-->Snow Job
The Daily Reckoning
Amelia Island, Florida
Friday, 23 May 2003
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*** Bubble in the bond market? Yields at 45-year lows...
*** Meanwhile back in Amelia... Gold's mega-bulls find their
audience...
*** Something so perfect can't possibly be true..."feelin' it
like a whiskey spill"... poor John Snow... and more...
OK, here's a riddle for you:
What's the difference between Nasdaq 5,000 and a 30-year Treasury
bond yielding 4.30%?
Answer: Absolutely nothing...just kidding...
Everyone knows that a 30-year bond paying 4.30% per year is a
terrific value, especially when the issuing party -- which, by the
way, is running a half-billion dollar annual current account
deficit -- promises to repay the bond with money that it has
promised to debase.
Who WOULDN'T want to buy an investment like that?
Yesterday, the lumpeninvestoriat scrambled to by more long-dated US
bonds, pushing the yields down to new 45-year lows. The 10-year
treasury gained about half a point yesterday pushing its yield down
to a new 45-year low of 3.32%.
In the stock market, the Dow rose 77 points to 8,594, while the
Nasdaq jumped 1.2% to 1,507. While stocks and bonds were rallying,
the gold market took a well-deserved rest, as the June contract for
gold fell $4.10 to $368.10 an ounce.
The precious metal had risen in each of the past six sessions,
adding a total $22 an ounce prior to yesterday's selloff...
Here's Eric with the news far from Wall Street...
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Eric Fry writing from Florida...
- 1,000 miles or so south of Wall and Broad, the Amelia Island
confab was winding down. The final day's discussion ranged as
freely as an organic chicken, but somehow, the discussion kept
ranging back to the gold market. Nearly all of those in attendance
believe that gold has commenced the early stages of an epic bull
market. But some of the guys down here are little sheepish about
admitting their affinity for the barbarous relic...after all, they
have their credibility and their reputations to protect.
- Most of the discussion about gold focused on the"inevitability"
of a gold bull market, rather than the precise TIMING and EXTENT of
said inevitable event. However,"soon" and"big" would aptly
describe the IM-precise timing and extent of the gold rally that
the Amelia Island consensus anticipates.
- John Hathaway, manager of the Tocqueville Gold Fund, was not in
attendance at Amelia Island. But his bullish views toward the
yellow metal would have found a ready audience. Hathaway is one of
a small crowd of mega-bulls who expect the price of gold to soar
well above $1,000 in coming years.
-"The market capitalization of the gold mining sector is a
relatively tiny $50 billion to $60 billion," Hathaway explained
recently."The market cap of the amount of physical gold available
for investment, excluding central bank holdings, is very
approximately $1 trillion. Even after making the extreme assumption
that all central bank gold is in play, the investment gold market
cap is only $1.4 trillion."
- By comparison, financial wealth in the form of bonds and stocks
totals more than $50 trillion. Obviously, Hathaway giddily
observes, a small shift from the big pile of wealth that's in
stocks and bonds to the little pile of wealth that's in gold could
produce a much higher gold price."Such an allocation would in time
cause gold to trade comfortably in excess of four digits ($1,000)
in terms of U.S. dollars," Hathaway predicts.
- But isn't there something a little bizarre about a $1,000 gold
price flowering from the soil of a deflationary world...if that is
indeed what we inhabit? The cohabitation of a US deflationary funk
with a gold bull market seems a little strange -- or, as we would
say down here on Amelia Island,"It just ain't natural." And yet,
this is exactly what appears to be happening -- emphasis on
"appears."
- Your New York correspondent is as suspicious of the deflation
scare as he is of the bond market rally. He suspects, therefore,
that the gold market is"looking ahead" to a coming inflation...
And yet, deflationary symptoms continue to beset our economy.
- The world's growth engine continues sputtering, says Morgan
Stanley's Richard Berner."U.S. manufacturing has taken it on the
chin again, with factory output declining at a 3.2% annual rate
over the three months ending in April...In Detroit, producers have
stepped hard on the brakes in the past three months, producing
another down leg in the stop-start automotive expansion. Output of
motor vehicles and parts tumbled 22% annualized in the past three
months...
-"Outside Detroit," Berner continues,"Smokestack America is also
still floundering...The energy shock was a double-whammy, hurting
both demand and supply. Going forward, the hike in natural gas
prices to a stubbornly high level ($5-6/mcf) is still particularly
worrisome, because natural gas accounts for about one third of
industrial America's energy consumption."
- It is a strange world indeed -- natural gas, oil, gold,
bonds and stocks are all rallying in unison. Can all of these
markets be"right" at the same time?
More questions from Bill Bonner below...
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The Daily Reckoning PRESENTS: Poor John Snow is not to blame
for the dollar's fall any more than Alan Greenspan deserved
the credit for its rise...
SNOW JOB
By Bill Bonner
Sooner or later, people in charge of money seem to say the
wrong things. Wim Duisenberg was the fool three years ago.
The head of the European Central Bank said something stupid,
(we do not recall what), and suddenly, the euro hit the skids.
Now it is John Snow's turn. Not that he said anything much
more asinine than Duisenberg or than his own fellow Americans
at the Federal Reserve; McTeer, Bernanke, and the rest of the
bunch seem to have a special gift for it. Nor did he say
anything that was untrue. A currency does depend on 'faith,'
after all.
But Soros was selling and the dollar was falling; the press
needed a simple, understandable reason: The U.S. Treasury
secretary had 'let the cat out of the bag,' they said,
revealing to the world that the current administration no
longer backed a strong dollar policy.
Here at the Daily Reckoning, we are more keenly aware of the
dollar than most other kibbitzers. Since we take our meager
income in dollars and spend it in euros; we feel each drop in
its value like a whiskey spill; it practically brings tears to
our eyes.
But we are resigned to it. Not just the 25% drop the dollar
has suffered at the hands of Wim Duisenberg's euro this
year...but a lot more. In 1985-'87, the dollar lost 50%
against the German mark. That was before Alan Greenspan took
his post...and before the greatest spree of dollar creation in
history.
You see, dear reader, poor John Snow is not to blame for the
dollar's fall any more than Alan Greenspan deserved the credit
for its rise. Today, we let the cat out of the bag ourselves
-- the dollar is going down, no matter what U.S. monetary
officials say.
Decent men and women are not normally interested in the
working of the international monetary mechanism anymore than
they are interested in the workings of the digestive tract.
We wouldn't blame them for setting aside today's column in
disgust or boredom. But there is a time and place for
everything. Suddenly, the world's money system is in the
news...and at risk. Readers are urged to send the young and
weak out of the room...fortify themselves with a shot of
whiskey...and continue reading. It isn't pretty, but it is
necessary, sometimes, to understand how these things work.
There was a time when America had honest money. Both the Gold
Standard and the Bretton Woods agreement required nations to
settle their debts in real money --- number 79 (pls check) on
the periodic table -- which none of them could create at will.
Even in its late, corrupted version, under the Bretton Woods
agreement, international accounts could still be settled in
gold. If a country bought more from abroad than it sold, it
could be forced to make good the difference in metal. America
might have the dollar. Germany might have the mark. But the
world's money was gold.
Then began a remarkable chapter in the history of monetary
chicanery. The Nixon Administration 'closed the gold window,'
at the Fed, meaning that foreign nations could no longer turn
in their excess paper dollars in exchange for gold. The
Dollar Standard was begun. With no access to gold, nations
settled their international trade and currency imbalances in
dollars...and built up dollar reserves, in place of gold
reserves, for that purpose.
During the 20 years of the Bretton Woods agreement -- 1949 to
1969 -- total international reserves -- money held in central
banks to settle accounts and protect the currency -- went up
only 55%. Since then, the increase has exceeded 2000%, most
of it coming since Alan Greenspan took over the Fed in 1987.
The Fed did not merely increase the supply of dollars in the
U.S. -- it increased the entire world's money supply, which
set the wheels of international commerce turning. So fast did
they turn that a pile-up on the highway of the globalized
economy was almost inevitable.
Richard Duncan explains:
"This explosion of reserve assets has been one of the most
significant economic events of the last 50 years. Today, Asian
central banks hold approximately $1.5 trillion in US dollar-
denominated reserve assets. Most of the world's international
reserves come into existence as a result of the United States
current account deficit. That deficit is now $1 million a
minute. Last year, it amounted to $503 billion or roughly 2%
of global GDP. The combined international reserves of the
countries with a current account surplus increase by more or
less the same amount as the US current account deficit
each year. So central bankers must worry not only about their
existing stockpile of dollar reserves, but also about the flow
of new US dollar reserves they will continue to accumulate
each year so long as their countries continue to achieve a
surplus on their overall balance of payments."
Since the breakdown of Bretton Woods, the U.S. has been able
to do something that other nations could only dream of; it
could settle its debts in 'money' that it could create, as Fed
governor Ben Bernanke recently explained, at near zero cost.
The rest of the world could sell as much as they wanted to the
U.S. -- on credit, which Americans could by creating more
dollars.
What a marvelous system this was! And not just for Americans.
In fact, while they appeared to be its greatest beneficiaries
-- for weren't they getting something for nothing? -- they
were actually its biggest victims.
For a very long while, the whole world was snowed. People
believed that a dollar was as good as gold. Foreigners were
willing to take as many of them as were offered, the last one
at the same value as the first. And they were willing to work
far into the night, for minimal wages, to produce things they
could exchange for dollars.
The first major beneficiary of the new system was Japan. The
Japanese wore their company uniforms and sang their company
songs...and transformed their island into Japan, Inc., a
nation that whose heart beat with a single purpose -- to sell
to Americans. But what could they do with all the dollars
they earned?
Duncan continues...
"This arrangement has had the benefit of allowing much more
rapid economic growth, particularly in large parts of the
developing world, than could have occurred otherwise.
It also has put downward pressure on consumer prices and,
therefore, interest rates in the United States as cheap
manufactured goods made with very low-cost labor have been
imported into the United States in rapidly increasing amounts.
However, it is now becoming increasingly apparent that The
Dollar Standard has also resulted in a number of undesirable
and potentially disastrous consequences.
First, it is clear that countries which built up large
stockpiles of international reserves through current account
or financial account surpluses have experienced severe
economic overheating and hyper-inflation in asset prices that
ultimately resulted in economic collapse. Japan and the
Asia crisis countries are the most obvious examples of
countries that suffered from that process. Those countries
were able to avoid complete economic depression only because
their governments went deeply into debt to bailout the
depositors of their bankrupt banks.
"Second, flaws in the current international monetary system
have also resulted in economic overheating and hyper-inflation
in asset prices in the United States as that country's trading
partners have reinvested their dollar surpluses (i.e. their
reserve assets) in dollar-denominated assets. Their
acquisitions of stocks, corporate bonds, and US agency debt
have helped fuel the stock market bubble, facilitated the
extraordinary misallocation of corporate capital, and helped
drive US property prices to unsustainable levels.
"Third, the credit creation The Dollar Standard made possible
has resulted in overinvestment on a grand scale across almost
every industry worldwide. Overinvestment has produced excess
capacity and deflationary pressures that are undermining
corporate profitability around the world."
Will it surprise you, dear reader, to find that getting
something for nothing hurts the gettor more than the gettee?
There is something so elegantly correct about it. Three
decades of the Dollar Standard have produced jobs, factories,
savings, profits -- mostly overseas.
More to come...
Bill Bonner
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