In Today's Daily Reckoning:
*** Sell the rallies...
*** Inflation at 7% annualized
*** Stealing movies...and a new ailment: "Sudden Wealth
*** In a bull market, of course, you buy the dips. In a
bear market, you sell the rallies. This idea seems to
have occurred to investors yesterday as they unloaded
stocks following Monday's most recent rally peak.
*** The Dow fell 64 points. The Nasdaq dropped 97 points.
And more stocks fell than rose - 1679 to 1162.
*** Commentators were puzzled that stocks fell on good
earnings news. Intel beat analysts' estimates by, guess
how much - 1 cent. MSFT also came in above expectations.
*** But stocks didn't seem to care. And why should they?
Earnings, relative to prices, are near all-time lows. You
could double the earnings on the S&P and still stocks
would be over-priced by historical averages. On the
Nasdaq, meanwhile... earnings would have to quadruple
before stocks would be near more normal levels.
*** But what was really puzzling was the reaction to
yesterday's cost of living figures. Consumer prices are
rising at a 7% annualized rate, according to the people
who make up the numbers. Seven percent is no paltry
amount. It cuts the value of the dollar in half every
decade. And, as if to underscore the point, that very day
oil rose another $1.11 - reaching almost $32.
*** Yet, while the inflation alarm bells were ringing -
investors kept calm...enjoying another hot, sunny day in
the 'Summer of Love.' In fact, bonds rose! Those bond
traders, who are supposed to be providing discipline,
seemed to be deaf. In general, bond investors appear to
be looking ahead to the consequences - another rate hike
in August, a stock meltdown, and an economic slowdown,
*** If bond investors were deaf, gold investors were
dumb. Or perhaps simply too beaten down and discouraged
to raise their voices and place a bid. Gold fell $1.10.
But more on that below...
*** "Given the current money supply and global reserves
of above ground gold," says Kevin Klombies, editor of
Inter-Market Relationships Analysis, "if we returned to
the gold standard.... each ounce of gold would be worth
something like $70,000." (see: Whither the Price of Gold? http://www.dailyreckoning.com/body_headline.cfm?id=248)
*** "With the possible exception of recent African
dictators, it's hard to imagine a more venal, arrogant,
thuggish, stupid, corrupt and grotesque array of socio-
paths in all of world history," says Doug Casey speaking
of Eastern European dictators in the 20th century. "Of
that group, Nicolae Ceausescu was... the most colorful."
Doug's trip through Rumania in May yielded, among a host
of interesting insights, rare speculative opportunities
on the Rumanian RASDAQ. He reports: "If I had a son or
grandson who was anxious to make a lot of money... I'd
pack him off to Bucharest with instructions to learn what
it means to be a venture capitalist, a white knight, a
green-mailer, a takeover artist and such. The bankroll
involved would be peanuts and the upside huge."
(see: Count Dracula: Is He a Folk Singer? http://www.dailyreckoning.com/body_headline.cfm?id=247)
*** China grew at an 8.2% annual rate in the first half -
faster than last year's growth.
*** The WSJ reports that movies will soon be vulnerable
to the sort of electronic piracy that has overtaken the
music industry. My own son, Will, showed up this summer
with a collection of music CD's that had been 'burned' in
a dorm room at his college in Santa Fe.
"Is that legal," I asked him.
"I don't know," he replied, "but everyone is doing it."
And now, with new Napster-like technology, it is
apparently possible to steal movies too. "Hollywood,"
says the WSJ piece, "your worst nightmare is here."
In this sense, Internet lovers are right. The Internet
democratizes commerce - it makes it easier to steal
*** The people I talk to say they are getting tired of
the Internet. They use it at work and don't feel like
turning it on when they get home. But Business Week
Online reports that the Internet may find a whole new
group of surfers - pets. A 20-month African gray parrot
named Wart is learning to surf the worldwide web. Someone
was quoted, (I couldn't tell if he was serious or
mischievous) as saying that pets may want to "video-
stream their owners at work."
*** That is the thing about the Internet - we still don't
know if the innovation is serious or ridiculous.
*** National Public Radio reports that the psychological
stress of sudden wealth in Silicon Valley is being
replaced by the shock of sudden wealth loss. Stephan
Goldbart, who is described as a psychotherapist, named
the first disorder "Sudden Wealth Syndrome."
Nouveau riches were apparently destroying people's lives.
They had become dot.com millionaires almost overnight and
didn't know how to handle it.
But just when the helping profession was learning how to
bill rich people for treating this disorder - poof, along
came an entirely different problem, which Goldbart
cleverly styled "Sudden Wealth Loss Syndrome."
Sufferers, we are told, can lose sleep, get moody, or
feel like the stupid failures they really are. But
perhaps the stupidest thing they do is to spend a little
of what they have left to have Mr. Goldbart explain that
money isn't everything.
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As I signed off yesterday, our favorite component of the
periodic table had been beaten down for the last 20
years. Gold, and those investors foolish enough to buy
it, had become a laughingstock - tripping over every
piece of news that came over the wire...and getting up
only to fall down once again, comically.
Even yesterday - which brought news that the dollar would
be cut in half in 10 years at the present rate of
inflation - gave gold another cue to tumble. Investors
would rather own something that loses value at 7% per
year - the dollar - then something that was supposed to
be nature's most perfect store of value - gold.
Goldbugs, people who harbor the quaint and romantic idea
that there exist things in this world of real and lasting
value, are mute. They have been silenced by 20-years of
ridicule. Their only hope - one that I share - is that
having indulged ourselves in the greatest investment
error that the last two decades had to offer, and
suffered accordingly, we might now have some measure of
immunity from gross foolishness. We have been there. Done
The gross foolishness I have in mind, to disclose the
destination of today's perambulation before we have gone
far, is not excessive faith in gold, but excessive faith
in the alternative to gold - the dollar.
The argument against gold, as I quoted yesterday, is not
merely that gold is in a slump, but that it is terminal.
The voice of 'progress!', you will recall, told us that
the 'thousand-year-old myth' of gold has come to an end.
"It's over," he said, referring to the use of gold as a
store of value. It's over because the discipline gold
provided has been replaced by the discipline of the
markets, including the f****** bond traders so much
admired by our president.
At the first hint of inflation, the argument goes, bond
traders sell bonds...the dollar collapses...and stocks
plummet. And yet, yesterday provided more than a hint of
inflation. Bond traders were notified by the Bureau of
Labor Statistics, in writing, that inflation is
destroying the dollar's purchasing power. Neither the
dollar nor bonds fell. They rose.
Instead, gold fell.
Over the long run gold varies inversely with the foreign
exchange value of the dollar. When the dollar is strong,
gold is weak.
"It is reported," writes Dr. Kurt Richebacher in the July
issue of his newsletter, "that measured bullish sentiment
on the dollar is at an absolute peak... Considering the
present unattractiveness of the U.S. financial markets on
the one hand, and the excessive and dangerous dependence
of the dollar on uninterrupted, huge capital inflows to
finance the yawning current-account deficit on the other,
the U.S. currency's resilience is certainly most
astonishing, if not enigmatic."
(see: Who Put 'the Bull' in this Bull Market? http://www.dailyreckoning.com/corprofits2/)
The enigma is that so many people seem to have such faith
in the dollar for so little reason. Price increases in
the U.S. are greater than those in Japan or Europe - by
at least 2 to 1. And American equity prices are at
dangerously high prices.
But the measure of faith in the dollar can be taken not
only by the drop in the price of gold...but also by the
incredible increase in the U.S. current account deficit.
The current account deficit tells us how many dollars
foreign interests are willing to take with no
compensating goods or services received in exchange. In
1980, when gold began its epic decline, the number was
zero. In fact, in 1981, the U.S. ran a small current
Meanwhile, Americans have concluded that not only do they
not need gold as a store of value - they don't need
anything. From 1960 to 1995, U.S. households ran a
financial surplus - roughly equivalent to savings - of
But, writes Dr. Richebacher, "during the bubble years
since 1995 this pattern has dramatically changed...the
private sector's former financial surplus has turned into
a substantial deficit." From an average of 2% positive,
the figure sank to more than 5% negative - a bubble swing
of about 7%, or about the same as the drop in personal
financial surpluses in Japan prior to the collapse in
There were bond traders in Japan 10 years ago too...just
as there were on Wall Street before the bear market of
'73-'74 and the double-digit inflation of the late 70s.
Is it possible that the guardians of discipline are as
capable of acting like clowns as the rest of us?
"[M]ajor currencies frequently trade like pink sheet
stocks," reports James Grant in his Interest Rate
Observer," as the dollar did against the yen in early
October 1998, dropping by 10% in just two days. In the
first quarter, according to the Bank of International
Settlements, the intra-day trading rang of the
dollar/euro exchange was greater than 2% on more than 21%
of trading days..."
The implication of this may not be obvious - so I will
draw it out: the dollar is as vulnerable as a dot.com.
And, the clowns of the future may be the bozos who
believe - as the goldbugs did 20 years ago - that today's
most dramatic and enigmatic trends are permanent.
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Last modified: April 02, 2001
Published By Tulips and Bears