-->The Idea Of America

The Daily Reckoning

Paris, France

Thursday, 8 January 2004

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*** Legalized embezzlement... and other tricks...

*** Stop the presses... the dollar didn't fall yesterday! Gold
didn't go up!?

*** Do people really make money in stocks? Do Daily Reckoning
readers really make any money at all? More below...

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We are still peeking out at the year ahead. And oh la la... what
do we see!

"Legalized embezzlement on a monstrous scale," says Clive Maund.
Mr. Maund, whose ideas we received mysteriously by Internet,
refers to America's great dollar devaluation.

The more we think of it, the more devilishly elegant and
marvelously scummy it is -- the fall of the dollar, that is. It
wipes out trillions worth of debt... with no bankruptcy
proceedings, no lawsuits, and no backlash from the voters.

While it makes Americans poorer, they hardly notice; the
immediate loss is taken by someone else. It passes the loss from
American debtors to foreigners who were dumb enough to take our
I.O.U.s.

The big story for the last half a century... which reached its
climax under the administration of George Bush the younger...
has been the rise of the consumer economy, the growth of
government and, especially, the build-up of debt in America.
Consumer debt, government debt, business debt -- mortgages,
credit cards, equity lines, derivatives, GSEs, bonds, I.O.U.s...
you name it.

"Americans are carrying more debt then ever before, and are
behind payments in record numbers," says the New York Post. Debt
averaged about 130% of GDP for many decades. Now, the figure has
grown to more than 300%. A figure we saw this week put it at
360%. The lumpen voters and dead-head investors may fantasize
that current trends can go on forever -- that we can pile up debt
like trash during a garbage strike... and never have to haul it
away -- but no serious person would think so.
Sometime soon, we suspect, the mound of rubbish will start to
stink. Then, the story line will reverse. Instead of wondering
how we will add to our odoriforous debt, the dramatic question
will be: how do we get rid of it.

We read the leftist press occasionally -- for laughs and horrors.
We find George W. Bush universally portrayed as the devil himself
-- an 'ultra-conservative cowboy'... who is"dismantling the New
Deal" in order to make the world a chummier place for his
capitalist friends. We chuckle... gasp for air... and wish it
were true. But the poor socialist schmucks haven't a clue. Bush
has come to praise the New Deal, not to bury it.

In less than 2 years, he shuffled out so much loot, he turned a
modest surplus into an extravagant deficit... a turnaround of $9
trillion dollars! He doubled the rate of government growth -- so
that Federal expenditures are getting dealt out 4 times faster
than the GDP growth rate. And he's managed to issue so much new
debt that the Congressional Budget office projects a national
debt of $14 trillion in 10 years... with interest alone of nearly
$1 trillion annually.

And he's done all this while lowering taxes. Here again, we
admire the blinding, polished gleam of it. For now the burden of
supporting the U.S. government's project falls neither on the
rich nor on the poor... but on the honest simpletons all over
the world who were attracted by the shine of the world's most
dynamic economy... and naive enough to believe its promises.

Our head spins.

More on this tomorrow...

In the meantime, more news from Eric Fry:

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Eric Fry, who, by the way, will be a guest host on CNNFn's
"Market Call" today and tomorrow 9am - 10am EST... catch him
LIVE! if you have a chance...

- Mr. Market suffered another schizophrenic episode yesterday...
The stock market fell AND rose. The Dow and S&P 500 both dipped
slightly, while the Nasdaq jumped to a new two-year high. The
blue chips fell 10 points to 10,529 and the Nasdaq gained 1% to
2,078...

- Eight days into the New Year, the"January Effect" is proving
to be alive and well... That's the effect -- according to
historic tendency -- that causes most stocks to rally in January
and causes small capitalization stocks to rally the most of all.
So far in this young year the Nasdaq has advanced nearly 4%,
while the Dow has gained less than 1%.

- The precise cause, or causes, of this delightful effect is a
matter of debate. Some say it's due to a New Year's optimism that
inspires individual investors to buy stocks. Others say the
January Effect results from institutional investors establishing
new billion-dollar positions at the beginning of the year. And
still others believe that UFOs and aliens are the driving force
behind all the stock-buying.

- Whatever the precise cause, racy Nasdaq stocks are zooming
ahead, while stodgy Dow stocks are merely inching along. Such
bifurcated trading action is unusual, but not unprecedented. The
Nasdaq has been outpacing the Dow for more than a year, and ever
since the stock market bottomed in October 2002, investors have
shown a clear preference for speculative stocks over the
relatively mundane Dow names.

- The stock market's schizophrenia was not the only financial
curiosity on display yesterday. The gold market also showed some
quirky behavior -- it barely budged, despite a big dollar rally.
Typically, like a mother-in-law and son-in-law getting up from
the dinner table, the dollar and gold usually head in opposite
directions.

- Yesterday, however, the dollar staged its first major rally in
six weeks by jumping 0.7% to $1.263 per euro. But gold barely
budged. The last three times the dollar rallied as much in a
single day, gold tumbled $4.50, $8.40 and $13.30 respectively.
Apparently, gold investors are becoming increasingly distrustful
of dollar rallies... And so far, distrusting dollar rallies has
been the winning trade.

- We wouldn't want to read too much into one trading day. But
gold's conspicuous strength has not been a one-day wonder; it has
been a multi-month phenomenon. When the gold rally was a mere
newborn, back in the middle of 2001, it seemed even less likely
to survive than baby Moses. Back then, the lumps loved their
dollars and their stocks and their bonds and their home equity...
Who needed gold?

- Instead, and seemingly against all odds, the gold rally
survived, then thrived... and it thrives still... to the dismay
of central bankers worldwide. The gold rally not only exposes the
world's paper currencies as institutionalized counterfeits, it
also exposes the world's central bankers as knaves. As many Daily
Reckoning readers may recall, these esteemed bureaucrats dumped
millions of ounces of their countries' gold reserves at prices
near and below $300 an ounce. The expressed rationale for this
knavery was usually"to seek higher-yielding investments."
Oops!... One way to raise the yield on investment might be to
remove all central bankers from their posts.

- Returning to our opening query, What's powering gold's tireless
advance? We don't know exactly, but we can guess as well as
anyone, and we would guess that the world's investors are voting
with their pocketbooks to exchange paper for gold.

- The hundreds of millions of folks around the world who distrust
their national currencies are nibbling on gold like piranha
around a water buffalo. Every day they nibble; every night they
nibble; and before you know it, there's no gold left to nibble
on... until the price moves high enough to draw more"fresh meat"
into the market.

- We, like many gold bulls, suspect that a"correction" will
begin very soon, possibly pulling gold down towards $400 an
ounce. But that correction, should it arrive, would provide
another splendid opportunity to swap America's dollars for
"nature's currency."

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Bill Bonner, back in Paris...

*** Our old friend, Mark Hulbert, reports that gold sentiment has
plunged to 11.54."You will rarely see a more perfect textbook
illustration of a bull market climbing a wall of worry," says
Hulbert.

***"In US$ terms; from July 2000 to the present day; we have
been witnessing the first phase of a gold bull market," Clive
Maund elaborates."However....this bull phase has merely
reflected the collapse of the world reserve currency, the US$,
against all other currencies. In terms of the Australian $,
Canadian $, South African Rand and Euro one could clearly argue
that the bull market is at best weak or is non-existent.

"The long-term chart for gold, which reveals a strong up-trend
when measured in terms of its US dollar price, can be seen to
have been little better than neutral when measured against the
Euro. The gold price in Euros has been virtually flat for nearly
4 years now!

"Much has been made in the popular media of the bear market rally
in US stocks from last March, with it being hailed as a new bull
market - nothing could be further from the truth. All investments
must always be considered in opportunity cost terms, and this
being so the plunging US dollar must be factored into the
equation when evaluating the rally in US stocks. If you are a US
investor and you don't do this, you are just kidding yourself.
When priced against the other major world currencies, the
performance of the US stockmarket has been nowhere near as
impressive as a straight reading of the indices would lead one to
believe. Charts in these currencies reveal a mediocre bear market
rally, which looks anaemic
against the Euro...

"Unfortunately, this is a game in which the entire world now
stands to lose and there is no way out, as every exporting nation
is dependent on the US economy and the credit - refinance funded
US consumer. However, this consumer is now 'maxed out' and
virtually saturated with easy credit with little or no savings
left to spend. Price inflation will run into overdrive... The
Feds printing presses are running white hot to fund a sham
recovery.

"The point at which gold rises against all currencies, and not
only the US$, will mark Phase 2 of this bull market, where
precious metals will go into an accelerated ascent and the
scramble for physical metal and precious metal mining stocks will
become truly global. In the case where the Fed commences raising
interest rates, initial rate rises are likely to be of the order
of 25 basis points. This will have little or no impact on the
gold market. If the decline in the US$ is not arrested, more
severe interest rate rises will be required, and in rapid
succession, to restore confidence. There will come a cross over
point where the dollar ceases to fall and the brakes are put on
gold's relentless rise. Where and when this point will come no
one can predict. However, it seems pretty obvious that gold will
surpass its 1980 peak of US$ 850 per fine ounce with consummate
ease. Given the massive US debt position and economic structural
imbalances, it is likely that this cross over point will be at
interest rates of well over 10%.

"The social consequences of the foregoing scenario, given average
debt exposure, are expected to be serious. However, whichever way
one cuts the cake, the precious metals market has a long way to
go yet."

***"Just out of curiosity, what percentage of people do you
think actually make money in the stock market over the span of
decades? The more I learn, the more that number drops for me."

Pirate Investor's Brian Hunt picked up on our note about the way
Wall Street works, not for the capitalist, but for the worker,
whether he be on the payroll of the traded corporations or on
Wall Street itself.

"If we are in a bubble and it pops, we all know what will happen
to microcaps, nanotech, and the like. I don't think any.system
would hold up very well. But while the music is still playing, I
think we've got a good chance at making some great returns. If
the Fed keeps spiking the punch, I'll keep drinking it."

"Nobody actually makes money in the stock market [over the very
long term], on average, is my guess," Porter Stansberry replied,
probably exaggerating to make a point:

"Take the example of Julian Robertson. He was the head of Tiger
Fund - one of the most successful hedge funds of all time.
Starting out with just a few million under management (including
his own $1.5 million), Julian ran a fund that made billions.
According to John Train, Tiger averaged gains of 36%. By 1997 his
fund was managing $16 billion. And at the end of that year he
raised another huge batch of money... several billions.

"The next three years saw his leveraged fund lose about 20% a
year on its stock positions. The size of his funds under
management fell from $22 billion down to $6 billion.

"Everyone, excepting his early investors, was largely wiped out.
And if you think about it... making $6 billion over 20 years is
impressive....but not as impressive as losing $16 billion in
only three years.

"So... over time... did Julian make money in stocks? No way. The
same thing, by the way, is true of almost every single successful
money manager, newsletter writer, or mutual fund. When the public
piles in, the gig is up and more money is lost than was ever
made."

*** Citing criticism of the Daily Reckoning we published a few
days back, a reader comes to our defense:

"I found the criticism that some readers made about your free
opinions in the DR totally out of line. You are absolutely right:
Had they followed your advice and gone short in 2000 and into
Gold, they would have done splendidly as I did. True, I lost
money being short in 2003, but more than compensated for all my
losses by being long gold and gold shares. For crying out loud,
CDE went from below 1 to over 6, a fantastic return beating yahoo
and the river of no return. But, as they say, you can never
please all the people all the time. I love reading your free
column every day, bought and read your book, and made money, so
for all it's worth you have at least one very satisfied
'customer'.

Sincerely,

P.S. I am still in the Prudent Bear Fund (down 4% for me) and
Profunds Ultra Short (down 16% for me), and KNOW that I will
make money with both investments in 2004. (Not OUGHT, but WILL)."


*** And another:

"My investing began about 18 months ago, no prior experience.
I've made money on currency options ($ down), gold options
(calls), gold stocks, oil stocks that pay good dividends as well
as their price continuing to rise. So sorry for those readers who
could not figure out how to use the information. The money that
I've made is more than I could have ever imagined, wished for, or
dreamed of. Plus, I enjoy reading your letter. Keep up the good
work."
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The Daily Reckoning PRESENTS: Some say the Daily Reckoning is
anti-American. We deny the charge. Regularly. Rather we fear the
great 'idea' is in danger of perishing. Bill Bonner ruminates on
the Idea of America below, in this Daily Reckoning classique
penned while vacationing in Nicaragua with his family.

THE IDEA OF AMERICA
By Bill Bonner

"Elizabeth," I asked this morning, as my wife climbed out of the
pool."How would you describe that sea turtle we saw on the
beach?"

Pausing for a moment, she replied:

"Rotating its slow and majestic flippers, it ground its way
slowly and inexorably towards China..."

The sea turtle was headed east. Whether China was its destination
or not, I don't know. I only know that it was about to leave the
Latin America isthmus, from the west coast of Nicaragua, and put
out to sea when a muscular, brown young man picked it up and
carried it back up on the beach. He and his friends had dug a big
hole in the sand where the turtle was placed.

At night we often see the dim light of flashlights along the
beach."It's the locals looking for turtle eggs," Manuel
explained."It's illegal to take them, but..." Manuel shrugged
his shoulders.

Sea turtles are protected by international convention. But here
in the wilds of Nicaragua they still end up in the soup from time
to time.

This is America too... but it is not the same America. It is the
New World... but not as new as the world north of the Rio Grande.
Here, the Old World has not yet been snuffed out. It survives in
a semi-tropical paradise.

But the object of our attention in today's Daily Reckoning is
neither the Old World nor the New one - but the ever- changing,
never-fully-explored idea of America.

"Proud to be an American" says one bumper sticker."One nation -
indivisible," says another. America was, of course, founded on
the opposite principle... the idea that people were free to
separate themselves from a parent government whenever they felt
they had come of age. But no fraud, no matter how stupendous, is
so obvious as to be detected by the average American. That is
America's great strength... or its most serious weakness.

After September 11, so many people bought flags that the shops
ran short. Old Glory festooned nearly every porch and bridge.
Patriotism swelled every heart.

Europeans, coming back to the Old Country, reported that they had
never seen anything like it. A Frenchman takes his country for
granted. He is born into it, just as he is born into his
religion. He may be proud of La Belle France the way he is proud
of his cheese. But he is not fool enough to claim credit for
either one. He just feels lucky to have them for his own.

America, by contrast, is a nation of people who chose to become
Americans. Even the oldest family tree in the New World has
immigrants at its root. And where did its government, its courts,
its businesses and saloons come from? They were all invented by
us. Having chosen the country... and made it what it is...
Americans feel more responsibility for what it has become than
the citizens of most other nations. And they take more pride in
it, too.

But what is it? What has it become? What makes America different
from any other nation? Why should we care more about it than
about, say, Lithuania or Chad?

Pressed for an answer, most Americans would reply,"Because
America is a free country." What else can be said of the place?
Its land mass is as varied as the earth itself. Inhabiting the
sands of Tucson as well as the steppes of Alaska, Americans could
as well be called a desert race as an arctic one. Its religions
are equally diverse - from moss-backed Episcopalians of the
Virginia tidewater to the holy rollers of East Texas to the
Muslims of East Harlem. Nor does blood itself give the country
any mark of distinction. The individual American has more in
common genetically with the people his people come from than with
his fellow Americans. In a DNA test, your correspondent is more
likely to be mistaken for an IRA hitman than a Baltimore drug
dealer.

America never was a nation in the usual sense of the word. Though
there are plenty of exceptions - especially among the made-up
nations of former European colonies - nations are usually
composed of groups of people who share common blood, culture, and
language.

Americans mostly speak English. But they might just as well speak
Spanish. And at the debut of the republic, the founding fathers
narrowly avoided declaring German the official language... at
least, that is the legend. A Frenchman has to speak French. A
German has to speak the language of the Vaterland. But an
American could speak anything. And often does.

Nor is there even a common history. The average immigrant didn't
arrive until the early 20th century. By then, America's history
was already 3 centuries old. The average citizen missed the whole
thing.

Neither blood, history, religion, language - what else is left?
Only an idea: that you could come to America and be whatever you
wanted to be. You might have been a bog- trotter in Ireland or a
baron in Silesia; in America you were free to become whatever you
could make of yourself.

"Give me liberty or give me death," said Patrick Henry, raising
the rhetorical stakes and praying no one would call him on it.
Yet, the average man at the time lived in near perfect freedom.
There were few books and few laws on them. And fewer people to
enforce them. Henry, if he wanted to do so, could have merely
crossed the Blue Ridge west of Charlottesville and never seen
another government agent again.

Thomas Jefferson complained, in the Declaration of Independence,
that Britain had"erected a multitude of New Offices, and set
hither swarms of Officers to harass our people, and eat out their
substance." Yet the swarms of officers sent by George III would
have barely filled a mid- sized regional office of the IRS or
city zoning department today.

Likewise, the Founding Fathers kvetched about taxation without
representation. But history has shown that representation only
makes taxation worse. Kings, emperors and tyrants must keep tax
rates low... otherwise, the people rise in rebellion. It is
democrats that really eat out the substance of the people: the
illusion of self-government lets them get away with it. Tax rates
were only an average of 3% under the tyranny of King George III.
One of the blessings of democracy is average tax rates that are
ten times as high.

"Americans today," wrote Rose Wilder Lane in 1936, after the
Lincoln administration had annihilated the principle of
self-government... but before the Roosevelt team had finished its
work,"are the most reckless and lawless of peoples... we are
also the most imaginative, the most temperamental, the most
infinitely varied."

But by the end of the 20th century, Americans were required to
wear seat belts and ate low-fat yogurt without a gun to their
heads. The recklessness seems to have been bred out of them. And
the variety too. North, south, east and west, people all wear the
same clothes and cherish the same decrepit ideas as if they were
religious relics.

And why not? It's a free country.

Bill Bonner,
The Daily Reckoning