The Markets This Week: Flights Of Fancy

On Thanksgiving, your New York editor viewed the Macy’s parade from the corner of 58th and Broadway. He wedged into the crowd with his three children and watched the massive balloons drift along overhead…The following morning, a different sort of helium-filled parade proceeded along Wall Street, as the tech-inflated Nasdaq floated 7 points higher to 1,960 and the Dow bobbed up 3 points to 9,783.

The market’s advance on Friday capped the S&P 500’s first weekly gain in three and its eighth monthly gain out of the last nine. For the month, the S&P 500 advanced a slim 0.7% and the Nasdaq improved 1.5% for the month. But the Dow lost 0.2%…Is the stock market’s momentum waning a bit? Is the tumbling dollar starting to restrain the stock market’s flight of fancy?

With 11 months under its belt the stock market enters the final month of the year poised to record its first annual gain since 1999. For the year, the Dow is ahead 17% and the Nasdaq is up a blistering 47%.

On the other side of the ledger sit bonds and the US dollar — the two assets your New York editor has often described and the “first and second best short sales in the US financial markets.” Both assets have struggled mightily throughout 2003.

The dollar’s slow-motion collapse continued Friday, as the greenback fell half a percent to a new record low against the euro. The beleaguered U.S. currency briefly touched $1.20 per euro during the shortened NY trading session, before ending the day at $1.198. That’s the dollar’s lowest level ever against the euro, since the currency debuted almost five years ago. Treasury bonds also fell Friday, pushing the 10-year T-note’s yield up to 4.33% from 4.25% on Wednesday.

Meanwhile, gold investors continued counting their blessings on the day after Thanksgiving, as spot gold gained $2.90 to $398.15 per ounce and the XAU Index of gold stocks jumped about 2% to a new 6-year high. Gold investors may wish to extend a special word of thanks to Ben Bernanke. Without the Fed Governor’s visionary leadership, the robust gold rally of the last 12 months might never have occurred.

A little more than one year ago, as many readers may recall, Ben Bernanke addressed the National Economists Club in Washington, D.C. During that now-infamous speech, Bernanke remarked, “U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press…that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

Bernanke has gotten his wish. The government has successfully generated “higher spending and hence positive inflation”…and gold investors are grateful. The precious metal has jumped from $300 an ounce when Bernanke spoke to nearly $400 an once today. Unfortunately, the dollar has crumbled since Bernanke promised to create “positive” inflation. What’s more, the “higher spending” he sought to promote is occurring, mostly because Americans are taking on ever-more-onerous levels of debt.

We Americans have piled up nearly $2 trillion in credit card and consumer debt. “Sit down and take a deep breath,” says Dan Ferris, editor of Extreme Value. “According to the Federal Reserve’s report last week, Americans had credit card and other consumer debts of $1.972 trillion in the month of September. That’s approximately $6,573.33 worth of high-interest debt for every man, woman and child in the United States…

“So Americans aren’t fooling around,” Ferris continues. “They’re not just adding a few bucks to their credit card balances. They’re going in deep…We quote Marty Whitman in the current issue [of Extreme Value] as saying that nobody with an IQ over 70 thinks the U.S. has anything but a bad long term future ahead of it. Whitman’s comment reminds of what H.L. Mencken said, ‘Nobody ever went broke underestimating the intelligence of the American people.’ Mencken’s line was crass and not particularly accurate. But I can’t argue with anyone who says that Americans are facing a crisis and they seem to have decided to handle it by behaving as stupidly as possible.”

Net-net, we trust gold’s rally more than the stock market’s rally.

Hope you’re having a good weekend,

Eric Fry,
The Daily Reckoning

November 29-30, 2003 

P.S. “We have very significant imbalances,” Strategic Investment contributor Marc Faber tells Swissinfo Magazine, “In the United States the debt level is rising very rapidly and generating some, what I would call, artificial growth but it doesn’t produce capital spending…The capital spending occurs largely in Asia, specifically in China, and the production is also in Asia. The US will probably not be able to sustain current growth rates and we will have probably, some time in 2004 or 2005, a consumer-led recession again in the US. “Where are the savvy investors going to put their money over the next few years?” Swissinfo asks Faber. He replies: “A lot of investors have acquired resources, hard assets…and they’re buying commodities, including gold which is one of the world’s currencies.” Gold investors are hoping that Faber’s definition of “savvy” is accurate.

See also: “The U.S. dollar is plunging. The Fed’s been printing money like nobody’s business, the federal deficit and the trade deficit are WAY OUT OF CONTROL, and inflation is about to rear it’s nasty head.

Are you ready for $4 a gallon gas? Unemployment lines around the block? Twenty people at every highway off ramp with signs that say, ‘Work for food?’ Another stock market plunge?

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THIS WEEK in THE DAILY RECKONING

SINOSITIS 11/28/03
By Bill Bonner

“…There are two major ways to compete in the business world, price or quality. China has an almost inexhaustible supply of cheap labor. With adequate capital funding…and access to global markets…China seems sure to win a large part of the world’s manufacturing; in fact, it already has. China is growing at such a furious pace, the Chinese government is allegedly fiddling the figures in order to understate its growth rate. But foreign investors might be alarmed if they knew what was really going on. They would be appalled if they really knew, was our sinologist’s message…”

THANKSGIVING 11/27/03
By Bill Bonner

“…Thanksgiving was declared a national holiday in 1931. Through the Depression, and then WWII, Thanksgiving grew in importance. In a country where roots meant almost nothing, where people were ready to pick up and move at the drop of a hat, where there were huge differences in what people thought and how they lived, Thanksgiving served to provide a unified, national myth…it is now part of everyone…”

THE PERPETUAL CHINESE BUBBLE MACHINE 11/26/03
By Lynn Carpenter

“…China is the biggest opportunity we investors have ever seen. (I trust none of us is over 150 years old.) The last one that was this big and as likely to stay at the top for a long time was a young country called America. But here’s the deal: Right now, it’s a bubble. Most of the headline stocks are already priced to fall undefined in fact, if you can name a Chinese stock off the top of your head, you probably shouldn’t invest in it. But overall, China is an extremely attractive investment now…”

MARGIN OF SAFETY 11/25/03
By James Boric

“…Graham, Buffett and Templeton were all successful because they refused to pay market value for a stock. And that meant they ignored the herd when it came to the hot stock tip du jour. Instead, they bought stock in companies no one else wanted – when a company was badly beaten down by the market, overlooked by Wall Street or simply under-researched. You can find the next GEICO, Coca-Cola and Gillette…but you have to be willing to look places other aren’t: the small-cap stock market…”

ONE BIG UGLY THING 11/24/03
By The Mogambo Guru

“…All the extra money and credit flooding the U.S. will keep working its way into prices, because that is where the money always goes, as has been proved by unanimous historical precedent. It is this rise in prices that is always the thing, the one thing, the big thing, the One Big Ugly Thing that ultimately destroys the economy, any economy, that tries to print and spend money. Ergo, the economy of the United States IS being destroyed by the Fed, and WILL be destroyed by the Fed…”

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*** FLOTSAM AND JETSAM: What DOES the smart money know?

– Pulled from a reader letter distributed this week by Addison Wiggin

Dear Daily Reckoning reader,

Leave it to your editors to release a book called “Financial Reckoning Day” at the exact moment when the government has declared the fastest economic growth rates in 20 years. Good timing, huh?

Actually, it is.

Now that the revised Q3 rate of 8.2% is on every financial commentators lips… and the stock market looks headed for its first positive close in 3 years… we think there is no more important time to consider the following:

According to the Wall Street Journal “insiders” are selling $59 in stock for every $1 they buy. Anything over $20 is considered a bearish signal… insiders have been selling at that rate for six months straight.

What does the smart money know?

They know that collapsing asset and credit bubbles look remarkable similar throughout the ages. During the 1990s undefined a decade the Japanese call “The Lost Decade” undefined the Japanese tried every trick, gag and feint now being employed by the Feds in an attempt to stave off the inevitable.

Five times it looked as though they were going to pull it off. The Nikkei Dow rallied over 25% and consumers lauded the return of Japan Inc. Five times, fear crept back into the markets. Five times investor euphoria gave way to new bouts of selling… and the Nikkei found new lows.

By the end of The Lost Decade, the Nikkei had collapsed from a high of nearly 39,000 to just over 10,000 today. Even now, in the land of the rising sun, the ‘tug of war’ between government policy wonks, entrenched banks and the market is far from over.

If the analogy holds, we can expect similar stock market rallies and resurgent consumer confidence in the US over the next decade. We can also expect these waves of speculation to get dashed against the hard rocks of reality. And for the stock market to reach new lows when they are over. When will it happen? We, of course, don’t know…

But one thing is clear: insiders are using the current rally in stocks to get their own money out!

“Since the days of Maynard Keynes,” our friend and colleague Lord William Rees-Mogg, former editor of the Times of London, writes, “the public have been told to expect government-protected prosperity. But as we have seen time and again, no government can deliver on this.”

If you’ve read Financial Reckoning Day, you know we spell out this “vicious cycle” in detail. Yet it’s easy to read, easy to follow. And easy to see how today’s economic environment follows familiar patterns. Having read it, you won’t be surprised at all to learn the rate at which insiders are cashing out.

“Financial Reckoning Day is a seriously good book,” William adds, “It asks all the right questions; but it does not pretend to have all the answers. Instead, Bill Bonner and Addison Wiggin rightly propose George Washington’s solution for the individual instead: ‘We cannot guarantee success, but we can deserve it’… [this book] makes good sense.”

Perhaps, that is what prompted Arthur Gray, a 60-year veteran of Wall Street, to write: “Now that I am enjoying my 60th year in Wall Street I can say with a decent background of credibility that your fine work undefined Financial Reckoning Day undefined should be required reading for anyone who signs up for Economics 101. Congratulations.”

After two kind extensions, the bn.com discount of 35% off the bookstore price comes to an end on November 30th. That’s today!

If you are like one reader from Denver, who writes: “I’m trying to convince my wife and our conventional investment councillor that NOW is the time for us to get what is essentially my wife’s retirement money out of harms way and into a well balanced portfolio of alternative investments.”

Perhaps, our book will help you show your advisors why an alternative explanation to the ‘recovery’ is at least important to consider. In which case, you’ll want to take advantage of the discount before it expires. And perhaps give copies to friends and family for Christmas.  

Addison Wiggin,
The Daily Reckoning