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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Under the Big Top, Part Deux

In Today's Daily Reckoning:
*** Sell the rallies...
*** Inflation at 7% annualized
*** Stealing movies...and a new ailment: "Sudden Wealth 
Loss Syndrome"

*** 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?

*** "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?

*** 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 
without guilt.

*** 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 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.

Gary North explained this in his note to me of a couple 
of days ago: Bond traders, not gold, are what keep the 
Fed from flooding the world with dollars.
(see: The Web of Lies and the Great Abyss

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?

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 
account surplus.

Since then, dollars have swamped the world - with a 
current account deficit in excess of $1 billion per day. 
(see: Whither the Price of Gold?

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 
about 2%. 

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 
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.


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
and publisher of The Fleet Street Letter, offers you his daily market
commentary absolutely FREE. For the first time, outsiders are getting a peek into his powerful and profitable investment insights. Bill's practical contrarian advice empowers even average investors to protect their hard-earned wealth and achieve amazing gains.

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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Last modified: April 02, 2001

Published By Tulips and Bears LLC