Joel Bowman, reading aloud today's program from a tiny island off the Chinese coastline... We've got a lot to get through today, dear reader. The dollar is in the dumps again and, partly due to that fact, gold continues to shatter records. Both Eric and Bill have words on our favorite yellow metal and where equities and the greenback fit into the story. Also today, Bill traces a long line of American political incompetence all the way back to...wait for it...the French! Well, at least to one Frenchman. Please enjoy today's issue and feel free to send any and all comments along to your managing editor at joel@dailyreckoning.com And now, here's Eric Fry, reporting from Laguna Beach, California... As the dollar careened toward a 15-month low yesterday, gold zoomed to a new all-time high. Once the dust finally settled, the Dollar Index closed the New York trading session at 74.41 - its lowest closing price since August 7, 2008, the day AIG reported the third of its shockingly large quarterly losses. Back in those days, the world at large was just beginning to learn the full extent of the rot that permeated the US financial system...and about the rodents who nourished themselves off the rot. But the Treasury and the Fed were already meeting in their war rooms, drawing up plans and arranging strategic alliances with various scoundrels. Bear Stearns, Fannie Mae and Freddie Mac had already gone bust. AIG and Lehman Bros. were on their way. But even before these shocking stories first crossed the newswires, the US Treasury and Federal Reserve began waging an all-out war against the forces of deflation and Depression. Their "secret weapon"? Dollar depreciation. Flood the financial system with liquidity, the heads of the Federal Reserve and the US Treasury reasoned, and the burdens of extreme indebtedness will become less burdensome. Banks can recapitalize their balance sheets and the financial sector can recover. This reasoning seems reasonable...until you understand that "liquidity" is just shorthand for "printing dollars." If the Federal Reserve did not conjure dollar bills into existence from thin air, it could not create any additional liquidity for the system. It's as simple as that. But of course, the processes that actually funnel liquidity into the financial system are not simple at all. They are cloaked in the sober language of economist jargon and conducted under the veil of opaque and complex transactions between innumerable "lending facilities" and counter-parties. To do anything less would be irresponsible. But the net effect of these complex processes is no different than turning on a printing press, leaving a monkey in charge of replacing the toner cartridges and going on vacation to Tahiti for a month. By the time you had returned - tanned and rested - you'd find hundreds of billions of new dollar bills all over the place, dozens of empty toner cartridges and one pissed off monkey. This situation, more or less, resembles the current condition of the US monetary system. The US money supply has exploded and the global monetary system is a messed. You won't find any pissed off monkeys, but you'll find plenty of pissed off dollar-holders. These folks are not happy that US monetary authorities are intentionally sacrificing the dollar's purchasing power in order to rescue the economy. Thus, to return to our military metaphor, the dollar's value is taking more direct hits than an Al Qaeda hideout. Nevertheless, Generals Bernanke and Geithner are claiming victory against deflation and Depression. And maybe that's true...as long as you ignore the rockets' red glare and the bombs bursting in air over the foreign exchange markets. But the gold market is not ignoring these monetary pyrotechnics, which is why the gold price advanced to a new all-time high yesterday of $1,200 an ounce.
The stock market is not oblivious to the dollar's weakness either...nor to the inflationary implications of the greenback's withering purchasing power. In fact, the stock market is behaving very much like a pure inflation hedge. Every day that the dollar loses big, the stock market gains big...and vice versa. In other words, the struggling American economy does not seem to validate the soaring stock market. But the dollar's weakness does...at least partly. Unfortunately, a bull market in stocks that relies more upon dollar-hedging than underlying economic strength is a bull market that should leap out of bed every morning, grateful for one more day. The stock market might continue leaping out of bed for many days, or weeks, to come. But the risks are increasing that this seemingly healthy stock market won't be able to fog a mirror. In fact, some of the "market internals" are already showing signs of deteriorating health.
As the top half of the nearby chart shows, small cap stocks and finance company stocks led the rest of the stock market out of the depths of the March lows. But as the bottom half of this chart shows, the same sectors that led the stock market off the bottom are now leading in the opposite direction. During the last seven weeks, while the Dow has advanced 5%, the Value Line Index has slumped nearly 5% and Goldman Sachs has tumbled 13%. These striking divergences do not necessarily bode ill for the entire stock market, but like a low white blood cell count, they do not bode well. [The nearby chart would illustrate the intended point even more clearly if our graphics art department had not made one slight error. The top half shows the performance of Goldman Sachs, the Value Line Index and the Dow Jones Industrial Average between March 9 and October 14. The bottom half shows these same securities and indices from October 14 to the present.] --- Critical Agora Financial Account Information* --- Attn: Agora Financial Reader - A Quick Word From our Publisher: Do any of the following apply to you?
If any of these scenarios do apply to you, the following message directly affects your account with Agora Financial. Please take a few moments to review this important message to ensure you are getting all the benefits included in your AF membership. *In some cases, existing members may be entitled to a partial refund and/or additional services at no extra charge. Cont. Here. --------------------------------------------------------------- Bill Bonner continues the discussion regarding our favorite metal in today's column, below, but first, here he is with a few words for the Feds... The crisis is over, say the feds. Now, they can begin turning off the taps. "Fed takes first step in exit strategy," is the headline in The Financial Times. A more accurate headline would have been... "Fed dodges and weaves...fakes exit." The only way to exit is by the door the Fed came in. It barged into the market buying up toxic assets and Treasury notes and bonds. In order to get back out the door, it has to get rid of all the debt it gobbled up. How? It has to sell them back to the people it bought them from - or to someone else. Instead, the Fed has come up with a subterfuge: the reverse repo. "In a reverse repo," The Financial Times explains, "the Fed sells assets, such as Treasury securities, to dealers for cash, with an agreement to buy them back later at a slightly higher price..." No kidding. That's what it says. Now, let us put the question to you, dear reader. Having thus reverse repo-ed a boatload of debt, has the Fed:
If you answered "all of the above" you are not paying attention to the choices we've given you. It's not on the list. Still, it's probably the right answer... The Fed says it's going to try out this reverse repo trick and see how it works. We can tell them now. Save them some trouble. Either the Fed is the bagman of bad US debt, or it is not. It is either in or out. Long or short. Either Fannie Mae, AIG, GM are backed by the government or they're not. If they're not, the market will sort them out in its own good time. If they are the bagmen...well, then, the feds will squirm and dissemble...get themselves in deeper and deeper...until, finally, the bags drag them beneath the surface. This reverse repo is just a scam to disguise the situation...so the Fed can pretend to exit without actually going out the door. And now, for today's column... | ||||||||
The Daily Reckoning PRESENTS: So you bought a few ounces of gold back when it was at $250 an ounce. Good for you. Now what? Do you sell your ingots and buy a sports car with the profits...or trade in your old clunker and buy more of the metal? Is it time to buy or sell? Bill Bonner offers some observations in today's reckoning. Please enjoy... Gold Gone Wild By Bill Bonner London England Yesterday, gold closed at $1,200. Long-term Daily Reckoning sufferers can finally hold their heads up. We bought gold at the beginning of the bull market. New readers, with no gold buried in their back yards, may wonder: is it too late? Here is a quick answer: no. We're still a long way from gold's ultimate destination. Our 'Trade of the Decade' was to buy gold on dips and sell stocks on rallies. The idea of that trade was that gold and stocks were going in opposite directions. Stocks were supposed to go down. Gold was supposed to go up. They would meet at some point, we imagined. But lately they've been going in the same direction. Yesterday, for example, stocks rose with gold; the Dow added 126 points. Which poses a bit of a dilemma. We think stocks are more likely to go down than up. Will gold go down too? Yes, probably. Does that mean you shouldn't buy gold here? No, not necessarily. If you're trading, we'd suggest you wait. Gold is ready for a correction. But it is usually a mistake to trade in an out during a major bull market. If the trade goes against you, you end up sitting by the sidelines as the market roars forward. You miss the best part. Gold's best part is still ahead. And this is not just a bull market; this is a fortune maker. Gold still hasn't entered the bubble phase. It is just a very strong bull market. Eventually, it will soar...adding $100 in a single day. It will take our breath away. You want to be in it when that happens. But is $1,200 the best price you can get to enter the gold market? Probably not. But it's not a bad price. You can wait for a better one; but don't wait too long. John Hussman puts the odds of a major market crash sometime in the next 12 months at 80%. If stocks go, gold is likely to go down too. And it could stay down for a long time. We keep our Crash Alert flag flying...and have a hunch the crash will come sooner rather than later. Day after day, the bubble gets bigger...and the pins get closer. Greece? Britain? The US? Real estate? GDP? Bond sales? Christmas sales? So many pins...so little time. One of the biggest pins is the record borrowing by governments. The longer it goes on...the bigger, sharper and closer the pin becomes. Dubai was nothing...like getting stuck by a mosquito. It itches. It swells. But it does no lasting damage. It could be much worse. Now, the government of Dubai says that Dubai World is on its own. Good luck to the lenders. Those Arabs are pretty smart. If the US feds had only done that with AIG, GM, Fannie Mae and other big debtors...the whole thing might have blown up and blown over ...and now we'd be picking up the pieces and getting back to work. Instead, the pols and central bankers trod in where angels and sensible investors feared to go at all. Now, they're wondering how to tread out. Germany announced that its deficit would not be as big as expected. Instead of 49 billion euros, it will be only 39 billion - below 3% of GDP this year. France says it's bringing its deficits down too - to less than 3% of GDP by 2013. The US and the UK, on the other hand, are out of control - with deficits over 12% of GDP and no credible plans for substantial reductions. As we reported last week, these deficits are largely structural - that is, they are the product of many years of mismanagement, not just this year's crisis-respond claptrap. It's hard to bring them down because they include public health, unemployment, social security and defense measures that are very difficult to stop. Yes, stocks will react, eventually. Gold will come down with them. Then, at some point in the future, gold and stocks will de-couple...and gold will head to the moon. Regards, Bill Bonner for The Daily Reckoning Joel's Note: They say you can't teach an old dog new tricks; but even a few of the old gold hounds might be interested to know these five ways to get into our favorite precious metal...including one way of owning it for as little as a penny per ounce. Interested parties will find all the info here. ------------------------------------------------------------------ And finally, Bill has some thoughts for today's endnote... We talked about the origins of US government scofflaw-ism a couple of days ago and promised a follow up. What sparked the idea was the recent newspaper report that President Obama has called for an extension of George Bush's post-9/11 emergency measures - such as eavesdropping and the suspension of the Bill of Rights in terrorist cases. Today, we see that he has announced another troop surge in Afghanistan, with no declaration of war from the US Congress (whom would they declare war against?) We pin this lawlessness on Napoleon Bonaparte's nephew, Charles Joseph Bonaparte. This story comes to us from one of our favorite raconteurs of Baltimore history - H.L. Mencken. It answers a question we posed ourselves for many years: what happened to them? The Bonapartes of Baltimore...that is. Jerome Bonaparte, Napoleon's younger brother, came to Baltimore in the early 19th century. There, he met the beautiful Betsy Patterson, from a prosperous Scotch-Irish family that gave its name to a leafy park that later became a center for drug use and homicides. But back in the 19th century, Baltimore was still a civilized place. And when Napoleon's bro' came, he was apparently attracted both by the energy of the place as well as the seductive charm of Ms. Patterson. Jerome stayed in Baltimore long enough to leave his name on the founders' brass plaque in the Maryland Club, of which your editor is a member, and to leave Ms. Patterson with child. Later, under Napoleon's heavy thumb, he rejected his Baltimore connections in order to aim for something grander, leaving the aforementioned Ms. Patterson abandoned in Paris...later to return, enfant en main, to Baltimore. This issue - Jerome Bonaparte-Patterson -- had two sons of his own, one of whom, Charles Joseph, devoted himself to public service....which is to say, he became a dangerous and meddlesome hack. Somehow, he caught the eye of Theodore Roosevelt, who had just enough knowledge of history to be flattered at the thought of a Bonaparte under his command, so he put him in as his Secretary of the Navy. "He was the worst Secretary of the Navy ever heard of," writes Mencken. He did not move to Washington, which was seen as a step in the wrong direction in those days. Instead, he kept his house in Baltimore and took the train down to the Navy Department in Washington. By the time he got down to work it was time for lunch. After dinning, he turned around and went home. This proved that he had the talent for even greater responsibility in Washington, so Roosevelt elevated him to Attorney General. Normally, a semi-comatose Attorney General is the best kind. He is not chasing terrorists or Dadaists or climatologists. Bonaparte was one of the best. For three years, he did nothing. Then, something stirred him to action. Roosevelt had his eye on a group of Italian immigrants in Paterson, New Jersey. He was sure they were undermining the republic with seditious literature. They were anarchists, with a small circulation newspaper, written in Italian, who were no danger to anyone, except perhaps themselves. Nevertheless, Roosevelt thought he heard the walls crack. He was determined to stop them before the roof fell in. So he put his Attorney General on the case. The trouble was that Mr. Bonaparte had sworn to uphold the law of the land. And the law of the land clearly gave the anarchists freedom of the press. It was then that the Roosevelt/Bonaparte team came up with a model for all the scalawags and scoundrels who have ever since smudged high office in the United States of America. They simply ignored the law and banned the Italians' rag from the US mail. Thus was established the hallowed principle of American jurisprudence -- it is perfectly all right to turn your back on the highest and most sacred laws of the land, as long as you can get away with. Until tomorrow, Bill Bonner for The Daily Reckoning | ||||||||
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Wednesday, 2 December 2009
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