The Daily Reckoning - Rodney Dangerfield (Doug Casey)

verfasst von Firmian, 30.06.2004, 21:03

-->Rodney Dangerfield

The Daily Reckoning

London, England

Wednesday, June 30, 2004

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*** The world doesn't hold its breath. No change expected.

*** But what's this? Gold plunges $8. Oil below $35. And
curiously - worst quarter for bonds since 1980.

*** America's degenerate capitalism...its degraded
democracy...and a building with golden balls...and more!

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It's Wednesday, the big day. And the world doesn't hold its
breath.

Nothing is going to happen to nobody, people believe.
Today, the Great Enabler is supposed to announce a historic
change in Fed direction. Henceforth, instead of making
money easier to get, it will be harder to get - by, most
likely, one quarter of one percent.

Alan"Bubbles" Greenspan has made money easier to get than
any Fed chairman who ever lived. It was so easy to get for
so long that a lot of people got a lot of it. Consumers had
more (borrowed) money to spend than ever. That they spent
it on cheap, imported goods was a wrinkle the Feds hadn't
counted on. Instead of inspiring jobs and capital spending
in the U.S., the EZ money merely encouraged Americans to
ruin themselves - while the jobs and factories sprouted in
Asia!

Now, Greenspan's reputation...and his economy...count on
the recklessness continuing. Which is too bad for everybody
because inflation rates are edging up. Interest rates are
beginning to anticipate even higher inflation. The bond
vigilantes, aslumber longer than Rip Van Winkle, now stir.
Last quarter, they woke up and began to sell...it was the
worse for bonds in 24 years.

The Fed can't take this sitting down. It has to at least
appear to protest. Its honor is at stake; which is to say,
it doesn't have much to lose. So it intends to raise
interest rates by.25% - enough to show its heart is in the
right place, but not enough to trouble anyone's wallet.

If the announcement comes as expected, we will take off our
reading glasses and pause for a moment of silence, here at
the Daily Reckoning office in London. The present trend has
lasted longer than most marriages. A person could have
bought a house in 1980 and refinanced almost every year -
knocking almost a full percentage point off each time. Each
year, he would have had more money to spend...as his
mortgage payments declined.

Larry Kudlow, a neo-economist, has written a remarkable
article explaining why"this Bush Boom is a lot like the
Reagan Boom 20 Years Ago." They are similar, we reply, but
only in the same way that, say, Uma Thurman, stark naked,
is a lot like Dick Cheney in a negligee.

Both may have a certain appeal. It depends on your tastes.
In every particular - especially the essential ones - the
two are quite different.

Bush is not Reagan. And America 2004 is not America 1980.
Back then, stocks were cheap and gold was dear. Interest
rates were high and bonds were low. It was, after all,
before the boom began. If anyone knows how it can be
compared to the period after the boom ends he doesn't work
here in the building with golden balls (explanation below).

1980, we have explained, was contrary to 2004 in almost
every way. America was still the world's biggest creditor -
now, it is the world's biggest debtor. America still had a
positive trade balance - now it has the biggest trade
negative imbalance ever achieved by any nation. Americans
were still, relatively, unburdened by debt. Now, they carry
such heavy loads, they may collapse at any moment.

Most important, the Reagan Boom and the Clinton boom that
followed were largely, if not completely, driven by falling
interest rates and EZ credit. Rising rates - which is what
the Fed announces today - will have the exact opposite
effect.

A Bush boom? Don't count on it, dear reader.

More news from Addison:

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Addison Wiggin, from Baltimore, Maryland...

- A new era starts today at 2.15 p.m. EDT, we think. Today,
the FOMC will issue a press release with its latest
decision on the official lending rate. Everybody seems to
think that the base rate will rise by a quarter of 1%, and
frankly, considering how scared the Fed is of the market,
we tend to agree. The appeasement will continue.

- There is much lethargy in the markets at the moment. We
see the S&P trapped in a narrow trading range between 1,130
and 1,135. Yesterday, it escaped...by one point, to close
at 1,136. Likewise, volatility, as measured by the VIX, is
extremely low. It currently hovers near the all-time lows
set back in 1996. We keep reading that this market is
difficult for both investors and traders alike and that
everyone but the pros on Wall Street should be holding
cash. People are bored; today, the boredom is expected to
continue."The rate rise has already been priced in to the
markets," they say.

- We're not so sure, dear reader. Low volatility doesn't
stay low volatility; it becomes high volatility. Boredom
never remains. Just when you least expect it, boredom turns
to excitement and complacency turns to panic. We don't know
what Mr. Market will feel like this afternoon, or tomorrow,
or even next month, but we remind readers - the strangest
things happen when no one is expecting them. 'Nothing'
cannot happen forever.

- Yesterday, gold plunged back below the $400 mark. We can
find only one explanation: buy the rumor, sell the news.
With the Fed expected to raise rates for the first time in
4 years, all the recent rumor has focused on the
'tightening' cycle. Gold has struggled, but struggled well
it has. At the beginning of April, gold was within a
rounding error of $430. Then the jobs came, and the
inflation and the earnings and Greenspan. The 'relic' was
knocked down to the mid-$370's by early May. But despite
yesterday's anxiety-attack, gold is still nudging $400. Who
would have thought it? And just as Big Al embarks on a new
era of inflation-quashing?

- And what about bonds? Treasurys are heading for their
worst quarterly loss since 1980. The 10-year note started
April at 3.84%. Yields had risen as high as 4.90% on the
14th June, although yesterday they closed at 4.70%, down
marginally on the day. Bond traders actually listen to
Greenspan and they believe him. In 1980, they didn't.
Whatever the Fed said, the markets did the opposite. They
doubted the Fed would ever beat inflation."It couldn't be
done," they said,"the U.S. is structurally prone to
inflation." 10-year yields were pushed to 15.84% in
September 1981.

- But do readers and bond traders really believe that
Greenspan is serious in his threat to beat inflation at all
costs? Could he realistically say anything else? From our
humble perch, we don't see an anti-inflationary policy for
miles, or even the intent to impose one. We see the lowest
interest rates for 5 decades coupled with a rapidly growing
economy. We see an administration that will do anything to
keep the credit bubble expanding and keep the consumer
spending. They may talk the talk, but they will never walk
the walk.

- Last quarter, the markets should have struggled, and for
a while, they did. They hate rising interest rates,
especially because such a huge proportion of America's
corporations are so directly dependent on low interest
rates. But in actuality, the market has held itself with
great aplomb. The S&P opened the quarter at 1,128;
yesterday it closed at 1,136, up 3 points on the day. The
Dow moved from 10,357 on April1 to 10,413 yesterday, a 57-
point gain or 0.5%. Tech stocks, as measured by the Nasdaq
Composite, moved up from 1,996 to 2,034 over the last three
months, a 2% gain. Yesterday alone, they gained 0.75%. We
admire the confidence of the lumpeninvestoriat. They should
have been selling on this rumor and today they should buy
the news.

- We may be on the cusp of a brave new world, dear reader,
and it might start at 2.15 this afternoon. But then again,
we've been saying that for ages...

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

Bill Bonner, back in London:

*** Gold plunged $8 yesterday. Inflation? Don't count on
that either, dear reader. Oil, of the Brent crude variety,
dropped below $33 a barrel yesterday. Chain store sales
were reported as 'sluggish' for last week. And Wal-Mart cut
its sales forecast in half.

Autos are beginning to back up on inventory lots. Retail
stocks are falling. These are not signs of 'heating up' or
inflation.

*** American capitalism has become as degenerate as
American democracy. The greedy scoundrels who run Fortune
500 companies increased their own pay 26% last year.
Neither capitalism nor democracy work the way the textbooks
tell you. Capitalist corporations are not run for the
benefit of shareholders...and government is not run for the
benefit of voters. Instead, both institutions have been
captured by their managers...the smooth-talking hacks who
make careers out of spending other people's money. Year
after year, the managers find new ways to get more of the
money for themselves - stock options, pensions, health
care, golden handcuffs...golden parachutes. Why not? The
little guys never read the fine print. Politicians do the
same - rigging the system so challengers scarcely have a
chance. U.S. Term Limits, a group with an obvious purpose,
estimates that the odds of a member of Congress getting
reelected are something like 99 to 1. The only way to get
rid of the leech - other than when the occasional lawmaker
is caught in bed with either a live boy or a dead girl - is
to wait for him to swell up and drop off. Otherwise, the
lumpeninvestors and the lumpen voters are too busy
refinancing their houses to notice.

*** The Queen's Walkway, along the south bank of the
Thames, was so crowded this morning your editor was
practically knocked down by a reckless runner.

He tried to give the fellow a good Baltimore salute but he
was off in pursuit of some other pedestrian before we could
say anything.

What put the crowds on two feet this morning is a subway
strike. Unionized 'Tube' workers say they are concerned
that modernization will mean fewer jobs. What nincompoops.

*** Until this week, our new Daily Reckoning headquarters
was in the Centre Point building...a protruding edifice so
ugly that many Londoners were hoping terrorists would make
it their next target. But it was not fear of death that
lead us to move - it was fear of elevators. A high-tech
system had been installed, such that once inside, you had
no control over where you were going. This led to many
pointless rides...as well as a longing to move. So, we
found a graceless building with huge golden balls, on the
bank of the Thames, a short walk from Waterloo Station. It
is perfect.

*** Little Edward was delighted yesterday. The poor boy
worked so hard at his schoolwork. Or, more accurately, his
mother and a group of tutors worked so hard on him. But it
seemed to pay off. He improved so much his teacher gave him
"compliments."

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

The Daily Reckoning PRESENTS: It can't get no respect. But
there's nothing funny about this investment. The case for
silver, says the world's most famous precious metal
analyst, is now stronger than it's ever been before...


RODNEY DANGERFIELD
by Doug Casey

I have said it many times: mining is an innately risky
business. Worse, it's an impossible business if metals'
prices are too low. In the case of silver, during the long
bear market from 1980 to 2003, when silver traded mostly in
the $3.50-$5 per ounce range, there were no major, public,
pure silver mining companies that generated free cash flow.
None.

The end result was that very few pure silver producers
remained in business. With the exception of a smattering of
mines in Mexico, Peru and very few other locations, it has
simply been uneconomic to produce silver (other than as a
by-product).

That is not to say that there haven't been profitable
silver mines, but very large mining companies, such as BHP
Billiton, generally own these. These are not stocks you
would buy strictly for the silver exposure, however,
because silver is a minute portion of the overall value of
the company.

Which points to one of the fundamental caveats about
silver: namely that around 80% of new production is a
byproduct of gold, copper, lead and zinc. So silver is
produced almost regardless of its price. That makes primary
production of silver even more volatile and risky than
mining in general.

Of the primary silver producers (defined as companies in
which at least 50% of their revenue is silver), the value
of the silver they produce represents only about 3% of
total supply brought to market. It's a tiny sub-sector of
mining.

But, understanding the risks, I think silver stocks could
provide some of the best, if not the very best, contrarian
returns in the years ahead. There are several reasons I say
that, but the main one is the ongoing silver supply/demand
equation.

At first glance, one of the more remarkable aspects about
the silver bear market was that, beginning in 1990, it
occurred against the backdrop of a supply deficit. In those
years when the global economy could be considered in a
positive light, annual silver deficits ran as high as 200
million ounces. When the economy was in recession, the
silver shortfall still came in at 40-50 million ounces.

More recently, in 2002, a down year for the U.S. economy,
mine production totaled 585.9 million ounces, while total
demand hit 863 million ounces. So production has not kept
up with demand for a very long time.

For a brief period back in 1997-98, it looked as if the
supply/demand imbalance had finally caught the attention of
the market when Warren Buffet purchased 129.7 million
ounces. Prices moved all the way to the $7.50 level before
institutional short sellers and forward selling by base
metals producers beat the price back to the $4 range. Once
again, silver could get no respect.

Despite the supply deficits, and overlooking the relatively
short-lived rally that took it to $8.29 in early April, the
price of silver has been remarkably stable in the $4 to $6
per ounce range. Why no sustained recovery?

Ignoring the conspiracy theories making the rounds, the
primary reason for silver's doldrums has to do with the
drawdown of accumulated stockpiles. These stockpiles
include old scrap and coin melt, as well as those held by
various governments who used to think that backing a
currency with something other than cheap talk was the right
thing to do.

Speaking of cheap talk, in 1959, the U.S. Treasury held
2.06 billion ounces, the majority of which was sold in the
1960s in a futile attempt to keep the price at $1.29, where
they'd arbitrarily fixed it. The balance was used in the
minting of Silver Eagles coins from 1986 through 2002. As a
consequence, except for a few bars forgotten in some dark
corner, the U.S. stockpile is gone. As the government uses
12.5 million ounces a year in coinage, it is (or soon will
be) a net buyer.

The largest remaining known government silver inventories
are in India, which was reported to be holding around 87
million ounces as recently as 2002.

The largest unknown government inventory is likely held by
China, whose currency was the last in the world to be
backed by silver. In its usual inscrutable way, the Chinese
government has not revealed the extent of its holdings, but
we know that it has been a big seller over the past few
years, almost certainly helping to keep a lid on the price.
Last year, of a total of 82.6 million net ounces of silver
that came onto the market through government sales, 35
million ounces came from China. That on top of over 50
million ounces they sold into the market the year prior.
Some of the most credible silver observers believe that
these sales cannot continue for long at the same pace
before the Chinese stockpile, too, is depleted...which the
fall-off in year-over-year sales may already be indicating.

I would add that the Chinese may very well decide it is
better to hang on to what they have left in their
stockpile, rather than continue to trade it for
increasingly worthless dollars. We should have additional
clarity on the Chinese stockpiles later this year once The
Silver Institute releases its new comprehensive study on
the topic. Regardless, the odds are good that we are
nearing the end of the period where government silver sales
are much of a factor.

Institutionally held inventories (Comex, CBT, etc), have
likewise fallen dramatically. After reaching 245.8 million
ounces in 1996, these inventories have dropped by 41.3% to
144.4 million in 2002.

All told, according to the CPM Group, global non-coin
inventory is now in the area of 419 million ounces, with an
additional estimated coin inventory of about 487.5 million
ounces, but one shouldn't put too much stock in these
figures because much of the world's silver is now stashed
in the lock boxes, drawers, and closets of individual
holders.

Speaking of individuals, as is often the case after a long
bear market, sellers begin to dry up. Case in point, sales
of silver by individual holders fell to 43.5 million ounces
on a net basis in 2003, down from 81 million ounces in
2002...and well off the peak hit in 1997 when individuals
dumped 221 million ounces back onto the market.

Jewelry demand, silver's second largest use, was higher at
276.7 million ounces in 2003, compared to 265.9 million
ounces in 2002, a rise of 4.06%. Driving growth is demand
from Asia, including a 22% increase in jewelry demand from
China and a 13% increase in Thailand. The fact remains
that, while silver's fundamentals are very much affected by
industrial demand, it is still viewed as poor man's gold by
much of the world — an alternative to the colored toilet
paper governments pass off as currency.

For some years now, silver bears have warned that the move
to digital photography will dry up that important use of
silver. In the long run, that may be true. Yet, the
correlation with sales of digital cameras and available
silver supplies is not a 1:1 ratio because photographic
demand also influences silver supply. As much of the
secondary scrap supply is refined from photographic film
and chemicals, a decline in photographic demand also
impacts secondary scrap supply.

According to the GFMS World Silver Survey 2004,
photography, which accounts for the third-largest silver
off-take, was down to 196.1 million ounces compared to
205.7 million ounces the year before. But even that
relatively modest decline may not accurately reflect the
trend because the Iraq war, fear of terrorism, and the SARS
hysteria dramatically curtailed tourism and hence picture
taking.

That same survey shows that a 2-year decline in global
fabrication demand for silver ended in 2003, with demand
increasing to 859.2 million ounces, 13.3 million ounces
over 2002's level.

Industrial usage, which is reflected in the fabrication
figures, is the largest source of silver demand. It was up
2.87% to 351.2 million ounces. It is always worth noting
that unlike gold, where virtually all the metal ever mined
still exists, in the case of silver, most of that used in
industry is consumed. I'm quite optimistic about silver
industrial demand outpacing overall economic growth for the
indefinite future simply because, of the 92 naturally
occurring elements, it's the best conductor of both heat
and electricity, as well as the most reflective and the
second-most ductile and malleable.

As a result, there are new industrial uses for silver
consistently being developed, some with the potential to
add significantly to demand, including uses as divergent as
a catalyst in fuel cells for electric motor cars, high-
temperature superconductor wires, and as an anti-microbial
agent.

Unless the reported numbers are wildly askew, there's no
question silver is going much higher in price. And that's
not counting the possibility of a monetary, crisis-driven
mania, like the mania that took silver to $50 in 1980. I
have no reason to believe the numbers aren't more or less
accurate and plenty of reason to expect a mania.

Regards,

Doug Casey
for The Daily Reckoning

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