Election Year Emergency Survival Kit

The Daily Reckoning Weekend Edition
October 2-3, 2004
Baltimore, Maryland
By Addison Wiggin and Tom Dyson

In the subject line it read: "The most intelligent thing I have read in a long time."

The email continued: "I know I’ve sent a couple of ‘must read’ items already today, but this one has to join them… "

It turns out Bill Gross and Steve Roach were swapping notes on the global economy. The candid exchange took place over email during late August and early September and was posted at Morgan Stanley’s website. A reader forwarded us the thread…

"Bill, I don’t know about you, but I’ve lost confidence in the world’s fiscal authorities." Roach is almost desperate. "[B]y fuelling the debt-driven super-liquidity cycle of the past several years, they, too, have now become part of the problem, I fear."

The bond man’s response: "While I would concur that monetary authorities have been drinking with reckless abandon without turning over the keys to a designated driver, there’s only so much I can do. What? Sell my bonds and accept their penal yield of 1.5% in short-term paper?"

"Central bankers used to be the tough guys," retorts Roach, "and you used to be one of the world’s leading bond market vigilantes who held them accountable for doing the right thing. Where are the vigilantes now that we really need them?"

"So the world’s on my shoulders now?" retorts Gross, in an email back to Morgan Stanley’s chief economist. "My first obligation is to my clients."

1.5% may look pretty decent to some folks, we’d wager, even to some of Gross’ clients. But drunken monetary authorities? We certainly wouldn’t be lending them any of our disposable earnings.

The market currently offers 4.95% for anyone who buys a 30-year Treasury bond and 4.19% for a 10-year bond. The market may soon have to offer even higher yields… bonds turned sharply lower last week. 10-year yield rose 16 basis points, while the long end of the curve climbed 15 points.

$100 lent to the U.S. government, interest compounded, will be worth $374.53 in 2034.

Meanwhile, the goons in power make the monetary authorities look tightfisted with their spending plans.

The Congressional Budget Office shows Bush’s people have transformed a 10-year projected surplus of $5.6 trillion to a deficit of $4.4 trillion in roughly 32 months: a turnaround of $10 trillion. "This is the sort of level one associates with a Third World kleptocracy," comments William Bryk in a piece titled: the conservative case against George W. Bush. Readers can find a link to the article in the P.S. to today’s edition.

And what about this projection: government debt will rise from 37 percent of the economy today to 69% percent in 2020 and 250% in 2040. This isn’t some half-baked prediction overheard at the horse track either… Charles Kolb – who served under Reagan and George H.W. Bush – presented these figures to Congress in a sworn testimony earlier this year.

If you cut taxes and increase spending, at some point, someone has to pay. Payment is reached in two ways: by stoking inflation and destroying the currency or by raising taxes. The former is politically viable in the short-term but ultimately destructive, while the latter is repugnant but ultimately healthy.

We watched the Presidential Debate on Thursday evening…

Bush and Kerry will argue about all kinds of things, but neither man can suggest a solution to America’s debt. They’ll both just make the problem worse.

The markets felt twitchy last week, and we saw big moves in many sectors. The commodity arena stole the limelight. Not only did crude oil pass $50 for the first time, industrial metals also made sharp moves higher. Aluminium prices hit a fresh 9-year high. Lead hit its highest price since the contract converted from a sterling denomination into a U.S. dollar denomination in 1993. Copper passed $3000 a tonne and nickel prices have risen 25% in the past two weeks.

Are commodity markets anticipating another growth spurt from the world’s economy? Equity investors think so. They pushed the Nasdaq up 2.4% on Friday alone. And for the week, the Nasdaq was up 62 points, or 3%, closing at 1,942. The Dow ended at 10,193, a weekly gain of 205 points.

Gold forged a new 6-month high, closing the week at just less than $420 an ounce.

It’s raining. There’s 70,000 people crowding one of Baltimore’s outlying barrios for the Fell’s Point festival. We must join them.

Regards,

Tom Dyson,
The Daily Reckoning
October 2, 2004

P.S. "The Conservative case against George W. Bush," the article we referenced above, by William Bryk, is an excellent and well thought out piece of writing and an article we think readers will enjoy.

— Daily Reckoning Book Of The Week —

Telecosm by George Gilder

George Gilder is best known to the public as a mouthpiece for the tech revolution and a symbol of catastrophic investor stock losses.

But readers of the Daily Reckoning will be more familiar with George Gilder as the man who stood up and heckled Bill Bonner at the Las Vegas MoneyShow. Bill was giving a speech to over a thousand people when Gilder repeatedly raised his arm and interrupted.

Regardless of Gilder’s abrasive approach, Telecosm is an excellent book focusing on the telecom revolution and Gilder’s view of the future, written with commanding knowledge and in lyrical prose…

Above all, Telecosm – and Gilder – will help you understand and avoid the next speculative bubble, without even intending to do so!

THIS WEEK in THE DAILY RECKONING

GOOD GUYS VS BAD GUYS 10/1/04
By Bill Bonner

"… More and more, we see columnists, pundits, military strategists, politicians and even friends of ours refer to America’s purported enemies as "the bad guys." No one knows who the bad guys actually are or why they are so bad, but we all know the difference between a "bad guy" and a "good" one… "

THROUGH THE ROOF AND TO THE MOON 9/30/04
By Doug Casey

"… That’s the good news. The bad news is that something called the business cycle still exists, which evidences itself in periodic booms and busts. We’ve had a tremendous boom from 1982 on. Must it result in a serious bust? In a word, yes… "

WHITE ELEPHANTS                                  9/29/04
By Chris Mayer

"… How did Forepaugh do it? Easy. He faked it. His animal trainers and handlers scrubbed an ordinary gray elephant with white plaster and used peach-colored tint around the animal’s ears, trunk and feet… "

DEFICITS-R-US                                            9/28/04
By Karim Rahemtulla

"… Pretending to be a doomsayer would be too easy. Pretending to know when gold will reach that next magical plateau of $500, if ever, would be crazy. I am a pragmatist. What I do know is that the value of my currency, the dollar, is being eroded daily with no end in sight… "

REMARKABLY ROBUST                                9/27/04
By The Mogambo Guru

"… And furthermore, I am afraid that this 20-something woman, despite her obvious genius, confuses the anomaly of the last 54 years with the last 5,000 years. And when one examines that historical record, one finds there has never been an economy that has proven to be sufficiently ‘robust’ to permanently withstand the kind of economic, death-by-debt stupidity that we are exhibiting… "

———————-

HEADLINE, NEWS And INSIGHT:

Economic Warfare
by Dan Denning

"The market is not a school-crossing officer or social worker. It does not wait to make sure every last person keeps up. In other words, China’s transition is likely be volatile and awfully difficult to muddle through"

The Midas Touch
by Dr. Steve Sjuggerud

"Gold coins offer the best opportunity to do this in the investment world right now. If the last few coin bull markets are any indication, you could literally make hundreds of percent in the next few years. It’s happened before… ."

Flawed Intelligence
by Lord William Rees-Mogg

"… Some Europeans believe that the alliance should pull out of Iraq. My conclusion is that there is no safe exit. If the United States and Britain withdraw, the consequences will be terrible. Islamic terrorism will have won its great victory and will be reinforced in every way… "

FLOTSAM AND JETSAM: THE CONSERVATIVE CASE AGAINST GEORGE W. BUSH

"Forty years ago, when Lyndon Johnson believed the United States could afford both Great Society and the Vietnam War, conservatives attacked his fiscal policies as extravagant and reckless. Ten years ago, the Republican Party regained control of Congress with the Contract with America, which included a balanced-budget amendment to restore fiscal responsibility. But today, thanks to tax cuts and massively increased military spending, the Bush administration has transformed, according to the Congressional Budget Office, a ten-year projected surplus of $5.6 trillion to a deficit of $4.4 trillion: a turnaround of $10 trillion in roughly 32 months."

"The Bush Administration can’t even pretend to keep an arm’s length from Halliburton, the master of the no-bid government contract. Sugar, grain, cotton, oil, gas and coal: These industries enjoy increased subsidies and targeted tax breaks not enjoyed by less-connected industries. The conservative Heritage Foundation blasts the administration’s agricultural subsidies as the nation’s most wasteful corporate welfare program."

"The libertarian Cato Institute called the administration’s energy plan ‘three parts corporate welfare and one part cynical politics… a smorgasbord of handouts and subsidies for virtually every energy lobby in Washington’ that ‘does little but transfer wealth from taxpayers to well-connected energy lobbies.’ And the Republican Party’s Medicare drug benefit, the largest single expansion of the welfare state since Lyndon Johnson’s Great Society, was designed to appeal to senior citizens who, as any competent politician knows, show up at the polls… "