DR Weekend Edition May 1-2, 2004

The Daily Reckoning
Weekend Edition
May 1-2, 2004
Baltimore, Maryland
By Addison Wiggin and Tom Dyson

Despite another week of excellent corporate earnings andbetter-than-expected economic news, markets tanked around the planet. In this strange world of ours, good news is bad news and bad news isgood news – anything that indicates growth, profits or recovery ispushing the Fed to raise rates… and rising rates is just about theworst news. Stock investors, bond investors, commodity investors,housing investors and basically anyone who is positioned to profit
from the global reflation all fear rising rates.

If you think that the interest rate discussion can’t go any further,next week, the markets have an FOMC meeting to digest and a headlineunemployment number to get to grips with.

“A combination of (“reflation”) trades that had been so neat andprofitable for months has all the sudden turned into a losingproposition. We could now be in an inhospitable circumstance whereselling in one market leads to lower prices, speculative losses,angst and liquidations in other markets. Greed is turning to fear,”observes Doug Noland at the Prudent Bear.

10-year Treasury rates are poised just below the high mark of 4.67%they set on August 14th last year, closing the week at 4.5%. 10-yearrates haven’t exceeded 4.67% since July 2002… the capital marketswill find a new multi-year high difficult to ignore. The ripple willbe felt in almost every market worldwide, sending shivers throughtraders and investors alike.

Inventory shortages, explosive-laden speedboats and an escalation ofviolence in Iraq helped push the oil price higher. Crude is onceagain threatening new highs, closing the week at $37.74. Meanwhile,Brent crude traded to $35 in London on Friday, the highest pricesince October 2000. And in a further punch to the already-stretched
consumer’s wallet, gasoline rose for four days consecutively, setting a new all-time high just as America gets ready to hit the road in anew collection of SUVs, Winnebagos and other gas-guzzling motorvehicles.

Chinese authorities also helped the markets dig the hole forthemselves with some deft spadework of their own – they publiclyasked banks to tighten up on lending procedures in a move designed to slow China’s expansion. Officials are obviously starting to fear an“over-heating” economy – perhaps they should share some of theirconcerns with Alan, Ben, Bob and the rest of the sleepy dwarfs at the Fed. The Australian dollar sunk to five month lows.

At every party, there is always a show off and the temperamentalNasdaq took the biscuit by dropping over 6% last week. Closing at1,920, the Nasdaq is within 25 points of making a four-month low andheading into negative territory for the year. The Dow lost 247 points to close at 10,226, a 2.36% weekly loss.

The Dollar index closed at 90.48, declining one percent on the week.Unusually, gold mirrored the dollar’s decline, dropping $6 last week, closing at $388.5 in London’s afternoon fixing. Gold had dropped asfar as $375 on Thursday before recovering. Silver lost 24¢ byFriday’s Fixing to $5.95, but recovered to $6.06 by end of play inNew York.

Tom Dyson,
The Daily Reckoning
May 1, 2004

P.S. In a credit – driven bubble, almost every asset class seems torise. But when the bubble bursts, almost every asset class willdecline. Marc Faber thinks we might be closing in on an inflexionpoint…

THIS WEEK in THE DAILY RECKONING

WITTGENSTEIN (04/30/04)
by Bill Bonner

“… Talk about luck! Few people have had so much luck in their lives as Wittgenstein – both good and bad. On the good side, the man wasborn rich… and became richer. When his father died, Wittgenstein,still a young man, was one of the richest men in Europe. He was alsosmart. In 1922 he published his one and only book – Tractatuslogico-philosophicus – which was hailed immediately as one of thegreat works of philosophy of all time… “

PAINFUL RESOLUTIONS (4/29/04)
by Marc Faber

“… I was leaning toward the view that in 2004 some assets wouldcontinue to increase in value, while others, such as bonds, wouldbegin to fall by the wayside and enter longer-term bear markets. Upon further consideration, I am now increasingly concerned that sometimein the near future ‘everything’ could begin to unravel! A painfulresolution of the current asset inflation is inevitable… “

THE ANTI-TERRORIST MAP (4/28/04)
By Mark Skousen

“… I first saw [the Anti-Terrorist] map a month after 9/11. And Iwas amazed. ‘Look where the red is!’ I said to myself. Does theAnti-Terrorist Map and its evolution influence your investments? Itvery well might. You never know what the international terroristgroups have planned – better be prepared in advance for theunexpected… ”

DOGES OF WAR (4/27/04)
By Bill Bonner

“… Reading Mrs. Oliphant’s history of the dead dukes – or ‘Doges’ – of Venice, we felt as though we should send a copy to someone inWashington. But who reads anything but newspapers in the capitolcity? Who reads at all? In America, if it isn’t on the evening news,it didn’t happen. Too bad. For many of the most preposterous ideasnow emanating from the feverish swamps of the Potomac have alreadybeen tried out here in the feverish swamps of Venice, hundreds of
years ago… “

THE NEW FED PARADIGM (4/26/04)
by The Mogambo Guru

“… The Fed can sit on 1% rates forever if they want to, as far as they are concerned. And they probably will. The old aphorism about how the Fed is supposed to take away the punch bowl after the party really gets started is now proved false. The new Fed paradigm is something more bizarre: the Fed is pouring pure grain alcohol down the throats of partygoers who are passed out drunk on the floor… “

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HEADLINE, NEWS And INSIGHT:

Will They Raise or Will They Stay?
by John Mauldin

“… I think the Fed will start to change their language and start to clearly let everyone know that they are going to start raising rates. I am not certain they think that a two-month warning is enough time to allow the markets to adjust. For what it’s worth, I think it would take more than two months to unwind the massive carry trade we see today without causing some real market turbulence. Perhaps I am just an old worry wart, but I like these type of things to go nice and
slow. Speed kills… “

Why The Fed Can’t Raise Rates
by Dan Denning

“… The Fed’s response to [rising prices] CANNOT be to raise rates until the final piece of the inflation puzzle is in place: rising consumer incomes. Until that happens, rising prices will simply make consumers cut back on spending. Throw in rising interest rates and energy prices, and you have two more factors which lead to slower consumer spending and economic growth… “