* * * * * * * * * * * * REMINDER * * * * * * * * * * * * *
On the days that I don't publish, like today, you will
receive Bill Bonner's DAILY RECKONING. This will help you
to keep pace with the changes in the markets. Bonner and
I agree on most things in the field of economics, so the
two letters will reinforce each other.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
American Eagle
The Daily Reckoning
London, England
Wednesday, September 1, 2004
---------------------
*** Threats... danger... fight... fight... fight... fight...
*** Dr. Steve Sjuggerud recommends a tech stock!
*** Who's the fool... the reader's carry trade... dumb chain
letters... and more!
---------------------
An election is an advance auction of stolen goods, as
Ambrose Bierce put it. The bidding began many months ago
and continues in the Big Apple this week, with each
candidate burnishing his shield, sharpening his sword... and
raising the stakes.
Republicans can tell which way the wind is blowing. They've
come out with a flattering convention theme - "A Nation of
Courage" - and an agenda at least as bellicose as their
opponents'.
Kicking the scrawny butts of nearly unarmed Third World
nations is not the sort of thing that epic poems and
granite monuments typically celebrate. Besides, when you
are the world's only superpower, it's not courage that you
need... it's prudence. You just don't want to do something
rash or stupid. But that seems to be what both parties are
bent on.
Conservatism is dead in America. George Bush will put the
crown on his own head on Thursday and announce a reign of
grandiose ambition, expansionism, recklessness and self-
delusion. It makes little difference whether he wins or
loses. Neither party plans to cut spending, though it is
debt that threatens the republic far more than terrorism.
Neither party can face up to the $44 trillion "funding gap"
in federal finances, nor to the current account deficit,
nor to the challenge of low-wage competitors in Asia. Even
Alan Greenspan is talking about the need to reform Social
Security and Medicare; but which national leader is going
to tell the voters that they will get less than expected?
Nor does either party question the "War on Terror"; it's a
fool's war, which is why it is so popular.
But Nature has to have her way... no matter what we think.
America cannot continue to be the world's only superpower,
for Nature will not permit a monopoly for very long. And
yet, no foreign nation is strong enough to offer a serious
military challenge - at least not yet. So the U.S. of A.
must ruin itself... and needs leadership that is up to the
task. In Bush and Kerry, America seems to have found its
Louis XVI... it's Nicholas II, its Theodosius, Rome's last
emperor. In Bush and Kerry, America has found leaders
worthy of a nation of happy hallucinators.
What is astonishing to us is the way both parties have
become war parties. We predicted it; but we are still
surprised by it.
"Last night, in Madison Square Garden, I took the stage at
the Republican National Convention to speak to America
about the threats we face in the world," said an e-mail
message from Rudolph Giuliani...
"President Bush has been the steady hand we need in these
times of uncertainty and danger. He understands the
stakes... he chooses to fight terror in places like Baghdad
and Kabul, rather than in New York and Kansas. It is the
right way to fight this enemy, and it is a fight we must
win...
"In order to take the fight to our enemies, we must have
the strength of conviction and support for our Armed
Forces... this is not a fight that favors sensitivity and
nuance. This is a fight that requires strength,
determination and resolve."
An edited version reads as follows:
"threats... danger... fight... fight... fight... fight...
fight..
fight... "
We cannot recall when America was in such a fighting mood.
Too bad the fight is an expansive fraud (see additional
note below). But it is a convenient and foreseeable one.
"The first panacea of a mismanaged nation is inflation,"
wrote Hemingway. "The second is war."
Government has proved completely inept at fighting
illiteracy, poverty and drugs. Liberal activists found that
they could no longer expand government spending - and their
own authority - except by becoming "neo-conservatives" and
focusing their do-goodism on foreign policy. Besides, who
will oppose war spending when the nation is in danger?
Of course, the nation is in no danger at all. A handful of
murderous fanatics represent a threat to Americans - along
with muggers, rapists and reality TV - but not to America
itself. Only by reacting to terrorists in an absurd and
hysterical way can the nation defeat itself.
Bush and Kerry have come forward just when Nature needed
them...
Spend, spend, spend... fight, fight, fight... from the comic
to the tragic... America creates her own calamity...
More news from the East Coast:
---------------------
Tom Dyson, from 808 Saint Paul St...
- Long-time readers will recall Dr. Steve Sjuggerud's 1-2-3
Stock Market Model. Based on three critical factors, the
indicator predicts the future direction of the stock market
with astonishing accuracy.
- On July 7, 2004, just after Alan Greenspan raised rates,
Dr. Sjuggerud warned his subscribers that his model had
moved into "Super Red Light" mode, and he recommended
shorting the market. This development was dutifully
reported in The Daily Reckoning...
- "The 'red light' we refer to today has nothing to do with
the shadowy clubs and street corners of Baltimore's seedy
underbelly, but a stock market 'sell' signal," we explained
at the time. "You see, dear reader, we here at The Daily
Reckoning will venture far and wide to deliver you the
goods... including territory forbidden to brokers, market
makers and stock market shills. 'Sell', we say... "
- ... And sell off the market did. The Nasdaq - the target
of Dr. Sjuggerud's sell order - fell from 2,007 down as low
as 1,752 two weeks ago. It has since rallied, closing
yesterday - the final session in August - at 1,838, for a
loss of 8.5% since we entered "Super Red Light" mode - and
a profit of 25% for Steve's subscribers.
- Of course, your humble editors here in the Baltimore HQ
of The Daily Reckoning take no credit for the prediction;
we simply passed on the message. "Why was it so easy?" asks
the obnoxiously accurate forecaster. "Put simply... all the
pieces had fallen into place for us to go short."
- Now Dr. Sjuggerud sends us word of a new trade... he calls
it the "Druckenmiller Opportunity." Dr. Sjuggerud has just
recommended - for the first time ever - that his readers
buy a specific tech stock for a short-term speculation!
We'd call him crazy, but we know better...
- In early January 1991, Stan Druckenmiller was short
approximately $3 billion in the U.S. and Japanese stock
markets. "On the way down," explained Stan, "the pessimism
regarding the U.S. stock market had become extreme.
Everybody was talking about how the market would crater if
the United States went to war with Iraq."
- Furthermore, Druckenmiller noticed that many of the fund
managers he knew were holding their highest cash balances
in 10 years. "I was convinced that once the war started,"
he said, "the market had to go up, because everyone had
already sold."
- Today we hear the same story. According to a new survey
by Merrill Lynch, 30% of fund managers are overweight cash
and the last time mutual funds had this much cash piled up
was in March 2003 - just before Gulf War II. Merrill Lynch:
"[This] represents one of the highest cash positions that
we have seen, only surpassed by the aftermath of 9/11, the
credit crunch of October 2002 and the pre-Iraq
uncertainty."
- Not only are cash balances high, but yesterday we heard
that consumer confidence had plummeted in August. The
Conference Board said that the reading had dropped to the
lowest level since May and was far below what analysts had
expected. The market didn't seem to care... it just shrugged
and then rallied. The Dow closed 51 points higher, reaching
10,173. The S&P added 5, or 0.5%, to 1,104, comfortably
outperforming the meager 2 point gain at the Nasdaq, which
left the tech index at 1,838.
- But while Mr. Market has lifted itself from its August
funk, we've yet to see any really significant upside
strength. Dr. Sjuggerud thinks this might be because the
uncertainty surrounding the November presidential election
is keeping investors on the sidelines. It's acting like a
deadline, he says. But when the deadline passes, the money
will come flooding back into the market.
---------------------
Bill Bonner, with more views... from the building with the
golden balls:
*** Reader comment:
"Perhaps foreigners will buy hard assets in the United
States. Don't forget, the value of those assets depends on
the American consumer. That value will drop if Americans
have no money or desire to purchase the production.
"There was a lot of concern when such foreign purchasing
was going on several years ago. Pebble Beach comes to mind.
I believe it was purchased by a Japanese investor and sold
by him to a Japanese company at half its purchase price.
That owner invested a significant amount of money in the
property, which was finally sold back to American investors
at something less than the original price.
"Seems like a great method of repatriating our dollars. Pay
a foreigner for a TV. He turns the cash around and buys a
hotel in the United States. The former American hotel owner
holds on to his cash, the value of which increases, while
the hotel deflates in value because the Americans who would
stay at the hotel stay home watching TV while saving their
cash. The foreigner invests money in the property to make
it more attractive, repatriating even more cash and
employing Americans. But the TV keeps working, as does the
American who continues to save his cash, maybe even buying
another TV along the way. The foreign investor finally
bails out to an American investor and the process starts
over again.
"Who's the fool? Probably the person who gets the foreign
dupe to understand the racket."
*** And another:
"I have three credit cards with a combined balance of over
$50,000 with 0% interest until June and July of 2005. My
other credit card company offered me a $38,000 cash advance
with 0% APR until March of 2005. I couldn't resist. Let's
hope the dollar doesn't soar! I've got a pretty big carry
trade going here."
*** And another:
"This is pretty interesting... comes from a dumb chain
letter I received. It does make sense and is in keeping
with your loose fiscal theme.
"Alexander Tyler (a Scottish history professor at the
University of Edinburgh) had this to say about 'the fall of
the Athenian Republic' some 2,000 years prior.
"'A democracy is always temporary in nature; it simply
cannot exist as a permanent form of government. A democracy
will continue to exist up until the time that voters
discover that they can vote themselves generous gifts from
the public treasury. From that moment on, the majority
always votes for the candidates who promise the most
benefits from the public treasury, with the result that
every democracy will finally collapse due to loose fiscal
policy, [which is] always followed by a dictatorship."
"'The average age of the world's greatest civilizations
from the beginning of history has been about 200 years.
During those 200 years, these nations always progressed
through the following sequence:
"'From bondage to spiritual faith;
"'From spiritual faith to great courage;
"'From courage to liberty;
"'From liberty to abundance;
"'From abundance to complacency;
"'From complacency to apathy;
"'From apathy to dependence;
"'From dependence back into bondage."
[Ed. comment: Yes... the average citizen now depends on the
U.S. government... and the U.S. government depends on Asian
financing...
But between dependence and bondage come a couple of other
steps... absurdity... delusion... and often, a brawl or two.)
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---------------------
The Daily Reckoning PRESENTS: Gold coins are so
misunderstood, yet they are the BEST way to play the gold
bull market. There are literally dozens of different forms
of physical gold bullion on the market, so we asked coin
expert James DiGeorgia for an explanation...
AMERICAN EAGLE
by James DiGeorgia
I love those gold bars you see in the movies. Stacks of
100-ounce bars are commonly the target of thieves and
villains, like Goldfinger or some other greedy scoundrel.
When not being used by Hollywood or lifted by egomaniac
mobsters, 100-ounce bars are primarily traded on the major
world commodity exchanges and used by the world's central
banks when trading gold.
Private investors buying less than 1,000 ounces of gold
should steer clear of these 100-ounce gold bars. And I
strongly recommend NEVER buying smaller gold bars, like 1
ounce or less weighted gold bars produced by private mints
or refiners.
First of all, small investors who buy one or two 100-ounce
bars lose the ability to sell their gold in intelligent
increments. In addition, only exchanges regularly trade
100-ounce bars. Most gold dealers, coin dealers and gold
brokers don't trade these bars and will discount a bar that
large, by 5-7%.
Second, my personal experience with smaller gold bars has
been consistently bad. They sell for a 3%-10% premium over
the spot price, which works out to a spread of as much as
20%, which is way too big.
The marketplace is dominated by bullion coins. The vast
majority of rare coin and bullion dealers do 99% of their
trading in coin form.
It's important here to make a distinction between bullion
coins and numismatic coins. A bullion coin's value is
derived solely from the content of its gold and is normally
sold at a small premium above the market price for gold. A
numismatic coin derives its value from its rarity,
historical and aesthetic qualities and can sell for up to a
million dollars.
Now that I've steered you away from gold bullion bars, let
me also caution you against private mint gold coins. Many
refiners and private mints around the world produce 1-ounce
to 1/10th-ounce gold coins and offer them for sale as
"bullion" alternatives. They tout either the fact that they
cost less than more commonly traded gold bullion coins
produced by the governments of the United States, Canada,
South Africa and Australia or that they are sold based on
the uniqueness of their design.
Private mints coin their gold bullion with images of
everything from sporting events to Elvis Presley.
You should never buy privately minted gold bullion coins.
They sell originally for large premiums above the price of
gold and later sell at a discount to their intrinsic gold
value because they are NOT widely bought and sold by
dealers, and therefore dealers will discount the coins when
(or if) they buy them.
Instead, you should stick with the five most commonly
traded gold bullion coins in the world!
Back in the 1970s, the most famous gold bullion unit was
the Krugerrand from South Africa. The coins contain 1 ounce
of gold and just enough copper to allow the coin to be
struck. So the net weight of the coin is actually more than
an ounce. They dominated trading in the last gold bull
market and are still traded today. The South African
government produces small-weighted coins in addition to the
1-ounce standard.
The popularity of the South African Krugerrand prompted the
Canadian government to mint the Canadian maple leaf in
1979. The coin was an instant success, thanks to a clever
advertising angle that touted the Canadian Maple Leaf as
the first solid 24-karat gold bullion coin. While that is
true, the fact remains that Canadian and South African
coins both contain a full 1 troy ounce of gold. Few people
realize that the Canadian Maple Leaf actually has a face
value of $50 Canadian dollars, far less, of course, than
the value of the gold bullion.
The "Roo," as it's commonly called, is minted by the
Australian Perth Mint and is actually the second bullion
coin produced by Australia. The first was called the
"Nugget Coin," and the Kangaroo replaced it.
The most popular European bullion coin is the Vienna
Philharmonic. It is struck in pure (99..9%) gold by the
Austrian Mint, which has been minting gold coins for more
than 800 years. The obverse depicts the great organ in the
Golden Hall in Vienna's concert hall (Musikverein), home of
the Vienna Philharmonic. A bouquet of musical instruments
represents the world famous orchestra on the reverse of the
coin.
One of the most popular gold bullion coins in the world is
the China Panda, which was first introduced in 1982. The
1/20-ounce coin was introduced in 1983. Throughout the
years, the China Mint has kept the same Panda design, but
has frequently changed the position of the panda on its
coins.
But the American Gold Eagle is now by far the most popular
gold bullion coin in the world. Authorized by Congress in
1985 and first minted in 1986, American Eagles are minted
in 22-karat, which was the standard established for
circulating U.S. gold, dating back to the gold that was
first struck in 1796. In fact, the 22-karat standard has
been the worldwide standard for circulating gold coinage
for more than 350 years!
American Gold Eagles have a substantial patriotic edge, as
they can only be coined from newly mined sources in the
United States. The balance of the coin's composition
consists of silver and copper, which is added to increase
the coin's durability. Gold is a very soft metal.
The obverse is based on world-renowned American sculptor
Augustus Saint-Gauden's design for the prized 1907 $20 gold
coin. The reverse pictures a family of eagles, symbolizing
family tradition and unity.
Which gold bullion coin do I recommend? Hands down, the
best gold bullion coin is the American Gold Eagle! It's the
most liquid coin in the world. The buy/sell spread is
rarely more than 7% on small amounts and as little as 5% on
larger quantities.
Don't buy bullion coins that have any rim nicks, scratches,
abrasions, chips, or dents or those that appear to be
discolored in any way. NEVER! Any knowledgeable buyer will
discount coins that have even the slightest damage.
Steer clear of any coins that have carbon or copper spots.
Some gold bullion coins, even those that are in 100%
absolutely perfect condition, will have tiny spots visible
to the naked eye without magnification. These are natural
and are caused by the inclusion of copper into the gold to
increase the durability of the planchets (the metal disks)
on which the coins are struck. Despite the fact that these
spots are natural to gold coins, they are undesirable, and
dealers will buy and sell them at a slight discount. Make
sure when buying gold bullion coins that you insist on "no
spots." Keep in mind a spot is only a problem if you can
see it with the naked eye. If you have to use a magnifying
glass to see a spot(s), it is not a problem.
Don't buy "rare date" bullion coins. A bullion coin is a
bullion coin. Don't be fooled. The least expensive way to
purchase the 1-ounce coin is to specify "common date."
Common date means the bullion dealer can send you any date
bullion coins of the type you desire in gem condition. If
you order a specific date, for example 1996, it will cost
more then the common date.
Some telemarketing firms are now selling some dates of the
American Eagle a-ounce gold coins in mint state condition
for premiums of 10%, 20%, even 30%! Yuck - what a horrible
deal. It's a complete rip-off. The coins are and will
always be bullion coins. They're NOT rare and don't deserve
a premium.
NEVER buy or sell gold bullion strictly on the basis of the
best price. Saving a few dollars with buying or selling
prices versus dealing with a reputable company or person is
silly. Over the years, I've seen investors decide to do
business with one dealer or another based 100% on price.
The firm could offer the best price because they had no
intention of delivering the gold! When the gold market gets
red hot, the scam artists breed like rats. Here are two
recommendations I always make:
Know your dealer. Do some background checking. How long has
the dealer been in business? Check with the Better Business
Bureau. Are you dealing with a "nameless" clerk or a
principal in the firm on whom you can check? You'd be
amazed how many people are out there waiting to steal your
money.
Always take immediate delivery of your gold coins. NEVER
store your gold coins in a dealer's vault. I've seen people
lose every penny trusting a dealer. Take the time and get a
safety deposit box at your bank and take charge of the
storage. When buying bullion, it's important to get your
gold as quickly as possible. Checks need several days to
clear, money orders need less time and bank wires are
immediate; you can always insist on next-day shipment when
you send a bank wire.
Now I'm going to give it to you straight: When the gold
market gets red hot, and it will, EVERY gold dealer and
precious metals brokerage firm will pay spot (most current
price) for your gold coins and sell at 10% over spot. The
bid/ask spread at which gold coins are traded will widen.
It happened in 1979-1980, and it will happen again. Don't
sweat it. Take your profits, and don't let the wider
premiums bother you.
The best analogies are...
Gasoline: When we experience a "shortage," gas stations
gouge. It happens every time. A frenzied marketplace
creates fear, which widens the spread, and prices rise.
Buyers get the short end of the stick, while dealers get
rich.
Stocks: Forget all the nonsense about reform on Wall
Street. The fact is when a stock becomes red hot, the
spread between the buy and sell widens. The specialists who
run the market make much more money. They argue that the
spread widens because the transaction risk increases. This
isn't always true, but it's true enough that they can get
away with the wider buy/sell spread.
Here's the bottom line: Get into your gold investments now,
before the market gets red hot. Diversify your investment
portfolio, because it's the smart thing to do. Get yourself
into a position to ride gold from $350 to $1,250 or $2,000
an ounce. Buy the best, most liquid gold investments and
cash in on the bull market ahead.
Regards,
James DiGeorgia
for The Daily Reckoning
Editor's Note: Experts as knowledgeable about gold as James
DiGeorgia are as rare as a MS-69 $2.50 Liberty!
James was trading in gold coins before his 15th birthday,
and by 16, he already had his own office in Danbury, Conn.
That was back in 1976, and the gold market was just about
to mushroom. By the time the precious metal markets had
crashed, James had made well over $1 million.
He's never looked back. Since then, James has traveled the
world attending auctions, estate sales and conventions and
establishing a network of dealers and traders in virtually
every major city on earth.
Now James DiGeorgia is one of the most familiar rare coin
dealers in the world.
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