Under The Big Top, Part Deux
As I signed off yesterday, our favorite component of the periodic table had been beaten down for the last 20 years. Gold, and those investors foolish enough to buy it, had become a laughingstock – tripping over every piece of news that came over the wire…and getting up only to fall down once again, comically.
Even yesterday – which brought news that the dollar would be cut in half in 10 years at the present rate of inflation – gave gold another cue to tumble. Investors would rather own something that loses value at 7% per year – the dollar – then something that was supposed to be nature’s most perfect store of value – gold.
Goldbugs, people who harbor the quaint and romantic idea that there exist things in this world of real and lasting value, are mute. They have been silenced by 20-years of ridicule. Their only hope – one that I share – is that having indulged ourselves in the greatest investment error that the last two decades had to offer, and suffered accordingly, we might now have some measure of immunity from gross foolishness. We have been there. Done that.
The gross foolishness I have in mind, to disclose the destination of today’s perambulation before we have gone far, is not excessive faith in gold, but excessive faith in the alternative to gold – the dollar.
The argument against gold, as I quoted yesterday, is not merely that gold is in a slump, but that it is terminal. The voice of ‘progress!’, you will recall, told us that the ‘thousand-year-old myth’ of gold has come to an end. “It’s over,” he said, referring to the use of gold as a store of value. It’s over because the discipline gold provided has been replaced by the discipline of the markets, including the f****** bond traders so much admired by our president.
Gary North explained this in his note to me of a couple of days ago: Bond traders, not gold, are what keep the Fed from flooding the world with dollars.
At the first hint of inflation, the argument goes, bond traders sell bonds…the dollar collapses…and stocks plummet. And yet, yesterday provided more than a hint of inflation. Bond traders were notified by the Bureau of Labor Statistics, in writing, that inflation is destroying the dollar’s purchasing power. Neither the dollar nor bonds fell. They rose.
Instead, gold fell.
Over the long run gold varies inversely with the foreign exchange value of the dollar. When the dollar is strong, gold is weak.
“It is reported,” writes Dr. Kurt Richebacher in the July issue of his newsletter, “that measured bullish sentiment on the dollar is at an absolute peak… Considering the present unattractiveness of the U.S. financial markets on the one hand, and the excessive and dangerous dependence of the dollar on uninterrupted, huge capital inflows to finance the yawning current-account deficit on the other, the U.S. currency’s resilience is certainly most astonishing, if not enigmatic.”
The enigma is that so many people seem to have such faith in the dollar for so little reason. Price increases in the U.S. are greater than those in Japan or Europe – by at least 2 to 1. And American equity prices are at dangerously high prices.
But the measure of faith in the dollar can be taken not only by the drop in the price of gold…but also by the incredible increase in the U.S. current account deficit. The current account deficit tells us how many dollars foreign interests are willing to take with no compensating goods or services received in exchange. In 1980, when gold began its epic decline, the number was zero. In fact, in 1981, the U.S. ran a small current account surplus.
Since then, dollars have swamped the world – with a current account deficit in excess of $1 billion per day.
Meanwhile, Americans have concluded that not only do they not need gold as a store of value – they don’t need anything. From 1960 to 1995, U.S. households ran a financial surplus – roughly equivalent to savings – of about 2%.
But, writes Dr. Richebacher, “during the bubble years since 1995 this pattern has dramatically changed…the private sector’s former financial surplus has turned into a substantial deficit.” From an average of 2% positive, the figure sank to more than 5% negative – a bubble swing of about 7%, or about the same as the drop in personal financial surpluses in Japan prior to the collapse in 1989.
There were bond traders in Japan 10 years ago too…just as there were on Wall Street before the bear market of ’73-’74 and the double-digit inflation of the late 70s. Is it possible that the guardians of discipline are as capable of acting like clowns as the rest of us?
“[M]ajor currencies frequently trade like pink sheet stocks,” reports James Grant in his Interest Rate Observer,” as the dollar did against the yen in early October 1998, dropping by 10% in just two days. In the first quarter, according to the Bank of International Settlements, the intra-day trading rang of the dollar/euro exchange was greater than 2% on more than 21% of trading days…”
The implication of this may not be obvious – so I will draw it out: the dollar is as vulnerable as a dot.com. And, the clowns of the future may be the bozos who believe – as the goldbugs did 20 years ago – that today’s most dramatic and enigmatic trends are permanent.
Baltimore, Maryland July 19, 2000
*** In a bull market, of course, you buy the dips. In a bear market, you sell the rallies. This idea seems to have occurred to investors yesterday as they unloaded stocks following Monday’s most recent rally peak.
*** The Dow fell 64 points. The Nasdaq dropped 97 points. And more stocks fell than rose – 1679 to 1162.
*** Commentators were puzzled that stocks fell on good earnings news. Intel beat analysts’ estimates by, guess how much – 1 cent. MSFT also came in above expectations.
*** But stocks didn’t seem to care. And why should they? Earnings, relative to prices, are near all-time lows. You could double the earnings on the S&P and still stocks would be over-priced by historical averages. On the Nasdaq, meanwhile… earnings would have to quadruple before stocks would be near more normal levels.
*** But what was really puzzling was the reaction to yesterday’s cost of living figures. Consumer prices are rising at a 7% annualized rate, according to the people who make up the numbers. Seven percent is no paltry amount. It cuts the value of the dollar in half every decade. And, as if to underscore the point, that very day oil rose another $1.11 – reaching almost $32.
*** Yet, while the inflation alarm bells were ringing – investors kept calm…enjoying another hot, sunny day in the ‘Summer of Love.’ In fact, bonds rose! Those bond traders, who are supposed to be providing discipline, seemed to be deaf. In general, bond investors appear to be looking ahead to the consequences – another rate hike in August, a stock meltdown, and an economic slowdown, too.
*** If bond investors were deaf, gold investors were dumb. Or perhaps simply too beaten down and discouraged to raise their voices and place a bid. Gold fell $1.10. But more on that below…
*** “Given the current money supply and global reserves of above ground gold,” says Kevin Klombies, editor of Inter-Market Relationships Analysis, “if we returned to the gold standard…. each ounce of gold would be worth something like $70,000.”
*** “With the possible exception of recent African dictators, it’s hard to imagine a more venal, arrogant, thuggish, stupid, corrupt and grotesque array of socio- paths in all of world history,” says Doug Casey speaking of Eastern European dictators in the 20th century. “Of that group, Nicolae Ceausescu was… the most colorful.”
Doug’s trip through Rumania in May yielded, among a host of interesting insights, rare speculative opportunities on the Rumanian RASDAQ. He reports: “If I had a son or grandson who was anxious to make a lot of money… I’d pack him off to Bucharest with instructions to learn what it means to be a venture capitalist, a white knight, a green-mailer, a takeover artist and such. The bankroll involved would be peanuts and the upside huge.”
*** China grew at an 8.2% annual rate in the first half – faster than last year’s growth.
*** The WSJ reports that movies will soon be vulnerable to the sort of electronic piracy that has overtaken the music industry. My own son, Will, showed up this summer with a collection of music CD’s that had been ‘burned’ in a dorm room at his college in Santa Fe.
“Is that legal,” I asked him.
“I don’t know,” he replied, “but everyone is doing it.”
And now, with new Napster-like technology, it is apparently possible to steal movies too. “Hollywood,” says the WSJ piece, “your worst nightmare is here.”
In this sense, Internet lovers are right. The Internet democratizes commerce – it makes it easier to steal without guilt.
*** The people I talk to say they are getting tired of the Internet. They use it at work and don’t feel like turning it on when they get home. But Business Week Online reports that the Internet may find a whole new group of surfers – pets. A 20-month African gray parrot named Wart is learning to surf the worldwide web. Someone was quoted, (I couldn’t tell if he was serious or mischievous) as saying that pets may want to “video- stream their owners at work.”
*** That is the thing about the Internet – we still don’t know if the innovation is serious or ridiculous.
*** National Public Radio reports that the psychological stress of sudden wealth in Silicon Valley is being replaced by the shock of sudden wealth loss. Stephan Goldbart, who is described as a psychotherapist, named the first disorder “Sudden Wealth Syndrome.”
Nouveau riches were apparently destroying people’s lives. They had become dot.com millionaires almost overnight and didn’t know how to handle it.
But just when the helping profession was learning how to bill rich people for treating this disorder – poof, along came an entirely different problem, which Goldbart cleverly styled “Sudden Wealth Loss Syndrome.”
Sufferers, we are told, can lose sleep, get moody, or feel like the stupid failures they really are. But perhaps the stupidest thing they do is to spend a little of what they have left to have Mr. Goldbart explain that money isn’t everything.