Wall Street's Forgotten Guru

“My mission on earth is to make everyone happy.”

Shri Sathya Sai Baba

Stocks rise against a wall of worry, it is said.

How else could you describe the stock market’s action
since September 21? War, pestilence, famine, a
collapsing bubble, depression – investors had plenty of
reasons to worry, of which we reminded them often.

But today, I write about something about which investors
forgot to worry. It has been fully 21 years since the
last bull market in gold, dear reader; it is a rare
investor who worries about missing the next one. Many a
care may line the brow of the average investor, but a
rise in the price of gold is not one of them.

An exception, perhaps in many ways, is a veteran of the
last gold market, Jim Sinclair, recently profiled in
Forbes. Sinclair’s name will not ring any bell with most
investors…nor even with most Daily Reckoning readers.
But those old enough to recall the time when the price
of gold and the Dow were almost the same number may
remember. Sinclair was a goldbug at a time when goldbugs
were just becoming cool. In 1977, he foresaw what must
seem like a fantasy today – a rise in the price of gold
from $150 per ounce to $900.

Two years later, on January 21, 1980, the price of gold
– in its own little bubble market – hit an all-time high
of $887.50. [For reference, the Dow closed that day at
9,921.]

“The next day,” Forbes reports, “Sinclair says he
unloaded his entire gold position, personally netting
$15 million…Sinclair then predicted at an annual gold
conference that the metal would languish for the next 15
years.”

He was right. It did. In fact, in a few weeks it will
begin its 22nd year of languishing.

We don’t know the source of Sinclair’s gift of prophecy.
“On the walls of his office,” reports Forbes, “hang six
photographs of Shri Sathya Sai Baba, a guru whom
Sinclair visits in India several times a year.”

Not wishing to leave a stone unturned, nor a toad
unexamined, in our quest for market insights, dear
reader, my indefatigable colleague in Paris, John T.
Forde, made haste to the website. His report:

“Bill, when you said ‘guru’ I thought you meant
investment guru. This guy is more about spiritual
investments. If this is the right guy, he’s truly a
character.

According to an August 2001 article in The Times, Sai
Baba has 20 million international followers. Many are
jet-set wealthy.

His organization runs schools and hospitals, as well as
thousands of “Sai” centers worldwide (kinda like
Scientology from the East).

James Mason’s widow, Clarisa Mason, was a devotee (along
with her 13 million sterling fortune). She died in 1994
and willed a large chunk of money to his cult.

Isaac Tigrett, the American who founded the Hard Rock
Cafes, also funded the building of a Sai Baba hospital
in India.

The Duchess of York visited his ashram when she was in
India and he ‘summoned’ a gold watch from ash for her.

Other ‘miracles’ he’s performed include:

Two resurrections, the materialization of jewelry from
Holy Ash (handy for forgotten spousal birthdays and
anniversaries, I’ll bet), and ‘giving birth’ to small
egg-sized objects called ‘lingams’ from his throat.

Here’s a good one – Sai once turned water into gas in a
car that had run out of fuel (a modern-day Canna story,
I guess).

He can also appear physically in two places at once.
That sounds handy, too.

By the way, Sai claims omniscience, ‘I am everything,
everywhere, omniscient, omnipotent, and omnipresent, and
so whatever I will instantly happens.’

Some of the most vocal detractors are those who say that
part of the holy treatment young males get during one-
on-one audiences with Sai Baba involves genital
fondling.

Those allegations started in 1976 and have continued
since. A quote from one of his U.K. followers about a
friend’s visit with Sai Baba: ‘One chap said that a
tremendous amount of energy was suddenly released in him
and he felt wonderful afterwards.’

Oh, and I found a picture. He looks like one of the
Jackson Five.”

Sinclair has spent the last 20 years on various
adventures, not the least of which was building cable
systems at Cross Country Cable, on which he made
millions selling to John Malone’s TCI, says Forbes.

But he has also kept up with gold as an investor, and
more recently, as a miner. Forbes: “He has invested $11
million to develop 2,154 square miles of barren land in
central Tanzania that he’s convinced hold vast gold
deposits.”

So, he is long.

“He believes,” Forbes explains, “despite the whiff of
deflation in the October producer price index, that the
country is headed for mild inflation. He thinks the
dollar is due for a fall. He also is moved by the fact
that mining companies which routinely sell un-mined
metal forward at fixed prices to protect themselves
against further price drops have recently pulled back
from placing these hedges, a move that should prompt
gold prices to rise.”

It is a funny, old world, as Margaret Thatcher once
observed. The Fed cuts rates to cause people to spend
and invest money, rather than hold onto to it. But it is
a rare cause that doesn’t have unintended effects.

It used to be profitable to borrow gold, sell it
forward, invest the money at short term rates and enjoy
a profitable spread. But with the fall of short rates,
it no longer pays. Result: less gold sold forward.

“It doesn’t pay to hedge anymore,” elaborates co-CEO of
Franco-Nevada, Pierre Lassonde, to Grant’s Interest Rate
Observer. “The hedgers have borrowed, on record, 4,700
tonnes of gold from the central banks, which will have
to returned over the next, let’s say, seven years. So
that is 700 tonnes that is not going to hit the
market…and production is coming off as well, by a
factor of about 200 to 300 tonnes over the next three
years. So you are looking at almost 1,000 tonnes of
supply [per annum] that is not going to hit the market.
[For perspective, new mine production this year will
range around 2,500 tonnes.]

“At some point, this is really going to bite the price,”
Lassonde concludes. “If you look at gold over the past
10 years, the average price is $350. I think it is going
back there.”

When and if the gold price does rise, James Sinclair
expects a massive squeeze on hedgers. Speculators have
$36 billion in short positions. Sinclair figures the
shorts will cover their positions soon after gold hits
$305. Then, gold should shoot up to $350 and maybe as
high as $430.

We, who are guru-less, have no way of knowing. Sai Baba
may will the price of gold higher. Then again, he may
not. But we note that gold is relatively cheap…and
that the bear market in the yellow metal is not likely
to last forever.

Your correspondent,

Bill Bonner

P.S. “But how can you square your pro-gold position with
your forecast of deflation,” we ask ourselves, saving
many readers the trouble.

While we expect more than a whiff of deflation, we
reply, we have little doubt that sooner or later
government will find a way to do what it does best –
inflating the currency. Gold is good insurance, even if
it is not a good investment.

What’s more, even in a deflationary world, the price of
gold can go up. Gold is, ultimately, money. And when
consumer prices go down – money of first, and last,
resort goes up in purchasing power.

There were 5 rallies of 20% or more during the
great bear market following the crash of ’29. And 5
times, too, the Japanese market rallied more than 20% as
it made its way from 39,000 down to below 10,000 – 1990-
2001.

Wall Street rallied more than 20% since Sept. 21.
Is that rally over? Or is it a new bull market?

Of the nine “top Wall Street strategists” surveyed
by the Wall Street Journal, eight of them are bullish.
Only one expects stocks to go down over the next 12
months.

But why? Third quarter profits fell 26% in the
last quarter, from a year earlier. J.P. Morgan expects
profits to drop at a 20% rate in the 4th quarter too.
Without profits, employment falls…and capital spending
disappears. How will sales go up? Why would stock prices
rise?

But “what about all that money on the sidelines,”
you may ask. The WSJ reports that more than $4 trillion
is waiting to jump back into stocks. It’s just a matter
of time, say the experts, before that cash gets re-
invested in equities. After all, “what else are they
going to do with it,” they ask.

I don’t know. But someone should ask the Japanese.
Talk about cash “on the sidelines!” They’ve had so much
money pile up they had to bring in snowplows to push it
out of the way. Eleven years into a bear market/economic
slump…and the Japanese are saving more than ever.
Trillions and trillions of yen wait…and wait…and
wait…”on the sidelines.”

And the one thing that Greenspan must fear more
than any other is that something similar happens in the
U.S. That’s why he will, most likely, cut rates again
today – to make it less attractive to investors to hold
money “on the sidelines,” in money market funds…where
it earns less interest than the inflation rate.

When the Fed began cutting rates back in January,
some economists argued that the economy would turn up
after 3 cuts. Others thought it would take 5. So, today,
will they compromise at 11?

What do you think, Eric?

*****

Eric Fry in New York…

– Well Bill, it looks like Mr. Market has forgotten his
lines…either that, or he’s memorized the wrong script.
The lighthearted financial farce we’ve all been enjoying
since late September has taken an abrupt and tragic
turn.

– The Dow dropped 128 points yesterday to 9,921. The
Nasdaq slid 1.4% to 1,992. And sadly, just like that,
Dow 10,000 and NASDAQ 2,000 are but fond memories.

– It’s not simply the loss of a couple hundred Dow
points over the last two days that has investors (and
drama-lovers) shifting anxiously in their seats. Rather,
it is that the much-ballyhooed economic recovery is
starting to seem a little less robust than advertised.

– No sooner does everybody start believing the “recovery
in 2002″ story than former tech icon, JDS Uniphase
Corp., announces that demand for its fiber-optic gizmos
is still falling steeply.

– “The company believes that the March quarter will
represent the low point in sales for the current
downturn,” JDS stated hopefully, “although the recovery
rate is expected initially to be modest.”

– If Amazon is the River of No Returns, as Bill likes to
call it, then JDS Uniphase is the Flashflood of Large
Losses. JDS somehow managed to post a $50.6 billion loss
for the fiscal year ended in June 2001, and still stay
in business. Not just anybody can lose $50 billion, and
stay out of bankruptcy court. Just ask Enron.

– “Like many of its peers,” says Crain’s, “JDS saw sales
tumble in the last year as the global economic downturn
sapped demand for its products. Indeed, first quarter
sales were less that half of the $786 million posted a
year earlier.”

– Recent analysis from Moody’s John Lonski suggests that
JDS Uniphase’s sales shortfall is a harbinger of things
to come. Lonski points out that the growth of “real”
business investment in high-technology equipment and
software soared “an outsized 17.9%” per year between
1993 and 2000. It therefore seems inevitable that a
period of much slower growth should follow. Low and
behold, that’s exactly what’s happening. “For the
quarter-ended October 2001,” says Lonski, “high-tech
equipment orders were down by a -33% from a year ago.

– “Far from being immune to business cycle,” Lonski
concludes, “high-technology’s collapse helped to drive
the U.S. into recession.”

– “You can’t make profits by giving away your
merchandise. All you can do is make sales,” Bill
observed recently. “And even trying to make up the
losses with volume – as Amazon.com has tried to do – is,
after all, still a joke.”

– But it is a joke that Amazon eagerly perpetuates with
its “Holiday Delight-O-Meter.” (Bear in mind that this
is not supposed to be a joke, even if it happens to be
one).

– “The Delight-O-Meter tracks the approximate number of
items ordered from Amazon.com’s sites worldwide,” says
the profitless retailer’s Web site. “The Delight-O-Meter
debuted on November 14, 2001, with a count of over 2.5
million items ordered since November 9.” As of last
night, the Delight-O-Meter had logged 28,136,490 sales.

– If there were a corresponding “Misery-O-Meter,”
tracking Amazon’s cumulative losses, the meter would no
doubt be rising in lock-step with Amazon’s sales.

– The bookseller’s Web site very helpfully explains,
“The Delight-O-Meter should not be viewed or used as a
predictor or indicator of revenue or other financial
information relating to Amazon.com.” Does anybody really
need a predictor of Amazon’s financial information?
Don’t we know it already?…Losses for as far as the eye
can see. How delightful.

– Speaking of Amazon, Henry Blodget, the former Internet
stock analyst-cheerleader, is in the news again, and not
just for his obscenely generous $5 million severance
package from Merrill Lynch. Smartmoney.com reports “The
New York state attorney general’s office is
investigating some of his actions as an Internet-stock
analyst for [Merrill Lynch] as part of its broad probe
of analyst conflicts of interest…” Conflicts of
interest? On Wall Street? Come on, who are you trying to
kid?

– “At issue for state investigators,” says
Smartmoney.com, “[is] whether Mr. Blodget misled
investors with some of his stock recommendations, and
whether that can translate into criminal or civil
securities fraud charges against Mr. Blodget and
Merrill.”

– Don’t let ’em get to ya, Henry. Just because your
actions were reprehensible, that doesn’t make them
illegal.

*****

Back to Bill in Baltimore…

*** Coming into Baltimore last night, I was greeted by
the purple sign on the Raven’s stadium: PSINet, it says,
without explanation.

*** There seems to be something about these companies
that put their names on stadiums. Not only are they
driven to self-destruction, but also to make a public
spectacle themselves along the way.

*** Bloomberg reports that Enron’s bankruptcy made it
the “fifth owner of stadium-naming rights, and the
second in less than a month, to go into bankruptcy.” In
1999, Enron signed a $100 million deal to put its name
on the new stadium for the Houston Astros.

*** What possible good could Enron expect from putting
its name in lights on a stadium? Or PSINet, for that
matter? Who is going to buy an Enron product or a PSINet
product simply because he saw the name in lights? On the
contrary, a smart buyer would avoid them…recognizing
that they were companies run by fools, with too much
money to spend.

*** PSINet went bankrupt in June. But no one has yet
unplugged the neon sign.