Two Adams

Mr. Delaplaine whirled around with the grace of an undertaker at a rich man’s funeral. Smoothly, carefully…he had practiced every step hundreds of time and knew how to make people feel at ease in critical moments.

His partner on the dance floor was a blond woman who looked as though she might be in her late 50s…but could have easily been past 60. She too, was at home on the dance floor. Her blue dress reminded me of something worn by Jane Avril.

It’s hem was not straight, but came to a series of points that gradually rose up as she waltzed around. From a perch in the rafters, she would have looked a little like a daisy with blue leaves. But for the other revelers on Saturday night, she became a source of suspense. For the faster she danced around, the higher her hemline rose.

"If she spins around a little faster," said the woman sitting on my right "wowww…"

Small town life has few diversions. One of the biggest events in Montmorillon, for example, is the annual fundraising dinner for the Catholic school, St. Martiale. People look forward to it all year long. For it is a rare occasion, when nearly 500 people fill the town hall to raise a glass and swing a hip until 3 in the morning.

We did our share, but not without our customary contrariness. We danced waltzes as if they were tangos and foxtrotted our way through rock and roll. The French have a special form of rock that we have never mastered.

What does this have to do with investing? I can’t think of a thing. But I’ll continue with this account of our Saturday night…and maybe I’ll come up with something…

Besides, here at the Daily Reckoning we do not follow the money supply numbers as they did in the ’70s, nor the consumer confidence numbers as most economists do now. We take our method from the two Adams of our profession – Adam Smith and Adam Ferguson – who studied humans as though they were any other species. We keep at it, on your behalf, dear reader, even on our days off…

"Mr. Delaplaine had an affair with the woman who runs the fabric store," explained my informant. "It was scandalous. Because the woman also had a younger man on the side."

Everyone knows everyone else’s business. Which makes get-togethers like this so interesting. When else would you notice that Madame Labiche has gained 20 lbs and Monsieur Fuet has taken up with the sales clerk in the Renault garage.

"The girl has no manners…" continued my informant, "I heard her talking to a customer once in a way that was…well…shocking…"

And then there was young Olivier with his fiance…

"She is a cute girl, but he could have done better…" was the judgment at our table.

But here, dear reader, I will interrupt my account of the ball – to keep a promise. I promised to tell you how to invest now.

Last week, the S&P traded at 43 times earnings. Do you need to know more? Our essential investment rule tells us to "buy low, sell high." So, buying stocks is out of the question…unless we can find one that is completely out-of-step with the market. And in that case, you would want to know why.

We are at an epic peak of confidence in America, we believe. As a result, assets are overpriced. Eventually, people will not feel so proud and confident – and stocks will be cheaper. But what can you do in the meantime?

"Nothing" is the best answer. It is time to take your money off the table, pay off your debts…maybe buy some income-producing property (bonds, real estate, stocks)…and buy some gold, as insurance. Then, relax and enjoy yourself.

Which brings me back to the ball…

Around the floor they flew, glided, trudged, and stumbled. After a few glasses of champagne and a few bottles of wine, barely man, woman or child remained with his dignity intact.

There was our mason – Mr. Ledreau – a big man with a red face and black beard – doing the twist with his daughter. And there was our baker…but who was that he was dancing with? And around the bend, ah…Mr. Brule… a short, stout man so nearsighted he practically stands on your toes when he talks to you…but he is light on his feet on the dance floor. He waltzes well.

And his daughter…what a beauty! It seems like it was only last year we went to her wedding – and she has two children already!

By midnight, the salad course still had not been served, but people were beginning to lose track. The band had a remarkable range. Disco tunes one minute, celtic jigs and reels the next. And the few dozen children present seemed to have eaten the dessert first; they were becoming more and more excited – bouncing, jumping, racing around the hall.

As the band cranked up the decibel level with "I Will Survive," I turned to a woman and told her about a joke someone had sent me on the Internet.

"It’s a cartoon in which a woman is singing this song… and then a giant ball – like a meteorite – comes down and crushes her."

The woman did not smile.

"You don’t find that funny?" I asked.

"There’s so much sick humor on the Internet," she replied.

Perhaps she did not understand the English words and missed the joke.

Your editor, rushing to catch a plane…

Bill Bonner
April 29, 2002 — Paris, France

The Dow is back below 10,000…

And the dollar’s day of glory: is it over? The question comes directly from a headline on the International Herald Tribune. The green paper fell to 90 cents against the euro on Friday. It’s down to 127 yen too – despite the most aggressive expansion of the money supply in Japan in 30 years.

What’s wrong with the dollar? Well, says the IHT, "U.S. investors are venturing back overseas, after having brought their money home to Wall Street following the Asian economic crisis of 1998…"

U.S. investments have gone nowhere for the last 3 years – so investors are looking elsewhere.

This is very bad news for a country that needs almost $2 billion per day in new money to finance its current account deficit. Paul O’Neill says not to worry about it.

Yet, "the consequences for the dollar if foreigners’ appetite for American assets ever wanes would give a Treasury secretary who knew what he was talking about sleepless nights…history suggests that big current account deficits always collapse in the end."

When they do, according to a Fed study, the currency goes down an average of 40%. O’Neill is a straight shooter, as everyone says. Too bad he doesn’t know what to shoot at.

Over to you, Eric…


Eric Fry in New York…

– To borrow from the eloquent prose of a well-known Merrill Lynch research analyst, the stock market looks like "crap." The Dow fell 346 points last week to 9,911 – its worst one-week performance since the market reopened for trading after September 11. The NASDAQ fared even worse – tumbling 7.4% over the five-day span to 1,664.

– Whether the economy might suffer a "double-dip" remains an open question, but a stock market double-dip is already a fait accompli. The very same stock market that Abby Joseph Cohen declared last January to be on the road to recovery is instead on the road to nowhere fast.

– All three of the major market indices have lost ground thus far in 2002. The NASDAQ has tumbled nearly 15% year-to-date and almost 20% from its January high. In short, it is starting to become very expensive to trust in Cohen’s happy story about a recovering stock market.

– Meanwhile, that unlikeliest of financial market heroes, Mr. Gold Market, continues his dazzling performance. Gold for April delivery jumped $9.10 last week to $311.60 – bringing its gain for the year to 10%. Gold stocks are faring even better the metal itself. The XAU Gold Stock index has been on a tear – jumping more than 40% year-to-date.

– Among stocks in the XAU, Newmont Mining has been one of the best performers – gaining nearly 60% year-to- date. Newmont’s president Pierre Lassonde calls the company he oversees the "go to" gold stock. That’s because it is the largest gold producer in the world – with 86 million ounces of reserves, 7.2 million ounces of annual production and $859 million of annual cash flow.

– But for value investors it’s pretty tough to "go to" a stock trading for 42 times estimated earnings. Newmont is not exactly cheap in conventional terms. Therefore, if/as/when the gold rally gathers steam, we should not be surprised to see the metal itself start to perform better than most gold shares.

– Last week’s gold rally was manna from heaven for subscribers to John Myers’ Resource Trader Alert. The two separate gold call-option trades that John has recommended continue to soar in value. Meanwhile, John’s Outstanding Investments subscribers aren’t exactly crying in their soup. Many of his resource stock recommendations are flourishing in the current environment.

– John has been asserting repeatedly over the last several months that a long-term bull market in resource stocks has begun. So far, the markets are proving him correct. For the small minority of investors who hold large positions in the resource sector, 2002 has been a great year. But for the vast majority of investors who cling like shipwrecked sailors to the flotsam of the "U.S.S. New Economy," these are desperate times.

– Tossed about on the rough seas of a tempestuous stock market, many investors find themselves trying merely to hang on for financial life. Some unfortunate souls have already slipped beneath the bounding main, never to resurface.

– The harrowing conditions in the U.S. stock market are but one of many reasons why a sustained economic recovery is far from assured. Remember that the U.S. stock market has fallen for two years in a row. And U.S. stocks have not fallen for three consecutive years since the 1930s. That is a troubling precedent for a stock market that is in negative territory – so far – for the third year in a row.

– Without stock market wealth creation or refinance activity or tax rebates or employment growth, the consumer might simply drown in a sea of debt.

– Despite these challenges, Anirvan Banerji, the affable economist from the Economic Cycles Research Institute, confidently predicts that the U.S. recession is absolutely, positively over. "There’s a durable U.S. economic recovery underway," he informed the attendees of last week’s Grant’s Investment Conference, "not necessarily strong, but hard to derail at this point." He punctuated his pronouncement with the promise, "there will be no double-dip."

– Banerji may well be correct. But the economy doesn’t always do what it’s told.

– "Where we are today, in any case, is not where we were supposed to be, according to the received wisdom back at the turn of the year," writes Alan Abelson in today’s issues of Barron’s. "Economically, the perfect storm was supposed to be followed by the perfect recovery… Obviously, things haven’t gone according to script…The recovery, alas, is proving far from perfect. In fact, such vital elements as employment, profits and capital investment still are far from robust, and that most definitely ain’t good."


Back in Paris…

*** Is America a great country, or what?

*** Not only do we have the world’s highest output of high tech military equipment…and the world’s greatest economy…in the weekend edition of the International Herald Tribune we also discover that we have the world’s greatest race relations!

*** David Ignatius, listed as Executive Editor of the paper, can’t help but wag a finger at the French following the Le Pen showing last week.

*** "America’s cities were burning in 1968," he notes, "much as the flames of post-colonial rage and neglect are burning now on some weekends in suburbs of Paris… But unlike America in 1968, France isn’t making a serious effort to address racial problems."

*** France, Ignatius complains, is colorblind. The poor dumb French treat everyone alike, not even collecting statistics by race or religion. "France’s official race blindness, coupled with its ultra-meritocratic educational system," he says, have blocked efforts to give one race privileges at the expense of others.

*** In French schools, and in public employment, people who do well on tests get ahead. But in America, people often can get ahead just because of the color of their skin. "Affirmative action helped make America feel like an ‘opportunity society’ for minorities," he explains. His conclusion: French intellectuals should stop "beating their breasts" and begin creating an "opportunity society" just like ours.

The Daily Reckoning