10/05/03
Eric Fry, lost in the wilds of New York’s financial district…
Stocks soared… Gold swooned… It was a wild week on Wall Street, as the financial markets thumbed their noses at Poor Richard’s dictum: "Moderation in all things." Stocks, bonds, gold and the dollar cavorted with one another all week, and their behavior was anything but moderate. To start the week, stocks tumbled, then soared… bonds soared, then tumbled… the dollar tumbled, then bounced a bit… while gold bounced a bit, then tumbled.
The Dow Jones Industrial Average closed out a losing September by falling a cumulative 40 points on Monday and Tuesday. But a revitalized Dow showed up for work on Wednesday, and seemed to find the new month very much to its liking. The dividing line between September and October was as distinct as the old dividing line between East and West Berlin at "Checkpoint Charlie." On Wednesday, October 1st, stocks raced ahead like an escaping East Berliner, and never looked back. For the week, the Dow piled on 2.8% to 9,572 and the Nasdaq heaped up a 4.9% gain to 1,880.
The bond market played yin to the stock market’s yang, soaring early in the week, then sliding steadily downhill through the end of Friday’s trading. Consequently, yields jumped sharply. The 10-year Treasury yield, which touched a three-month low of 3.91% on Wednesday, finished the week at 4.20%. The dollar fared as badly as the bond market, falling to $1.156 per euro from $1.144 last week.
Despite the extreme volatility rocking the financial markets, gold struggled all week and then seemed to collapse in an exhausted heap on Friday afternoon. The yellow metal cratered as much as $16 on Friday, before recovering to end the session $13.70 lower at $370.00 an ounce.
Why? Why? Why? Gold investors want to know. Shouldn’t a weak dollar and tumbling bond prices have lent support to the gold price? It should have, dear reader, it should have… but it didn’t. Other, less bullish, factors were also at work, as we can plainly see in hindsight.
For one thing, speculative positions in the gold market had become quite large. So, once the gold price started falling on Friday, the "specs" started unloading their positions, which fueled additional selling and, before long, you’ve got a wash-out. "Gold made a dramatic sell-off in just minutes Friday because very large traders liquidated their positions and triggered technical sell-stops in the market," one trader explained.
It was a rugged week for gold, no doubt about it. But we suspect the yellow metal will return to take another run at $400 an ounce sometime over the next few weeks… at least that’s our guess/hope/wish/prayer/plea.
Triggering the coincident stock market rally and bond market selloff Friday was the news from the Labor Department that the economy added 57,000 jobs in September. The increase in the labor force was the first such improvement since January. Unfortunately, the manufacturing sector continues to shed jobs. Manufacturers cut 29,000 jobs during the month, which was the 38th straight decline in the manufacturing sector.
Forgive us our skepticism, but we are a little baffled by the positive employment number. Mostly because we know that 400,000 individuals are filing claims for unemployment insurance week after week. How is it that the economy is adding jobs, when so many jobs are going away?
And if the economy is improving as much as the stock market’s rally suggests, why are Americans carrying more debt than ever before?
"Households have been on a borrowing spree," observes Northern Trust economist Asha Bangalore. "Household borrowing as a percentage of disposable personal income hit a new high of 12.4% in the second quarter. This measure of household borrowing reflects mortgage borrowing, credit card borrowing, borrowing from banks and the like… Household borrowing is not only at a record high, but a new aspect has emerged – household borrowing advanced during the recession unlike in every other post-war recession when households reduced borrowing. The good news is that consumer demand continues to advance with the support from borrowing."
The bad news is that no economy has ever borrowed its way to prosperity.
Eric Fry,
The Daily Reckoning
October 4-5, 2003
P.S. If you’re close to a TV and have the inclination next week, you might catch your Manhattan correspondent on CNNfn next Wednesday through Friday (the morning show, "Market Call", runs from 9 to 11 A.M.).
A week in the Daily Reckoning lies below…
And finally – have you had a chance to order Bill and Addison’s new book, Financial Reckoning Day? We are still awaiting our copy, with increasing impatience. However, we’re told Amazon.com still has stock and is shipping regularly…
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THIS WEEK in THE DAILY RECKONING
POOR HOUSE, PART I (10/03/03)
by Bill Bonner
"… Many are the reasons given why real estate prices must continue to rise. On the other hand, we immediately see one reason why they might all be wrong: everyone believes them. As they say on Wall Street, when everyone thinks the same thing, no one is thinking. And so we began to think… and came to a disturbing conclusion. The average house, we believe, is a dangerous place for your money. But since this little aperçu is completely at odds with the entire corpus of modern household economics, clearly the burden of proof is on us. Fair enough… "
MYANMAR EXAMINED (10/02/03)
by Jim Rogers
"… Various armed separatist movements have dominated [Myanmar's] politics over the last four decades. Nevertheless, in the ’90s, Myanmar slowly began to reopen its borders to both people and capital – a process that continues today. Considering the wealth of natural resources and labor advantages a liberalized Myanmar could potentially offer, it’s worth taking a closer look at where the country is headed… "
THE GILDERED AGE (10/01/03)
by Bill Bonner
"… It doesn’t seem real. It doesn’t seem right. ‘Most of us know,’ writes Malone, ‘intuitively, that these young web companies minted by the hour will not survive and prosper. In the coming reckoning, investors will lose money, retirement funds will be erased and the valuations that rule the stock market will become rational.’ That seems to be the sentiment of Metcalfe and Moore too. It is as if they had come back to the Valley and found their tribesmen had turned the Internet Age into an absurd parody of the land of milk and honey they sought… "
THE MYSTERY OF WYNDCLYFFE (09/30/03)
by Addison Wiggin
"… The Fed and Treasury have lost their way altogether. Gone are the days when self reliance meant busting your gut to build a house, a factory… or even a fine piece of furniture. Now, credit lines grow ever longer and home equity loans more ubiquitous. Boobus Americanus – to borrow a phrase from HL Mencken, by way of our friend Doug Casey – has regressed along the line from ‘know-how’ to ‘nowhere.’ And judging from the reader mail we expect to receive upon publication of this letter, they’re quite belligerent about it… "
THE FED’S FREE LUNCH PROGRAM (09/29/03)
by the Mogambo Guru
"… Bernanke says that he will be happy to achieve monetary policy objectives by unconventional means, and nobody gets all shook up, except me. So I figure that we bedeviled savers out here ought to emulate Bernanke and his Fed, and commit ‘unconventional’ acts of our own. We have got to get our money back here! We are suffering deflation in our discretionary spending account! We demand the same rights as the Federal Reserve! We demand the right to commit unconventional acts and get away with them!… "
Addison Wiggin
Addison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. He’s the creator and editorial director of Agora Financial’s daily 5 Min. Forecast and editorial director of The Daily Reckoning. Wiggin is the founder of Agora Entertainment, executive producer and co-writer of I.O.U.S.A., which was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival, the 2009 Critics Choice Award for Best Documentary Feature, and was also shortlisted for a 2009 Academy Award. He is the author of the companion book of the film I.O.U.S.A.and his second edition of The Demise of the Dollar… and Why it’s Even Better for Your Investments was just fully revised and updated. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times Magazine, The Economist, Worth, The New York Times, The Washington Post as well as major network news programs. He also co-authored international bestsellers Financial Reckoning Day and Empire of Debt with Bill Bonner.
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