King Dollar At The Guillotine / The Daily Reckoning

verfasst von - ELLI -, 22.01.2003, 20:05

-->King Dollar At The Guillotine

The Daily Reckoning

Paris, France

Wednesday, 22 January 2003

-------------------

*** The Trade of the Decade - still looking good after 3
years...

*** The dollar's dolorous decline...how much should you
have invested in stocks? Making money while you sleep...

*** Gold - at $934/oz? Housing still going strong...euro
and oil, both at multi-year highs...Groucho, Chico, and
Karlo...and more!

-------------------

Sell stocks; buy gold. The Trade of the Decade has been a
big winner for the last 3 years. And stocks were down again
yesterday; gold was up.

Whether it will continue to be a big winner or not, we
can't say. But we wouldn't give up on it yet. Stocks are
still much too expensive. And gold - though perhaps
overbought in the short term - is still far too cheap.

Abby Joseph Cohen says you should have 75% of your money in
stocks. Ed Kerschner, Steve Galbraith and other Wall Street
strategists agree, with Kerschner recommending an 89%
exposure to the stock market. Of course, the companies they
work for sell stock, but we're sure that does not affect
their judgment. They call them as they see them - and right
now, they see rising stock prices.

It will be a long time before the lumpeninvestoriat gives
up on the dream of getting rich without working. That's the
promise of modern American capitalism...that even ordinary
people can"make money while they sleep," to use Francois
Mitterand's expression. Wall Street forgot to mention that
they could lose money while they sleep, too.

Except for China, the world economy seems to be drifting
into an era of slow growth, deflation, and stock market
losses. Europe, North America and Japan all have aging
populations and feeble economies. Everybody depends on U.S.
consumers to keep buying...but the Americans are running
out of money. For 30 years they've been consuming more and
more of their savings, instead of investing it on
worthwhile projects. They have jobs - but the jobs don't
pay much better than they did 30 years ago. And the
consumer has much more debt than ever before. The Fed
offers to make more and more money available - but what are
Americans going to do with it? They're already having
trouble paying their bills. Why would they want to borrow
more? And businesses, what can they do? The heyday of
mergers and acquisitions, stock buybacks, and huge
investments in information technology is over. With
consumer goods falling in price, it's very hard to find
capital investment projects that will make a profit - no
matter how low the Fed puts short-term rates. Business
profits, as we have pointed out before, have been declining
as a percentage of GDP for the last 30 years.

China is not complaining. It has the lowest labor rates in
the world and a remarkably dynamic manufacturing sector.
Its people save 25% of their incomes (the most recent
figure for Americans was less than 2%) and has linked its
currency to the dollar, so a falling greenback makes
Chinese goods even more competitive. Other nations will
have to lower their currencies too, in order to avoid
losing market share.

And so...we have the wonderful, wacky, world of 2003, with
a falling dollar...falling stock prices...a little
deflation, a little inflation...and rising gold.

Sit back, relax...it may be with us for a long, long time.

What's new in the Big Apple, Eric?

------------

Eric Fry in New York...

- The stock market's promising January rally is rapidly
running out of gas, as the Dow Jones Industrial Average
sputtered for a fourth straight day. The blue chips dropped
144 points to 8,423, while the Nasdaq slipped 12 to 1,364.
Meanwhile, the dollar's dolorous decline continues. The
greenback fell another half a percent yesterday to $1.069.

- The dollar's weakness, of course, is gold's strength. The
yellow metal dipped more than $3 early in the New York
trading session. But by lunchtime, gold had recovered its
losses and moved into the plus column, gaining 70 cents to
$357.50. Like an annoying party guest, gold just keeps
hanging around. Most folks expected the precious metal to
'cut out' a long time ago. But it refuses to go away.

- The editors of the Daily Reckoning are long-time admirers
of gold, mostly because we have no idea what the future
holds. Given our macroeconomic agnosticism, gold seems a
worthy hedge against the unknowable...But then along comes
James Turk - decades-long gold bug and West Coast eccentric
- to remove the scales from our eyes. Mr. Turk knows
exactly where the gold price is going and when it will get
there.

- Turk announced yesterday,"The gold price will hit $934
an ounce by October of 2004." Turk's prediction is
audacious, to be sure, but we wouldn't rule it out. Given
the dollar's persistent weakness, the gold price could
surprise even mega-bulls like Turk. What's more, the U.S.
is not alone in seeking a weaker currency, and a
synchronous global currency debasement could be a wonderful
thing for the gold price.

- U.S. Fed Governor Ben Bernanke is not the only central
banker seeking to cheapen the home crowd's currency.
Monetary authorities worldwide are hoping to weaken their
currencies as a way of stimulating export growth.

-"Such are the times that few governments welcome a rising
exchange rate," James Grant explains."Each of the three
principal currency blocks - dollar, euro, yen - would
welcome a falling exchange rate...Of course, the top
currencies can't all simultaneously become cheaper against
each other. They can only become cheaper against an
alternative. What would that alternative be? Constant
readers may close their eyes, because they have read the
answer here before. It is gold, an asset with the virtue of
being mute. It never complains and never explains, and it
has no central bank...It does not object if its price
appreciates..."

- Nor do we.

-"An awful convergence of macroeconomic trends was
revealed last week," observes Strategic Investments editor,
Dan Denning."Spending for the indebted consumer went up.
But business spending did not. What demand there is in
America is directed towards foreign goods, with the profits
going overseas, further putting pressure on U.S. firms; the
very same firms who have no incentive to invest in new jobs
because they are already operating well below capacity. The
only real question left for the economy is when the
consumer will surrender."

- No white flags are waving just yet. To the contrary,
homebuyers are still buying and homebuilders are still
building, according to the latest stats from the Commerce
Department. Housing starts surged 5% in December from the
November level. Building permits rose an even more
impressive 8.2%.

- The robust housing data spurred copper prices to a new six-
month high of 76.8 cents per pound. Copper is not the only
commodity that's on a tear, of course. The CRB Index of
commodity prices advanced to a fresh six-year high of 242.11
yesterday. [For more information about opportunities in
commodities and natural resources, see: Outstanding
Investments, http://www.agora-inc.com/reports/OST/SetForProfits/]
Repeat after me: there is no inflation.

-"The world wants to reflate," says Grant."Bloomberg News
reminds us that, by August, the Bank of Japan, the European
Central Bank and the Bank of England will all be under new
management. 'With the 1970s inflation rates of 10% or more
a distant memory,' the news service notes, 'the new central
bankers will probably keep a lid on interest rates.'"
We suspect that the new generation of central bankers will
also see to it that their national mints do not lack for
either parchment or pigment.

------------

Back in Paris...there is little to report...

*** The euro is at a 3-year high - ouch! Oil is at a 2-year
high.

*** The Wall Street Journal reports that Europeans are
buying fewer dollar assets - 36% fewer based on October
figures. America still needs huge amounts of capital from
overseas to plug the gap between what its citizens spend
and what they produce. Where's the money going to come
from, we keep wondering?

*** France's Prime Minister, Jean-Pierre Raffarin,
announced that the"days of running the country based on
ideology are over." From now on, says he, it's all about
getting the job done at the most reasonable price. Nobody
seems to care about ideology any more. Karl Marx has joined
Groucho and Chico as a comic figure. Che appears on T-
shirts, worn by people who think he was a rock & roll star
who died in a plane crash.

***"Did you pay attention in school today?"

Edward's mother posed the question at dinner.

"I only turned around and talked one time," came the
answer.

Edward had been moved to a seat right in front of the
teacher's desk so she could keep an eye on him.

"But the teacher said if I kept doing better, she would
give me a better report at the end of this trimester."

---------------------------------

The Daily Reckoning PRESENTS: In the global marketplace,
how is the health of the dollar faring? Not yet as badly as
you might think, contends John Mauldin. But its future
prospects are dim...and rest in the hands of China and
Europe.


KING DOLLAR AT THE GUILLOTINE
by John Mauldin

Whither the dollar? Downwards, of course. The U.S. trade
deficit continues to rise. It is well over 5% of GDP and
going to 6%, and such levels normally mean a serious
correction in the value of a currency. But while the dollar
has dropped, especially against the euro, it has not
dropped as much as you might think on a trade-weighted
basis.

The dollar is doing better than it should because China has
fixed its currency to the dollar, and the rest of Asia is
in a competitive currency devaluation race to see who can
make their currency lower in order to attract U.S.
consumers. The world and especially Asia will continue to
be addicted to the U.S. consumer. They sell us their
products for electronic dollars, and then buy our
government paper and stock. The world either owns 35%
(BCA Research) or 42% (Morgan Stanley) of our Treasury
debt. Morgan Stanley also reports foreign investors own 18%
of U.S. long-term securities and stocks.

Why would foreign central banks continue to buy and hold
large positions of dollar-denominated U.S. assets when it
is clear the dollar is over-priced? Because they have a
Hobson's choice: they can take pain now or take it later.
Politicians are the same all over the world...they all
prefer to take their pain later, even if it will be more
severe.

If a country stops taking dollars and buying U.S. assets,
then its currency will rise and make its products less
attractive to American consumers. In export-driven
economies, this is a disaster, especially for the
politicians, as it assures a recession at the very least.
Thus, foreigners continue to support the great American
spending habit.

Gary Shilling's INSIGHT newsletter reports that Canada,
Mexico, China and Japan account for 47% of the trade-
weighted currencies. The Canuck is flat for the year, the
peso is actually down 10% and the yen is down more than 10%
for the year, much to the consternation of the Bank of
Japan. The Chinese currency is pegged to the dollar, so
there has been no movement there. In other words, these
currencies have all been moving in tandem to the rhythm of
a sideways-and-downwards ballet.

Thus, the dollar's drop against the euro is the single
major reason the dollar has dropped slightly on a trade-
weighted basis, when seen on multi-decade chart.

Is there a limit to this? Of course. The U.S. can't sell
more than 100% of its assets, and it is now selling $500
billion a year. At this rate, the rest of the world will
own 100% of U.S. government debt in ten years, even as
America grows its deficits. Clearly this is not
sustainable.

When does the pain of taking over-valued dollars become
more than the pain of selling less to the U.S.? I think it
is when China allows its currency to float. Asian countries
do not necessarily want an over-priced dollar; they simply
want the price of their currencies to be favorable in
relation to their neighbors. China is the gorilla in this
process: when they allow the renminbi to rise, the rest of
Asia will feel comfortable letting their currencies rise as
well. That will be the real end of the dollar.

Interestingly, there is an increasing call from many
corners of the world for the Chinese to allow the renminbi
to float. China has not responded to the pressure, but as
do all countries, it will act when it feels to do so is in
its own best interests. That will probably be when the
Chinese find that their own consumer demand is growing and
solid, and thus can sustain a possible slowing of sales to
the U.S. When that will be is anyone's guess...and so the
dollar might remain surprisingly strong even when, by all
rights, it ought to drop. But China's decision to act on
the renminbi could be the surprise move that sets this set
of dominoes in motion.

Europe is the one real exception to foreign support of the
dollar. The European Central Bank seems quite content to
let the dollar drop. And despite the weakness in Europe, I
think it is likely this trend will continue.

From its current position at 1.069, the"natural" target of
the next 12-18 months, if not sooner, is around $1.17,
which is where the euro started about four years ago.
Europe will probably resist a drop much further than
$1.17...until China starts the dollar tumbling down the
hill so it can stay competitive as well. It is truly every
country for themselves in the currency markets.

This naturally brings us to that international currency:
gold.

Gold has finally gotten off the floor. It has become the
hot investment of the year, up around 30% in 2002,
depending upon which day you look. I think it has more room
on the upside.

Central banks are not in some vast conspiracy to hold down
the price of gold. They simply want to sell what they have.
They do not understand the yellow stuff, and don't want to
own it. As gold rises, they will sell more. The prefer
electrons to hard metal, which in theory can earn interest.

My long-held belief is that gold acts like a currency, and
if the dollar drops another 10% against the euro, you could
easily see another 10% rise in gold. Because gold is so
thin a market, it could rise much further fairly quickly,
if central banks decide to limit their sales.

When the need of central bankers coincides with the
direction of the market, we should pay attention. Yes, the
dollar might not accelerate its descent just yet...but
there is no question that it ought to. Thus, I continue to
be a fan of gold and gold stocks in the long term.


Regards,

John Mauldin
for the Daily Reckoning

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• King Dollar At The Guillotine / The Daily Reckoning - - ELLI -, 22.01.2003, 20:05