as expected...but so
what?
*** Poor Alan Greenspan...an 'individualist' no
more...
*** California getting ready for $3 gas...real
estate developers and VCs make mistakes...the video
game business...a Florida land deal...and more!
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*** Better to travel hopefully than to arrive, as
the saying goes. Arriving at the expected Fed rate
cut yesterday, Mr. Market was so unimpressed he
almost turned around and went home.
*** The Dow lost a negligible four points while the
Nasdaq gained a meager 3. Perhaps the only surprise
was that there was no surprise. The Fed reduced
rates by the full half-point that most had
expected, despite last Friday's upbeat retail sales
report and buoyant Michigan consumer sentiment
survey.
*** Poor Alan Greenspan. Once a devotee of Ayn Rand
and 'The Individualist,' now he approaches his
retirement as a complete conformist. The stock
market expected him to cut rates by 50 bps - so cut
rates he did, despite the fact that the bond market
is telling anyone who will listen that it sees
inflation rising.
*** "Gas at record high," warns one of yesterday's
headlines. But "Industrial Production Fell for the
7th Straight Month" said another. Greenspan, caught
between the former rock and the latter hard place
probably could have left well enough alone.
Instead, he went along with the crowd - fearful, no
doubt, that failing to cut rates yesterday would
have triggered a major sell off.
*** Or perhaps, there's something else, entirely.
"Does the Fed fear a deflation tsunami?" asked Greg
Weldon following the last Fed cut. "The Fed is
cutting rates as the stock market is rallying and
at the same time it is allowing the money supply to
explode. The only plausible explanation for this
hat trick is that the Fed fears a deflation tsunami
is rolling towards the U.S." (see: Reading The
Chairman)
*** The Wall Street Journal reported a big drop in
corporate profits this year. They're down more than
40%. And Floyd Norris, in the NY Post, says that
Wall Street's profits are expected to decline 75%
this year.
*** "The Golden State today epitomizes bubble
economy precariousness," Doug Noland warns. "[Tax
revenue] projections from only a few months ago of
a combined $8 billion surplus for this year and
next have recently been revised to a $7.5 billion
deficit. The state has authorized the issuance of
$13.4 billion of bonds to finance energy
purchases," Noland writes. "It's estimated that the
California general fund will have absorbed $9
billion of energy expenditures by August."
*** Already, yields on California 10-year general
obligation bonds have jumped about 40 basis points
over the past few months, reflecting a palpable
anxiety about the state's worsening fiscal
condition. Senate Budget Committee Chairman Steve
Peace predicted last week that California's revenue
shortfall for the 2001-02 fiscal year could swell
to as much as $20 billion. That would be pretty
harsh, dude!
*** California is also getting ready for $3
gasoline... literally. Platts Oilgram News reports
that some oil companies have started to stock up on
the numeral "3" to use at their gas stations.
Specifically, they are buying "3 points," the large
font signs used to denote $3, followed by a
decimal, says Platts.
*** "Real-estate developers picked a bad time to
step up the pace of speculative office-building
development," the WSJ also observes. "After showing
a surprising amount of restraint throughout the
1990s, developers this year are set to deliver 163
million square feet of speculative space, more than
any year since 1985, according to Reis Inc...Reis
predicts that only 101 million square feet will be
absorbed this year," a drop of 31% from last year.
*** Even in this Age of Information, people make
mistakes. If it's any comfort, the real estate
developers were hardly alone in overestimating the
durability of our bubble economy.
*** Venture capitalists made some of the most
egregious miscalculations of all. Flatiron
Partners, the once-vaunted venture capital firm
that backed pioneering Internet companies like
theStreet.com and Kozmo.com is moving back in with
Mom and Dad, so to speak. The NY Times reports that
the firm "is giving up its offices to save on rent.
The 5-year-old venture capitalist operation is
moving in with its main backer, J.P. Morgan Chase &
Co. The firm will save 'millions of dollars a year'
by giving up space with views of the historic
three-sided Flatiron Building at Fifth Avenue and
Broadway."
*** Meanwhile, how much do you think 141,530 acres
of land in Florida might be worth? Barron's reports
that a company called Alico owns that much land in
Polk, Hendry, Collier and Lee counties. At less
than $20 a share, the company has a total stock
market value of $130 million. Uh... let's see. The
math is not too difficult. If the market value of
the land is more than $1,000 an acre - Alico will
be a bargain. Recently, the company signed a
contract to sell 44 acres for more than $113,000
each.
*** I attended a meeting of our supper club in
Chicago last night. My plane was held up, but I
arrived in time to see a presentation on the
interactive video game business. Did you know that
it is a bigger industry than the movie business?
Last year, video games sold $21 billion worth of
product. And they are more profitable than movies.
A movie costs, on average, about $40 million to
make. But a video game only costs $4 million. A
heavily-promoted movie, such as "A Bug's Life,"
will gross about $100 million in sales. But a video
game can gross even more. And while most stocks
that have anything to do with computers fell last
year - video game companies soared. Activision, for
example, rose 300%. What a business.
*** If you have young boys, you'll already know
that these things are expensive...and very popular.
My son Jules, 13, can spend an entire day playing
video games. The sun may be shinning outside... on
a rowboat that sits on the edge of our pond. Fish
jump from time to time. Water rats scurry around.
There are trees, woods, pastures...new born
calves...chickens (including a dozen or so little
chicks)...ducks, turkeys... barns, bicycles, swings
- nothing real, it seems, can compete with the
make-believe world of video games.
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Daily Reckoning readers write from time to time
asking why we don't include the GATA lawsuit v.
Alan Greenspan and others in our commentary. Truth
is, we don't really know anything about it.
However, our old friend Doug Casey seems to have an
opinion:
AN UNLIKELY C0NSPIRACY, AN ENTIRELY LIKELY SWINDLE
By Doug Casey
Reviewing lawsuits isn't exactly my favorite form
of recreation...but I've recently been taken to
task for not taking seriously a lawsuit filed on
Dec 7, 2000 by one Reginald Howe in the US District
court of Massachusetts.
The suit names, among others, Alan Greenspan, the
US Secretary of the Treasury and the Bank for
International Settlements (BIS). And alleges a
conspiracy to manipulate the price of gold; as well
as violations of the Sherman Antitrust act, various
SEC regs and common law claims. It has been
financed and promoted by a group called GATA (the
Gold Anti-Trust Action Committee), of which I
presume many readers who are interested in gold may
have heard.
Briefly, the complaint explains how certain mining
firms and gold dealing banks sell the metal into
the futures market for a premium; how central banks
lend their gold to commercial banks to collect
about 2% interest; and how commercial banks capture
the difference. The suit argues new production of
gold is 2,500 tonnes - but consumption is 4,000 -
and that this deficit is filled with borrowed gold,
constituting a giant short position.
That short position, says GATA, can never be
covered at anywhere near current prices. So far, I
agree.
But then the suit jumps to the conclusion that just
because some people have an interest in seeing the
gold price stay stable - otherwise they might get
caught short in a runaway gold bull market
partially of their own making - that those people
are conspiring to depress the price of gold.
What do I make of it?
Well, I don't hold myself out as a legal maven, but
all this suit proves is that anybody can sue anyone
about absolutely anything. I'm sympathetic to the
intent behind this suit, of course. But I don't
think it's got a snowball's chance.
In fact, I expect it will be dismissed out-of-hand
by the court. I can hear the judges chuckling up
the sleeves of their ample robes as they compare it
to lawsuits alleging the Queen of England still
owns the US, or that sovereign individuals in the
US don't have to pay income tax under the law.
As per their price fixing count, it makes sense to
me that there's a huge uncovered short position in
the gold market. But it doesn't make sense to me
that the powerful people and institutions named
would collude to keep the gold price down, however
much that might be to their advantage.
Rather, in the real world, the guys that could get
hurt most would be trying to cover before the other
guys do, recognizing you can't control a market
forever; these aren't plowboys who just fell off a
turnip truck. And the idea of the Fed Chairman, the
Treasury Secretary and a roomful of bankers sitting
down at a table to collude wouldn't even make a
good movie, because it's so incredible. At least to
me.
It's clearly in the interest of all governments and
central banks for the price to stay low, giving the
appearance that all's right with the financial and
economic worlds. (It's one thing for the stock
market to be weak. But if gold takes off at the
same time, that could cause people to push the
panic button for real.) So maybe governments are
trying to manipulate the price of gold; that's the
type of thing they've always done. In fact, that's
what most people think they ought to do. But if
they are, what do you think the chances are of a
government court saying they shouldn't? I'd say
slim and none. And Slim's out of town.
If I were the judge I'd throw it out of court as a
grandstanding effort of a bunch of sore losers and
conspiracy wankers - despite my dislike of central
bankers, and my sympathy for gold.
Another part of the complaint decries the BIS
attempt to force its private shareholders to tender
their shares for US$ 9,280 per - when recent
fairness opinion set their value at over twice that
much.
Well, of course the public shareholders are being
screwed. It happens all the time; that's what
management buyouts are usually all about.
Personally, I'd like to see the BIS wound up, and
its capital distributed. And frankly, I wouldn't
mind if its officers and directors were shot at
dawn. But that doesn't mean I'm particularly
sympathetic to its shareholders. They bought into a
corrupt and destructive quasi-governmental
institution, controlled by central bankers where
all the other shareholders are central banks. You
swim with sharks, you can expect to get bit. Tough
luck.
The lawsuit also has a bunch of miscellaneous
Constitutional and Common Law violations thrown in
for good measure. But the US Constitution is a dead
letter, except for certain of its aspects in which
the Supreme Court has taken an interest. And gold
ain't one of them.
Common Law has, unfortunately, been superceded in
all meaningful ways by statute law in the US. Which
actually leads me to what I think is a rather
distasteful aspect of the suit, namely its
respectful reference to US securities and antitrust
laws - two areas of legislation in need of
abolition. Every suit filed referencing them,
serves only to legitimize them. But perhaps that's
just a personal bete noir of mine.
Don't get me wrong. I'm happy to see folks do this
kind of thing, if only because it distracts the
enemy. Maybe there's a chance in a hundred that a
lower court will entertain part of it, before it's
thrown out on appeal. I wish these folks well. But
mostly, I think it's just a waste of time. And
regrettably, it adds to the reputation of gold-bugs
as windmill tilters and conspiracy buffs.
Yours,
Doug Casey
Doug Casey is the editor of International
Speculator and author of several best-selling
financial books, including Crisis Investing. If
you're interested in financial advice consistent
with Doug's views please see the special report:
Nobody Notices The Good News Until It's Too Late.
http://www.agora-inc.com/reports/CRIS/bioCasey
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| About
The Daily Reckoning: |
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Daily Reckoning
author Bill Bonner
Bill Bonner is,
in spite of himself, a natural born contrarian. Early each morning, Bill
writes The Daily
Reckoning—his take on the financial markets and what’s going
on in the world—and 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 up—not 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 ’90s—opening offices in Florida, London, Paris, Ireland, and
Germany.
Agora's publication
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.
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