*** Wheee! A wild ride...but it's time to get off...
*** Bankers are good contrary indicators - like magazine
covers. Guess what they're invested in now...
*** More collective imbecility...Technology!
*** Wheee! The market took investors for a wild ride
yesterday. The Dow plunged 433 points before bouncing
back to close down 146 points - below 10,000 for the
first time since March.
*** The Nasdaq, meanwhile, followed the same trajectory,
coming near the 3,000 level early in the day, but ending
the session down 42 points.
*** The proximate cause of the market's trouble was the
IBM announcement I mentioned yesterday. IBM's sales are
barely growing, giving investors cause to knock the share
price down $18.
*** Despite the morning flop in prices, there was no
panic or fear on Wall Street. Investors are accustomed to
believing that share prices always go up in the long run.
Many saw the big drop in the indexes as a decisive end to
the bear market they said couldn't happen.
*** "People are asking themselves is this is the end of
the sell-off," said one analyst quoted by the N.Y. TIMES.
*** I will venture an answer: No. Prices may go up in the
near term...but it is very unlikely that a genuine bull
market can begin with prices still this high, and so many
people so deeply committed to investments that can't
possibly be profitable. Mr. Market just doesn't work that
way.
*** But what do I know? The euro continues to disappoint
me. It hit yet another new low yesterday. Today, a euro
is only 84 cents...and you can get 7.8 French francs for
your dollar. The dollar may be "an accident waiting to
happen" - but it has a lot of patience.
*** What really ails the euro? "Three things: statistics,
perceptions and propaganda," says Dr. Richebacher.
"Dollar strength and euro weakness is a matter of
perception. But the 'technological gap' - suggested by
the official statistics - is a function of the yardstick
rather than the cloth. Look for the dollar to fall."
(see: What Really Ails The Euro?
http://www.dailyreckoning.com/body_headline.cfm?id=639)
*** Gold seems to have unlimited patience too. It lost 80
cents yesterday. More on gold, money...and wealth,
below...
*** AOL lost ground yesterday, even though it reported
earnings in the last quarter up 100% from a year ago.
*** MSFT came out with good numbers, after the market
closed. Its latest quarter showed net income up 18%, the
news of which is supposed to revive the market this
morning.
*** The cost of living rose 0.5% last month, after
falling in the previous month. The year-to-date inflation
figure is 3.5% - more than twice the nominal yield on the
S&P 500. In real terms, investors are losing a lot of
money: a couple of percent points to inflation, net of
dividends...plus the loss in capital value.
*** There were 994 advancing issues yesterday; 1888
declined. The number of new lows rose to the highest
level in 9 months - 297, while only 19 stocks hit new
highs.
*** Amazon rose $3 yesterday...it is now trading at $24
and change. Cisco fell $2 5/16th.
*** "Chase Manhattan Corp.," reports Caroline Baum on
Bloomberg.com, "the second largest U.S. bank, reported
today that third-quarter earnings fell 24 percent from
the year- ago quarter, dragged down by a $25 million loss
in Chase Capital Partners, its private banking unit that
lends money to start-up companies."
*** Bankers have a habit of lending money to whatever
popular sensation is in the news... Follow their lending
and it will lead you to the next financial implosion:
"Back in the 1970s and early 1980s, when OPEC was having
its way with the oil markets, banks lent hand over fist
to the oil and gas industry," Baum explains. "With the
Organization of Petroleum Exporting Countries controlling
the limited oil supply and oil demand rising, oil was as
good as gold.
[But] "The price of oil collapsed in 1986, and so did the
loans to the oil patch." The next target of lending was
Latin America - where the loans went bad to such a big
extent the banks had to be bailed out by the U.S.
Treasury. Then, "proving that memory is fleeting, banks
repeated their mistake, this time with emerging markets
in Asia. In between they managed a couple of forays into
real-estate loans, which left them holding the bag when
prices collapsed.
"The coup de grace," says Baum, "was the banks' eagerness
to lend, under very favorable terms, to Long-Term Capital
Management, the hedge fund to end all hedge funds. When
the fund almost collapsed in 1998, the banks professed to
be shocked, shocked, at the degree of leverage and size
of LTCM's positions. They were too shocked to explain
their lack of due diligence."
*** Well, now the bankers are heavily invested, along
with the Cisco Kids, in new technology start-ups. Will
those go the way of oil loans and Brady bonds?
*** Are their bargains among the crashing techs and
dot.coms? Maybe. The NY TIMES reports that Stamps.com,
one of Ray Devoe's 65 Fallen Internet Angels, "now sells
for less than $3 a share, down from a high of $98.50 last
November - and less than half the amount of cash per
share the company has in the bank." (For Ray's complete
list see: The Dot.com Shakeout: Fallen Angels, Still
Falling
http://www.dailyreckoning.com/body_headline.cfm?id=638)
*** Today is a big day in history - it is the anniversary
of the stock market crash of '87. It is also the date on
which Napoleon began his disastrous retreat from Moscow,
in 1812. Bonaparte ended up with fewer than 5% of his
troops alive - about the same percentage of investors'
money that will survive the retreat from Big Tech.
*** Episodes of collective imbecility are defined and
encouraged by big, dumb words. Napoleon pushed his troops
onward with appeals to 'La Patrie,' which had little real
meaning in Paris... but was utterly senseless in Moscow.
In the Nasdaq Nation, the rallying cry is 'Technology'!
*** People are not buying as much 'technology' as they
used to. James Paulsen, chief investment officer at Wells
Capital Management: "Real personal consumption growth in
technology went from an 80 percent rate in 1999 to 35
percent right now," he said. "When there's not real price
declines, it slows the growth."
*** But what is 'technology?" My friend Michel notes that
the word implies the use of information and electronics.
"Thus, the transmission in your car is industrial
equipment. But add a cheap little calculator and it
becomes 'technology.' The word has no real meaning, and
since it has no real meaning, it has taken on a magical
dimension that allows people to believe that 'technology'
will make people rich."
When The Greatest Credit Bubble in History Bursts...What
Comes Next?
No banks or brokerage houses went bust in the 1929 crash.
In fact, many investors and businessmen prospered. The
real damage was done later on - when popular sentiment
turned against stocks altogether. Just as is happening in
our markets today... Will you profit in the months ahead?
You will if you prepare yourself now - EVERYTHING that is
happening in the markets today has already happened
before. Click here to learn more about the Hidden Logic
of Credit Bubbles:
(http://www.agora-inc.com/reports/BUBD/BubbleHistory)
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
"I've been to Hollywood,
I've been to Redwood,
I've crossed the ocean for a heart of gold.
There's an expression,
That gives direction,
And keeps me searching for a heart of gold.
But I'm getting old."
Neil Young
Despite the fact that 'money can't buy me love'...and the
despite the disappointment of the law of declining
marginal utility (the more you get, the less you
appreciate it)... and despite the fact that Christendom's
most reliable source said it increases the likelihood of
burning in hell for all eternity...
...the quest for wealth remains popular.
Not only do people want to get it. They also are very
keen on not losing it.
In both respects, gold has played an important role for
many generations.
This is not to say that other ways of amassing and
preserving wealth have not been found. "Money" is, after
all, an abstraction. It represents purchasing power only
by common agreement. An ounce of gold, for example, is
inherently almost worthless. It is useful, say, for
leveling an old table...or repairing a broken tooth. But,
you cannot eat it...nor will it keep you warm. It is not
even entertaining, unlike, say, a Jimmie Rogers song or
the racy Aubade (so bad...so bad...) underwear ad which
Rafael has turned into a screen saver.
Yap is an island in the Caroline chain somewhere in the
vast Pacific. Peter Bernstein's new book, The Power of
Gold, explains the Yap money system, as it was when
anthropologists studied the island in 1903:
"The medium of exchange, or more properly, the store of
value on Yap at that time was called fei. Fei consisted
of thick stone wheels with diameters ranging from saucer-
size pieces to twelve-foot millstones. The stones from
which these fei had been fashioned came from limestone
quarries found on the island of Babelthuap, one of the
Pealao Islands about four hundred miles away, and brought
to Yap long ago, piece by piece, in canoes and on rafts
by some venturesome natives..."
This, dear reader, is the similarity between the Yap
stones and gold, and a point of difference with shares in
Cisco. The Yap stones were hard to replicate. It was a
coin that was hard to debase.
Many high tech and dot.com shares are like gold and Yap
wheels in that they are similarly inert. You could get
about the same dividend yield from a stone wheel that you
might get from a tech stock - that is, zero.
But while the earth gives up more gold grudgingly...and
the stone wheels on Yap were almost impossible for the
natives to reproduce...all it took was a few business
meetings to increase the world's ready supply of Cisco
shares.
But while the Yap stones offered no hope of investment
yield - they paid no dividends, nor distributed any
earnings - tech stocks have always held out the potential
of making money for their holders. Paradoxically, this
also limits their usefulness as a store of value. Tech
stocks are valuable as long as people believe they are
valuable. But they fall in value as investors seek to
increase their rate of return by moving to an
alternative.
The attractiveness of gold is precisely that it is not
engaged in any activity that might be profitable. It has
no creditors. It reports no earnings. It issues no
options to employees. It is financially, as well as
physically, lifeless.
Gold bugs often say that they like the yellow metal
because it represents "tangible" or "hard assets." Yet,
the actual value of gold is pure abstraction - not much
different from an electronic brokerage report that you
see on your computer screen. Cut off from almost all
financial, economic and utilitarian activity - gold, like
the Yap stones, is worth only what people agree that it
is worth.
"In fact," continues Mr. Bernstein, "the wealthiest
family in the [Yap] community owned an enormous fei that
no one could see or had ever seen. According to this
family, their fei lay on the bottom of the sea. Many
generations past, while an ancestor was towing it on a
raft attached to his canoe, a terrible storm came up.
[T]his man decided that life came first and money second:
he cut the raft adrift and watched the huge stone sink
below the waves. But he survived to tell the tale and to
describe to everyone the extraordinary size and quality
of the stone he had lost. Nobody had ever doubted the
veracity of his testimony. As Furness [the
anthropologist] described it, 'The purchasing power of
that stone remains, therefore, as valid as if it were
leaning visibly against the side of the owner's house.'"
Bernstein's subtitle for his book is "The History of an
Obsession." He points out how, over the centuries, gold
has been used as a convenient proxy for wealth.
From the time of King Croesus of Lydia, the man whom
people even today still wish to be as rich as - who took
the throne in 568 BC - right up until approximately the
moment when Alan Greenspan acceded to the throne of the
Federal Reserve System, people still searched for a heart
of gold. Wealth could be accumulated, exchanged, and
preserved in the form of gold coins and bricks. This was
as true for individuals as it was for central banks.
And one of the most successful and ubiquitous forms of
gold was the Byzantine gold coin: the bezant.
A contemporary of Emperor Justinian in the 4th century
reported that the bezant "is accepted by everywhere from
end to end of the earth. It is admired by all mean and in
all kingdoms, because no kingdom has a currency that can
be compared to it."
In 1951, an economist called the bezant "the Dollar of
the Middle Ages."
But a dollar is not an exact replica of a bezant. A
dollar is made of paper; the bezant was made of gold.
Like the Yap's rocks, the bezant resisted inflation as
well as rust. Bezants, even today, have value - even
though the Empire that created them fell to the Turks in
1453 - more than 5 centuries ago.
What will the dollar's value be in 500 years?
More to come... on wealth, gold, and the dollar,
Bill Bonner
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Last modified: April 01, 2001
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