09/28/03
And now… Eric Fry, live from New York!
The September jinx remains alive and well.
“It wasn’t a good week to own anything,” one professional investor griped to your New York editor yesterday. “Gold fell, stocks fell, and gold stocks REALLY fell.” The XAU Index of gold stocks tumbled 6% for the week, despite hitting a fresh six-year high on Thursday.
But almost no one cared about the pain and suffering of the gold bulls; most investors were preoccupied with their own pain and suffering, as the Dow fell 3.5% to 9,313 and the Nasdaq dropped 5.5% to 1,792. The steep stock market losses plunged all of the major market averages into the red for the month…
The bond market, meanwhile, floated comfortably above the fray. The 10-year Treasury note gained ground for the sixth straight week, lowering its yield to 4.02% from 4.15% at the close of last week’s trading. For the week, the dollar slumped about 1% against the euro to $1.1483.
Despite the slumping dollar and stock market, gold ended the week with a loss of more than $1 an ounce, just one day after hitting a seven-year high of $394.80. The yellow metal seemed to have trouble acclimating itself to the rarefied air near $400. Gasping for breath, it stumbled to lower and lower elevations until collapsing Friday afternoon at $381.80 an ounce, its lowest close since Sept. 18.
Oh well, maybe next week will be better for the gold market.
Thursday morning, your Paris editor anticipated the gold market’s unnerving volatility by observing, “We remember urging you to buy gold when it fell below $350. We don’t remember buying it ourselves. Now we don’t know what to do. The price will go up and down. If it does what we expect, buying at $388 – today’s price - will turn out to be a brilliant move; gold will go over $1,000 before this bull market is over. But if it falls back below $350, we will feel like idiots for buying at $388…
“Likewise, the euro. We suspect that the euro will rise to $1.50 or $2.00 before this cycle is over. We feel a little stupid buying euros at $1.14 when we could have bought all we wanted at 88 cents. But how much stupider will we feel when the euro hits $2.00?”
We would feel stupid, all right, but still not as stupid as a CNBC commentator. In a departure from his habitual creative process, your New York editor did not “mute” the television while working in his office. So, while typing away at his keyboard on Thursday, he overheard a parade of experts on CNBC offering up a series of absurd comments about the stock market.
Your editor learned, for example, that the Dow “would have” produced a nice gain Thursday, “if only Eastman Kodak’s 4-point drop hadn’t pulled the blue-chip average into the red.” He also learned that retail sales “would have” been much stronger, “if only Hurricane Isabel hadn’t dampened economic activity.”
It is equally true, we suppose, that the stock market averages “would have” advanced last week, if only fewer stocks had fallen. Or that Amazon “would have” earned billions of dollars last year, if only it hadn’t deducted its expenses from its gross revenues. Or that the Titanic undefined ex-icebergs — “would have” completed its maiden voyage.
So you see, the world is a perfect place, and the U.S. financial markets are perfect in every detail, except for the imperfect items that do not rightfully belong in a perfect world. The stock market has been near-perfect all year, despite the various imperfections plaguing the U.S. economy — the most glaring imperfection of which is the weakening U.S. dollar, which has slipped 12% against the euro year-to-date and more than 35% against gold over the last two years… Of course, the dollar would have been much stronger, if only the euro and gold had been much weaker.
For several months, Fed Chairman Greenspan has been damning the dollar with faint praise. Not surprisingly, he is succeeding. The dollar’s value tends to slide downhill, even when Chairman Greenspan isn’t pushing from behind.
In the olden days, of course, the Fed was supposed to pursue “monetary stability.” But in the enlightened 22nd century, the Fed pursues much grander designs. It imagines itself a kind of marionette to the world’s largest economy, making it dance whenever it wishes, simply by tugging on one little interest rate… or by tugging on the dollar. And so it tugs, hoping to revive the economy.
The dollar as a “store of value” is anathema to the shamans at the Fed. Rather, for the sake of the economy, the Fed seems to desire that each crisp new dollar bill begin losing its value the moment foreign creditors drive them off the U.S. mint’s showroom floor.
Who else besides Alan Greenspan and Treasury Secretary Snow would imagine that a feeble currency could pave the road to prosperity?… Investors, at least, seem to have some doubts. As the dollar slips, so do stocks and so does the bravado of investors.
We’ve seen this movie before… and it doesn’t have a happy ending.
Eric Fry,
The Daily Reckoning
P.S. You’ll find this week in The Daily Reckoning… Bill’s essay “Hurt” is a classic. If you didn’t get a chance to read it yet, we highly recommend it.
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THIS WEEK in THE DAILY RECKONING
HURT (09/26/03)
by Bill Bonner
“… When the Grim Reaper comes around for a politician of consequence… a Roosevelt or a Lincoln, for instance… apologists make a great effort to turn him into a kind of plastic archangel. An honest man, on the other hand, ought to get an honest send off. John R. Cash brought dew to our eyes when he died a couple of weeks ago. Now that the man is dead, we feel poorer. We have lost something. Not a fulminating vote-getter, but a real man with decent instincts and genuine feelings… ”
THE NEXT EMPIRE (09/25/03)
by James Boxley Cooke
“… Even with the current global economic slowdown, China is still likely to grow at more than 7% a year. That’s a huge number for an economy this size. And it represents huge potential profits for us as investors. Yet for all its potential, many investors still blanch when it comes to investing in this part of the world, noting that China is still a communist nation with a notoriously corrupt bureaucracy and only a gradually evolving rule of law. Are there enough positives to justify risking his capital in this part of the world?… “
EMPLOYMENT DISASTER (09/24/03)
by Dr. Kurt Richebächer
“There has been much talk to the effect that America has just had its slightest recession in the whole postwar period. That is measured in real GDP growth, being bolstered by many statistical tricks. Measured, however, by job losses, which certainly are the far more important gauge, it is already America’s worst recession by far.”
NEPAL (09/23/03)
by Marc Faber
“… [Would] Asian stock markets… suffer should the U.S. stock market experience a serious correction or a crash in the next few months? This question prompted me to look at some very simple economic, financial, and social statistics in Asia, and to compare them to the rest of the world. My conclusion? The long-term favorable potential of the Asian region may remain intact even if the Western economies were to weaken once again. In fact, a decoupling of the Asian stock markets from the performance of the U.S. is a distinct possibility… “
TRADE POLICIES OF THE CAVEMEN (09/22/03)
by the Mogambo Guru
“… Just as Michael Boskin showed the government how to lie with statistics about inflation – as if the government ever needed any help with lying, since they seem to cleave to it so naturally – our sainted leaders make ludicrous assumptions about adjusting prices for quality and the substitution effect and all the rest of that lying crapola that any second-grade kid can easily see through. But to get with the program and show that I am a team player, I want to prove to you that the Mogambo can be just as clever, and has just as many tricks up his economic sleeve… “
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