04/19/02
THE REVENGE OF GOLD* * * * * * * * * * * * * * * * * * * * * * * * * Jobless claims no longer falling - they're rising sharply - what kind of recovery is this?... But consumers still buying...how long can this go on?... Dow down slightly...what's wrong in techland - "no economic recovery yet..."
* * * * * * * * * * * * * * * * * * * * * * * * * Yesterday, we reported that new jobless claims "were still falling." And they were still falling...until about an hour after our report came out. Then, the Labor Dept. announced an unexpected rise in initial jobless benefits. Last week, more than 400,000 people were added to the unemployment roles - a 19-year high. What's more, "continued claims," from people who've been unemployed for a while, rose to 3.76 million, its highest level in nearly 20 years too. But the consumer - bless his poor, addled heart - doesn't seem to care about his income anymore. He's looking at his balance sheet and noticing that his house is worth more. So what the heck? Spend a little...live a little! Thus did imports rise by 4% in Feb. after being up 3.6% in January...while exports remained steady. And thank goodness for this reckless spending. Because it gave the foreigners more dollars, so they could buy more of our stocks and bonds. "An ever-rising trade deficit means that U.S. domestic demand is outstripping domestic income generation - symptomatic of a nation that is living beyond its means," explains Stephen Roach. "That acts as a depressant on domestic saving, requiring massive inflows of foreign capital to fill the void. And that's what puts America's current account deficit - the mirror image of its capital account - on such an explosive path." How long can this go on? We don't know. But that doesn't stop us from thinking about it...more below. But first...Eric's report from Wall Street: ****** Mr. Fry from Manhattan... - Stocks took a mid-session nose-dive yesterday on word that a plane had crashed into Milan's tallest building - - the 417-foot high Pirelli Tower. This Lilliputian version of the World Trade Center attack seemed too freakish to be anything other than a new terrorist assault. Investors, fearing the worst, started selling fast and furiously. But it turns out that the tragedy in Milan was merely freakish, and not the latest brainchild of Al Qaeda. The pilot had radioed for help shortly before the crash. - Once that relatively good news hit the wires, investors repented from fearing the worst to hoping for the best - which, between the two, is probably the greater financial sin. The Dow, which had been down as much as 163 points, rebounded to finish the day a mere 10 points lower at 10,210. The Nasdaq fell 1/2 a percent to 1,802. - Hoping for the best, while an admirable virtue when times are tough, can be downright foolhardy in other instances - like, for example, in the instance of buying richly priced tech stocks. Day after day, the sell-side analysts keep preaching to the faithful to trust in a budding recovery in the tech sector, or at worst, a "second-half recovery." Who wouldn't want to believe this happy story? But where is the evidence of said recovery? - For some of us tech-agnostics, walking on water would be a minor act of faith compared to trusting in a second-half tech recovery. The chorus of laments from those in the know is simply too deafening. - Intel shares jumped higher on Wednesday, thanks to a "strong" earnings report. But Intel's Chief Financial Officer, Andy Bryant, did not sound like a man who was looking around for champagne bottles to pop open. In response to a series of softball questions from CNBC's Sue Herera, he repeatedly talked about lackluster prospects for growth. - "The numbers seem to suggest that the profit decline for Intel is at an end," Herera said hopefully. "Are you willing to go that far?" - "I don't think I would go that far," Bryant replied, adding later on, "I don't think we're seeing an economic recovery yet in our business." - "In terms of macroeconomic trends, we still haven't seen any signs of a recovery," Bryant told Reuters in a separate interview. - The top dog at EMC Corp. told a similar tale yesterday, after the giant data storage company reported its third quarterly loss in a row. "This is the toughest environment for capital spending I have seen," groaned CEO Joe Tucci. - To cap it all off, even the mighty Microsoft is beginning to disappoint its investor-fans. After the close of trading yesterday, the tech icon let fly a mini-bombshell: Earnings and revenues for its fiscal- third quarter, ended March 31, fell short of analyst expectations. The stock dropped about 7% in after-hours trading. Microsoft's "miss" is all the more shocking because the company is usually so masterful at managing expectations. But not this time. - The company also cut its earnings forecast for the quarter ending in June. It does however, hold out hope - surprise - for a second-half recovery. - Fred Hickey, editor of The High Tech Strategist, provides more grist for the "phantom tech recovery" mill: "All those who are perplexed as to why tech stocks are so weak, with the economy seemingly so strong, should have listened to Tech Data's conference call," writes Hickey. "Like so many other tech companies, Tech Data stated that it had experienced an 'extraordinarily difficult business environment.' CEO Steve Raymund noted, 'An excess in spending on IT in 1999 and 2000 was so overdone that it will take some time to clear.' He stated that the IT industry was still working off the 'orgy of overspending.' He also called it a 'spending bubble.'" - "The tech industry's problems will not go away quickly, for they are long-term in nature," Hickey predicts. "The 'orgy of overspending' by business during the bubble created overcapacities that will take years to work off. History has shown that the last place that investors should keep their money after bubbles pop is in the segment where the bubble primarily occurred. That realization hasn't yet set in for this generation of investors. It eventually will." ****** Back in London... *** The U.K. office of the Daily Reckoning sits on the 11th floor of the Centre Point building, one of the tallest and ugliest edifices blemishing the London skyline. Reports that Milan's tallest building had been struck by a plane caused some disquiet in the office. We looked out the window to see what might be coming. * * * * * * * * * * * * * * * * * * * * * * * * * THE REVENGE OF GOLD
by Bill Bonner "In due course the Japanese people will own over 70% of the world's gold! Wrap your mind around the implications of that!" - Harry Schultz The price of gold hit $305 yesterday. "BUY GOLDS!!" says the headline of a James Dines ad in Barron's. Dines, whose headline - it seems like it was only a few months ago - was "Buy Internets," now believes that it is gold stocks that are in "RAGING UPTRENDS!" "If you honestly want to make money, it is obvious that you should be interested in uptrending stocks," says Dines. Internets, as all the world has noticed, are no longer in uptrends. Even "downtrend" seems too gentle to describe the white-knuckled descent of the companies Dines used to recommend. Perhaps "death spiral" would be more appropriate. Many of them went down so far, so fast, they will never get up again. But the trends have changed. One of James Dines' 61 "Dinesisms," explains the ad, is that "a trend in motion will continue in motion until it actually ends." We will not dispute this. In fact, the crystal elegance of this dictum makes us wonder about the 60 other "Dinesisms." In fact, we have a suggestion for a 62nd one: "The price of gold will go up...unless it goes down. Or nowhere." Dines thinks he knows what direction gold is going in. "It's an actual fact that golds and silvers are in uptrends," continues the author of three-score and one Dinesisms, "and have been outperforming the rest of the stock market. Serious money is made by getting into bull markets early, before the crowd 'gets it', and precious metals have been sneaking quietly higher, unnoticed by the crowd..." We've been urging you to buy some gold, too, dear reader. Not because we know something...but because we don't. There are so many things we don't know, we hardly know where to begin to describe them. We do not know how long the world will continue to accept dollars in exchange for goods and services, for example. Nor do we know how long American consumers can continue to spend money that they don't have. Nor do we know when real estate markets might turn downwards, ending the illusion of additional wealth caused by rising house prices. But in a world with so many unanswered questions, gold seems the perfect thing to own. There was a time when we thought we could predict what would happen in the markets. But today, even the dim recollection of those days brings a sigh of regret. How could we have been so naundefinedve, back in the 1970s, we ask ourselves? How could we have been so foolish and so cocksure back in the 1980s, we wonder? Ah...but then, we had the confidence of youth...the knowledge of the innocent...and, most importantly, we had hair. But by the 1990s, we were losing our mane and gaining our doubts. Age and modesty were beginning to catch up to us. Nature, in her majesty, had already found many ways to separate us from our dignity and our money; we had to conserve what little we had left. When forecasters told us - back in the '70s - that gold would rise to $5,000 an ounce, we believed them. For what would stop it? Government was inflating the currency. Government always inflated currency - if it could. There was no example from history of a currency that had not been inflated away to a bare trace of its original value. Why would the dollar be any different? The logic of that argument was persuasive then, and still is. But the timing proved difficult to forecast. In a better world, predicting the course of future events would be much easier. If man were merely the homo economicus that economists think he is, he could be expected to do the rational thing at the rational time. Back in 1971, for example, the rational thing would have been to sell dollars and buy gold. Gold had an established track record dating back thousands of years. It got excited when compared to paper currencies - jumping up and down with the fashions of the time. But, in terms of what it would buy, gold seemed extraordinarily calm. Through many generations of trial, and mostly error, humans had discovered that paper currencies eventually drifted away to nothing - unless they were anchored to gold or some other solid rock of value. Thus did the Western money system of the 19th century function so well - the major nations, Britain, France and America, had currencies tightly moored to gold. At the end of the century, the franc, the pound and the dollar were nearly in the same place as they had been at its beginning. But the 20th century brought changes. "The classical gold standard died like a soldier in WWI," writes James Grant. Governments yield to emergency like a dieter to devil's food. In war, for example, restraining influences - gold, habeus corpus, and common decency - give way to mass hysteria. We have already described how the emergency of WWI effectively bankrupted all the major belligerents - save one, the U.S. Britain, France, Germany, Russia - all were on the brink of destitution in 1919. They had lost millions of young men, and billions of dollars, but they had not completely lost their senses. A movement to re-establish the gold standard began almost as soon as the fighting stopped. But it wasn't until early 1924 that Germany ended its hyper-inflation by tying the mark to gold. Then, on the 28th of April 1925, Winston Churchill - then chancellor of the exchequer - announced that the pound would be once-again convertible into gold, as it had been before the war - and at the same rate! "Why did he do something so stupid?" John Maynard Keynes asked. Answering his own question, Keynes said he believed Churchill was led to his biggest mistake (perhaps even worse than his Dardanelles campaign in WWI) by his own advisors - notably, Norman Montagu, England's chief central banker at the time. The rate was too high. During the war years, Britain had expanded its money supply and run up billions in debt - most of it to the U.S. The general price level in Britain had doubled between 1914 and 1918. Unemployment increased in the post-war years. And exports, even by 1924, were still down 25% from their levels of 1913. A reasonable man might have concluded that the pound - loosed from gold - would likely float lower. It did. But then, a bull market in the pound in the early '20s produced a "sensational" run up in sterling. By 1924, the pound was once again trading at pre-war levels. Taking the bait, Churchill fixed it by law. The result was disastrous. "The revenge of gold," declared the French newspaper, Le Temps. Churchill realized his error almost immediately. "Something terrible is beginning to happen to the economy," he said, adding "If that happens I hope Norman Montagu will be hung." "It was the biggest mistake of my life," Churchill later said to his doctor. General Foch, returning from a visit to London in June 1925, described the situation: "England's government coffers are full. But the economic situation is poor...and its industry is operating at half-speed. From every side, you hear complaints that British producers can't possibly compete with foreign suppliers..." Churchill's mistake had far-reaching consequences. As England grew weaker, Germany grew stronger. Another French commentator: "We thought Germany had been sidelined for a long time, if not forever. But barely 7 years after the war, she has become an even more dangerous rival." Churchill's mistake did nothing to enhance the glory of gold. Many believed it was the gold standard itself that was at fault...a few even blamed it for the '29 crash...or for the inability of the government to correct the Great Depression that followed. Alas, the gold standard had entered a bear market... More to come... Your editor, always trying to connect the dots...but no longer so sure what picture it will give him... Bill Bonner | 
