Ascension Day

A DR Classique, first aired May 24, 2001…when one euro could be purchased for less than 86 cents, and the French Franc was still in circulation…

You may recall Mr. Goupil?

Weeks after we bought our house in France, Mr. Goupil arrived at the front door. A short, stout man with a round face and bright blue eyes, he informed us that he was our plasterer, by right of birth. His father, his uncle and his father’s father had done the plasterwork on the Château d’Ouzilly. He would continue to do so…and we would continue to pay him.

Mr. Goupil’s vision of how the world should work is a peculiar combination of red and purple… Everyone has his place, his duties and his responsibilities in Mr. Goupil’s cosmology…but they may be assigned by the State or by God. He is a God-fearing communist, I believe, sure that everything should be carefully organized and not particularly concerned about who does it…

I mention Mr. Goupil because the euro fell again yesterday. In fact, it dropped below 86 cents – bringing it closer to its record low. This decline comes at a most unlikely time – that is, just days after a record jump in the U.S. trade deficit and the most recent of 5 rate cuts by the custodians of the dollar. Neither theory nor experience provides an explanation.

"Here we have an economy that is running a current account deficit of 4% a year," writes Larry Elliott in the British on-line publication, the Guardian Unlimited. "It is one that has an overvalued currency and one where the corporate sector is showing all the classic signs of distress: falling profitability, cutting investment and laying off staff. It is an economy dependent on constant flows of hot money but which also gives investors the absolute right to leave with their money whenever they want. Faced with a similar set of circumstances in Thailand, dealers could not get out fast enough."

Dollar vs. Euro: A Puzzling Rise

"The rise in the dollar since February has been puzzling", says Elliott, quoting the Bank of England, "as it has been associated with falls in US growth forecasts and short-term interest rate expectations relative to some of its major trading partners". Elliott translates: "all our models say the dollar should be falling like a stone but for some reason it is going up."

One of the wonders of the modern world is the dollar. The U.S. is not Thailand and the dollar is not the Baht…but like the Baht, the dollar is paper…backed by nothing…and minded only by an organization – the Federal Reserve System – whose motives are suspect and whose competence is doubtful.

But, as Elliot tells us, "the herd mentality is powerful and, at the moment, the herd believes that Alan Greenspan has the situation under control, or at least pretends that it does."

Does he?

One feels like a fool for merely asking the question. How could a single mortal control an entire global economy…involving billions of people making billions of decisions every day? Perhaps he is not mortal, after all.

Dollar vs. Euro: Fundamental Economic Readjustments

No mortal man – even a former Randite – could stand in the way of fundamental economic re-adjustments…or the re- balancing of the yin and yang of nature itself.

"We are now in the midst of a capital goods recession," writes Marshall Auerback, "capital expenditure, particularly in high tech, is in sharp decline. It is falling from an unprecedented lofty peak. It is being slowed down by the sheer burden of debt and the consequent inability to service that debt as saturation dynamics take hold. We have not seen anything approximating this condition in the US economy since the 1930s. The most comparable post-war situation is the bubble economy of Japan in the 1980s, during which a capital expenditure boom (also fuelled primarily by debt) reached an unprecedented 25 percent of GDP at its peak.

"The Japanese analogy is also instructive in many other ways. In the aftermath of such excesses, the unwinding generally persists for a long time and proves surprisingly impervious to repeated interest rate cuts."

Cutting rates and debasing the currency are the only tools Mr. Greenspan has. Will they be enough to fix what economist Anirvan Banerji of the Economic Cycle Research Institute describes as "the worst global cyclical outlook in 20 years?" Can Greenspan hold back the cycles of commerce and investment…greed and fear…expansion and contraction…that have marked human action since the beginning of time?

The Fed’s record of protecting the dollar’s value is pathetic. Nor is the history of managed currencies free from sturm und drang. In fact, Elliott makes the point that there have been twice as many financial crises since 1973, when gold was removed from the international monetary system, than before.

Dollar vs. Euro: Why the Dollar Has Held up Well

Still, who am I to argue with the market? The dollar is up. But Mr. Goupil gave me a clue as to why the dollar has held up so well against the euro recently.

"I’m sorry I am so far behind schedule," he replied to an obvious question. "But all of a sudden everyone has work they want me to do. Mr. Morrant, for example. I know he’s been planning to redo his kitchen for at least 10 years. Now, he wants to do it right away. I told him I couldn’t do it until next year. So, he asked me if he could pay me for it now…"

"What’s going on?" I asked.

"Everyone wants to get rid of francs before we have to switch next January… You know, if you try to exchange more than a certain amount, they’re going to ask where you got them. And a lot of people don’t want to have to answer that question…"

It is a funny old world, as Maggie Thatcher put it. For now, the dollar’s value rests on hot money…’dirty’ money…and an absurd faith in the chairman of the Federal Reserve. But come January, the ‘dirty’ money in Europe should all have been laundered – thanks to Mr. Goupil and the world currency markets. The hot money may well have cooled off towards the dollar. And Mr. Greenspan’s control over the world financial system may no longer be in question. Most likely, it will be clear by then that the Fed Chairman was mortal after all.

On my way back to Paris…

Bill Bonner,
for the Daily Reckoning
May 21, 2004

Stocks did something yesterday that the pros don’t like to see.

Backing up a minute…the Dow has lost exactly 800 points since February 11. This kind of drop typically marks the index as ‘oversold’ and heralds a rally or at least a good bounce.

But yesterday, the Dow’s bounce fell flat. At the end of the day the Dow was still down exactly 800 points over the last 3 months. It is thought to be a bad sign when an index ‘should’ rally, but can’t.

Meanwhile, the price of gold fell $4.50.

And beyond the markets, the number of people asking for initial unemployment benefits rose.

All of this must be disturbing to the little schmuck…oops, we meant to the chairman of the Federal Reserve system. Alan "Bubbles" Greenspan has made his pacts with the devil and the president. For the devil, he keeps interest rates artificially low in order to lure the lumps further into debt…and keep his own name in the paper. For the president, he will do exactly the same thing for exactly the same reason.

For their part, the devil gets Alan’s soul…and hopes to pick up a few more among the millions of desperate bankrupts his low rates create. The president hopes to be reelected.

But sometimes, low rates don’t work. We remind readers that lending out money for less than it is worth creates inflation. People borrow and spend…and then borrow more to pay the interest. All the new money and credit competes for the same resources as the old stuff, which is why, broadly, house prices are soaring in many parts of the U.S. In Orange County, CA, for example, the average house has gone up 30% in the last 12 months.

Alan "Bubbles" Greenspan has led the greatest inflationary effort in history – introducing more new money and credit than all his predecessors put together. He cut the Fed’s key lending rate down to 1%…for only the second time in history – and kept it there longer than ever. The first time it was that low was in the Great Depression. This second time, he kept it at 1% even though the economy was supposedly growing about as fast as ever.

He created a bubble in the U.S. stock market…a bubble in the housing market…and a mammoth bubble in debt throughout the country.

What must worry the man now is that his bubbles are losing air. Stocks are falling…and can’t seem to rally. Bonds went up yesterday. And even gold, which ‘should’ be rising in anticipation of inflation, is falling!

What does it mean? Where does it lead? Are the bubbles imploding? Is the economy heading into deflation…not inflation? Is the U.S. still tracking Japan…after all these years? We don’t know. But, as usual, we have a guess:

The devil will get his due. But the president will wish he never supped with Alan Greenspan.

Over to Eric, for more news:

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Eric Fry, from New York City…

– Owning stocks right now feels like driving around town with a hornet in your car…the anxiety is almost unbearable, even when the stock market seems to be idling in neutral. Yesterday, investors traded billions of dollars worth of stocks, but found themselves neither richer nor poorer for the effort…just a little more anxious.

– Several modest rally attempts throughout the day failed to gather any momentum, as the Dow ended the session almost exactly where it began – down less than one point to 9,938. The Nasdaq slipped a little more than one point to 1,897…is this what an inflection point looks like? Is the stock market preparing itself for something dramatic?

– Beneath the placid surface of Lake Woe-be-Dow, many troubling trends are lurking. For one thing, oil prices are gushing to new record-highs almost every day, no matter how much oil OPEC pumps into the global markets. Last month, crude oil output from OPEC, excluding Iraq, amounted to 26 million barrels per day, according to the Middle East Economic Survey – that’s 2.5 million barrels above the cartel’s quota limit of 23.5 million barrels per day. In other words, OPEC is pumping oil almost as fast as it can and still the oil prices hover around $40 a barrel.

– Meanwhile, gasoline prices are out of control. The average price for a gallon of regular unleaded gasoline rose to another all-time high of $2.01 per gallon, according to the AAA’s Daily Fuel Gauge Report. Here in the Empire State, your editor routinely pays more than $2.50 a gallon.

– The road to $40.00 oil and $2.00 gasoline has been paved with the "sell" orders of bond investors. Long-dated bonds have plummeted over the last two months. The 10-year Treasury note, which yielded about 3.65% two months ago, is now "making camp" around the 4.75% level.

– Clearly, the bond market has caught the aroma of something that smells a little bit like inflation. Warren Buffett sees it too, which is why his Berkshire Hathaway owns about $12 billion worth of foreign currencies. What, we wonder, do bond investors see that gold investors don’t? Can’t gold investors also see that the oil price is more than $40 a barrel and that gasoline costs more than $2.00?

– The problem may be that very few die-hard gold investors remain. "The MBH Commodity survey shows a record low number of bulls in gold," says Jay Shartsis of Lafferty. "The other day I mentioned that one of the surveys (MBH Commodity) for gold had dropped to under 10% bulls on a 10- day basis, a record low number of bulls for the 17 years of the survey’s history. By itself that’s an eye opener, but especially so when considering what price action brought about the collapse in bullish opinion, which was something less than a commensurate collapse in the price of gold. A decline from $430 to $375 is no collapse – a setback, but not a collapse.

– "Gold is without question a seasonal investment," says John Hathaway, portfolio manager of the Tocqueville funds. "Decades can slip by while gold slumbers, or worse. However, during extended credit contractions, when lenders and investors alike shy away from risk, credit spreads widen and safety becomes paramount. In the rainy seasons of the 1930s and the 1970s, gold rose against financial assets. It did so not because it was part of some ‘reflation cocktail’ dreamed up and packaged by promotional investors. It did so because a general movement toward safety – caused by adverse experiences in financial asset investments – bid up its price…

– History may soon repeat itself.

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Now, Bill Bonner, back in rural France, where the Ascension holiday is in full swing…

*** What goes around, comes around.

We have been enjoying Lucian Boia’s new book, "Man Against Climate," in which he shows how leading civilizations look for explanations for their own success. Climate is a favorite one, since it, like geography, is permanent. Each dominant group tends to believe that it is on top for some unyielding, eternal reason…when, in fact, few stay on top for very long and none forever.

Americans, currently and unsteadily perched on the world’s high point, believe their institutions and ideas make them superior. Many Americans – such as Dinesh D’Sousa and the ‘neocons’ – want to export them, even at the barrel of a gun.

"But laws and institutions have no universal value," explains Boia. "They must be adapted to each culture and to the psychology of the people. Psychology and a people’s comportment dependent on the setting in which they evolve…"

*** It is almost unimaginable, but the center of the world was once thought to be Baghdad, not Washington. During the Middle Ages, it was Arab civilization that was dynamic, forward-looking, expansionist and aggressive. Baghdad was thought to have the world’s most advanced culture…and its best weather.

By the 8th century, the Moors had exported their civilization to this area of France, not far from Poitiers. Here, they were beaten back by Charles Martel and retreated from Europe over the next 700 years, until they were finally expelled from Spain at about the same time that Columbus discovered America.

*** "That’s why I’m pressing the Greater Middle East Reform Initiative," explained George Bush last week, "to work to spread freedom. And we will continue on that. So long as I’m the President, I will press for freedom. I believe so strongly in the power of freedom.

"You know why I do? Because I’ve seen freedom work right here in our own country. I also have this belief, strong belief, that freedom is not this country’s gift to the world; freedom is the Almighty’s gift to every man and woman in this world. And as the greatest power on the face of the Earth, we have an obligation to help the spread of freedom…."

*** Perhaps he is right. Perhaps the Almighty has chosen George W. Bush to deliver His gift to the world. Perhaps.