| A WORLD OF SIN AND SORROW THE DAILY RECKONING PARIS, FRANCE
FRIDAY, 19 NOVEMBER 1999 * * * * * * * * * * * * * * * * * * * * * * * * * * * *
In Today's Daily Reckoning: *** Nothing but blues skies from now on…on Wall Street
*** Microsoft falls below 85…
*** A rerun of the late `70s? * * * * * * * * * * * * * * * * * * * * * * * * * * * * *** Uh…well…whammo…the Dow broke through the 10,942
mark that Bill King had set as the limit of a classic bear
market retracement. We've had three hikes…but no tumble
so far. Just the opposite. *** The Dow rose 152 points yesterday, following good news
from Hewlett Packard that sent the stock up 22%. It was
all techs and Nets yesterday…taking the Nasdaq up to a
new bubble high. *** The Paris index…the CAC 40…also hit a new high. *** Feeling left out? I know I am. My competitor, Phillips
Publishing, has an ad on the Internet -- Five Internet
Stocks Every Investor Must Own. I don't have any of them.
Of course, the whole idea is absurd…if every investor
owned them…who would be left to drive up the price? *** I'm sticking with my "final spike" hypothesis. The
techs and Nets are not leading the market. They have lost
contact with it…and reality. Even in yesterday's great
surge…there were more declining stocks than advancing
ones. And only 93 new highs…with 153 new lows -- on big
volume. *** Microsoft actually fell…just a tad…but below 85. I
wonder what will happen next. Russell says it should break
down. *** I don't know how long it will take…but eventually,
the techs and Nets will crash, erode, evaporate. They are
existential stocks…with no essence…As Gertrude Stein,
who lived on the rue Fleurus, where I'm going for lunch
today, said, "there's no there there." *** I began to write about the big spending bill that just
went through Congress. But…nah…it was all lies. I'd
rather talk about something real. *** The markets are real. They mislead…they feint, they
bob and weave like Lennox Lewis and Evander
Holyfield…but they don't lie. Our job is to try to find
the hidden messages…the real essence…the underlying
Truth… *** Bill King believes we are seeing a rerun of the late
`70s. Then, inflation was in the consumer sector. Now it
is in the stock market. Then, Arthur Burns' timid rate
increases were not enough to attract investors to T-bonds
or offset the gains made in oil, gold and other
commodities. Today, Greenspan raises rates insubstantially
while flooding the world with cash. Monetary reserves are
rising at a 78% annual rate. But small rate increases are
not enough to overcome the kind of profits investors are
making in the Nasdaq. That will take a Volcker-style
shock. Volcker "took away the punch bowl" by removing the
reserves, and the whole thing turned around. For more information on Bill King's service, call 1-800-
433-1528 and ask for code 3457. *** Gold fell slightly. What's up with gold? Some ideas
below… *** Pokemon, the game that made my son Edward want to be
Japanese, has also been an investment sensation. Which
reminds me to introduce you to the newest member of our
Fleet Street investment team -- Dan Denning. Dan actually
recommended investing in Pokemon's U.S. license holder
long before Edward or I ever heard of it. A $1,000
investment at the time he made the recommendation could
have grown to more than $50,000. *** I'm not anti-technology, by the way. As Doug Casey
puts it in his latest issue, "The Internet will be the
savior of the common man in many ways, but Internet stocks
will be the graveyard for his capital." Dan Denning looks
for companies that have a heartbeat -- profits, sales,
cashflow -- and don't need a mania for life support…He
tries to find stocks that will "take off" like Internet
stocks…but not disappear when the mania ends. In fact,
he thinks he's found another Pokemon…in this case a
little company in Japan that makes virus protection
programs for computers. The company may have made a
technological breakthrough in fighting computer viral
infections. See advertisement below… *** Doug Casey's latest issue also offers a marvelous
quote from the establishment's pet scholar, Arthur
Schlesinger, Jr., in which the Big Government apologist
worries that "The computer turns the untrammeled market
into a global juggernaut, crashing across frontiers,
enfeebling national powers of taxation and regulation,
undercutting national management of interest rates and
exchange rates…creating a world economy without a world
polity." Sounds good to me. http://www.douglascasey.com *** Bars and restaurants in Paris began offering the
Beaujolais Nouveau yesterday. Waiters are wearing special
straw hats…and ads proclaim the arrival of this year's
vintage. But the stuff is not really very good. Good wine
is complex and rich. Not that I know much about wine…but
even a teetotaller could tell the difference. Beaujolais
never was considered a serious wine…just a refreshing
drink with a light lunch. But it has been a huge marketing
success. *** The Church of England…where every clergyman seems to
lust after another clergyman…or his wife…is putting
its service on the Internet. Worshippers will be able to
download the text of Common Worship and follow the
service. And to bring the service completely into the
modern age…a prayer has been added in which God is seen
as a mother, rather than a father. The Judeo-Christian
faith is a patriarchal religion. The Greeks identified the
inclusion of females in the priestly orders as a sign of
barbarianism. And "Mother Earth" worship is considered, by
fundamentalist Christians today, as rank paganism…which,
of course, it is. But the Anglicans are more of a social
group than a religious order, anyway. They are social
workers with funny clothes and mysterious chants.
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THE IRONIC METAL "They rang a bell." That is how Dr. Kurt Richebacher explained why the price
of gold exploded upward in response to a press release
from 15 European central banks on Sept. 28. The central
bankers declared their intention to stop selling
gold…and to cap the leasing of gold and use of gold
futures and options. The gold carry trade, which had hitherto been a nearly
risk-free way of making money, suddenly became
treacherous. No longer could borrowers of gold count on a
huge supply of central bank gold to depress prices.
Borrowing gold at 2%, selling it and investing the
proceeds at 5% is not exactly a trade that takes a lot of
higher math. But when the price of gold goes up, you have
to get out a pencil and do some calculations. The difference between $250 an ounce…and $300 an once is
50 bucks. And since the gold carry trade involved an
estimated 5,000 tons of gold…the amount of loss may have
been on the order of $8 billion. A lot of people lost a lot of money by selling gold
forward…and many of the losers, as demonstrated so
dramatically by Ashanti Gold, were the gold miners
themselves. No one knows exactly who took the losses…but it is
likely that billions of dollars in short positions are
still waiting to be resolved…with the speculators hoping
for a deeper dip in the gold price that will enable them
to get out with fewer losses. But in making their
announcement, the central banks took off the market as
much as 5% of all the gold ever mined, since the days of
King Midas right up to the present. And with many sellers
still caught in the squeeze…it is unlikely that the
price of gold will fall. Marc Faber writes in "Forbes," "I
very much doubt we will see prices fall below $280 an
ounce ever again." But what will we see? We live in a world of sin and sorrow. But it is not so
much sin and sorrow that is reflected in the gold market,
but confusion and irony. The sin and sorrow lie elsewhere. King Midas had the touch, you will recall. Everything to
which he laid his hand turned to gold. But as bad as this
might have been for investors who were long gold at the
time, it was worse for him. He hugged his daughter…and
all of a sudden the sin of his greed turned to sorrow.
Having a daughter of cold and silent gold may seem
passingly attractive to those of us with the more common
variety, but it takes little imagination to see that gold
is no substitute for the flesh and blood of one you love. If there is greed in the market today, it is probably not
among the gold bugs. Until recently, they were too poor to
be greedy. Even now they are barely able to pay off their
credit card debt and maybe replace the living room
carpeting. Greed will have to wait. But tech and Net investors, on the other hand, have the
Midas touch. Every silly Internet stock that comes along
is golden. America's leading technology companies --
Microsoft, Intel, IBM, Cisco, Lucent and Dell -- are now
worth more than all the gold the earth ever yielded. These
are the Midas companies…worth $1.6 trillion, compared to
the total value of all the world's gold above ground of
only $1.3 trillion. You could sell the six techs…buy
every bracelet, wedding ring and Kruggerand on the
planet…and have enough change left over to buy every
public company in Russia at 10 times the current market
price! In a better world, investors might enjoy the prospect of
ever-increasing share prices for these six companies…and
the other golden boys and girls on the stock market. The
huge gains made this year on the Nasdaq's techs and Nets
might just continue indefinitely. Morgan Stanley's Tech
Index, for example, is up 105% in the last 12 months. And
the investors who put their faith in these tech stocks
hope to be rewarded with these extraordinary gains
forever. But that would be a real fairy tale. In our world, the sin of outsized expectations…which we
will refer to here as "greed"…rarely goes unpunished. In
fact, it is self-correcting. As more and more people chase
the unrealistic profits -- new investors expect 22% per
year for the next 10 years! -- the prices on the shares go
higher and higher…to the point where it is almost
impossible for them to merit their prices. That is
Amazon's problem…not that it couldn't be a good
business…it just can't earn enough to warrant the
current stock price. Everywhere you look in the high tech and Internet sectors,
sin is rampant. Sorrow cannot be far behind. And that is
why we maintain our keen interest in gold. It is an ironic
metal…it shrinks in the heat of a bull market on Wall
Street and the sunny expectations of investors and
consumers. It expands in the cold, cruel world of sin and
sorrow. The irony and confusion is that the Fed is now pumping up
the money supply…the dollar has been flooding the world
for many years…savings rates in the United States have
dipped lower and lower -- to the point where they're now
negative…the average family is said to be unable to
scrape together $1,000 in cash…people have a higher
percentage of their assets in the stock market…at the
highest prices in history… twice as high, in GDP terms,
as preceded the `29 crash… …and still the price of gold, in real and nominal
terms…is far below where it was 20 years ago! Says Marc Faber, "The sum total of credit instruments
outstanding globally is growing by about 10% per year.
Thus, it doubles in size every seven years…The global
economy, however, expands by just about 3% per year…This
sorry condition [uncontrolled credit expansion] will lead
either to far higher inflation rates or to massive
defaults. Consequently, gold will provide the only sound
currency." It will be a sad day for many people when the bubble pops.
But it may be a happy day for those people holding gold.
Where might the price go? Doug Casey offered some guesses
in his recent issue. Dividing the U.S. gold supply by the
money supply -- M1 -- he figured the price of gold should
be $4,214 an ounce. Dividing the accumulated U.S. foreign
trade deficit by U.S. gold holdings produces a similar
number…about $4,000 per ounce. These numbers may or may not turn out to be
predictive…but they are certainly illustrative of the
huge gap between the current price of gold and the
fundamentals underpining its value. Right now, gold is waiting for something to happen. It is
waiting to see how much faith people have in Greenspan,
the dollar, the bubble, the United States economy…and
the Midas market. That faith can be shaken at any
time…or it could run to new heights of ironic absurdity.
We will have to wait too…and see. I am off for the weekend… Bill Bonner P.S. Next week, I want to examine the premise of Richard
Rahn's book, "The End of Money." Will money really become
obsolete? What will happen to gold? Until Monday… = = = = = = = = = = = = = = = = = = = =
Dan Denning, who last year recommended the company holding
the U.S. license to Pokemon, has a new pick in December's
"Fleet Street Letter." He's found a company that's already
profiting from the creative destruction caused by Internet
growth. That Pokeman pick of his could've turned a $1,000
investment back then $50,000. If you'd like to see what
he's found now, just subscribe to the "Fleet Street
Letter." Simply point your web browser to
http://209.70.9.80/secure/form2.cfm?pubcode=fsus. It's a
breeze to subscribe on line. Or subscribe by phone at 1-
800-433-1528 (international callers try 410-234-0691.)
Ask for code 7023.
= = = = = = = = = = = = = = = = = = = = = = The Daily Reckoning is a FREE e-mail service of Agora
Financial Publishing -- dailyreckoning@agora-inc.com
If you would like practical advice on how to act on the
ideas in this e-mail, then simply subscribe to my monthly
financial communique, "The Fleet Street Letter." You can
subscribe or get more information easily. Just call 1-800-
433-1528 and ask for code 3472. | 
