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* * * * * * * * * * * * REMINDER * * * * * * * * * * * * *
On the days that I don't publish, like today, you 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
reinforce each other.
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Why Gold is Set to Soar
THE DAILY RECKONING
PARIS, FRANCE
WEDNESDAY, 30 JANUARY 2002
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*** A new chapter in financial history - chapter 11.
*** Global Crossing under water. JP Morgan taking on water.
Tytanico getting wet.
*** Poor George Gilder... A 'cosmic position' brought down to
earth...$66 billion in supposed wealth vanishes...
The Enron story marks a new chapter in American financial
history, says Paul Krugman in today's International Herald
Tribune. Enron did begin a new chapter - chapter 11. But the
book's storyline is an old and familiar tale.
Economists and financial press hacks seem outraged, as if they
had been misled. Congressmen, eager to get their names in the
paper, are investigating. So many suits are being filed you'd
think Enron had forced its investors to have silicon breast
implants.
But beneath the mock indignation is a sordid lust. A few inches
down from the Krugman piece, David Broder - who must have just
read Edmund Morris's book on Teddy Roosevelt -urges George Bush
to seize this opportunity to "reform capitalism". Practically
everyone in the nation believes the myth of the 'robber barons.'
Teddy Roosevelt connived his way into the nation's heart by
pandering to it. Broder would have Bush repeat the trick.
Of course, it is all humbug. There is at least as much
corporate chicanery hiding behind the SEC regulations and in the
cracks of the IRS code than there was out in the open in Teddy's
day. At least back then, investors expected to be robbed. The
smart ones took precautions. The others got what they had
coming. What has changed?
What has changed is that the nation now employs a whole army of
lawyers, accountants functionaries and factotems to pretend to
scrub away the stain of original sin from the financial markets.
Thanks to regulators, lawyers, politicians, and analysts - we
are supposed to believe -investors will get what they expect
from the financial markets, not what they deserve.
But as long as there are fools who need to be separated from
their money, dear reader, people will find a way to do the job.
Roosevelt-era soap suds just made investors less wary....and
thus, easier marks.
Eric, how did the marks make out on Wall Street yesterday?
*******
Eric Fry in New York...
- The Wall Street witch-hunt is underway and several stocks
found themselves tied to the stake yesterday, while
frightened mobs set them aflame. After all was said and done,
247 Dow points went up in smoke and 51 Nasdaq points turned
to ash. The Dow closed at 9,618.24, while the Nasdaq dropped
to 1,892.99.
- Suddenly, everyone is scouting around for companies that
might have something to hide. And the hunt is proving
amusingly easy - more like an Easter-egg hunt for two-year-
olds than a genuine investigation.
- During the fantastic bull market of the 1990s, no one cared
which companies might have off-balance sheet financing or
whose director might have received a little semi-legal
"payola." Now they do.
- Yesterday, investors "discovered" troubling accounting
issues at Tyco, and the stock tumbled 20%. Never mind that
both David Tice of the Prudent Bear Fund (and featured monthly
in Strategic Investment) and Dr. Howard M. Schilit of the Center
for Financial Research & Analysis had warned about
accounting irregularities at Tyco more than two years ago.
Never mind that Grant's Investor detailed more of the same
several months ago in a story entitled, "Tytanico."
- Yesterday, the company's accounting "issues" took on a more
troubling hue in light of the revelation that Tyco paid $20
million to one of its directors for helping the company land
a major acquisition.
- But isn't this how witch-hunts usually go? One day you're
singing in the church choir and the next day you're suspected
of cooking up an evil brew. The difference in this case is
that there are not too many choirboys heading up American
corporations.
- My friend and renowned short-seller, Jim Chanos, made the
cover of this week's Barron's as, "The Guy Who Called Enron."
Jim has made more than one very timely call in his career, as
the Barron's story points out. More interesting however, is
the fact that he has been warning for years that public
companies often misrepresent their financial health.
- In a Grants Interest Rate Observer story that is now nearly
4 years old, Grant quoted Chanos remarking, "There is a lot
of fudging going on. Companies will do anything they can not
to miss somewhat aggressive earnings estimates when the
penalty for missing by a penny or two is, in some cases, to
see a high P/E multiple cut in half. That is the
corruption...But everyone has gotten used to the nudge and
the wink about the abilities of companies to massage the
bottom line through a variety of subterfuges and artifices,
so there is not even a slight disappointment."
- Yep, sounds like corruption to me...and now these winks and
nods are coming under long-overdue scrutiny from investors.
Clearly, the Enron story and its ramifications for the stock
market are far from over. In fact, for folks like JP Morgan
Chase, the ramifications might be just beginning.
- A shocking Wall Street Journal article relates that
Morgan's intimate relationship with Enron included
transacting numerous bogus trades with one of Enron's
infamous partnerships, known as Mahonia Ltd. The trades did
serve a financial purpose however: to create a tax-loss for
Enron and to produce large fees for JP Morgan.
- Enron is the new "asbestos." The number of claimants that
will be lining up to seek "recovery for damages" might keep
J.P. Morgan's litigation team gainfully employed for years.
- Meanwhile, J.P. Morgan shares got hammered anew yesterday,
falling more than 6%, as the bank's serial disasters
continue. "Born Under a Bad Sign," the 1960s song by "Cream,"
seems to describe JP Morgan's current predicament.
- Yesterday, we found The Morgan trapped in the gruesome
wreckage of yet one more financial disaster - Global Crossing
Ltd. This new era telecom, which spent five years and $15
billion building an undersea fiber-optic line and thousands
more miles of redundant telecom capacity, filed for
bankruptcy protection. And yes, J.P. Morgan is one the hook
for about $200 million in loans to the bankrupt telco.
- Maybe Morgan's recent string of disasters has nothing to do
with bad luck, but everything to do with hubris. Certainly,
Morgan's bankers would not be the first to mistake a bull
market for personal genius. Unfortunately, when the
inevitable bear market arrives, "genius" is shown to be
something wholly other.
- It's an age-old lesson folks, that even the highest-paid
bankers forget: an imprudent loan is an imprudent loan, no
matter when it is made. An expensive stock is an expensive
stock, no matter when it is bought. The best investors make
good loans and by inexpensive stocks...or they do nothing at
all.
*******
Back in Paris...
*** Poor George Gilder. According to TheStreet.com, he owned
only two stocks at the end of 2001. The first month of the
new year is not even over and one of them has already gone
belly up.
Global Crossing was one of Gilder's favorite stocks. Back in
1999, Gilder wrote that the company "has a truly cosmic
position as the supplier of the missing element that
completes the global [Internet] system."
The missing element was then...and now is in more ways than
one...underwater. Global Crossing announced, back in '99, a
plan to lay 88,100 miles of cable, connecting five
continents, 24 countries and 170 cities. At the time, Global
Crossing was the leading contender in the "great race for
broadband supremacy."
As recently as May of last year, Gilder was still hallucinating
about winning that race.
"The Telecosm will still prevail," he wrote, "and investors
who understand its dimensions will be able to spurn the
catastrophists and prosper from the largest opportunity in
the history of the world economy."
As it turned out, it was a race to insolvency. Global
Crossing shares once sold for $61...representing $80 billion
(Enron was only $66 billion at its peak) that investors
thought they had. Now, they have next to nothing.
In this new chapter of a very old story....investors - both
at home and abroad - must be wondering how much their
remaining shares are really worth.
Until tomorrow,
Bill Bonner
P.S. Easy Al Greenspan has been doing everything within his
power to stave off investor disgust. But, eleven rate cuts and a
plethora of 'coupon passes' have had little effect... except to
flood the system with cash.
"In fact," suggests John Myers below, "in October 2001 it
grew from $614 to $637 billion, one of the largest single-month
climbs in memory. Moreover the adjusted monetary base measured
just $500 billion in 1998. The addition of $137 billion in just
over three years is remarkable."
John suggests there is always a bit of a lag between the opening
of the money spigots and... and, er, what's this? Inflation?
No...More below...
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The Daily Reckoning PRESENTS: John Myers, ever the contrarian
gold bug, suggests the fundamentals for higher gold prices
haven't been this good in over a generation.
WHY GOLD IS SET TO SOAR
by John Myers
"Many of today's investors were still in diapers during the
great stagflation of the 1970s. Those who weren't will never
forget the darkest period in modern financial market history."
Stephen Roach,
Morgan Stanley Dean Witter
A decade ago I was 14,000-feet deep in a South African gold
mine, sweating bullets and reaching for a bottle of water. My
tour guide, a hardened South African mine executive, seemed
immune to the heat.
"Mr. Myers. Mr. Myers!" I could barely hear him above the buzz
of the rock drills only a dozen feet away. "You must
understand," he yelled into my cupped ear, "the price of gold
always comes down to one thing and one thing only. The number
of U.S. dollars out there."
I don't know where he is today, but I bet he has a smile on his
face. Why? Because he understands that the world is
experiencing the same kind of dollar inflation today that made
South Africa rich a generation ago.
Right now the United States is fighting a two-front war - one
against terrorism and the other against recession. George W.
Bush understands that the economy condemned his father to be a
one-term president.
That explains why Washington is doing everything it can to
inject money back into the economy and why the Fed frantically
cut rates last year. On Jan. 3, 2001, when the Fed cut its key
federal funds rate by half a percentage point to 6%, it was
because of a slowing economy. The move was the first of 11 cuts
in 2001, which slashed the key rate by 4.75 percentage points to
1.75%.
But Washington realizes this isn't enough. So it is reverting
to its old ways, specifically a new round of spending. The
budget surplus of 1998-2001 has evaporated. Still Congress is
eager to implement the kind of spending that would make
economist John Maynard Keynes proud. Congress will inject over
$200 billion into the economy this year, and unless the economy
begins to turn around soon, that total will grow.
Washington has one final trick up its sleeve - running the
printing presses day and night. Of course cash is not really
created, or at least not much of it. Instead the Treasury
controls the amount of currency by creating more money through
loans to banks, which in turn lend it out to businesses and
individuals, expecting them to jump on the low interest rate
bandwagon.
The adjusted monetary base - also called super money because
banks loan it out in multiples - is growing at a double-digit
annual rate. In fact, in October 2001 it grew from $614 to $637
billion, one of the largest single-month climbs in memory.
Moreover the adjusted monetary base measured just $500 billion
in 1998. The addition of $137 billion in just over three years
is remarkable.
Zero maturity money stock (MZM) has risen by $500 million, or
more than 11%, over the past year. The broad-based measure of
money, M3, has risen by more than 10%. And over the past year
$20 billion in new cash has been pumped into the system. There
is now $540 billion in cash in circulation, double the
outstanding cash of 1990.
In an ideal world the amount of money would grow lockstep with
the economy. But the situation we have here is one where money
is growing at a rate five to 10 times faster than GDP. Basic
economics tells us that if the money supply is growing faster
than the amount of goods and services, we end up with
inflation. It is a simple case of too much money chasing too
few goods.
If, and this is a huge "if," consumer confidence continues the
gains it showed in December, along with the low interest rates
available to borrowers, there is a strong likelihood this excess
money that has been made available to the banking system will
enter the economy. With the shallow growth ahead for this year,
expect a greater increase in money than in productivity.
There is a final component to the inflationary argument: the
United States is on a war footing. Congress could easily add
$200 billion a year in military spending. That would increase
defense spending by one-third, from 3% of GDP to 5%. Already
supplemental appropriations have raised the original fiscal
year 2002 spending level by $47 billion to $363 billion. This
would be a reversal of the 1990s when defense spending as a
share of GDP dropped from 5.5% around the time of the Persian
Gulf War to the inadequate 3% last year.
One of the major reasons inflation has been subdued for the
past decade has been the decline in military spending. During
the Cold War in the 1960s, the U.S. military budget absorbed
about 9% of GDP. In the aftermath of Vietnam, defense slipped
to less than 5% of the economy. President Ronald Reagan's final
assault on Soviet communism temporarily increased the defense
allotment to nearly 6.5% of national income, but it has been in
decline ever since. Looking at the big picture, consider that
national defense spending as a share of total federal budget
outlays has plunged from 50% in the early 1960s to 15% more
recently.
The problem with military spending is that it is not nearly as
productive as non-defense spending. One hundred billion dollars
spent building tanks does not add to the productivity of the
nation the way $100 billion spent on a new dam project or tax
cut would. "The military ratchet was the most important single
influence in raising prices and reducing the value of money in
the past 1,000 years," writes Glyn Davies in his book, A History
of Money.
No one would argue that the guns and butter legislation passed
by President Johnson during the 1960s had a major part in
stirring the inflationary kettle. Of course, the real impact of
that legislation took a few years to assert itself.
What experienced investors realize is that there is a time lag
between the creation of money and the onset of inflation.
Remember that the Treasury makes money available to the banks.
Sometimes that alone is enough. Economists call it pushing on a
string. But invariably there is a tug at the other end of that
string by borrowers.
In the '70s TV show "Barney Miller," a suspect is brought into
the precinct after his wife reported a robbery. It turns out the
robber was her husband. He confesses to his wife and
Captain Miller that he liquidated everything he could and used
the money to buy more gold.
She looks at him with tired eyes. "Maybe you're wrong, Harvey.
Maybe we won't get war, famine and runaway inflation."
"Stop being such a damn pessimist!" he yells.
A few gold bulls are beginning to think the gold pessimists may
finally be wrong. The 1970s were a spectacular time for hard
asset investors. This decade could be even better. The reason -
the continual decline in the world's raw resources. Just as big
oil is spending less at the drill bit than it is with
acquisitions, so too are mineral companies spending less on
exploration.
The Metals Economics Group reports that total worldwide
nonferrous exploration stood at $5.2 billion in 1997. However,
mineral exploration expenditures fell 29% in 1998, 24% in 1999
and 7% in 2000 (final numbers are still pending for 2001). As a
result exploration expenditure last year were $2.6 billion, 50%
of what they were only three years prior.
It is not hard to see that as current exploration slows down,
we could be headed for a supply squeeze on several fronts.
According to a recent report by Global Resource Investments,
"Mining is a depleting business and in real life mineral
deposits are depleted fairly rapidly while at the same time,
discovering new mineral deposits happens only occasionally."
Take copper as an example. The world consumes 16.5 million
tonnes each year. However, the biggest copper mines in the
world hold 12 to 16 million tonnes of copper. That means that
each year the world consumes a major copper mine. And replacing
these mines is becoming a tougher proposition. While the world
still has considerable reserves, much of it is either of poor
quality or in politically unstable parts of the world.
Yet buying up existing copper mines adds nothing to the world's
copper supplies. At some point this fact will result in
shortages. This, combined with inflation, will push hard asset
prices into the stratosphere.
One of the biggest winners, I believe, will be gold.
John Myers,
for The Daily Reckoning
P.S. After I sold Myers Finance & Energy in the late 1990s, I
worked as Mark Skousen's editor for the newsletter Forecast &
Strategies. Not only is Mark an acclaimed economist, he has
also published his successful newsletter Forecasts & Strategies
for over 20 years.
Mark was one of the people that encouraged me to begin writing
Outstanding Investments. Why? Because by 1999 he believed that
the market was getting close to a top and that it was better
than an even bet that inflation would ignite in the early part
of the new century.
"Watch for two things always," said Mark. "The yield on the
long bond and the price of gold."
The yield on the long bond - now 10 years instead of 30 -
appeared to have bottomed in the summer of 2001. It's current
yield of 5.11% is up from 4.88%. Gold has come off its lows.
And rising gold stock prices - which we have been seeing - are
often a leading indicator of rising bullion prices.
During crises investors begin protecting their wealth by
putting money in real assets such as gold, oil and silver. The
principle being that purchasing power will be preserved in hard
investments. It is a change in mindset that does not occur
overnight: A change from being eager to make money to one of
wanting to preserve money.
Ironically, once this metamorphosis takes place, the early
investors make far larger returns than they were collecting
while they were aggressively in the stock markets. For details
on obtaining a free copy of my new report "Make 500% Profits In
The Great Money Flood Of 2002!" please click here:
http://www.agora-inc.com/reports/OST/FloodOfCash
John Myers, son of the great goldbug C.V. Myers, is The Daily
Reckoning's 'man on the scene' in Calgary, John has his fingers
on the pulse of natural resource industry profits.
* * * * * * * * * Advertisement * * * * * * * * *
TIDAL WAVE OF CASH!!!
"The unemployment rate is headed for 6%," says Merril Lynch's
chief economist. S&P sees it hitting 6.5%. Auto analyst
Stephen Girsky expects car sales to drop to a low 15 million
by the end of 2002.
Over the last decade, corporate debt exploded 88%...
household mortgages skyrocketed 82%... and the U.S. national
debt, already over $5.7 trillion, shoots up another $123
million every single day.
Enron and Global Crossing are just the tip of the iceberg. With
these massive imbalances crashing ashore, is it any
wonder Alan Greenspan is throwing money around "like a
racetrack junkie that just cashed in on a 50-to-1 hunch"?
For your free copy of "Make 500% Profits In The Great Money
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Tidal Wave of Cash
http://www.agora-inc.com/reports/OST/FloodOfCash
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