What a week that was! In a period when gold should be in the seasonal doldrums, steady, un-seasonal physical buying relentlessly kept buying the gold on offer. As the gold price was pushed back down so it came back, like a high wave in a Neap tide, it swept all before it into uncomfortable confusion.
The physical buying alone was not the sole reason for its rise, for sure. The lack of liquidity in the market place played a major role! Why you may ask? We believe the Central Banks could be the cause, so we have prepared an article on this in the next issue of “Gold-Authentic Money” published for Subscribers, next week.
The market had focussed, in mild amazement on the very persistence of the physical buying, not able to convincingly point to a news story, however, trivial, for this price rise. But the price just kept on rising, bursting through the resistance pulling the triggers on stop loss orders, pushing onwards and upwards. Bear in mind that when we last reported gold was in the lower $340’s, that was twenty dollars ago. Not until the Euro began to recover, did the U.S. market jump on board and again, spurred more short covering. Full Story
Not too long ago, before the explosion of countless exchange-traded funds (ETFs) in recent years, the arena of choice for stock-index speculators was the futures markets.
Speculating on the future direction of the major stock indices via futures has a long and distinguished history compared to the new ETF phenomenon. While most of the hyper-popular ETFs like the QQQs universally loved by stock traders today were only introduced in the late 1990s, index futures trading stretches back over two decades.
Way back in 1982, near the very bottom of what would later grow into the greatest bull market in modern history, several individual futures contracts tied to specific stock indices began trading within months of each other. The Kansas City Board of Trade offered futures on the Value Line Index, the New York Futures Exchange introduced futures based on the NYSE Composite Index, and most important of all the Chicago Mercantile Exchange launched the mighty S&P 500 futures contract. Full Story
It was with this frame of mind that I read Fed Governor Bernanke's recent speech, An Unwelcome fall in inflation?, from which emerged this morning's quote. I wonder if Mr. Bernanke would tell a friend to keep smoking two packs of cigarettes a days because he had not yet experienced lung problems. That is, why should we universalize the current apparent low level of inflation and conclude that the Fed has, in his words, achieved its goal.
I surmise, from the recent bond market collapse, that the market does not see the same world that Mr. Bernanke sees. Indeed, this speech is an attempt to correct market misinterpretation of Fed views. In his words, Some in the media apparently interpreted the May 6 statement as saying that the Federal Reserve anticipated imminent deflation in the United States and informed the public accordingly. In my view, such an interpretation substantially overstates the concerns that the FOMC intended to communicate with its statement. Full Story
By: Bill Bonner & Eric Fry, The Daily Reckoning - 25 July, 2003
Oh là là... What a wicked, wonderful, wacky world it is.
We don't have any specific reason for saying that. It's just that it's Friday morning...we're in a light-hearted mood...and we've been so impressed lately by the elegant perversity of it. No sooner does someone think he's got the world by the tail than it turns around and bites him on the derrière.
Next to exterminating male members of the Hussein line, the Bush administration has made economic recovery a top priority. To that end, it has given the nation a tax cut, expected to provide an economic stimulus equivalent to 1.6% of GDP.
Too bad so much of the stimulating is done overseas, particularly in China. Full Story
By: Mary Anne & Pamela Aden, Aden Research - 24 July, 2003
Gold’s been rising over the past week. It shot up $8.00 yesterday, reinforcing its major bull market. This breakout marks the end of gold’s weakness over the past couple of months. But there’s much more, and it’s all good news for gold and gold share investors.
As we discussed last time, the overall backdrop is very bullish for gold. The fundamental steps are in place and so are the technical steps.
On the fundamental side, we’ve got a weak U.S. dollar, and gold moves opposite to the dollar. That’s been the case ever since Nixon closed the gold window in 1971 and allowed the dollar to float on its own merit. Full Story
By: Bill Bonner, Eric Fry & Marc Faber, The Daily Reckoning - 24 July, 2003
Yesterday, we wondered.
On what day will the U.S. economy change course? It has been following Japan...with a 10-year lag...since the mid- '90s. Stocks boomed up, then bubbled up, then blew up...just as they had in Tokyo 10 years before.
And then Greenspan, Bernanke, McTeer and Bush came along. Vowing not to repeat Japan's mistakes - they did almost exactly the same thing Sakakibara, Mieno, and Murayama did - they cut rates and increased government spending. Is it any wonder they got the same results?
Like Japan before it, the U.S. economy has slipped, slumped, and slid for the past 3 years. It cannot seem to find a firm footing. So much 'liquidity' has been hosed on the ground that it is now too sloppy to give a man any traction. Instead of making progress, he slips and falls. Prices drop. Jobs are lost. The economy sinks. Full Story
The question everyone is asking lately is, "Has the U.S. economy seen its bottom?" Depending on who you ask, the answer will vary. The entrenched bears contend it has not and that rough economic times are directly ahead. The bulls proclaim the bottom is in and "happy days are here again!" Then there are those whose views lie somewhere in the middle. Call them the "muddle through" crown, a sentiment best expressed by economist John Mauldin, whose "Muddle Through" scenario sees the economy inching along at 2-3% growth for the next few quarters. In other words, not bad, but below potential. Full Story
By: Richard Benson, The Specialty Finance Group, LLC - 23 July, 2003
It used to be that the economy drove the markets. Now, the markets drive the economy, and the Fed is behind the wheel!
The new market driven economy is based on managing expectations always upward and manipulating markets to keep asset prices up, and the appearance of wealth high. This is designed to keep businesses and households spending. This economic model, however, has an air of desperation about it. At present, corporate cash flows, and the rate of capacity utilization does not justify any meaningful pick-up in corporate investment or hiring. The household sector continues to spend beyond its means and is sustained only by the extraordinary increase in annual mortgage debt. Full Story
By: Richard Daughty, The Mogambo Guru - 23 July, 2003
St. Petersburg, Florida -- - The Treasury has now indebted us by another $600 billion in the last twelve months, more than $2,000 for every man, woman and child in the country. The Fed, being in total control of the banking system, can only make money cheap and available for borrowing. But the Treasury IS a borrower, and is borrowing scads of Fed-cheapened money for us and our children and our grandchildren to repay, and the Fed is making that money, as I said, cheap and available for borrowing. I am hereby defining the word "scads" to mean "Amounts so large that they defy comprehension and make your eyes bug out when you see it written down in front of you." And the fact that "scads" sounds like "scabs" is just a happy coincidence, since the Fed's actions are bleeding you dry and you are being covered with invisible scabs from the wounds. And since scabs have never been a popular beauty or health accessory, nobody wants them, and this is exactly the reason why the banking system was supposed to be independent from the government. Supposed to be. Used to be. Should be. But ain't.
And, since all the central banks of the world are in on the rigged game, the amounts of our debt held by foreigners in custody of the Fed naturally increased by another $4.2 billion, as those central banks are at war against their citizens, too, in the name of providing spendthrift Americans with more cheap pocket money. How special. Full Story
By: Bill Bonner & Eric Fry, The Daily Reckoning - 23 July, 2003
We can't wait to read the history books. Maybe a year from now. Maybe 2...5...10 years. We want to know the precise date on which the U.S. consumer credit economy stops muddling through. For it must shake, rattle and roll over dead some day. Everything does.
The day may come and go without notice. The world created in the Dollar Standard era may end with scarcely a whimper...and no bang whatsoever. But it will end. How and when...and the irony and agony of it all...are grist for the Daily Reckoning mill. Our wheel turns slowly, grinding one day's market news and then the next. Consumer sentiment gets crushed into chain store sales...which gets mashed into the pulp of M1, M2, M3 and so on. Unless you have a lively imagination or a perverse sense of humor, you might find the whole thing as dull and pointless as a joint session of Congress. What a pity, because you'd miss the eternal drama of it all...the spectacle of monumental arrogance humbled before nature.
Isn't that the theme? Powerful moneymen who think they can buck the laws of nature...and thumb their noses at the dead? Full Story
Greenspan forcefully condemned deficit spending and the inflation it causes in his essay, “Gold and Economic Freedom”.
As he sat looking with a possibly jaundiced eye at his political masters on the House Banking and Financial Services Committee, in his controlled, purposeful, but almost casual tone, Sir Alan Greenspan, titled, after a long and competent career, could well reflect on his writings of 1967, when he wrote the definitive article. In this essay he not only made a forceful argument for gold, but strongly criticised deficit spending and the inflation it causes. Such condemnation stands as solidly now as it did then, particularly in view of the current policies in the United States. Full Story
By: James Cook, Investment Rarities Inc. - 23 July, 2003
Once a week I like to call the South-of-France and talk with the economist, Kurt Richebacher. We have been friends for years. In 1997, he came to visit us and stayed at my home. He gave a talk to our broker staff and the two of us had many interesting discussions. What stands out is the accuracy of what he had to say about future economic events. He predicted the 1998 Asian crisis, the faltering U.S. economy, the stock crash and today’s lack of a meaningful recovery. Compare that to the community of U.S. economists who have been repeatedly wrong. (Not that they’ve learned from it.) Mr. Richebacher is the only economist on earth to be so right so early.
I think it’s a symptom of the times that the guy who has been right gets ignored, but those who have been wrong get wide currency. The equity culture has mesmerized America. There’s no listening to reason among investors. You might as well tell the sorry characters who blow their entire paycheck at the quarter slot machines to stop gambling. The growth in speculation, and the derivatives that facilitate it, is a measure of our dysfunction. Prompted by the greatest credit excesses in history, the nation has become a great casino, crowded with speculators, runaway consumers and subsidized pleasure seekers. Full Story
Returning to a more timely topic, lets consider the recent collapse of the bond market. As noted last week, rapid 50bp advances in 10 yr rates are rare events and often lead to market dislocations either domestically or abroad. Today's charts aim to compare the current decline with the two most recent previous declines of this magnitude. On this mode of comparison, the current decline seems far less economically distressing in the sense that much of the move is merely a quick reversal of the faith that the Fed would employ extraordinary measures to fight deflation. In my view the real sector effects of the current yield rise will be small as rate were only below 4% for a relatively brief period. Trading desks, however, may well bear the brunt of this decline which could reduce the willingness to take on future risk.
Of course, the above analysis is only based on current events. Should 10 yr yields approach 4.5%, the real sector effects will, in my view, begin to manifest. More intriguing, in my view, will be the expectations for the future. That is, at what point will markets come to the conclusion that US Treasury yields have reached their nadir? Full Story
In my previous report on Fred Sheehan's essay, "An Investor's Manifesto," I presented his basic thesis: all of the investment fund managers' fancy mathematical analyses are no guarantee that the geniuses and their computer programs will keep a major disaster from happening.
The various investment bubbles created by Federal Reserve monetary policy have not yet been liquidated, he argues. The size of the debt load of American consumers is still very high.
I would make this modification: the size of the debt load is high, but the monthly debt repayment burden has not changed much. It never does. Year after year, decade after decade, the ratio of debt payments to disposable personal income fluctuates within a narrow range of two percentage points: 12.5% to 14.5%. Full Story
By: Dr. Ron Paul, Congressman from Texas - 22 July, 2003
During testimony before the House Financial Services committee last week, Federal Reserve Chairman Alan Greenspan indicated that he is prepared to maintain low interest rates for “as long as it takes” to energize the listless economy. Unfortunately, this will only prolong the painful economic consequences of his own easy money, easy credit policies.
Throughout Greenspan’s tenure, we’ve been told that inflation is either nonexistent or very much in check. The Treasury department assures us that consumer prices, measured by the consumer price index (CPI), are under control. But inflation is much greater than the government admits. The CPI excludes housing prices, among other things. Everyone knows that housing prices have risen dramatically over the last decade in most parts of the country, with rents following closely behind. So the single biggest expense for most Americans – their mortgage or rent payment – certainly has inflated! The price of many other goods and services, including medical care and energy, also has risen substantially. Full Story
By: Bill Bonner & Eric Fry, The Daily Reckoning - 22 July, 2003
"When will we be there?"
The question was for John Mauldin, who was visiting over the weekend. Neither of us doubts that the Dollar Standard period will someday come to an end. Everything does.
But when?
For the moment, we are "muddling through," says John. When do we stop muddling, we wanted to know?
Here at the Daily Reckoning, we sit on the edge of our chair. We are such optimists; we can't help but think that a sort of economic rapture is at hand. Surely, this mess will be sorted out soon, we feel; at long last, people will get what they've got coming. Full Story
By: Chris Temple, The National Investor - 21 July, 2003
Recent rebounds both in U.S. stocks and the exchange value of the U.S. dollar have served to take a little luster off the price of gold since it topped out at over $370 per ounce in late May. Some have seen this second swoon of 2003 after a strong run (the first after a spike to the $390 level in early February) as more “proof” that gold still has relatively few fans. To a point, that’s true; as I commented in a recent article, much of the metal’s gyrations this year has been due to hedge fund and other short-term trading, rather than to more serious, longer-term money coming on board.
Still, though, I see gold’s recent success in holding above the $340 per ounce level as very positive. Keep in mind that much of the dollar’s recent bounce came AFTER gold had already undergone most of its own very orderly consolidation. The fact that gold held its own therefore shows that at least some investors are looking past the day-to-day moves in the dollar and focusing on the longer-term environment; one that both Federal Reserve Chairman Alan Greenspan and the federal government itself have made even more bullish in recent days. Full Story
By: Bill Bonner, Eric Fry & The Mogambo Guru, The Daily Reckoning - 21 July, 2003
"You can't muddle through the end-of-the-world."
"That may be so," replied our houseguest for the weekend, "but we're not there yet."
Sitting on the veranda with your editor was old friend John Mauldin, who had stopped by on his way to Geneva.
"We may be headed in that direction, but we have a ways to go yet," John continued.
Your editor thought he saw the end-of-the-world-as-we-have- known-it when consumers started running out of spending power back in 2001. Deeper in debt than ever before, losing their jobs, we figured they would cut back. But like purple mountains in the distance of U.S. 66, they were farther away than we thought.
Instead of slowing down, consumers sped up. Full Story
Times of great crisis in history are usually the crucible from which nations form new leaders and new visions. Such leaders seem to just suddenly appear often out of nowhere to alter the national path pursued, to cleanse the old ways, and stake out a saner, more just means of living and governing.
Is it God, destiny, fate that are somehow at work to bring about a saving metamorphosis in which some visionary soul rises to the occasion to stir the passions of the people and bring about a righting of the ship? Whatever the force may be, our country is in dire need of its power today.
If such a force is at work in history, I pray that it is exerting some heady pressure upon the one politician in Washington who has never been a politician. That man is Congressman Ron Paul from the 14th District in Texas who has always been a throwback to the original "citizen statesman" that the Founders promoted as the ideal type of leader for the Republic they had formed. Full Story
By: Julian D. W. Phillips, Gold-Authentic Money - 20 July, 2003
Again this week we have seen the strong support of physical Gold. As an example, here’s what happened yesterday; in new York the day started with Commission houses entering the market, buying for their clients, probably executing orders placed during the night, until they were satisfied. Gold then drifted down on dealers response to few orders until it reached $341.10, in the middle. Strong physical orders appeared [possibly contingent orders] and took up all the slack. With the mood swinging back to the positive and buyers believing prices were cheap, the price was shoved back up, followed by the funds picking up the baton taking the price up to $343 and scaring locals out of their shorts!
Most observers are saying this should not be happening and are hunting round for reason, usually alighting on currencies, with the Euro starting to clamber back up, slowly but surely. Others report, accurately, that Indian buyers are building up their positions, preparing themselves for around a 24% increase in demand, in line with the healthy rains, from the gold-loving farmers in India. The resilience of the demand seems so persistent and price related, that we are inclined to think that there are other strong forces in the shadows too. De-Hedgers, it could well be, or even a Central Bank or two, we cannot know for sure. Full Story
Everyone is watching the bond market. Rates appear to have turned upwards for the longer term. Pundits and investors speculate that the bond bubble has now burst. Many hypotheses and forecasts will now be tested. As prices drop and bonds are sold, where will the money go? A simple question it seems. A correct answer would be worth untold riches. Untold indeed.
Same As It Ever Was
Sitting before Congress, Mr. Greenspan seems to know. He remains rather calm right here. He must have the answers: Everything is fine. The economy is showing signs of recovery. Never mind our posturing over the past year, but the Fed needn't consider unconventional methods to keep long rates down. After all, we can just revert to our old ways. Deflation was just a passing nightmare. And the Treasury, with a little help from its friends, can just sell paper gold again to hold down the long rate. Plenty of time to buy it back with printed dollars. Or net out the paper ledger. As long as the Fed does not run out of friends. And useful idiots. Full Story
This week we look at what Greenspan really said and what he didn't say; the real reason why the bond market reacted so violently (not what the headlines would lead us to believe); what History tells us about the volatility of the bond markets and what we can expect in the future. It should make for a lively letter, as I wrap up the week early to catch a plane to Paris. Stay with me, as this letter is going to give you some real insight into the bond markets, a "secret" called the "6/50 Rule," which will help you as you ponder interest rates and your investment future. Let's jump right in.
What in the Wide, Wide World of Sports Did Greenspan Say?
Last week I compared this week's Greenspan testimony to the last card dealt in a Texas Hold'Em poker game. If Greenspan did not confirm to the bond market the substance (read bluff) of recent speeches by members of the Federal Reserve, bond traders would call the bluff and rates would jump back up. He didn't and they did. Full Story
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