- The Good, The Bad, The Ugly Part II / The Daily Reckoning - - Elli -, 29.05.2003, 12:31
- in 4 Absätzen alles gesagt, was es zu Amerika noch zu sagen gibt.... - Palstek, 29.05.2003, 13:20
- die Parallelen zum Spanien des 16. Jh sind bemerkenswert - kingsolomon, 29.05.2003, 13:33
- in 4 Absätzen alles gesagt, was es zu Amerika noch zu sagen gibt.... - Palstek, 29.05.2003, 13:20
The Good, The Bad, The Ugly Part II / The Daily Reckoning
-->The Good, The Bad, The Ugly Part II
The Daily Reckoning
Baltimore, Maryland
Wednesday, 28 May 2003
---------------------
*** Deflation...not yet respectable, but no longer kooky
*** Gold standard is back!?? Dow up. Bonds down...
*** Dollar down too. And gold...But Amazon up... ha ha ha...
Life in a banana republic...and more...
------------------
Expecting deflation is"no longer a kooky point of view," Ray
Dalio tells us (in USA Today).
We are so glad to hear it; we had begun worrying about
ourselves.
But while USA Today reassures us that the opinion is no
longer"kooky," it is still very, very unlikely. The IMF says
so. So does everyone else.
But last week, by pure accident, America's beloved central
banker, Alan Greenspan, told us why they all may be wrong.
His intended point was preposterous -- that central banks
"essentially have restrained the expansion of credit enough
that many aspects of the gold standard, which induced
deflationary patterns in past periods, have been replicated in
our monetary systems."
Of course, central banks have done no such thing.
The Fed let loose a torrent of credit that now sits in huge,
stagnant puddles all over the world. And yet, the world is
beginning to act as if there were, in fact, a gold standard in
place; many prices are falling, just as they did in the 1880s
and in the 1930s. Central banks all over the world stand
ready and willing to provide more cash and credit (the
European Central Bank will probably cut rates at any moment)
and still the world economy slumps.
What we are seeing is the deflation of the huge bubble created
in the last 3 decades of the 20th century. Central bankers
could do away with the Gold Standard...but they couldn't do
away with the problems the gold standard helped to solve. Once
gold was out of the way in 1971, the Dollar Standard made it
possible for the U.S. to expand the world's supply of money
and credit far beyond anything the Gold Standard would have
permitted. But it could not go on forever. Under the Gold
Standard or the Dollar Standard every credit carries a debit
on its back... a burden that gets heavier and less portable as
the amount of credit expands.
It took years to puff out the U.S. dollar credit bubble; now
it is taking years to deflate.
"The high level of the dollar has been another manifestation
of the remains of the 'bubble mentality' in financial
markets," explains Tim Lee in the Financial Times."The US
economy's apparent resilience has, in large part, been due to
the Fed's monetary policy aggressiveness. At other times, or
in other countries facing similar circumstances, the monetary
policy that has been implemented by the Fed would have been
impossible. The combination of monetary laxity and weak
growth, against the background of the large imbalances, would
have resulted in currency collapse. The Fed has got away with
it up to now because of the financial markets' irrational
attachment to the dollar, helped out both by the Asian central
banks' willingness to accumulate dollar reserves and by US
fiscal policy.
"These factors could not have supported the dollar
indefinitely. Investors should now be prepared for the
dollar's fall to go much further than they might have thought
possible."
How far could it go? We do not know. We cringe and wait to
find out. (For a few easy ways to protect your money, see:
Seeking Profits From A Dollar Breakdown
http://www.agora-inc.com/reports/RCKN/Everbank )
Now, over to our New York colleague, Eric Fry:
-----------------
Eric Fry writing from Wall Street...
- The recession is over, and so is the bear market in
stocks...or so the financial markets seemed to proclaim
yesterday. Stocks rocketed higher, while bonds
plummeted...just like what happens during a REAL economic
recovery! The Dow rallied 179 points to 8,781, while the
Nasdaq Composite jumped more than 3% to 1,556.
- The bond market answered the stock market, downtick-for-
uptick. The benchmark 10-year Treasury note dipped 21/32, to
drive its yield up to 3.41% from 3.34% on Friday. The 30-year
bond suffered an even heavier selling barrage, as its yield
spiked to 4.38% from 4.26% on Friday.
- Animating both the stock and bond markets -- albeit in
opposite directions -- was the news that consumers are feeling
a bit better about things, and that they are putting their
money where their feelings are by buying houses...lots of
houses.
- Consumer confidence rose to a six-month high of 83.8 in May
from April's 81 -- the highest level since November.
- Tellingly, however, consumers are far more sanguine about
the future than they are about the present...which may help to
explain the source of the current, hope-infused rally in the
stock market. The current conditions component of the index
deteriorated to 67.9 from 75.2. But, hold onto your hats, the
future expectations component soared to 94.4 from 84.8. What's
more, the expectations index has risen by 33 points in the
past two months.
- Indicative of the resurgent confidence, many consumers are
availing themselves of generation-low interest rates to buy
houses, and your New York editor doesn't blame them one bit.
Why not take advantage of the bond bubble to take a flyer on
the housing bubble? Single-family home sales jumped 1.7% in
April, their fastest pace of the year. Existing home sales
jumped an even more stupendous 5.6%.
- As bubbles go, the housing bubble hardly compares to the
bond bubble. Therefore, borrowing long-term at 5% to buy a
house may not be the world's worst investment. In fact,
borrowing at low fixed rates to buy a house amounts to a sort
of"Texas hedge" against inflation. (A Texas hedge is when an
investor makes two separate investments that are certain to
succeed or fail together. Like, for example, buying gold AND
gold stocks). If inflation returns, the nominal price of
houses is likely to rise, even if inflation erodes some or all
of that gain.
- Of course, if Greenspan's deflationary angst proves to be
justified and deflation grips the land, borrowing to buy a
house could turn out to be one of the worst investment ideas
of this generation...Place you bets.
- Here in New York, we remain friendly to the idea that a new
inflationary episode is not impossible. Perhaps that's because
evidence of inflation is so visible."The New York papers are
full of details of what a layman might describe as an
unwelcome, substantial rise in inflation," writes Jim Grant in
a recent Forbes column."Recent or impending jumps in rents,
subway fares, bridge tolls, property taxes, income taxes and
cigarette taxes have contributed to the growing apprehension
that one day soon the only New York resident who will be able
to afford to remain in the city is Michael R. Bloomberg, its
billionaire mayor."
- Grant reckons that resurgent inflation is not an
impossibility, thanks in part to the Fed's promise to fight
deflation.
-"Sufferers in the great inflation of the 1970s may have
doubted they would ever live to see the day, but the day is
here," Grant writes."On May 6 the policy-making arm of the
Federal Reserve declared that the rate of inflation is
worrisomely, almost unacceptably, low. The Fed indicated it
wouldn't stand for it.
-"You may now be rubbing your eyes. The Fed is purportedly in
the business of making prices 'stable.' But now that prices
are virtually stable, the Fed is worried they might sag. The
Bank of Greenspan may not want a lot of inflation. However, it
wants even less to have no inflation."
----------------
Bill Bonner back in Baltimore...
*** Amazon.com rose to a 52-week high. Ha ha ha ha...
[Although, having said that, we're happy to see our friend Jim
Rogers' new book Adventure Capitalist is #1 on the Amazon
finance list. If you haven't seen it yet, I recommend you take
a look:
Adventure Capitalist - highly recommended reading!
http://www.amazon.com/exec/obidos/ASIN/0375509127/dailyreckonin-20 ]
*** Gold dipped $1. The dollar slipped further against the
yen.
*** Freddie Mac reported record low mortgage rates of 5.34%.
A one-year adjustable rate of 3.61% is also available.
***"The world's only superpower is turning into a banana
republic," wrote the New York Times' economist, Paul Krugman,
recently. He was referring to the enormous debts and
deficits being run up by the current administration.
Krugman has come to a conclusion about the Bush
administration:
"The people now running America aren't conservatives, they're
radicals who want to do away with the social and economic
system we have..."
We don't know if the Bush team want to change the system
radically, but they are certainly the most activist bunch of
conservatives we have ever seen. They seem to think they
really know what is best for the world and are going to make
sure we get it, good and hard.
But the more often we visit Nicaragua the more we begin to
think that turning into a banana republic wouldn't be so bad.
The weather is nice. The fruit is fresh. And the cost of
living is low. Besides, people take their politicians less
serious; they seem to expect them to act like clowns, crooks
and desperadoes. They suffer few disappointments.
Your editor went into a barbershop to get his hair cut. The
woman barber seemed to enjoy her work, smiling coyly as she
clipped and shaved. And, then almost reluctant to let her
client go, so gently did she massage and caress his benuded
head that he drifted into sweet afternoon reverie. He saw
himself dressed standing on a balcony of a large building on
the public square. Dressed in a gaudy uniform, he was
delivering a fiery speech....full of sturm and drang...but
with jolly asides...ironic twists and tear-stained public
confessions. It was a real barn-burner of a speech, worthy of
a demented TV evangelist. But then, looking out on the crowd
gathered in the plaza, he realized that there was something
wrong. The people stood and stared at him. But they were
not moved, only puzzled. Alas, he was giving his speech in
the wrong language.
What's wrong in his cabeza, the crowd wanted to know.
Your editor awoke with a disappointed start. He gave the
barberessa $2 and got change.
See: THE CASE FOR GOLD
http://www.agora-inc.com/reports/905STCFG/W905D503/
---------------------
The Daily Reckoning PRESENTS: Yesterday, when we left our
heroes - gold (the Good), the dollar (the Bad) and the US
government (the Ugly) - they were white-knuckling it out in a
celebrity death match! Today... the drama continues...
THE GOOD, THE BAD, THE UGLY Part II
By Frank Giustra
The current situation with Iraq does not bode well for the
future economic well being of America.
Firstly, now that the coalition has declared military success
it will only mean the end to the easy part of the entire
exercise. The administration of Iraq under the auspice of the
U.S. military and the effort to create a functioning democracy
may end up being a long and bloody exercise indeed.
History has shown that the Middle East does not respond well
to occupation by the West. From the Crusaders to the Brits,
the eventual outcome is always an exhausted retreat. Trying to
impose democracy on a region populated by a multitude of sects
and tribes that all hold grudges that go way back (in some
cases more than a thousand years) and was only held together
with totalitarian force, may be challenging to say the least.
Furthermore, given that the U.S. will have influence as to
which specific Iraqi groups and people will be allowed to
participate in this process, it will create further suspicion
and turmoil. Democracy is a concept that must evolve, with
groups of people that wish to live together and with a proper
institutional infrastructure in place. I doubt it can be
ordained at will.
Secondly, whatever is being promoted as the reason de jour
behind the invasion (oops, I mean liberation) of Iraq, i.e.
elimination of weapons of mass destruction, preventing state-
sponsored terrorism, regime change, the freeing of the Iraqi
people, etc., it is increasingly evident that there is a much
larger plan at play. Recent rhetoric suggests that once
America succeeds in replacing the Iraqi regime, its focus will
turn on other countries in the region. It's astonishing that
without even pausing for breath, once the Iraqi regime fell,
Administration attack-dogs Rumsfeld and Wolfowitz started
accusing Syria with the whole terrorism/sponsorship/WMD thing.
Iran may be next, and eventually even old friends like Saudi
Arabia may find themselves in need of an unsolicited American-
sponsored regime change. Also lurking and simmering in the
background is North Korea, which is preparing itself for some
type of confrontation with the U.S. Unless it can negotiate a
non-aggression pact (something a recently battle-victorious
U.S. is unlikely to give), it will continue to play its
nuclear hand.
How Iraq's Arab neighbors react to all of this is hard to
predict. For one, they certainly don't trust America's motives
and their rulers haven't done much to prevent recent public
outrage over America's attack on Iraq out of fear their
citizens will turn on them and partially to take the heat off
how badly they have run their own countries.
Ironically, many of the Arab countries are run by regimes
which would be deemed illegitimate by American standards but
who, nonetheless, are propped up by the Americans. In the end,
the rulers of these countries will likely keep a fairly low
profile while quietly rooting the U.S.'s occasional stumble.
Their enraged citizens, on the other hand, may eventually
behave less predictably and this is when the entire region may
turn into hell on earth. If at that point the Americans are
still in the region, it will become a bloody conflict beyond
what America is prepared for.
It is doubtful that the average American will choose to
sacrifice his standard of living once the combined economic
reality of the accumulated excesses and the costs of American
foreign policy collide. Sentiment will eventually parallel
that of the Vietnam era rather than say, WWII. Waging wars in
far off lands that pose no"immediate threat" while impairing
the comforts of daily life at home, have never succeeded in
popularity for long. I am not sure what will happen at that
point, but suffice to say, that America will be a less happy
place to live in.
The debate over current U.S. foreign policy will continue. I
will leave it to future historians to judge whether America
was acting in self defense and for the benefit of the
oppressed in need of freedom, or whether it was acting out of
economic self-interest. I will say though, that,"freeing the
world from evil" might be a long and expensive exercise. For
the purpose of this analysis, it only matters how much this
current adventurism will cost the U.S. economy and how the
rest of the world perceives Americas intentions. The magnitude
of the economic costs will negatively impact the U.S. dollar
and foreign perception may amplify its fall.
In the long run imperialism and over-consumption are a recipe
for economic decline. We only need to look back at the 16th
century Spaniards, the late 18th - early 19th century French
or the late 19th century - early 20th century British for
historic examples of countries trying to run concurrent war-
monging and consumption.
Of the three, the experience of the 16th century Spaniards
makes for the best comparison with the Americans of today. For
nearly 100 years immense supplies of gold and silver (the
likes of which Europe had never seen before), plundered from
the natives of Central and South America flowed into Spanish
coffers. Sadly, this 16th century version of excessive money
supply growth managed only to fuel the nations' spending
habits, while at the same time disincentivizing their
willingness to produce. Instead of turning this windfall into
productive wealth, Spain used it to buy"consumer goods" from
other nations. As a result, Spain's debt to foreigners soared
and all the gold and silver was exported out of the country
(think current account deficit without the ability to"print"
more gold).
With all this new-found wealth, it didn't take long for the
kings of Spain to think themselves superior and embark on a
mission of bending the world to their will. Charles V, not
satisfied any longer with being a mere king, lobbied
intensely, using bribes and threats and eventually convinced a
"coalition of the willing" to make him emperor of the Holy
Roman Empire. After loosing quite a few of its booty-laden
ships on the high seas, Spain, claiming self defense, declared
that it would no longer make a distinction between the pirates
and the nations that harboured them. To eliminate this"state-
sponsored piracy", they decided to strike at the worst
offender - Britain (although I doubt that Philip II ever
suggested that he was merely trying to free the British people
from oppression).
Boasting their technologically superior Spanish Armada (not
dissimilar to America's air supremacy), they waged what proved
to be a disastrous war against Britain whose smaller ships
proved far too wily. Years of wars ensued with a variety of
other countries that did not share Spain's view of the world.
Having already traded their gold and silver for consumer
goods, the nation had to turn to debt-finance to pay for these
wars. As Spain's tab reached the limit, their lenders, the
Fuggers of Augsburg (16th century version of the Japanese)
were forced to convert their debt into long-term loans.
Eventually, Spain's creditors cut them off and the nation, now
bankrupt, introduced to the world the now time-honored
tradition of default by a sovereign state.
Of course, in their time very few of the above mentioned
governments or their citizens would have ever believed such an
economic fate would befall them. I suspect most Americans
today wouldn't either. Truly amazing when one looks at the
current sad state of America's public and private balance
sheet and its voracious consumption appetite. For although
past global powers had their excesses, it took the Americans
to really put the"pro" in the term profligate.
So what has all this to do with the price of gold?
The current economic and geopolitical direction of the U.S.
will, unless corrected, lead to a long-term decline in
America's standard of living. How quickly all of this unfolds
is subject to many unpredictable factors. There exists a small
chance that this decline can be prevented, but that would take
political courage and economic sacrifice that just doesn't
seem to exist anymore.
It may take several decades for the collapse of the U.S.
financial system to occur or it could happen this decade. In a
few years we may witness a new bull market in equities
(although I doubt it) after this current bear market plays
out. That said, the current macro-economic trend and its
eventual outcome is undeniable.
Regardless how it plays out, there is one thing for sure. The
world is dangerously awash with U.S. dollars. In addition to
the previously mentioned levels of foreign owned U.S. debt and
equities, it's notable that more than three quarters of global
central bank reserves are in U.S. dollars. The downward trend
in the dollar began two years ago and is very much intact.
Although it has fallen approximately 25% against the U.S.
dollar index, it is still over valued and will most likely
fall a further 15% in the next two years alone. In the long
run it may go down a lot further. This bodes well for gold for
several reasons. Firstly, as gold is priced in U.S. dollars,
the dollar's decline will make it cheaper to purchase in other
currency terms and less attractive for non-U.S. gold producers
to produce.
More importantly, if its imperial status is severely
challenged and no other currency emerges as a viable
alternative (only two are sizeable enough, the Euro and the
Yen, and both have more than their share of problems), then
gold will regain its historical status as the currency of last
resort and the ultimate store of wealth. In this scenario, the
price of gold would reach levels never seen before.
Unfortunately, it seems most Americans are impervious to the
current economic trend, foolishly ignoring 2,500 years of
monetary history. A history which is littered with lessons
about the consequences of virtually every monetary and
financial phenomenon we are witnessing today. Excess debt and
consumption brought down every major power in history. Stock
market and other asset bubbles, whether they were speculative
manias (the tulip bubble of the1600's), market frauds (the
South Sea bubble of 1720), easy money bubbles (the Mississippi
Company of 1721), or bubbles caused by innovations (the canals
bubble of 1837 and the railroad bubble of 1873), all ended
with crashes and subsequent depressions.
We are all familiar with the economic aftermaths of the 1929
stock market crash and the more recent 1989 Japanese stock
market and real estate crash. Finally,"preemptive" wars and
other types of military adventurism are also nothing new and
the end result in economic terms is never very pretty.
Inevitably, a combination of these events is almost always
followed by subsequent currency debasements (as invented by
Dionysius of Syracuse in 400 BC and practiced regularly by
every major world power since, especially with the
introduction of paper money).
America will be no different.
It's only a question of time. Since none of us knows how long
before that day comes, I suggest that at the very least
investors should diversify out of U.S. dollars and hedge their
portfolios with at least 15% gold content.
As for the lesson in this story, unfortunately it will be
learned time and time again throughout history and our
protagonist, gold, will always be around to provide refuge
from man's inherent need to push things too far.
Finally, for those that read this and dismiss it as
apocalyptic ramblings, consider that all I predict is a
repetition of history, not the end of it. The day will come
when it will be prudent to sell one's gold holdings and invest
in paper assets. Furthermore, although corporate America may
be in decline, investment opportunities will always exist. And
if not in America, then in other parts of the world, perhaps
in emerging economic powerhouses such as China.
On the bright side, who knows, perhaps in 50-100 years, it
will be the Chinese who will play the"Ugly" role in our
movie.
Regards,
Frank Giustra,
for The Daily Reckoning
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