The Ghosts of October 19
“Certain dates stand out in my life. One is October 19, 1987, the day the Dow Jones Industrial Average suddenly collapsed by 22%. That day is also significant because it happened to be my 40th birthday. Ever since then, I’ve been known as the ‘crash baby.’
“Most of my broker friends and investors were in a somber mood that Monday evening, stunned by the 509 point drop in the Dow. I was ebullient because by some fortune I sent out a ‘flash alert’ on September 8, 1987, six weeks before the crash, telling my subscribers: ‘The coming credit squeeze could devastate the stock and bond markets; get out now! I advise you to sell all stocks and long-term growth mutual funds.’
“That evening, my wife had arranged a surprise birthday party. I had a lot of fun, but the party ended early as friends rushed home to check the financial news overseas.
“Was the crash a portend of something more ominous, another Great Depression perhaps? After all, a similar stock market crash occurred in October, 1929, followed by the worst economic collapse in world history.”
October 19, 2007
Keep reading today’s guest essay here:
Now over to Short Fuse with some more views from Los Angeles…
Views from the Fuse:
As today’s guest essay, above, points out, it is the 20th anniversary of Black Monday. And to commemorate this special day in history, the NY dollar index hit an all time low yesterday.
“The index was created in 1973 to measure the dollar’s effectiveness in a post-Bretton Woods world…where all the major currencies of the world were floating freely, backed by nothing more than the confidence in the governments who sponsor them. The dollar has never been as low as it is today,” explains Addison in today’s issue of The 5 Min. Forecast.
“On Jan 26, 2007, the same index stood at 85…the high for the year. In 2002, when Ben Bernanke made his infamous ‘helicopter speech’ the index was at 120. It has fallen over 40% in five years.
“The high point for the dollar was reached back in 1985 when the index topped 160.”
There was a point in time when the value of the dollar and the price of oil would rise and fall in tandem – but those days are well behind us. Now, as the dollar falls, the price of oil rises…and today it hit an all-time high, breaking $90 a barrel.
And here, the inimitable Byron King expresses himself on the recent surge in oil prices…war in Kurdistan…and bio-diesel fuels…
“Who would have thought that oil could go that high? (Well actually, we did.)
“Heck, just when we were all getting fired up over how to keep them doggies rolling down the highways on biodiesel, the dang U.S. Congress passes some resolution about how the Turks killed a bunch of Armenians back in 1916.
“Turks get all P-O’ed about it. They say that we’re taking a historical issue and making a current political case out of it. So the Turks then start saying, hey, if you want to make a current political case out of things, then we’ll do some current politics of our own. So the Turks move the army to where they can kick some butt in the Kurdish areas of Iraq. Now all of a sudden, you’ve got NATO ally Turkey, which refused to participate in the original invasion of Iraq, talking about invading Iraq, which is otherwise occupied by NATO leader US of A. Whoops.
“The front page of the Financial Times has a photo of Turkish general Yashar Buyukanit, saying that the U.S. has ‘shot itself in the foot’ with that Armenian resolution. And oil traders read the Financial Times.
“A friend of mine is a Turkish guy named Mehmet, and an engineer here in the United States. Mehmet says, ‘You Americans individually can be pretty smart. But collectively and certainly politically, you are among the stupidest race of people on the face of this earth.’
“Leave it to a Turk to make the point.”
Byron continues…on what he calls “Deathanol.”
“Now we have the UN calling the development of the biofuels industry a ‘massacre’ of the world’s poorest. The food that goes into 50 liters of biodiesel could feed a child for one year, claims the UN man. Sounds about right to me. This concerns first generation methodology, using food crops as feedstock. There is less outrage and more hope for second-generation methodology, using crop waste and other plant waste as feedstock.”
“Elizabeth thought I’d lost my mind, the first time I brought her up here,” we explained to friends as we made our way up to the ranch. “The terrain gets worse and worse…more and more desolate…more and more empty. We got up to this high valley, and she said she couldn’t see why we’d come all this way. What was the point? There is nothing here.”
After we’ve been driving for three hours or so, we began to wonder too.
You spend about half your life trying to make money; the other half you spend trying to get rid of it. For help with the latter, we’ve turned to the high plains of the Andes.
But judging by what is going on in the U.S. economy, most people will not need help. And judging by the falling dollar – neither will we.
The average American has only gained wealth in the last five years because his house rose in price. Now even that is going away. And unfortunately for him…and for the U.S. economy generally…he already spent the wealth that is now disappearing. Each year, the MEW (Mortgage Equity Withdrawal) grew higher…until it reached a peak in 2005/2006. Consumer spending rose too – and pushed GDP growth for the economy. Housing contributed 90% to 100% of the gains from the last five years, according to some estimates. But this year, MEW has been cut in half…and house prices nationwide are falling, for the first time since the Great Depression.
While wages in the USA haven’t risen in 30 years, in Asia they’re going up about 10% per year. The Asians are making money…and getting richer. And in the process they’re accumulating huge stacks of dollars. Many of those dollars end up in the new Sovereign Funds – immense private equity funds owned by governments. Lenin said that capitalists would sell the ropes that he’d use to hang them. Well, the communist Chinese are ready for a buying spree. Currently, those funds have about $2 trillion in them. They’re expected to have about $17 trillion by 2010 – enough to buy every publicly-listed company in America…with change left over.
What will they do with all that money? Well, what would you do?
Yesterday, the dollar hit new record lows. The euro (EUR) rose to nearly $1.42. Since we live in Europe…and pay our bills in euros…but earn our money in dollars…every day, your editor loses more than he makes. His dollar assets go down. He’s getting tired of it. Surely, other dollar holders/earners are too – including foreign treasuries. What will they do? They will try to trade their dollars for something solid, while they still can. Companies. Land. Gold.
Whatever they can get.
What they will do is to use their paper U.S. dollars to buy America’s valuable assets.
The dollars, of course, are essentially worthless. The United States can create as many as it wants at negligible cost. But the companies…the factories…the land…the resources – those are really valuable. When the foreigners gain ownership, Americans’ own wealth – and independence – is reduced.
What did you expect? “The borrower is slave to the lender,” it says in the Bible. Welcome to captivity.
But we don’t have time to worry about that now…we’re on our way to our own desert oasis…
This is how it goes every time we make the trip.
The flight up to Salta went smoothly enough. And then the drive seemed to promise adventure. We drove down the valley and turned off to cross over the mountains. As always, crews of workmen were filling in holes, and rebuilding bridges. Still, there were places where the road seemed to have washed out since our last trip…we weren’t sure whether the workmen were gaining ground or losing it.
After about an hour and a half we had gotten up through the pass. Then, we were in high, very empty desert country. It is only an hour or so later that you begin to ask questions, the most prominent among them: why are we here?
“We’ve come to count the cows,” we told our friends.
“See how dry it is. Normally, there’s a little more grass. Even up here. But this year they’re having a bad drought. So, we have to buy hay to feed the cattle. We’re paying to feed 1,000 head. But we’ve never actually seen 1,000 head. The most we’ve ever seen is about 40. I don’t know, but people in Buenos Aires figure that we’re being taken by the locals for a bunch of stupid gringos.”
“They can’t be too far off,” said a cousin.
Reading up on the history of the area, we stumbled upon an interesting fact. In the 17th century, our farm was said to support 984 head of cattle. Of course, they could have been lying about it back then too.
But we’d come to get to the bottom of it. And to check on things, generally.
Finally, after nearly five hours exactly, we could see the green trees in the distance.
“There it is, home sweet home.”
“Where does your land begin?” asked a friend.
“Oh…we’ve been on our land for the last 20 minutes,” we replied. That is the attraction of the place. For 20 minutes, driving at 40 mph on a very rough, dirt road, we’d been on our ranch. We had not seen a single living thing – other than dried-out sagebrush and cactus. Without water, the land itself has no value. Still, there is a lot of it.
We stopped to swing open an old gate. Then, our truck rose up between the stone walls, turned to the right at another open gate, and continued up the hill towards the stone house. Even though the house is in sight, it still takes a while to get there. Irrigation ditches cut through the road. There was no water in them, but the truck had to cross them carefully.
Jorge and Maria were at the front door when we arrived.
“Hola…Don Bill…” said Jorge, taking our hand and putting his arm around our shoulders. “It’s good to have you back here. How is the family? We got a letter from Maria…she is in a play in London? You must be very proud. We are proud too.”
Maria put her hand behind ours neck and pulled us down to kiss our cheeks.
“Welcome back…what a pleasure to see you. Come into the kitchen. We have dinner waiting for you…”
Until next week,
The Daily Reckoning