Market Review: An Uncomfortable Feeling

Eric Fry, a bit soggy in New York…

Good week for stocks, good week for bonds and great week forgold… thanks to a stumbling dollar.

The Dow Jones Industrial Average gained 173 points for the weekto 9,471, while the Nasdaq jumped 2.7% to 1,855. The bond marketalso enjoyed steady buying interest, as the yield on the 10-yearTreasury issue dipped to 4.16% from 4.27% the week before.

Unfortunately, while investors loaded up on American stocks andbonds, their American dollars were losing more of their globalpurchasing power. During the week, the greenback dropped 1%against the euro to $1.137, and tumbled to 113.9 Japanese yen.That’s the dollar’s lowest level against the yen since December,2000.

Gold celebrated the dollar’s misery by jumping $6 during the week to $382.90 an ounce. Most of that gain occurred Friday, when gold surged $5.20. The yellow metal’s gains powered the PhiladelphiaGold and Silver Index to a 3.7% advance and a new 6-year high.

Investors and speculators may have been scurrying to buy gold and sell dollars in advance of the bureaucrat-fest in Dubai thisweekend. Both the G-7 ministers and officials from the IMFdescended on the Middle Eastern emirate to eat filet mignon,drink Bordeaux and furrow their brows over various globaleconomic "imbalances."

The approximate G-7 agenda features: 1) Scolding the Chinese –conveniently absent from the meeting – for systematically holding the value of their currency at the artificially low,export-friendly exchange rate of 8.28 Yuan to the dollar; 2)Brow-beating the U.S. for its trillion-dollar "twin deficits,"and particularly for its outsized current account deficit. Thenone-too-subtle implication being that a devalued Yuan will helpto reduce the American’s current account deficit, thereby takingpressure off of the mostly-European G-7 members to "correct" theproblem on their own by boosting imports of American goods.

To conclude the G-7 meeting, the bureaucrats will pose for photos and issue a final communiqué – expertly crafted to say nothingand to offend no one. "The G-7 is unlikely to call for an end tocurrency intervention, or to name names," the Lex column notes in today’s Financial Times. "Yet a statement in favouor ofmarket-driven exchange rates, of concern about the U.S. currentaccount deficit, and of collective responsibility in helping tomanage the required global adjustment would justify the air fares [of the finance ministers]."

Perhaps, but we suspect that no amount of finger-wagging fromofficialdom will alter the dollar’s fate. On Monday, the dollarwill be just as dangerous a currency to own as it is today. Itwill be no less reliable a store of value, and gold will be noless reliable a hedge against the dollar’s demise.

The U.S. current account deficit is 5% of GDP, and rising – anunpleasant fact that is worrying the U.S. credit agencies andshould be terrifying dollar-holders from Beijing to Brussels."The deficits leave you with an uncomfortable feeling about thefuture," says a tactful Moody’s Investors Service analyst, Steven Hess.

Consider us officially "uncomfortable."

Bon weekend…

Eric Fry,
The Daily Reckoning

September 20-21, 2003



AS WE GO MARCHING (09/19/03)
by Bill Bonner

"… The romantic appeal of war… and the political pull ofmilitary spending… the economic delusion… the polished brassand boots… it was all too much to resist. Despite a disastrousexperience in WWI, under Mussolini’s leadership, even thefun-loving Italians were soon marching around like popinjays andgetting out maps of Abysinnia… As Flynn puts it: ‘Out of Italy[as out of America currently] had gone definitely any importantparty committed to the theory that the economic system should befree.’… "

by Bill Bonner

"… My thoughts drifted to experiences of the last 6 years –since we moved to France… and how, little by little, withoutever really thinking about it, we became something we neverintended. You’ve heard of the accidental tourist. Somehow, webecame accidental immigrants. But that is how things actuallyhappen in life, dear reader. Things happen that we intend tohappen… and try to make happen… and other things justhappen… "

HOMELAND (09/17/03)
by Doug Casey

"… I’m favorably inclined towards real estate as an investmentclass. But as a means of growing wealth, the party is over, fornow at least. The way I see it, there are two ways to play realestate. Either sell, and do something better with the capital; or borrow heavily against it with a fixed-rate, long-term loan. Dosomething intelligent with the proceeds, and count on inflationto decrease the value of the loan faster than the market candecrease the value of the property… "

by Brian Durrant

"… The Cold War is over and Europe’s economic star is indecline. According to the latest IMF forecasts, the U.S. isexpected to grow by 2.4% this year, Japan by 2.0%, Britain by1.7% and the eurozone by a measly 0.5%. But the really brightnews is coming from Asia; China is expected to grow by 7.5% thisyear. Not surprisingly, then, the focus of U.S. financialdiplomacy has shifted from the Atlantic to the Pacific… "

by the Mogambo Guru

"… Raising taxes will, as I said, reduce somebody’s income, but it will also increase somebody else’s income, namely therecipient of the taxes when the money is spent as part of somegovernment program. The only difference is WHERE the money isgoing. If you spend it on things that you want, then the economygrows along those lines. If the government spends the money, then the economy grows along those lines. Now, all you have to do isfigure out which is healthier in the long run… "

The Daily Reckoning