-->The Mystery Of Wyndclyffe

The Daily Reckoning

London, England

Tuesday, 30 September 2003

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*** Dollar plunges... yen up... euro up... new records for
debt...

*** Housing in 'bubble territory'... Dow up... Bill Gates'
wealth down.

*** The remorse price of gold... up again... what to do? Be
thankful you're not in Zimbabwe!

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"Dollar Plunges Against Yen, Euro..." begins a headline.

Oh là là... the European currency is about where it was when
it was first introduced: $1.15. At the time, we dubbed it
the 'Esperanto currency' and wondered what would happen
next. Currencies have been backed by gold, or by the power
of a sovereign nation to rob its citizens. Never before had
we seen one with only a treaty and good intentions standing
behind it.

At first, the Esperanto currency went down against the
dollar - to about 82 cents - and everyone said,"I told you
so... the euro can never compete with the dollar." But by
then we had begun to see the euro in a different light.
While the treaty nations would never back the euro as the
Poles back the zloty or Chinese back the yuan, neither
would they be ready collude to destroy it. Just as Europe
could not agree on an activist foreign policy, neither
would it be likely to agree on an activist monetary policy.

It was about this time that America's great Nasdaq bubble
was approaching its pin. The Fed, eager to let the good
times roll, cut rates faster than anyone ever had, while on
the other side of the Atlantic, Wim Duisenberg barely
budged. The European Central Bank chief had better hair
than Alan Greenspan, but much less pizzazz in his money
policy.

"Here in Europe," we recall our friend saying at dinner
last week,"they just don't know how to deal with these
problems." Faced with an economic dry spell, the Europeans
did nothing while their American counterparts opened every
sluice and faucet.

The world praised Greenspan for loosing the tide, and
blamed poor Duisenberg for inaction. We, on the other hand,
came to see the flood in another way... and began looking
for high ground. Americans had been lured into a sea of
debt, we noted. The current account deficit, the federal
deficit, mortgage refinancings, credit cards... at every
level, debt increased. Bankruptcies hit new records;
foreclosures, too.

Despite the highest levels of debt ever, America continues
to borrow and spend at record levels. Currently, the U.S.
consumes 70% of the entire world's savings, and keeps
asking for more."Personal spending up," a Bloomberg
headline tells us.

In 1970, the average house cost about 2.3 times the average
family income. Now, it costs more than 3 times average
income... and is still rising. Housing has reached"bubble
territory," says Ed Hyman.

Exactly how these trends will end, we cannot say. But we
would rather hold euros in our pockets than dollars, while
we wait to find out.

Here's Eric Fry with more details...

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

Eric Fry covering the markets from New York...

- Yesterday, the stock market recovered a bit from last
week's bloodletting, but the U.S. dollar is still screaming
for a tourniquet. The Dow advanced 67 points to 9,380 and
the Nasdaq Composite charged ahead nearly 2% to 1,825. But
the stock market rally lifted none of the dollar's misery.
The greenback tumbled more than 1% against the euro to
$1.159. And, as usual, gold cheered the dollar's woes by
gaining $1.40 to $383.20 an ounce.

- The dollar's relentless slide is bad news for almost
everyone except American steelworkers and Brazilian
tourists. It is bad news for American consumers, no matter
how many times Alan Greenspan or Treasury Secretary Snow
try to portray dollar devaluation as a 'miracle cure' for
the economy. And the slumping greenback is also bad news
for foreign investors.

- At first blush, the stock market seems like a very
inviting place for capital... All denominations are welcome.
But not all 'guests' are treated equally well. For example,
the S&P 500 has soared 14.6% year-to-date... in U.S. dollar
terms. However, after stripping away the dollar's 11% year-
to-date loss against the euro, European investors have only
a 4.6% gain to show for their troubles.

- But at least the stock market is still producing profits
for euro-based investors, even after deducting the dollar's
sizeable foreign exchange losses - a.k.a. the 'Greenspan
tax.' We suspect that this happy state of affairs will not
persist. The dollar's descent is the most worrisome - and
influential - trend in the financial markets today. And
yet, as long as Cisco is"breaking out to the upside," few
investors seem to care about the dollar's slide into the
dustbin of monetary history.

- We, on the other hand, are captivated by the demise of
the world's reserve currency. In fact, we would admit to a
morbid fascination with the dollar's declining health. Like
lazy heirs waiting around for grandpa to kick the bucket,
we gold investors wait around for the dollar's last gasp.
We don't hope for it, mind you. We merely expect it, and
allocate our assets accordingly.

- The dollar's demise is not inevitable... just highly
likely.

-"My experience as an emerging markets analyst in the
1990s taught me to be on the lookout for signs of financial
vulnerability," observes analyst Hernando Cortina in a
recent Morgan Stanley research note (shoved under your New
York editor's nose by his good friend David Bernacchia).
"They include ballooning current-account and fiscal
deficits, overvalued currencies, dependence on foreign
portfolio flows, optimistic stock market valuations coupled
with murky earnings, questionable corporate governance, and
acrimonious political landscapes... Any one of these signals
in an emerging market usually raises a red flag, and a
market that combines all of them is almost surely best
avoided or at least underweighted. I didn't imagine back
then that one day these indicators would all be flashing
red for the world's biggest and most important market - the
U.S...

-"A by-the-numbers analysis of America's macro accounts in
a global context doesn't paint a flattering picture,"
Cortina continues."Yet for growth-starved financial
markets, perceptions and hope are often more important than
economic reality. According to the macro indicators that
the IMF uses to assess emerging-market economies, the U.S.
falls between Turkey and Brazil... As [Morgan Stanley] chief
economist Stephen Roach has noted, the U.S. current-account
deficit our economists anticipate in 2004 will reach 6% of
GDP, requiring almost $3 billion per business day to
finance. This tide of red ink underpins our bearishness on
the U.S. dollar."

- Cortina politely concludes:"Investors contemplating the
purchase of U.S. dollar-denominated assets would be wise to
factor in significant dollar depreciation over the next few
years."

- There is some solace, however, for us dollar-based
investors - at least we didn't lose $5 billion worth of
purchasing power over the last 12 months, like Bill Gates
did. According to the latest Forbes 400 list of the
wealthiest Americans, Bill Gates is $3 billion richer this
year than last, and his $46 billion fortune places him at
the top of the heap.

- But by our calculations, the $43 billion that Mr. Gates
possessed in 2002 lost about $5 billion worth of its global
purchasing power over the last 12 months. So, courtesy of
the falling dollar, Bill Gates is actually poorer this year
than last... just like the rest of us.

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Bill Bonner, back in London...

*** What to do about gold?

Colleagues Dan Ferris and Dan Denning offer advice:

"If gold gets below $378," writes the first Dan,"it'll be
a major buying opportunity. If it goes above $398, the
sky's the limit. It had trouble at $398 back in 1995. Some
of the big traders have stops at about $380.50. When those
are hit, it could easily push gold below $378, the next
major support.

"I can't wait to pour back in below $380 or so... gold isn't
done by a long shot. You could probably pay $500 an ounce
today and still double your money in two years.

"The important thing for all traders to know is that it's a
bull market, a big one, a waiting-for-23-years-to-happen
bull market.

"No fiat currency has ever lasted. Not one. Even when
metals are debased, people require more of them for the
same amount of goods and services.

"Funny you should mention Abe Lincoln today. There's a good
account of how the federal debt rose from $90.5 million at
the beginning of the Civil War to $2.7 billion by 1865 [in
"The Pursuit of Wealth," by Robert Sobel]. Money to fight
the war came from taxes and the issuance of $250 million in
new paper money.

"There was something of a gold carry trade back then, too.
You could buy $120 in paper money with $100 worth of gold.
The paper paid 6% and was redeemable in... gold. If the
Union won the war, so the thinking went, you'd make a lot
more than 6%...

"Moving ahead in the story... gold trading began in New York
City shortly after the government stopped gold payments.
Even though it was deemed illegal and unpatriotic, the
underground gold trade flourished. Gold went in starts and
stops, from 101.50 in 1862 to $250 in 1864... even after the
trading rooms were shut down, traders met in the street...

"Gold will out."

*** Meanwhile, Dan II offers a way to gauge our regret for
not having bought more gold when the getting was more good.
Dan gives us a new index which he calls"The Remorse Price
of Gold."

"I should say," he begins,"that if I'm right about gold
and the dollar, it won't really matter at what price you
buy gold or gold stocks - if you buy them before the big
'correction' in the dollar... The trade of the decade is
still simple: sell the dollar, buy gold."

Gold rose again yesterday, by $1.40. But:"What you need to
know about gold is how far it is above the price at which
you SHOULD have most recently bought it," he continues."I
call this 'The Remorse Price of Gold,' implying, as you can
guess, that you should be sorry you didn't buy it at the
lower price earlier when you had the chance.

"The remorse price will change, the higher gold goes. Each
level it passes will be the one at which you should have
bought it, but waited instead to see if it was the top."

The current benchmark remorse price is $350 per ounce. We
will regret not having bought the metal below $350 until it
passes $400, says Dan. Then, we will regret not having
taken action below $400.

*** At least we're not regretting the price of toilet
paper... at least, not yet.

Even Pickworth, our South African correspondent, sends this
up-date:

"[Zimbabwe] is the only country in the world where your
largest note - $500 - can't buy you a beer, which is $650.
A roll of 1-ply toilet paper actually costs $1000. There
are about 72 sections on the average roll, so it's cheaper
to take your $1000, change it into $10's, wipe your bum on
72 of them and get $280 change... Toilet paper is important
after all, whether you're rich or poor, you're going to
need it. This is the legacy Mugabe has left... [he] has run
up food inflation by 334.6% as his supporters take charge
of farming. Great job they're doing.

"South Africa's inflation is at 6.3% and dropping while
Zimbabwe's is running at 300% and rising. Analysts expect
inflation in Zimbabwe to hit 450% by year end. Mugabe's
government has set a target of 96% (all this while they
need to import basic necessities to support starving
masses, so the target is pretty unlikely to be met)."

*** We are fond of obituaries. We laugh, we weep. But
Sunday, we stopped short and almost cursed The Man himself.
A young girl, the beautiful daughter of a friend, recently
engaged, died in an auto crash. We've noticed that
investors get what they've got coming; we like to think
that, in some strange way, everyone does. But why her, dear
reader? Why her family? The pain must be so severe, as
Johnny Cash put it, that there is no way to describe it.
But why? Did The Man made a mistake? Was it just 'an
accident'? We waited for an explanation from our new
priest. He had none.

Elizabeth went to the funeral today.

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The Daily Reckoning PRESENTS: From"rugged individualism"
to"keeping up with the Joneses"... what became of"the
missing lessons of US history"?


THE MYSTERY OF WYNDLCLYFFE
by Addison Wiggin

"Guys, here's a rich metaphor for you," writes friend and
colleague Porter Stansberry."The house that originally
spawned the term 'keeping up with the Joneses' and which
led to the building of gaudy mansions on the Hudson river
is collapsing and in disrepair..."

The story was printed in yesterday's Wall Street Journal.
"It was the original McMansion"... so grand it had its own
name: Wyndclyffe. The house was built in 1853 by Edith
Wharton's spinster aunt, Elizabeth Schermerhorn Jones, and
kicked off a flurry of mansion building up the Hudson River
valley. Wyndclyffe sported a four-story tower, 24 rooms, 80
acres of lawn and"sweeping river views."

After the completion of the Jones house, turret towers and
extra wings began appearing on nearby homes - hence the
now-famous phrase, 'keeping up with the Joneses.' Nowadays,
the maxim illustrates the modern desire of suburban
Americans to keep up appearances... by taking out home
equity loans to buy Humvees and home theater systems.

Last week, as you'll recall, we had to save face for
arriving late to a symposium conducted here in Paris by
economist Hernando de Soto - by running his overhead
projector. We'd like to return to the scene of the crime
for a moment. De Soto is doing some of the most interesting
work in economics today... and having picked up his book,
"The Mystery of Capital," we've become intrigued with the
question he poses in chapter five:"What became of the
missing lessons of U.S. history?" (And... we also still feel
like we owe him something for interrupting his speech.)

Hernando de Soto runs a think tank called the"Institute
for Liberty and Democracy." With a name like that, you'd
think it was an half-cocked Washingon-based fundraising
scheme invented by friends and associates of Richard Perle.
It's not. Headquartered in de Soto's native Peru, the
Economist magazine called the Institute for Liberty and
Democracy one of the most important think tanks in the
world."Over the past five years," de Soto explains in The
Mystery of Capital,"I and a hundred colleagues from six
different nations have closed our books and opened our eyes
- and gone out into the streets and countrysides of four
continents to see how much the poorest sectors of society
have saved. The quantity is enormous.

"The poor inhabitants of [Third World] nations," explains
de Soto,"some five-sixths of humanity, do have things, but
they lack the process to represent their prosperity and
create capital. They have houses but not titles; crops but
not deeds; businesses but not statutes of incorporation. It
is the unavailability of these essential representations
that explains why people who have adapted every other
Western invention, from the paper clip to the nuclear
reactor, have not been able to produce sufficient capital
to make their domestic capitalisms work."

The inability of poorer countries to transform their assets
into usable capital is not the end-game of some sort of
neo-colonial monopolistic conspiracy, de Soto's argument
goes. Rather, the West is oblivious to the developing
nations' dilemma:"Westerners take this mechanism so
completely for granted that they have lost all awareness of
its existence..." So much so that its history is all but
undocumented.

De Soto's search for the reasons why capitalism thrives in
the West - but is the target of scorn elsewhere in the
world - has led him through thousands of pages of archived
material, much of it detailing the westward expansion of
U.S. pioneers in the late 18th and early 19th century. Going
back as far as 1783, for example, George Washington
"complained about 'Banditti... skimming and disposing of the
cream of the country at the expense of the many.'" These
banditti were squatters and illegal entrepreneurs occupying
lands to which they had neither title nor deed.

"Americans and Europeans," says de Soto,"have been telling
the other countries of the world, 'you have to be more like
us.' In fact, they are very much like the United States of
a century or more ago, when it too was an undeveloped
country. Western politicians were once faced with the same
dramatic challenges that leaders of the developing and
former communist countries are facing today."

In the U.S., it wasn't until the application of the
doctrine of 'pre-emption' that America's backwater culture
began picking up the steam that would empower it to become
the foremost economic power on the planet. Preemption
allowed a squatter who had made improvements on a piece of
land, simply by building shack or a mill there, first right
of refusal on its purchase. Once the deed became legal, it
also became a commodity.

Henry Clay, a Senator from Kentucky in the early 19th
century, explained the process:"They build houses, plant
orchards, enclose fields, cultivate the earth and rear up
families around them. Meantime, the tide of emigration
flows upon them, their improved farms rise in value, a
demand for them takes place, they sell to the newcomers at
a great advance and proceed farther west... in this way
thousands and tens of thousands are daily improving their
circumstances and bettering their conditions." The
squatters, banditti and flagrant ne'er-do-wells thus became
the vaunted 'pioneers' of American history.

Unfortunately - as we're wont to say here at The Daily
Reckoning - nothing fails like success.

"[The pioneers'] successors," de Soto observes (that would
be you, me, the Fed, etc....),"have lost contact with the
days when the pioneers who opened the American West were
undercapitalized because they seldom possessed title to
lands they settled... when Adam Smith did his shopping in
black markets and English street urchins plucked pennies
cast by laughing tourists on the banks of the Thames... when
Jean-Baptiste Colbert's technocrats executed 16,000 small
entrepreneurs whose only crime was manufacturing and
importing cotton cloth in violation of France's industrial
codes. That past is many nation's present."

The process of change, according to de Soto, is
unquestionably a political one: revolution."In most
nations of the West," says Hernando,"the major task of
widespread property reform was completed only about a
century ago; in Japan it has been in place for less than
fifty years... Law [has thus been made] to serve popular
capital formation and economic growth. This is what gives
the present property institutions of the West their
vitality. The property revolution was a political victory.
In every country it was the result of a few enlightened men
deciding that official law made no sense... if a sizeable
part of the population lived outside it."

The neo-cons have taken the political lesson to heart and,
like the Leninists of the early 20th, are using Iraq as a
test case to see if revolution can be had at the point of a
gun. In the meantime, the Fed and Treasury have lost their
way altogether. Gone are the days when self reliance meant
busting your gut to build a house, a factory... or even a
fine piece of furniture. Now, credit lines grow ever longer
and home equity loans more ubiquitous.

Boobus Americanus - to borrow a phrase from HL Mencken, by
way of our friend Doug Casey - has regressed along the line
from 'know-how' to 'nowhere.' And judging from the reader
mail we expect to receive upon publication of this letter,
they're quite belligerent about it.

Bill Gross calls it"hegemonic decay." In his September
Investment outlook for PIMCO, Gross writes,"Pretend you
are the head of a household. You earn a good living, but it
never seems to be enough. There are bills to pay, the
Joneses to keep up with, you've had your eye on that goofy
Hummer for at least three months now. You'd like to save
money, but you can't or you won't, so you don't. In fact,
each year for the past decade you've had to borrow 4, 5, 6%
of your annual income to pay for what you want. You're
running a personal deficit, not a surplus."

People are no different than countries... sooner or later,
the bill comes due. Gross:"With no savings and a boatload
of debt, the wheels all of a sudden go into reverse.
Creditors are not so friendly... Forget the Hummmer, pal.
You're thinking of survival, not staying up with Joneses.
This hegemon with a face... has started to decay."

The great mystery, at least from the vantage point of your
puzzled Parisian pontificators, is: how is it that the
country from whence naturally arose the property rights
that helped unlock de Soto's 'dead capital' - and serves as
a model for emerging nations today - is also the current
site of the most egregious credit-goosed spending binge and
bust in economic history? The answer, we fear, lies
somewhere in the ruins of Wyndclyffe.


Sincerely,

Addison Wiggin,
The Daily Reckoning

P.S."Miss Jones, Edith Wharton's spinster aunt," the WSJ
article states,"was a cousin to the Astors and entertained
William and Henry James in the mansion. After she died, the
house was purchased by Andrew Finck, a brewer who, legend
has it, set up a beer tap that flowed from the basement to
the tennis courts. During the depression [the last great
credit-goosed financial disaster to visit the land],
Wyndclyffe was neglected, like many other lavish houses of
the time. Then it had a string of owners, most of whom
didn't live in the house or make repairs. Neighbors say
Wyndclyffe briefly housed a nudist colony in the mid-
century."

The ruins are apparently littered with garbage and
frequently used by bands of nosed-ringed teenagers, dressed
in black, and sporting Matrix style long coats. When asked
what should be done with the ruins, Charles Eggert, who
owned Wyndeclyffe in the 60s and 70s, said:"Maybe some
crazy idiot will buy it. I think it should be torn down."