Reformation

"Bonner – give up your passport and your citizenship…"

– A Daily Reckoning sufferer

"This is a quiet Sunday," explained a gray-haired woman speaking from the pulpit, "between the ascension of Christ last week and the coming of the spirit at Pentecost next week."

It was as quiet as a tomb this past Sunday in the church at Bourg Archambault. Almost no one was there – not even a priest. Your editor and two of his children could choose almost any pew they wanted – even arriving at the last minute. Entering, we stepped upon a granite threshold worn into a bowl shape by centuries of feet, marking the rhythms of the church calendar. At our back, the balcony – which must have been built to house the overflow of the faithful – was completely empty.

So low has the stock of the Catholic church fallen that churchgoers in France no longer have to get there early. Except on certain ceremonial occasions, there are always plenty of empty seats. Spiders can spin their webs in almost any corner of almost any church in the Old World and rest at ease; they will not be disturbed.

The old priests are dying off – along with the parishioners…leaving little groups gathered on Sunday mornings to worship without clerical guidance. There is a shortage of new priests. But what does the church have to offer the young? Celibacy? Poverty? Dreary lives spent in dreary places listening to dreary passages from ancient texts? And no stock options…

While the star of traditional Catholicism has fallen, new bulbs have been plugged in to take its place – reason, politics and the state! While the world once basked in the light of faith, religion and the church… now an unnatural neon light shines into nearly every heart…and flickers into every nook and crevice of the modern world.

Today’s world is lit up by politics as the medieval world was once illuminated by religion. But when a light is everywhere, all the time, who notices it? "That’s just the way things are," people say to themselves – until the light goes out.

People in the Middle Ages did not even notice religion. It was everywhere. Their lives were organized around it – with religious events punctuating every important phase of life…and providing meaning and explanation for all that happened.

"Well, we can bring the lemon trees out now," said our gardener on Sunday. "The ‘ice saints’ are past." The "ice saints," are the two Saints Days in early May that, in our area, traditionally mark the end of the risk of frost.

Religion was so important, people could not imagine life without it. The saints told them when to plant. The priests told them what to think…and what to do.

In today’s world, it is politics that is everywhere and in nearly everything. The newspapers are full of it. There is scarcely any little hideaway in the entire economy where a man can nap away from the glare of politics. Yet, Americans hardly notice. Even the libertarians think that politics is the way to freedom; they can’t imagine anything else. Got a problem? Think about it. Argue it in public. Put it to a vote. Pass a law.

Today, people think they can invent their own ethics and their own rules – binding themselves and others to whatever claptrap they come up with. Would it surprise you, dear reader, to discover that the rules they invent happen to be the most convenient for the fads and fashions of the time?

Nowhere on earth has this new faith reached such a zenith as in America. Hardly anywhere else on the planet are politicians, the stock market and the state held in such esteem.

The French are proud to be French, not because of their government – but in spite of it. In the time since the founding of the American republic, France has endured 5 republics, 2 monarchies, and 2 empires, not including Vichy France, which we’re not sure how to classify. They are no strangers to defeat…nor to treason…nor to complete confusion and national bankruptcy. They’ve seen governments, and currencies, come and go many times.

A friend gave me a book describing how nearly all of Napoleon’s top generals betrayed him – even Lafayette, whose help was critical in winning the American war of independence from Britain. Some of the generals betrayed him more than once…first when he was exiled to the Isle of Elba and again before the battle of Waterloo. Some were actively negotiating with enemy forces, passing on critical information at vital points in the campaign.

This kind of back-stabbing doesn’t contribute to battlefield victories, but it is a great boon to national cynicism. America’s weakness is that it has been too successful. People do not reflect carefully when things go well; they save their serious thinking for when things go badly. The Frenchman is a skeptic; he knows that things are not necessarily what they seem and that even this government and this year’s franc will one day be gone. The American, by contrast, is a true believer. In the long journey from feeble colonies to the edge of empire, Americans seem to have chucked their cynicism by the roadside.

The U.S. government and its money are considered permanent – like the Catholic Church in 1400. And in America, "freedom and democracy" are no longer subjects for examination, but objects of worship…popular myths, like the virgin birth and the transubstantiation of the flesh…and similarly, beyond question. Doubters risk excommunication. (See note from a Daily Reckoning reader, above.)

We realize, dear reader, that our criticism of American democracy puts us in a very small minority – so small, we might be all alone!

And why do we bother? We’re not sure. But we have a sneaking suspicion that politics, the Fed, the dollar, the stock market and America itself are all overbought.

Until recently, foreigners admired the U.S. even more than Americans. What greater act of flattery is there then to send $1.5 billion per day to a foreign country – in exchange for pieces of paper?

But foreign investors are more skeptical than Americans. And they are beginning to ask questions. What will happen to our U.S. investments if the dollar goes down, they want to know. How can a nation maintain the value of its currency when it produces so much of it? Might not the Americans be biting off more than they can chew…with their worldwide War Against Terror? What would happen if we foreigners stop financing the U.S.?

We have no way of knowing, of course. The present trend could last another century. Then again, there could be a reformation at any time.

Bill Bonner
Not trying to stir up trouble…just thinking…
May 13, 2002 — Paris, France

Stocks fell on Friday – 97 points. Why did they fall? No special reason. And as Eric points out below, even with Wednesday’s spectacular run-up, Wall Street ended the week lower than it began it.

But that’s what happens in a bear market. A piece of good news rolls down Wall Street and the market shoots up. But then, on no news at all, it gives up the gains and slowly and surely works its way down.

Meanwhile, gold seems headed in the opposite direction – little by little moving to higher ground as the stock market sinks. Even USA Today has noticed the trend. Harmony Gold is up 134% for the year, reports USA Today. Glamis is up 104%. Anglogold is up 61%. Meanwhile, the S&P 500 has lost 6.5% of its value.

And the steady rise of gold "could be a clue that the stock market is in more trouble than many realize…" says USA Today.

We had no doubt that stocks were in deeper doo doo than most people thought, but we’re troubled that gold is making headlines in major newspapers. The last thing a contrarian investor wants to see is too much favorable attention too soon. Could the gold bull market be old news already?

"Don’t worry about it," said my old friend Bob Bishop in Las Vegas last week. "So far, only the serious players are in this market. The public hasn’t even begun to move to gold. Of course, when that happens…gold will really shoot up…and it will be time to sell."

Eric…over to you…

******

Eric Fry, in the city that never sleeps…

– How rough is it out there in the stock market these days? Here’s a clue: Despite the biggest one-day rally of the year last Wednesday, all the major averages finished the week in the red. The NASDAQ, for example, soared nearly 8% last Wednesday. And yet the tech-laden index still managed to drop 0.8% for the week. Likewise, the Dow fell 0.7% and the S&P 500 lost 1.8%. That’s rough!

– Most investors aren’t accustomed to this sort of thing…(We used to call them "bear markets"). Stocks are supposed to go up, aren’t they? In fact, aren’t stocks supposed to go up at least 15% per year? Something is wrong here.

– The stock market’s frailty is as astonishing as the gold market’s resilience. It’s as if a mad scientist lured these two markets into his laboratory and fiendishly swapped their DNA. The stock market seems dejected and full of self-loathing. It rallies occasionally, merely to stumble even lower than before…just like the gold market used to do. The gold market, on the other hand, is brimming with confidence and vigor. It rallies and holds its ground…just like the stock market used to do. Hmmm…pretty weird.

– Gold is very "well bid," as the traders would say. And gold stocks are even more popular than the metal itself. Despite the fact that the yellow metal slipped about half a percent last week, gold stock mutual funds jumped 4.7%, according to Lipper Inc. Year-to-date, the gold funds have advanced a sparkling 53%.

– The higher they climb, the more fans they attract and the more vocal longtime gold bulls become. One by one, the gold bulls are emerging from their bunkers and attempting to rejoin polite society. The assimilation is made easier by the fact that polite society itself is becoming increasingly bullish about gold, for the first time in a more than 20 years.

– "A month from now, a year from now, five years from now – you choose the timing, because I won’t," writes Thom Calandra of CBS MarketWatch.com, as Addison pointed out in The Daily Reckoning Weekend Edition, "the price of an ounce of gold will be three to six times what it is now."

– In March of 2000, such a prediction would have been met by howls of laughter. Today, however, the only laughter you might hear in response to this prediction is a nervous chuckle – the kind of chuckle that says, "If you’re right, I’m in trouble."

– Judging from the near-vertical trajectory of many gold stocks, Calandra has plenty of company. For most of the last two decades you couldn’t give gold stocks away. But now, there aren’t enough of these relics around to satisfy all the new demand. So prices are jumping.

– Consider Central Fund of Canada (CEF), a closed-end fund that owns gold and silver bars. The fund does not mine gold; it merely holds the stuff in a vault up in Canada. To be precise, the fund holds 163,000 ounces of gold, 8.1 million ounces of silver and about $2 million in cash. In other words, CEF is like a publicly traded piggy bank that owns gold and silver. The funny thing about this piggy bank, however, is that investors have been paying more than $1.20 for every $1.00 worth of gold and silver that it holds.

– Historically, the Central Fund’s share price has tacked the underlying value fairly closely. The surging demand for CEF has caused its price to climb some 20% above the value of the gold and silver that the fund holds.

– Last week, CEF jumped 7% on trading volume that was about 20 times greater than normal. The jump occurred despite the fact that the gold price actually dipped slightly over the five-day span.

– Why, you ask, might folks pay $1.20 for $1.00 worth of gold? Not – I’m just guessing now – because they think the price of gold is heading lower.

– To be sure, buying, storing and insuring gold coins can be quite a hassle. (Not to mention the hassle of digging a big hole in the back yard). CEF provides a hassle-free, antiseptic alternative. Whether the convenience is worth paying a 20% premium is not for me to decide. I merely point out this pricing anomaly to illustrate how far the pendulum has swung in favor of gold investing.

– One year ago, most investors probably wouldn’t have paid 80 cents to own a $1.00 of gold. They knew they could make more money buying Cisco. Today, gold is the must-own investment of the year! Maybe it’s a little too popular at the moment for its own good. But we’ve got a long way to go before we start talking about a "gold bubble."

******

Back in Paris…

*** "It’s all over. Bernard Ebbers of Worldcom has won." So announced George Gilder to the readers of Wired magazine back in 1998. It looked like victory at the time. Worldcom had just brought MCI and Gilder was beside himself with admiration. Gilder thought Worldcom had won the race to wire the world.

*** Four years later, Ebbers is out. And last week Worldcom’s bonds were officially downgraded to junk status. Equity holders have done even worse than bond buyers. Shareholders who bought stock at its peak now find themselves down 96%.

*** The price of food fell 3.2% in April, it’s biggest drop in 28 years. What kind of inflation is this?

*** Poor Jules, 14, failed an important test at school two weeks ago. He doesn’t seem too upset about it. But it may mean that he has to find a new school next year. Elizabeth and I are meeting with the school principal tomorrow morning.

*** The schools are tough. For example, Jules is fluent in French and English, but the school requires a third language. So, he struggles with Spanish too…And math that I can’t figure out.

*** I’ve begun my work as Baltimore’s ambassador to France. The city is trying to attract biotech business. So, I’m having an assistant survey French biotechs to see if any would want to set up shop in a Baltimore ghetto…I mean, in an up-and-coming opportunity area.

*** My hidden motive? Mayor O’Malley is attractive and ambitious. He’s already announced that he may run for governor. Who knows, he may someday make it to the White House. And who knows, he may appoint me America’s ambassador to France. I’d have a much nicer office… and I could stop worrying about parking tickets.