The Perfect Storm

The Daily Reckoning
Weekend Edition
May 15-16, 2004
Baltimore, Maryland

The markets are confused, the Fed is confused, we are confused. Good news is bad news – for stocks; inflation is bad news for gold and good news for the dollar; the Fed couldn’t print money any faster if it was
giving it away, yet there’s talk of a liquidity crisis; credit has grown to levels people couldn’t have conceived of 20 years ago, yet some fear a credit crunch; befuddling.

Of course, there are explanations for all these phenomena – though mostly far too complex and overly thought-out for our wine-addled brains. Sometimes you just have to go back to basics.

The Fed has been inflating its way out of a recession. In fact, the Fed has been inflating since the dollar was released from its golden anchor in 1971, at which point – for the first time since 700B.C. – no currency on the planet had any connection to gold.

We are now steaming ‘full ahead’ into the "perfect-storm" – as Steven Roach put it. The potential confluence of three economic weather-systems – an energy crisis, a China collapse and a Federal boob-job on the interest rate – all bearing down on the unseaworthy U.S. balance sheet, loaded with debts, derivatives and deficits, could, theoretically speaking, sink the ship.

Nobody can possibly predict how this story might end, let alone assign the correct probabilities to all the different factors. We are sailing across uncharted waters. What is clear, though, is that the U.S. dollar is in a bear market. And although we may see some prolonged rallies, and sharp, upward spikes – call them death-throes – the long-term conclusion doesn’t make for pleasant reading, unless, of course, you own gold.

Gold closed the week at $377, down a couple of dollars on the week. Next week, it may go down more. Or it may go up. We don’t know. The huge dollar-short position may uncoil, or it may not. The debt bubble could explode, or is it implode? We couldn’t say.

The important point is that – no matter how the tragedy plays out – gold will benefit eventually.

Elsewhere, on Friday, crude oil hit another intraday all-time-high at $41.50 per barrel, as did gasoline on Thursday, touching $1.4015 a gallon.

Meanwhile, at the stock market, the Nasdaq made a new low for the year, reaching 1,878 on Wednesday. It closed at 1,904 at the end of Friday’ session. It had been as low as 1,896 in mid-March, which is still well clear of the bear-market-low at 1,108, set in October 2002. The Dow closed the week at 10,013, 107 points lower than this time last Friday.

30-year ‘risk-free’ Treasury rates fell from 5.56% to 5.50% on Friday, but gained 4 basis points over the week. Considering that both the PPI, on Thursday, and the core CPI, on Friday, jumped unexpectedly higher, the reaction was muted, which perfectly suited the character of this baffling market.

Maybe next week, no news will be bad news.

Regards,

Tom Dyson,
The Daily Reckoning
May 15, 2004

THIS WEEK in THE DAILY RECKONING

THE ETERNAL SUNSHINE OF THE SPOTLESS MIND 5/14/04
By Bill Bonner

"… According to the reviews, a couple decides to divorce… and to scrub their minds of all the unpleasant memories of their union. We can imagine what happens next… the way is now clear for the couple to fall in love again… "

PAYING OFF THE PIPER 5/13/04
By John Myers

"… The U.S.’s financial obligation is so big that it is hard to fathom. One way to look at it is to consider the fact that America’s annual deficit almost matches the total value of goods and services that Canada produces in a single year… "

AGAINST A BRICK WALL 5/12/04
By Marc Faber

"… From the 1950s to the late 1970s, $1 of additional debt generated between $0.50 and $0.70 of additional nominal GDP. However, more recently, $1 of additional debt has only managed to increase nominal GDP by around $0.20. In other words, in order to maintain its altitude, the pilot of the U.S. economic airplane needs to continuously increase the RPM of the engine… "

IMBALANCES AND DISLOCATIONS 5/11/04
By Kurt Richebächer

"… For most American economists, sufficiently easy money is of infallible efficacy. The few instances in history when record-low interest rates persistently failed to work, like recently in Japan and during the 1930s in the United States, are summarily discarded with the argument that central banks failed to act fast enough… "

FORCES OF NATURE 5/10/04
By The Mogambo Guru

"… With pyramids, it all comes down to one thing – gravity. The same goes for economics. You can try and make an economic structure out of many things, arranged in many ways, but there is one thing – inflation
– that will always bring it down. And that is why I am so fixated on inflation… "

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HEADLINE, NEWS And INSIGHT:

Hero Worship
by Taki
"… When Cogny appointed him commander of Dien Bien Phu, de Castries named the various outposts surrounding his headquarters after his favourite French mistresses, including Claudine, Eliane (there were two Elianes), Huguette, Lili, Béatrice, Françoise, Gabrielle, Dominique and Isabelle… "

Economic Autopsy
by Byron King

"… The particular business owner, with whom I am dealing, ran up a series of delinquent accounts to obtain materials, bouncing from one vendor to another when the previous one would shut him off. He max’ed out his credit cards for day-to-day cash and expenses, and drew down every other line of unsecured credit that he could find… "