-->Let The Revolution Begin

The Daily Reckoning

Paris, France

Thursday, 20 November 2003


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*** De hosses run down an' den dey run back..."

*** Euro hits new high... gold sells off... dollar bulls
retreat... money supply down...

*** Betting against their own product? Wandering in Wal-
Mart... and more!

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Doo dah... doo dah...

Today, we remember Maryland's racetracks fondly. Such a
rich source of graft... corruption... slush funds... laundered
money... and investment wisdom!

"Yo' don't bet on de hoss yo' think is gonna win," an old
gambler once explained to us."Yo' bet on de hoss dat's got
de bes' odds..."

Solvent traders understand the principle, but few investors
do. Since you can't know which horse will win, you bet
according to the odds... favoring the under-rated animal.
Your bob-tailed nag may not win, but he's still the best
bet. That is why you can believe that stocks are most
likely to go up... and still short them. And you can think
that gold will probably go down... and still buy it. Because
the reward from any bet is the likelihood of the event
happening multiplied by the payoff. Long odds usually pay
well.

A poster on the Rue Sebastopol reminded us of our old
racetrack friend. It advertises a concert by a black gospel
group, the Blind Boys of Alabama. One of them looked
familiar.

Maybe we should join them, we thought. Except for the facts
that we can't sing and are not black, we would fit right
in. Nearly every investor, economist, and analyst in
America thinks he can see the horses crossing the finish
line even before they start the race. We must be blind; we
can't see a thing.

What do you do when you are blind to the future? You turn
your head around and look to the past... and figure the
odds.

Investors who failed to buy stocks at the end of
WWII... when the Dow traded below 200... must have kicked
themselves for the next 20 years. Stocks rose until the
late '60s. Then, they fell... and then they rose. By the
time the century was over, the Dow was over 11,000. What a
long and fabulous ride; and they missed it!

But if that investor didn't buy... it was probably because
he was already black and blue from kicking himself for the
previous 20 years - the period from the late '20s to the
late '40s... in which stocks had fallen. 'Why bother
investing in stocks,' he may have said to himself, 'they
always go down.'

In real terms, stocks don't always go down. They go
up... and then they go down. Measured in constant dollars,
during the 20th century, they rose for periods of 17-20
years... and then they fell for periods of similar length.

We don't know what will happen next year, but we know that
stocks rose from a Dow under 1,000 to a Dow over 11,000 -
from 1982 to 2000. They began falling in March of
2000... they dropped about 20%... and have since bounced back
to recover about half of what they lost. In order to return
to its low of 1982, the Dow would have to fall to around
2,000 - a fall of nearly 80%.

Gold, meanwhile, did almost the opposite. It peaked out in
1980... and then began an 18-year bear market....which, in
real terms, wiped out nearly 90% of its value. Since then,
it has bounced, recovering about 10% of what it lost - to
slightly below $400 an ounce. But to fully recover,
adjusted for inflation, it would have to trade at over
$2,000 per ounce.

At this point, gold can go up 500% and still not equal the
price it set 23 years ago. Stocks, on the other hand, can
go down 75% and still not be as cheap as they were during
the first Reagan administration.

What is more likely to make you money? Betting that stocks
will rise further from today's near-epic high... and that
gold will fall from today's near-epic low? Or betting that
the patterns of the last hundred years will repeat
themselves?

Of course, a lot has happened in the course of the last 2
decades that could twist history in a strange
direction... but nothing that is likely to make a stock
worth much more than 30 times earnings... or gold worth much
less than $400 per ounce.

We will see...

In the meantime, more news from Eric Fry:

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Eric on the scene in New York...

- Let's peruse yesterday's headlines and try to connect the
dots:"AT&T to Axe More Than Ten Percent of its 30,000
Workers,""Detroit Jobs Exported to India, as General
Motors, Ford Reduce Their Costs,""Yen Falls After Bank of
Japan Sells Currency, Dollar Gains,""Bank of China Starts
Gold Trading,""Arrest Warrant is Issued for Michael
Jackson in Child Molestation Probe."

- Ok, maybe there's no DIRECT connection between the Bank
of China's gold trading and Michael Jackson's alleged child
molestation. On the other hand, we see a metaphorical
connection between the two headlines: The"little guy" is
exacting revenge! Having suffered years of abuse by
currency-debasing politicians, small investors are seeking
a kind of monetary justice. They are buying gold instead of
paper money.

- For the first time"since the establishment of the
People's Republic of China in 1949," the Shanghai Daily
reports, individual investors can buy gold bullion through
an officially sanctioned gold-exchange. Ever since Mao Tse-
tung was passing around little red books, the People's Bank
of China has tightly regulated gold trading. But the
increasingly confident and de-regulated communist nation is
letting"the people" decide for themselves how much gold
they wish to own. This new liberalization may not be
immediately bullish for the gold price, but we suspect that
it will not be bearish.

- The yellow metal fell $4.00 in New York to $394.75, while
the dollar recouped about one third of Tuesday's losses,
rising to $1.18 per euro. Stock investors took courage from
the contrived dollar rally, and returned to buying their
favorite overpriced U.S. stocks. The Dow gained 66 points
to 9,690 and the Nasdaq added about 1% to 1,900.

- The dollar's one-day respite - and gold's one-day retreat
- does not alter the global monetary trends that are
unfolding. The long-term dollar trends still looks very
scary, even to many of the long-term dollar bulls.
Citibank, one of the largest traders in global foreign
exchange markets and biggest dollar bulls, closed all its
existing long dollar positions Tuesday. The about-face by
Citibank is significant, says Dow Jones News,"in that the
dollar's slide has forced one of the most aggressive dollar
bulls in the market to temper its optimism toward the
currency.

-"In a research note," Dow Jones continues,"Citibank
currency analysts cite three specific reasons: the U.S.
decision Tuesday to impose temporary quotas on certain
textile imports from China, the dollar's failure to respond
to positive U.S. economic data and the breakdown of key
technical levels such as dollar index support at 90.56."

- In addition to Citibank's touchy-feely reasons to sell
the dollar, we would add three more: America's gaping
current account deficit, record household indebtedness, and
half a trillion dollar Federal deficits.

- Gold's ascent toward $400 an ounce is a direct reflection
of the dollar's woes. However, gold's sudden surge of
popularity suggests - from a contrarian perspective - that
the yellow metal may struggle to conquer the $400 level.

- Strategic Investment editor, Dan Denning, explains:"When
I wrote recently about hedging your downside risk in gold
stocks by owning some puts on the Philly Gold Index (XAU),
I was anticipating a temporary fall in the gold price. The
reason for my caution [stems from] last week's Commitment
of Traders report from the Commodity Futures Trading
Commission showing that commercial traders ('Commercials')
had increased their short position to more than 185,000
contracts. The Commercials are thought to be the 'smart
money.' So if they are betting against the gold market in a
big way, it's usually best to bet with them.

-"But the futures traders shift their positions quickly
and often," Denning continues."So I don't want to get too
hung up on what they are doing. I think it's more important
to continue focusing on the big trends, all of which are
very bullish for gold. In fact, the Commitment of Trader's
report itself, while bearish for gold over the short term,
highlights a phenomenon in the gold market that is very
bullish over the long term. The fact that the commercial
traders are net short gold means that the gold companies
are still betting against their own product! And they've
been betting against their own product for more than 10
years... They continue to sell their future production at
today's prices.

-"Think about that... Let's imagine that a mutual fund
could mine shares of Cisco Systems like a gold mining
company mines gold. Let's imagine further that the mutual
fund could sell today, at today's prices, the Cisco shares
that it would mine five years from now. Can you imagine any
mutual fund manager selling shares of Cisco Systems at
today's prices, instead of waiting to sell them for the
price he would receive five years from now? Every mutual
fund manager in America believes that Cisco will be worth
more in five years than it is today.

-"But the opposite point of view prevails in the gold
market. The very same companies that pull the stuff out of
the ground fear that prices will be lower three four and
five years from now. So they sell their future production
at today's prices... This institutionalized bearishness
towards gold is one of the strongest contrarian arguments
for a higher gold price... a much higher gold price.

-"One day - timing uncertain - the gold mining companies
will have to reduce their forward sales by buying back at
higher prices the gold they have already sold. The higher
the gold price climbs, the more costly it will be to buy
back these forward sales."

- Be patient, Denning concludes,"If you're nervous about
the gold price retreating from $400, keep in mind you've
got a box seat for a major event in financial history: the
forced deleveraging of the American financial economy."

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Bill Bonner, back in Paris...

*** What's this? After a big boost in the money supply in
the early summer... suddenly, M3 numbers are falling. So are
net capital inflows - from $50 billion in August, down to
only $4.2 billion in September. Central banks are said to
still be buying America's debt. But individuals are cutting
back. We don't know what this means, and neither does
anyone else, but it sounds ominous.

*** Dan Ferris sends this alarming message:

"You walk through the automatic doors into a cavernous
space, brightly lit.

"An elderly woman greets you with a radiant smile and a
charming 'hello.' You see two or three others, also dressed
in blue, like the smiling woman. You then slowly wander
through a space the size of two football fields, through
stacks of merchandise 20 feet high.

"Along the way you encounter stacks of cans and boxes,
pillows and stereos, furniture and clothing everywhere; you
are practically the only person in the store. It's quiet,
except for the sounds of 'The Girl from Ipanema,' wafting
down from somewhere above you.

"No, this is not an all-night grocery store at 4 am Sunday
morning.

"This quiet, almost desolate, place is Wal-Mart on the 14th
of the month. The throngs of greedy, sharp-elbowed bargain
hunters are not there.

"This isn't a scene from Wal-Mart's future, either. This is
how it is right now, today. You see, Wal-Mart's foundation
customer has finally gone bust..."

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The Daily Reckoning PRESENTS: Resource man John Myers fills
us in on the doubled-barreled bull market in real assets,
which, he says,"has only just begun."


LET THE REVOLUTION BEGIN
By John Myers

All the press talks about these days is this"miraculous
recovery" of the U.S. economy and Wall Street. But when you
examine the numbers, there's no avoiding the fact that this
so-called recovery is NOT happening. The economy is still
off... and so is Wall Street. The greenback has plummeted,
unemployment is still too strong, personal savings are
down, but... commodities are soaring.

As you know, gold just recently hit seven-year highs. But
look at these other metals: lead is at its highest point in
five years; aluminum is selling at two-year highs; copper
is at levels last seen in December 2000. In fact, the CRB
index, which represents a broad basket of commodities, is
currently trading at 246, up from 190 at the beginning of
2002... a gain of 29.5%.

There are two things, really, that are pushing commodities
to all-time highs. In fact, I call this a double-barreled
bull market... and it has only just begun.

The first barrel is one readers of the Daily Reckoning will
be well versed in: the downfall of the U.S. dollar. In the
past year, the dollar has fallen 15.8% against the euro,
and given the events of this past week, there appears to be
little relief in sight.

But this has been going on for some time. In late September
the U.S. dollar took a heavy hit, dragging the bond market
along with it. The dollar's latest comeuppance came on the
heels of a Group of Seven meeting, where leaders called for
a flexible exchange rate. Translation: Countries are
rushing like mad to decouple their money from the
greenback.

According to Hughes Lajeunesse, a currency analyst with BNP
Paribas, the gist of the G7 meeting was that"the U.S.
wishes to see a weaker dollar." Given the lax monetary
policies instrumented by the Federal Reserve and the
humongous trade and budget deficits, the United States will
not have much of a problem seeing its wish come true.

Of course, the biggest beneficiaries of the dollar's fall
are commodities and real assets - not to mention the
companies that produce them. The move is well under way.

This week, bullion pushed its way briefly past the vaunted
$400 dollar mark. I strongly believe the Midas metal is
heading towards $450 and above. The Gold Bugs index of
mining shares is up a whopping 489% from its lows.

The price of copper, meanwhile, has climbed from 62 cents
per pound to 86 cents... its highest level since December
2000. During the same time span, silver has risen from $4
per ounce to more than $5. Zinc, tin and aluminum are all
at two-year highs... lead is at its highest point in five
years... and nickel has climbed the charts, hitting a 13-
year high.

The grain markets are also strong, with wheat prices
fetching $3.50 per bushel - almost a dollar more today than
what they brought in spring 2002. And soybeans have soared
from $5.20 per bushel to $7.20 - since August!

But the real surprise and thus the opportunity is that even
after this run-up, commodities are still undervalued.

Wall Street likes to say that stocks are cheap right now. I
hardly agree based on historical measurements, such as the
market's overall price-to-earnings ratio. But even if you
buy into the argument that"new era" stocks should be
evaluated in a"new" light, stocks are still not nearly as
cheap as real assets. Right now, the discount in the most
glamorous of commodities is incredible.

Take the number of ounces of gold needed to buy a share in
the Dow Jones Industrial Average. When gold became
unrealistically priced at the end of 1980, one ounce of
gold would buy one share in the Dow. That was when gold was
at $800 per ounce and the Dow was at 800. In early 2000
that ratio became an incredible 42-to-1. (The Dow reached
11,906 in March of that year, a time when gold was trading
at $280 per ounce.) Even now, with Wall Street gurus
calling the stock market cheap while heaping disdain on
gold, the ratio stands at 26-to-1.

In the same vein, oil is also cheap. In 1980 it took 22
barrels of oil to buy one share in the Dow. By 2000 that
ratio reached an astounding 545-to-1. Today, the ratio is
still 312-to-1.

This is a dramatic change since 1980, when you consider
that the Dow 30 companies continued to offer new shares,
but there had been no new discoveries of oil.

It's only a matter of time before these trends start to
reverse themselves. A few brave gold analysts even believe
that an ounce of gold could one day be worth more than a
share of the Dow. But even if it doesn't happen, investors
will still have a very good chance to get rich with
commodities - thanks to another unstoppable force driving
commodity prices.

This bull market has more than just the inner machinations
of an inflated U.S. buck backing it. The other part of the
double-barreled bull market is growing demand. Throughout
the world, demand is outstripping supply.

But nowhere is this more prevalent than in Asia, where the
superpowers of tomorrow are underpinning the long-term
cyclical uptrend in commodities. This region is exploding
in population, economic growth and spending.

All across Asia consumers are discovering their buying
power. These consumers are younger than their counterparts
in the West, and most importantly, the number of these
young Asian consumers is growing. In 2000, there were 1.2
billion Asians between the ages of 30 and 59. That number's
expected to rise to 1.7 billion by 2020. Compare that to
the same age group in Western Europe and America, where the
number of consumers is actually shrinking.

Also consider that these Asian consumers are buying more
and saving less than their high-saving parents. Basically,
Asia's growing number of well-educated singles and couples
are enjoying a sense of confidence in their own living
standards... much like America during the 1950s. They are
spending money on homes, consumer durables, luxury goods
and tourism. And with the path they are on, Asia's
consumers may soon replace America's consumers as the
drivers of global growth.

The nation that's leading this growth is China. With its
1.29 billion population - up 12% since 1990 - this massive
country is bent on modernizing itself in a more Western
image. China's estimated economic growth this year is 8%.
Compare that to the United States at 3% GDP and Canada at
2.2% for 2003.

And along with their need for more roads, housing,
energy... everything required for everyday survival, they're
also consuming more base metals. With China's booming
economy, the nation's factories are consuming 2.8 million
metric tons of copper each year (and they're only producing
800,000 metric tons from the state-owned mines). China's
consumption of copper was only 6% of the world in 1990. By
2010 it's predicted to be 29% or more.

And that's just copper. The thriving steel industry in
China is bigger than the United States and Japan combined.

Demand is up; supply is down. The growth within Third World
countries entering their own Industrial Revolutions - and
especially China's impact on real assets - is just the
beginning of a double-barreled bull market in commodities.
In less than two years, though, it will be the hot topic in
the investment community. Now is the time for you to profit
from this boom.


Regards,

John Myers
for The Daily Reckoning

P.S. With China's economy growing by leaps and bounds and a
national will to become a modern society, many of the
Earth's already taxed resources will fall into bidding wars
that will drive up their prices not by 20%, 30% or 50% but
by 200%, 300% and 500% before this decade ends. The Chinese
are known to say there is always tremendous opportunity in
a crisis. Well, the crisis is here.