In Today's Daily Reckoning:
*** Mr. Bear takes a break - the Big Techs recover some
of their losses
*** Higher oil...lower euro...the Four E's that worry
*** Franc hits new low... gold 'ain't nuthin' but a hound
dog'... and The Economist signals a rise in Europe
*** After taking the Nasdaq down 11% so far in September,
Mr. Bear decided it was time to let up. The tech-heavy
index rose 3.73%.
*** Leading the index, of course, were the Big Techs.
Qualcomm jumped $7 to $77.50. Cobalt Networks rose $16
after Sun Micro said it would buy the company for $2
billion. Intel scrambled back above $60.
*** The tech rally on Wall Street gave hope to Asian
markets overnight. South Korean stocks bounced a bit.
Even Japan rose 2.07%.
*** But the world's equity markets are plagued by what is
becoming known as the Four E's: Earnings, Energy, the
Euro and the Economy.
*** Oil rose overnight. October light crude rose above
its Gulf War peak - to $37.14 - earlier in the week, and
is trading this morning at $37.08. The American Petroleum
Institute said oil supplies are still falling. There are
22 million fewer barrels of oil in inventory now than 1
*** "In 1973, there were 15 oil-fields producing over 1
million barrels of oil per day," says John Myers.
"Together they accounted for almost 30% of the world's
daily supply. Today only two of these fields produce more
than 1 million barrels a day." The others are getting
'long in the tooth.' Are higher oil prices harbingers of
scarcity to come? (see: Investing in an Age of Scarcity)
*** The higher oil price hit utilities hard yesterday and
worried the Dow down 19 points. The Advance/Decline ratio
fell further - with 1380 stocks advancing, while 1494
declined. Twice as many stocks hit new lows on the NYSE
as new highs - 122 to 62.
*** Higher oil prices cut into corporate earnings, of
course, too, which further depresses the animal spirits
of stock buyers. Walmart - the world's biggest retailer -
fell 6%, reflecting what may be a downturn in consumer
spending, as well as, earnings.
*** Amazon fell $2 too - to close at $40.
*** The euro also fell. The French franc, which tracks
the euro, is now at 7.7 to the dollar - a new low for
this cycle. The IMF called for concerted intervention.
Every financial news medium seems to be telling the story
of the euro's collapse. Is it possible that this marks
the near-bottom for the euro? Uh...yes!
*** "As indicators of popular sentiment," writes Dan
Ferris, "magazine covers and other news sources are like
the Oracle of Delphi in ancient Greece." Dan points to a
recent cover of The Economist. The title says,
"EUROSHAMBLES." The subtitle reads, "No fuel, roads
blockaded, a vanishing currency and blundering
*** "It's a sign," says Dan, "of pessimism that is
widespread enough that somebody thinks he can sell
magazines with it. That would normally be an easy buy
signal, the way The Economist's now-famous "Drowning in
Oil" cover was an easy buy signal for oil when it
appeared in March '99."
*** But even Dan cannot bring himself to buy the euro
whose time, he believes, "will never come."
*** Nor is he persuaded to sell oil even though he
mentions a rash of articles in the press about how oil
"could go to $60 a barrel." Perhaps it is still too early
for the euro... and not yet too late for oil. But if you
have made a lot of money on oil - you might want to move
some of that money to euro bonds.
*** The Economy, meanwhile, is a composite of the other
three E's. Higher oil, a higher euro and lower corporate
earnings lead to lower stock prices... which leads to a
reversal of the 'wealth effect' - which tracks consumer
spending. As consumers spend less, they reduce debt...and
the credit cycle enters the contraction phase. The
economy goes into a slump, stocks fall further, and life
as we have known it on planet Bubble comes to an end.
*** In fact, "today's New Era story about the wondrous
effects of information technology," says the good Dr.
Richebacher, "has its precise parallel in the 1980s:
Reaganomics and supply-side tax cuts... the end of the
that 'new era' is well-known: dollar collapse, recession
and the S&L disaster." (see: The Alleged Productivity
*** Gold rose 50 cents. Gold is supposed to be a watchdog
on inflation and financial excess. But this old hound
seems to have gone blind and deaf. The money supply
continues to rise twice as fast as the GDP... and the
annual trade deficit is approaching the total of GDP
growth. But nary a woof or growl out of gold.
*** Speaking of gold, reader B.G. asks: "You and other
writers have been very high on Anglo Gold. After reading
the comments about Barrick's hedging of their gold, I
asked Anglo about their positions. Steve Lenahan,
Executive Officer, Investor Relations, stated, '...on 30
June 2000, approximately 41% of five years' production
was hedged out until 2009, with some 77% of that in the
first five years'... Comment?"
Doug Casey responds: "Hedging production has been an
excellent idea over the last decade, in that it's greatly
improved returns for the companies that have done so,
with the exception of a few relative newcomers to the
game, like Ashanti and Cambior, who came close to
bankrupting themselves on the metal's brief spike some
months ago. Hedging has been especially profitable for
Barrick, its originator. But, as more companies hedged,
it's reduced the returns of hedging. And the longer the
gold bear market has gone on, the riskier it's become. "
"Personally," Casey continues, "I'm leery about owning
any company with significant hedging. The entire thing
could blow up much in the manner of Long Term Capital.
The whole point of owning gold stocks is to have leverage
when gold goes up. If your company is hedged, it not only
won't profit from higher gold prices, but may go under
due to being short in a bull market. What's the point?"
*** We had some problem with our digital technology
yesterday. The Daily Reckoning was late. I don't know
what the problem was...but Addison tells me it has been
*** Elizabeth comes back today. Thank God. Sophia is
staying up late, worrying about what she's going to do
after she finishes high school this year. Maria is upset
because she couldn't get into the ballet class she
wanted. "My whole career is ruined," she told me
yesterday, close to tears. Jules's school is threatening
to toss him out if he doesn't get his vaccination shots
up to date...and Jules is hoping they do so. Henry,
usually the teacher's pet, says his teacher has developed
a bad attitude towards him. And Edward, 6,...is...well...
Edward. Being a single dad isn't easy.
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"Kim An Wu, a 55-year-old housewife," says a report in
William Fleckenstein's SiliconInvestor.com column
yesterday, "believed the [South Korean] government's vow
last year that it would foster technology stocks. She
spent more than $250,000 to buy shares listed on the
"Instead of profiting from the Kosdaq's Internet and
mobile phone stocks, Kim posted a loss. No longer able to
afford the home she hoped to buy for her soon-to-be-
married son, Kim is so incensed that she phoned the
presidential palace yesterday to complain. 'The only way
I can make up for my losses is through the stock market,'
she said, standing amid a grimfaced group of retirees at
a Seoul brokerage today, as stocks slipped yet again. 'So
I want the government to do something fast.'"
The article went on to say "housewives and retires
watched, dazed, yesterday and today as screens on broking
floors quickly filled with green, that in many parts of
Asia marks declines."
Ms. Wu may not know exactly what she wants the government
to do. But the central bankers who work for the world's
governments know. Another dose of 'liquidity'...of
cash...of credit...usually sends equities higher.
"Look at this," said Addison to me yesterday, excitedly
pointing to a group of charts. "Credit expansion and
stock market growth go together."
Sure enough, the group of charts, from a study done in
1996 - produced by the Japanese central bank - showed
that credit growth paralleled stock price movements. When
stocks were in a boom - credit growth was too. (None of
the parallel lines, I noted, went up forever.)
Japanese monetary officials made a reasonable inference:
looser credit policies must CAUSE stock market increases.
In 1996, Tokyo was looking for a way to boost its economy
and stock market. Lower interest rates - lowering the
cost of borrowing - looked like a decent bet. Besides, it
was about all central bankers could do. So, interest
rates came down. By 1999 they had reached what the
Financial Times called "effectively zero." Yet, even free
money failed to revive the Japanese economy or its stock
Digital Man is stumped. To him, everything works by
simple cause and effect logic. When the cost of borrowing
goes down, the demand should increase. And yet, not even
giving money away could persuade Japanese business and
consumers back into the credit market.
But Analog Man, more heart than brain, understands. He
knows it is his fault. He knows that, were it not for
him, the world would be a different place.
Paul Erdman, former analog gloom-and-doomer, explains
[via Gary North] how monetary officials reacted to the
Long Term Capital Management crisis of 1998. The LTCM
geniuses had gotten themselves into multi-billion-dollar
dry hole...into which the entire world's financial system
threatened to slide.
But the Fed, according to Erdman, "pushed immense
liquidity into that system within hours and saved the
Erdman, reborn a digital man, does not believe night
follows day: "In this information age," he says, "we live
in a new world in which decision makers are immeasurably
Daily Reckoning readers who have endured my letters on
the value of information will be tempted to click off at
this point. Let me reassure you... my point in today's
letter has nothing to do with the value of information.
It is not the nature of information that interests me
today, but the nature of man.
Whatever technological improvement the 'information age'
represents it is neither the first nor the last to get
investors noticeably aroused. The railroads, internal
combustion engines, electricity - all of these were seen
in the same light as we see information technology today.
And each time, investors "under-reacted...and over-
reacted" in what has become a predictable fashion. They
got excited...they bid up prices to outrageous levels...
and then there came a bust.
But, Erdman continues: "The business cycle may not be
dead. But there are increasing grounds to believe that
the boom-and-bust phenomenon is. Which reinforces the
view that the place to keep your money is in index funds,
not in gold."
In short, if the central bankers were able to 'save the
day' in 1998 - why not now? Why not forever?
A boom is accompanied by an expansion of credit...a bust,
by a contraction of credit. The Japanese tried to create
a boom by reducing interest rates - making credit more
affordable. But, it didn't work. They were not able to
get their own people to borrow yen.
But animal spirits still ran high in the western world.
The 'yen carry trade' developed. Speculators borrowed yen
and then invested the money in U.S. stocks and bonds.
Speculation is, however, a zero-sum game. (Actually,
taking into account the friction costs...it is a minus
sum game.) So there have to be some losers as well as
winners. And with trillions of dollars at stake, it was
only a matter of time until a there was a big, big loser.
LTCM would have been that big loser - had not the Fed
A little later, the Fed and other central bankers stepped
in to save the world from the Asian currency meltdown.
Then, two years later, they protected the system from a
These efforts at rescue, resuscitation and protection
have produced a moral hazard of grotesque proportions.
The amount of derivatives outstanding today is estimated
to be as high as $100 trillion. And the debt in the U.S.
economy has reached $26 trillion.
Most interesting, from our point of view, for a boom to
continue, it needs an expansion of credit - at a faster
and faster rate. A man with a $1000/wk lifestyle and a
$100,000 debt needs a lot more new cash than the man who
lives on $100/wk and owes only $10,000.
Likewise, it takes a lot more money to move a billion-
dollar company up in price than a million-dollar one.
(see: "I'm In the Trap; I Don't Need Any More Cheese"
As the boom of the late 90s continued, reports Dr. Kurt
Richebacher, "the rise in indebtedness gathered ever
greater speed in relation to economic activity... In
1999, nominal GDP growth of $509 billion compared to
aggregate financial and non-financial debt growth of
$2.208 billion. For each dollar added to GDP there were
4.3 dollars added to outstanding debt."
"There is something healthy," Grant's (www.grantspub.com)
quotes Mike Brosnan, an official at the Office of
Comptroller of the Currency, "...about having a little
downturn. It reminds you that the world is a risky
Thanks to the work of the world's central bankers -
saving the system from the Japanese bust...LTCM...the
Asian currency meltdown...and Y2k...the world has become
an even more risky place.
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Last modified: April 01, 2001
Published By Tulips and Bears