Last Tuesday evening I spent one of the more stimulating (and enjoyable) evenings I have had in a long time in the home of one Francis Stobart of SODITIC in Geneva. He had assembled a small, but eclectic, group of Swiss private bankers and asset managers for dinner to discuss whatever small insights into finance and economics I might be able to dispense. I was expected to sing for my exceptional supper and superb wines, but I believe I walked away with far more insight than I was able to impart.

While the size of the firms represented ranged from huge to small and the range of services was quite diverse, we all had one common connection: our clients expect us to come up with investment strategies that make sense in today’s world. The problem is the future seems particularly risky as of late, with the world of investment ideas a less and less friendly place.

Where does one safely put assets, whether it is billions for institutions or smaller personal accounts for retirees? One very large and rather bearish manager is now suggesting his rather substantial clients allocate 15% to physical gold. While not all participants were quite so bearish, the outlook was more somber than I would have expected.

[Reading an advance copy of Bill Bonner’s new book, Financial Reckoning Day (on my computer – it will soon be out in print) on the ten-hour return flight did not relieve that note of concern. But it did give me some food for thought as I reflected upon the conversation. A few of those thoughts gleaned from that evening might be of interest.]

Alan Greenspan: Not Strategy, but Execution

As might be expected, there were more than a few questions for a Republican from Texas. Not only at this dinner but throughout the week, I was posed some hard, but polite, questions. The night before, I had dined in Paris with a friend of Chirac’s, who also had questions. Jean-Michel noted that it was not the strategy in Iraq that was the concern, but the execution.

I have been a staunch defender, and still am, of the President. But I will tell you that it is disconcerting to talk with sophisticated men of considerable experience in the world who so clearly did not understand the President’s view or America’s concerns. It was not a case of these men not listening (I did not have an opportunity to discuss events with any ladies). It was not always a case of disagreement. We have clearly not communicated well to the public at large, and that must be corrected or it will come back to haunt us.

But the subject of the evening was primarily economics, so that is where we will return. There was almost universal unease with the U.S. economy. There was a recognition that the U.S. was the economic engine for the world, and a concern the engine was running out of steam. There was an intense discussion on Greenspan’s latest policy statements, which none (including me, of course) in the room could understand.

The feelings expressed about Greenspan are best summed up in a statement by Alex Bridport, of Bridport and Cie., in a client letter he wrote the next morning. (Bridport is a major firm, consulting with large European institutions on their bond portfolios, which in the aggregate would be well in excess of $100,000,000,000. They have bought over $20,000,000,000 in bonds for their clients just since the beginning of the year. In short, they have their fingers on the pulse of European institutional investors.) This caustic note from Sir Alex:

Alan Greenspan: A Victim of the Greenscam

“When it comes to wealth destruction, the recent fall in bond values must rival anything that happened to the stock market when the bubble burst. For this contribution to mankind, investors can thank Alan Greenspan for an operation we might call the ‘Greenscam.’ It involved him allowing investors to believe that the overwhelming risk was deflation and that all means would be used, including the Fed buying long T-bonds, to keep long-term yields low and support the ‘carry trade.’ Then Greenspan pulled the rug and investors all fell down, taking off the carry trade.

“We admit to being as much a victim of the Greenscam as anyone else. At least we all know whom never to trust again. Beyond the half-truths, the inherent contradictions and unproven optimism about the rolling ‘recovery in six months,’ our task is to weigh up the likely developments in the U.S. economy as the starting point to what will happen there and elsewhere.

“Until last week we had ‘swallowed’ the Greenscam line that the economy could only recover or deflate. Since recovery with such a debt load looked impossible, we went along with deflation being the more likely scenario, although, in fairness to ourselves, we saw it as only a short-term phenomenon, as a weakening dollar would offset deflationary pressures in time (we overestimated the amount of time in making a ‘wild guess’ of one year).

“As of last week, because of a little-publicized report that producer prices were rising at a 4.8% annual rate, we began to think of the third possibility: stagflation. Given our view that recovery is impossible until the U.S. imbalances have been corrected (a view we hold despite volatile stock market rallies), we see the debate as deflation vs. stagflation. The latter is understood to mean slow growth (only slightly above growth in working population), increasing unemployment, and rising inflation and interest rates.

Alan Greenspan: Stagflatiion vs. Deflation

“A major question for the outlook in this stagflation vs. deflation competition is the future of the dollar. Bridgewater [Associates] points out that, in past periods of high twin deficits, the dollar fell but bonds did not. They see the Fed producing ‘whatever liquidity is needed to shift some of the downward pressure on bond and stock markets to the US dollar’ – hoping to attract foreign capital because the dollar is cheap (presumably with a view to its appreciating again). Up to that point we agree with Bridgewater’s analysis, but we have to part company with them when they continue to see the deflation model and falling yields as the most likely scenario.

“Our view is towards the stagflation model, because of the force of argument from the indices and because the dollar looks likely to fall again. Despite our now leaning towards the stagflation model (yes, we changed our minds over the last few weeks – but the facts changed, too!), it would be inappropriate to recommend maturities other than those close to the bond index. Yields overshot on the way down and may well do on the way up. Besides, the Greenscam may not have run its course. New cash should wait on the sidelines or be used to buy instruments to counter a further rise in yields and inflation.”

I am attracted to this view, as it is similar to mine, although I think the time-line is somewhat longer and more stretched out. Reviewing quickly, I think we are in a slow-growth Muddle Through Economy. The Fed has virtually guaranteed that short-term rates will remain low for some time, until either inflation appears or the economy is soundly growing above trend.

Neither eventuality is my most likely scenario. At some point, there will come a recession (there is always another recession), without the Fed having the “ammunition” of being able to lower short-term rates. In my opinion, if a significant rise in rates, either long term or short term, were to happen in the current slow growth economy, it would indeed trigger a recession.

Since recessions are by nature deflationary, the Fed will respond with the rest of its arsenal, as they view deflation as the worst of all possible worlds. I believe they will indeed stop deflation dead in its tracks.

However, I think that leads not to a comfortable reflation and a return to the Roaring 90’s, but to a slow-growth inflationary period, similar to the stagflation of the 70’s. It will become the Muddle Through Decade.


John Mauldin,
for The Daily Reckoning
July 28, 2003

P.S. I use the term Muddle Through to suggest that we are not facing an End of The World As We Have Known It scenario [present company included]. For a variety of reasons, I do not think we will see a return of the Great (or even a Lesser) Depression, as do some. However, there are significant imbalances that must be addressed, and until they are, there will not be a return to continued above trend growth.

That means the investment opportunities will be different than those of the 80’s and 90’s.


All eyes were on Wall Street last week. Most people think the economy is improving; the long-awaited recovery is here at last, they say.

New home sales hit a record 1.16 million in June. And prices are still rising. The average house in Massachusetts sells for $414,517. On the other coast, in San Diego, ordinary digs will cost you $419,320.

Unemployment numbers looked better last week. And durable goods sales – such as cars and washing machines – rose 2.1% last month.

No wonder the Dow rose more than 170 points on Friday alone. Who says you can’t get rich by buying stocks?

Well…we did, last week. But we get away with nothing here at the Daily Reckoning. Several readers wrote with a challenge:

“You say the stock market is a fraud…” began the polite version, “but aren’t you the same ones who are promising that we’ll make 10,000% profit from this newsletter or a million dollars from that trading service? What gives?”

Here we give an answer. But first, we stand still, turn our eyes away from the stock market and once again, we admire the polished irony of it all; we have to cover our eyes, so brightly does it shine.

Our senses alert, we turn our heads slightly and think we hear a million voices of the dead:

“It’s not that simple…” they whisper.

The swindle of the stock market is the idea that Wall Street is there to make you rich, no matter what you buy or when you buy it. Every shopper tries to get the most for his money, when he buys clothes, food, or anything else. But when he shops on Wall Street, the poor man man’s brain starts backing up; instead of looking for bargains, he looks for the most expensive merchandise he can find.

The brokerage houses, the media, Lou Rukeyeser, Abby Cohen – they all tell him not to worry; all he has to do is to be ‘in the market’ and he’ll get rich along with everyone else. Nothing is as safe or as sure as long-term stock market investing, they say. If only it were that simple and that easy! And here’s the lovely irony of it: the more he believes them, the more he and other investors will lose.

There is, of course, a way to make a lot of money by investing. But it can only be done by a few people, not by many…and only by doing what the many do not do. There is a time to buy stocks and a time to sell them. The time to buy them is when other investors are least interested in buying them and Wall Street is least interested in selling them. The time to sell them is…we think…now.

And when all investors’ eyes are on stocks, it is time to recognize the humbug of Wall Street and look elsewhere. The important spectacle is being played out, we believe, not on Wall Street, but in the world’s currency markets and gold exchanges.

And here, the sparkle of irony is almost blinding. When the Dollar Standard system emerged, Americans thought they had been handed the keys to a liquor warehouse on the night watchman’s day off. The keys got them in…but there will be hell to pay getting out. More on this – how America has been cursed with good fortune – as the summer continues…

But now, Eric Fry with the latest news:


Presenting our “man-on-the-scene” in New York, Mr. Eric Fry (haraaahh!!!):

– Mr. Market continues to behave like a well-mannered dinner guest – perfectly innocuous. He is impeccably inoffensive to bulls and bears alike. So fastidiously does he avoid offending that he also fails to excite.

– The S&P 500 added half a percent last week to 998, but still did not deviate outside the perfectly agreeable trading range between 962 and 1,015 that has contained it for the last seven weeks. The similarly inoffensive Dow Jones Industrials rose 96 points last week to 9,288, while the Nasdaq added 1.3% to 1,730.

– The bond market has not been nearly as polite. Unlike the equity market, the bond market has become as alarmingly raucous as a co-ed on spring break. Suddenly this delightful girl-next-door of the financial markets is doing “body shots” with those ill-mannered bond bears. No one knows what she might do next!

– Already, her unspeakable improprieties include tossing off “32nds” like so many articles of clothing. And now that the 10-year bond price is flat on its back, its yield is soaring. Over the last several weeks, 10-year bond yields have jumped from 3.10% to 4.18%.

– The bond market’s behavior is not sitting well with all the folks that had been expecting so much more of her. In the last month, long-term government funds have tumbled about 8%, which drops their year-to-date performance into the red. So much for the safe haven of fixed income.

– Not surprisingly, Barron’s observes, “a growing number of investors do appear to be losing their ardor for bond funds. Flows into taxable bond funds, which hit a record $45.3 billion in the first quarter of this year, have slowed remarkably, according to Robert Adler, president of AMG Data, a fund-tracking service based in Arcata, California. The rate of inflows has dropped $2.1 billion per week this month, down from a peak of $4.7 billion in mid-March. Equity funds appear to be the beneficiaries of this trend: Flows into equity funds climbed to nearly $20 billion in June from $1.2 billion in March, Adler says.”

– The bond market’s sidekick, mortgage rates are also out of control. 30-year mortgage rates have spiked a stunning 73 basis points in only five weeks – from 5.21% to 5.94%. These surging mortgage rates will be no friend to the housing market.

– “The Mortgage Bankers Association says applications to refinance mortgages fell 7% this week from a week earlier,” USA Today reports. “But the real impact of rising rates on the refinancing business won’t be seen until later this year, because many loans with locked-in lower rates are still in the pipeline.”

– Financial bubbles, like rock stars, live fast and die young. The bond bubble was no different…its hard-core groupies may still be in denial. But the rest of us are already mourning the loss of the economy’s best friend.

– During his testimony last week before the Senate Committee on Banking, Housing, and Urban Affairs, Greenspan opened with his familiar refrain: “The FOMC stands prepared to maintain a highly accommodative stance of policy for as long as needed to promote economic performance.”

– Professional bond market participants understood the phrase to mean: “I will slash interest rates as low as needed to produce a ‘little’ inflation and to trigger economic growth.” But in light of the ensuing bond market collapse, it would appear that Greenspan’s policies are “accommodative” first and foremost to the bond market’s small cadre of short sellers. When rates rise, almost no one wins, neither corporations nor investors…well, maybe some investors…

– A couple of weeks ago in the Daily Reckoning, we mentioned Rydex Juno Fund and ProFund’s Rising Rates Opportunity Fund – two mutual funds that take bearish bets on the bond market by selling short long-term Treasury bonds. We are happy to report that neither fund has collapsed in price since we mentioned them. Instead, both of them have advanced nicely.

– Likewise, John Myers’ Resource Trader Alert has also been busy profiting from the bond market’s collapse. Last week, Myers urged his subscribers to ring up a 260% profit on the bond put options he recommended in early June, when the bond market was very close to it recent high.


Bill Bonner back in…well, we’re out in the countryside for the rest of the summer…

*** An interesting letter from a dear reader:

“As I said in an email to Addison Wiggin the other day, when I read your daily reckonings I nod my head knowingly because I agree with you that, yes, the government is broke, the currency declining and the economy is hollowing out. The social programs of FDR and LBJ, dressed up with all the additional bells and whistles added under the administrations of HST, IKE, JFK, RMN, JRF, JEC, RWR, GHWB, SLICK and now W, are leading us to the $44T (and growing) shipwreck about which you have written. I think to myself, ‘the water is washing over the decks of the Titanic, and…’ well, we all saw the movie, right? Remember that line from Titanic? The shocked passenger says: ‘But, but, but this ship is unsinkable.’ The ship’s architect replies: ‘Madame, this ship is made of iron, and I assure you she can sink.’ And my heart sinks, because this was one hell of a country before standards went out of favor and, more specifically, the currency got all screwed up. Nothing that you and your writers say about the future of the US Dollar, and the US economy, makes me feel good.

“But you convinced me to buy Gold, and to take delivery. I did exactly that. I do feel good about it. And I appreciate your time and efforts.”

Best wishes…BWK

*** And here’s another letter that made us wistful for the Clinton years…

“It doesn’t get any better (worse?) than this.

“Jesse Jackson has added former Chicago democratic congressman Mel Reynolds to Rainbow/PUSH Coalition’s payroll. Reynolds was among the 176 criminals excused in President Clinton’s last-minute forgiveness spree.

“Reynolds received a commutation of his six-and-a-half-year federal sentence for 15 convictions of wire fraud, bank fraud and lies to the Federal Election Commission. He is more notorious, however, for concurrently serving five years for sleeping with an underage campaign volunteer. This is a first in American politics: an ex-congressman who had sex with a subordinate…won clemency from a president who had sex with a subordinate…then was hired by a clergyman who had sex with a subordinate.

“His new job?

“Youth counselor!!!


The Daily Reckoning