Apr 2, 2004
Market News Digest
-> Jobs & Unemployment Rise -CNNfn
-> Dow jumps triple digits on jobs data -CBSMW
-> Gold and silver fall on jobs report -Reuters
-> AT&T, Kodak, IP out of Dow -CNNfn
-> OPEC to cut oil production -Reuters/FT
-> Silver Rises Above $8 an Ounce,16-Yr High -Bloomberg
-> SS Trust Fund, A Weed Waiting to Sprout -Wash. Post
-> NYSE "specialists" pay $242M fine -CNNfn
-> Japan ends currency intervention -Lon. Times
Commentary
-> ALL COINS ARE NOT CREATED EQUAL -Craig R. Smith
-> Social Security 'trust fund' is anything but secure -TNS
-> BE BRACED FOR A BUST AS BUBBLES BURST -Mark Faber
-> THE MAN WITHOUT MEDIA -Bill Bonner, Daily Reckoning
-> HIGHER INTEREST RATES; SOONER OR LATER? -Martin Weiss
-> AL-QAEDA: WHO'S THE ENEMY NOW? -TIME
-> WHO DO YOU BELIEVE? -Harry Chernoff, Economist
Market News Digest
AT&T, Kodak, IP out of Dow -CNNfn
AIG, Verizon, Pfizer to replace long time components as of April 8.
April 1, 2004
NEW YORK (CNN/Money) - The Dow Jones industrial average is changing.
The change in the world's most widely watch stock index continues a shift toward the service sector as long-time components AT&T Corp., Eastman Kodak Co. and International Paper Co. will be replaced by phone company Verizon Communications Inc., American International Group Inc. and Pfizer Inc.
The shift is meant to, "recognize trends within the U.S. stock market, including the continued growth of the financial and health care sectors and the diminishing relative weight of basic materials stocks," said a statement from Paul Steiger, managing editor The Wall Street Journal, which selects the components of the index that is named for its corporate parent.
The change, the first change of components since 1999, will be effective at the open of trading April 8. The divisor used to calculate The Dow from its components' stock prices will be adjusted so that there is no change in the average prior to the opening that day.
The news sent the share price of the three stocks being removed from the average down at least 2 percent each in early trading, and lifted the three new components up at least 2 percent each.
http://www.cnnfn.com
Jobs & Unemployment Rise -CNN
Gain of 308,000 jobs far better than Wall Street's forecasts; unemployment rate up to 5.7 percent.
April 2, 2004
NEW YORK (CNN/Money) - U.S. payrolls grew at the fastest pace in nearly four years in March, the government said Friday, in a report that soared past Wall Street's expectations and could play a pivotal role in Fed policy and the presidential election.
Payrolls outside the farm sector grew by 308,000 jobs in March, the Labor Department reported, compared with a revised gain of 46,000 in February. The unemployment rate rose to 5.7 from 5.6 percent.
Economists, on average, had expected 123,000 new jobs and unemployment at 5.6 percent, according to Briefing.com.
It was the strongest gain in payrolls since a matching gain of 308,000 in April 2000.
The surprisingly strong number should ease some of the political pressure on President Bush, who has seen little job growth during his administration.
It should also raise speculation that the Federal Reserve is closer than ever to raising its target for the fed funds rate, an overnight bank lending rate it manipulates to steer the economy.
Despite some signs of incipient inflation, most economists have believed that the Fed was waiting for a string of strong payrolls reports to raise rates, and Friday's report could be the first in that string.
http://www.cnnfn.com
Silver Rises Above $8 an Ounce,16-Yr High -Bloomberg
April 1 (Bloomberg) -- Silver topped $8 an ounce in London, a 16-year high, as investors sought an alternative to gold and base metals amid threats of terrorism, a declining dollar and increasing industrial demand.
Silver, which had lagged gains in gold, copper and platinum, has caught up by surging 83 percent in the past year. It's the metal's biggest rally since 1980, when hoarding by billionaire brothers Nelson Bunker Hunt and William Herbert Hunt of Dallas sent the metal to $50 an ounce from $6.
Since the Madrid train bombings killed 190 people on March 11, silver has risen 13 percent, twice as fast as gold. Demand for the metal is also rising in the electronics industry, where it's favored as a conductor, and among jewelry buyers in Asia, who are switching from more-costly platinum.
``Consumers are getting concerned about the rate at which commodities prices have been rising so they are buying ahead,'' Kamal Naqvi, an analyst at Barclays Capital in London, said in a telephone interview. ``Demand in Asia has been resilient.''
Silver for immediate delivery jumped as much as 31 cents, or 3.9 percent, to $8.19 an ounce in London, the highest since Oct. 19, 1987. It stood at $8.10 at 5:22 p.m.
Today's price surpassed the $7.93 reached in February 1998, when Warren Buffett's Berkshire Hathaway Inc. disclosed that the billionaire investor had acquired 130 million ounces of the metal, or about a quarter of global production at the time.
Before this year, silver had gained 29 percent since the end of 2001. Gold rose 49 percent, copper 55 percent and platinum 70 percent in the period.
``For people looking to get into commodities silver has looked dirt cheap compared to other precious and base metals,'' James Moore, an analyst at TheBullionDesk.com said by phone.
Gold for immediate delivery in London was at $427.70 an ounce, platinum sold for $912.50 and copper traded for $3,018 a metric ton. The metals have risen to 15-year, 24-year and eight- year highs respectively this year.
Weaker Dollar
Investors have been attracted to dollar-denominated metals such as gold and silver as way to hedge against further declines in the U.S. currency, down 13 percent against the euro and 12 percent against the yen in the past year.
Silver ``is enjoying a great run right now based on the weak dollar,'' Ross Beatty, chairman of Pan American Silver Corp., based in Vancouver, said in an interview last month. ``As an industrial metal, it's benefiting from global economic production growth, and as a precious metal, it's benefiting from a shift away from assets like stocks and bonds.''
Read Below to Discover Why Silver is Soaring ...
Silver Boat About To Set Sail - Richard Spohr, SATC
Nov. 21, 2003, Real Money Perspectives
The biggest knocks against silver are that it is too bulky, takes up too much space, or weighs too much. As super bull Ted Butler puts it, with silver you get too much for your money.
Although silver does have its drawbacks, investors determined to protect their assets from a declining dollar should make silver a part of their portfolios. Historically, silver outperforms gold--on a percentage basis--in precious metals bull markets. Further, an examination of current developments suggests that silver could do even better than in past precious metals bull markets.
Despite what some analysts say, silver is as much a monetary metal as is gold. More people around the globe have used silver for money than have used gold. In at least fourteen languages, the same words are used for silver and for money.
In the US, gold coins were called from circulation in 1933. Standard US 90% silver coins, however, were minted through 1964.
Analysts who relegate silver to the category of “industrial metal” do so because a huge industrial demand has developed for silver over the last half century. Gold, on the other hand, has no such demand. About 90% of the annual production of gold is turned into jewelry. Yet, no one asserts that gold is a “decorative” metal.
Gold is considered a monetary metal because it has been used as money for centuries. But, so has silver. Then why is gold a monetary metal and silver not? In reality, both are monetary metals.
Still, the constant haranging that silver is an industrial metal has diminished its desirability in eyes of many investors. Actually, though, the huge industrial demand for silver is what makes it as good or better investment than gold.
A few decades ago, when the now disposed US Strategic Stockpile stood at more than two billion ounces, one could argue that silver was going nowhere for ample supplies were available to meet the growing industrial demand. However, only a decade after most of the Strategic Stockpile was sold off, which meant that huge supplies were still available but then in private investor hands, silver skyrocketed to $50 in the face of a monetary crisis. Gold went to $850; both responded like the monetary metals that they are. In that crisis, demand as a safe haven trumped the cries that “silver is an industrial metal.”
Instead of disdaining silver, analysts should be saying that silver is at least as good, or better of an investment between the two, because it is a monetary metal with a staggering industrial demand. When the next (current?) crisis is recognized, diminished silver supplies--because of industrial usage--should cause silver to turn in a better performance than what we saw in 1980. Astute investors should not miss the silver boat.
Request a Free Copy of "MORGAN SILVER DOLLAR SPECIAL REPORT
Social Security Trust Fund Is a Weed Waiting to Sprout - Wash. Post
By Allan Sloan
Tuesday, March 30, 2004; Page E03
Ah, yes, spring has officially arrived. That delightful season when grass turns green, forsythias bloom and Social Security trustees issue their annual report. Grass and forsythia are much prettier than the trustees' report, whose endless pages of numbers can satisfy even the wonkiest of wonks. But in another annual event, news coverage of the report missed an essential point: that the gigantic Social Security trust fund, bigger than Citigroup and growing faster, will be utterly useless when the time comes to tap it.
Stories about Social Security's retirement system -- we'll leave Medicare, a total financial horror, for another day -- said that essentially nothing has changed in the past year. The system is still projected to run cash surpluses until 2018, and the trust fund will still have assets until 2041.
But get deep enough into the report, and you see that's largely irrelevant. Log on to www.socialsecurity.gov/OACT/TR/TR04/lr6F9-2.html. There, you find table VI.F9 (intermediate assumptions). You can't use the printed version, which skips years.
Use this table and a little common sense, and you can see that the trust fund won't help cover Social Security's cash shortfall when problems start.
Here goes. To compute Social Security's cash flow, you subtract the "cost" column from "income excluding interest." You see that this year, there's a $64.4 billion cash surplus, and an additional $88.9 billion in interest income from the fund's Treasury securities. The government pays this with additional Treasury securities rather than cash.
The cash surplus peaks in 2009, then shrinks. In 2018, the program goes cash-negative for the first time, $23.4 billion, and within five years, the shortfall is $200 billion and rocketing upward.
Just about now, many people -- including, unfortunately, most of my journalistic colleagues -- trot out the magical trust fund.
What's the problem? they ask. By the 2018 cash-crossover date, the trust fund will have more than $5 trillion in it. So we can just tap the trust fund to cover the deficit, right? Actually, no.
Here's why...
FULL STORY
Related Story
SOCIAL INSECURITY: Research Report
Dow jumps triple digits on jobs data -CBSMW
Bonds tumble, dollar rallies; Sun Micro rally aids techs
By Tomi Kilgore, CBS.MarketWatch.com
April 2, 2004
NEW YORK (CBS.MW) -- U.S. stocks rocketed out of the gate Friday as investors cheered a much better-than-expected March employment report.
The data, which produced a positive surprise in non-farm payroll growth for the first time in five months, also sent the bond market tumbling and the U.S. dollar soaring, as economists suggested the number may prompt the Federal Reserve to rethink its accommodative interest rate policy.
The Dow Jones Industrials Average powered up 122 points, or 1.2 percent, to 10,495, with all 30 components gaining ground.
The U.S. Labor Department said non-farm payrolls increased 308,000 in March, well above expectations of 122,000. In addition, February's payroll growth was raised to 46,000 and January's to 159,000 from 21,000 and 97,000, respectively.
Meanwhile, the unemployment rate rose to 5.7 percent vs. expectations that it would remain unchanged at 5.6 percent.
"Obviously it was a very solid number but I am more concerned about the implications as regards the Fed," said Peter Boockvar, equity strategist at Miller Tabak. "The Fed is likely to raise rates in August, possibly earlier, and markets don't rally during rate hiking cycles. I wouldn't be surprised if we close flat on the day."
The S&P 500 Index shot up 12, or 1.1 percent, to 1,145 and the technology-friendly Nasdaq Composite hiked up 40 points, or 2 percent, to 2,055.
A rally in Sun Microsystems (SUNW: news, chart, profile), which received nearly $2 billion from Microsoft (MSFT: news, chart, profile) as part of a technology collaboration agreement and to settle outstanding anti-trust and patent issues, provided further fuel for the technology sector.
http://www.cbs.marketwatch.com
NYSE "specialists" pay $242M fine -CNNfn
The SEC says five trading firms agree to settle allegations of improper trading activities.
March 30, 2004
NEW YORK (CNN/Money) - Five New York Stock Exchange trading firms have agreed to pay $242 million to settle charges of violating federal securities laws and exchange rules, the NYSE and the Securities and Exchange Commission said Tuesday.
The SEC, after a joint investigation with the Big Board, said the five firms -- Bear Wagner Specialists, Fleet Specialist Inc., LaBranche & Co., Spear, Leeds & Kellogg Specialists and Van der Moolen Specialists USA -- violated securities laws and exchange rules by executing orders for their accounts ahead of orders for the public between 1999 and 2003.
The firms -- known as market "specialists" for their roles bringing together buyers and sellers at the exchange -- violated their basic obligation to match orders from the public with other similar orders, and not to fill the orders via trades from their own accounts, the SEC and NYSE said.
The firms agreed to the settlement without admitting or denying the allegations, the SEC said, adding that the investigation will continue, possibly targeting individuals.
http://www.cnnfn.com
OPEC Split on Oil Cut -Reuters
The Organization of the Petroleum Exporting Countries, meeting on Wednesday, is under pressure to reverse or postpone scheduled supply cuts that recently forced U.S. oil prices to a 13-year peak.
Some in OPEC admit prices are uncomfortably high and favor postponing a February deal agreed in Algiers to cut supplies in April.
"The Algeria agreement can be reviewed, it is not compulsory," said UAE oil minister Obaid al-Nasseri. "There are different opinions that will be discussed including postponing implementing the Algeria agreement."
Others blame speculative investment funds for inflaming the market and worry the funds are showing signs of preparing to exit the market, causing an oil price avalanche.
"It's our position that in the second quarter there will be a reduction in demand so we will work for the cut in production to support prices," said Algerian Oil Minister Chakib Khelil.
OPEC's February deal to cut production by a million barrels a day from April 1 sent U.S. prices roaring two weeks ago above $38 a barrel, the highest close since the 1990-1991 Gulf War.
But prices fell $2.35 a barrel last week as the funds took profit. U.S. crude eased another 37 cents to $35.36 a barrel on Monday, read by traders as increasing the likelihood that OPEC will stick to planned curbs.
http://www.reuters.com
UPDATE:
Mar 29, 2004
By Richard Mably and Francois Murphy
VIENNA (Reuters) - OPEC producers remained divided on Monday over whether or not to bow to consumer country demands and open the taps to rein in runaway oil prices.
Opec heavyweights back production cut -FT
March 30, 2004 -- Leading oil producer Saudi Arabia and Venezuela, another heavyweight in the Organisation of Petroleum Exporting Countries, lined up on Tuesday to support the implementation of 1m barrels per day of production cuts in April.
[CRS NOTE: OPEC has agreed to cut production buy 4% sighting they are losing money. They are cutting because they're selling their oil denominated in dollars. They are taking weaker dollars and they know they're only getting about $24 a barrel, adjusted for the drop in the dollar. If investors need to see an illustration of how the dropping dollar affects them, all they have to do is look at the price of gasoline. The dollar has dropped 35% in value against a "real" tangibles, like oil, over the last 2 years. So oil has to sell for many more dollars to compensate. What better example of why every investors needs to hold gold! The Islamic fundamentalist argument for denominating oil in the gold "dinar" currency instead of U.S. dollars grows stronger every day ... More on the Gold Dinar]
From Leo Lewis, Richard Lloyd Parry and Robert Thomson in Tokyo
Mar 29, 2004
JAPAN’S £150 billion campaign to weaken the yen and strengthen the dollar has officially come to an end, Bank of Japan sources have told The Times.
The currency intervention campaign, which has provoked criticism in Washington and deep concern in London, is thought by Japanese officials to be no longer necessary because the country’s economic recovery is gathering strength. Officials also believe that the country’s export outlook is positive and that there is no more need to weaken the yen artificially. BoJ sources indicated that they would intervene in the market only when there was extraordinary volatility, but made clear that the unprecedented dollar purchases of the past seven months were formally over.
The new confidence at both the BoJ and the Ministry of Finance means they will no longer buy dollars even to smooth the sort of sudden price spikes that have prompted intervention in the past. “Even if the market shows volatility we believe that things are not so fragile now,” the BoJ sources said in an exclusive briefing. “We have reached the point where we are confident that the Japanese recovery no longer depends on export strength . . . the interventions have served their purpose.”
The dramatic policy switch draws a line under a controversial and record-breaking government effort to manipulate currency rates by supporting the falling dollar against the yen. The intervention drive, which began in earnest last September, has left Japan with paper trading losses of more than £50 billion.
British and US authorities said that the colossal accumulation of dollar assets threatened to destabilise the US and international economy.
Gold and silver fall on jobs report -Reuters
By Veronica Brown
LONDON, April 2 (Reuters) - Palladium burst into the limelight on precious metals in Europe on Friday, gaining nearly seven percent to hit a 17-month high in a knee-jerk reaction to reports that new technology could open up fresh demand, dealers and analysts said. Gold fell from lofty heights near the 15-year peak of $430.50 achieved in early January, as the dollar moved higher on surprisingly strong jobs data -- raising belief that the U.S. economy is on a firmer path to recovery.
"Gold dropped after the jobs report because people were buying the dollar, but it looks like the market overreacted to the data. I'm still quite bullish despite the drop," one dealer said. A stronger U.S. currency makes dollar-priced gold more expensive for European investors.
Silver chased gold downwards after putting in a sterling performance, notching up new near-17-year peaks for the second day running.
Earlier on Friday, Belgian metals group Umicore said it had developed a new technology that allowed palladium to be used instead of platinum in diesel emission control systems. A spokesman for the firm said the technology could theoretically go to market in 2005.
Palladium has been suffering from chronic oversupply, which coupled with weak demand, saw the metal slump to its lowest in six years last April at $140 an ounce -- a far cry from its 2001 record price of over $1,000.
By 1456 GMT, spot palladium (XPD=) had cooled slightly, quoted at $297.00/302.00, after hitting a peak of $313.00 -- its highest since October 30, 2002 and up from New York's late quote on Thursday of $292.00/297.00.
Platinum (XPT) dropped back to $890.00/895.00 from $912.00/917.00. Simon Weeks, bullion director with ScotiaMocatta, noted the Umicore news broke just after the close of Japan's TOCOM palladium futures.
"I guess the real volatility will kick in when they come back next week...Monday will be the real acid test as to how the direction will go over the next few weeks," he said.
Gold slid sharply, with the market shedding around $8 after the U.S. March employment report came in much stronger than expected.
Non-farm payrolls climbed 308,000 in March, the Labor Department said, the biggest gain since April 2000 and well above the 103,000 rise expected on Wall Street. The dollar surged against major currencies, including the euro, sucking money out of gold and silver as investors entertained thoughts of a stronger U.S. economy. The euro (EUR=) dived more than one percent against the dollar to session lows around $1.2120.
Spot gold was at $422.40/423.15 after touching a low of $417.70. That compared with $426.50/427.25 in New York late on Thursday.
"The rising dollar...threatens to wreck a number of key investment plays -- including the heavy long bets on U.S. dollar-denominated commodities," Sempra Metals economist John Kemp said.
Silver fell out of bed after romping up towards a 17-year high earlier as funds continued their buying spree. The market touched $8.43 in Europe and was on target for $8.50, last seen in October 1987. It later fell back sharply, briefly moving below $8 before trading around $8.18 by Friday afternoon.
http://www.reuters.com
Commentary
ALL COINS ARE NOT CREATED EQUAL - Craig R. Smith, SATC
Mar 29, 2004
A rare coin is not a commodity like sugar, wheat or bullion gold.
Have you ever seen a 100 oz. bar of gold? Some are ugly and beat up, some are brand new and shiny, but they both trade for the same value. This is not true in the Numismatic coin market. The way a coin looks (known as 'eye appeal') as well as the way it was graded is very important when making your comparisons. Frankly, unless the other dealer has the coin you bought right in front of him, he can't make the comparison correctly. He simply can't see the coin through the telephone. Even if you went to his shop, he probably doesn't have another coin to compare it with that is the exact grade or date. Often, coin shops will try and use another date or grade coin, which then invalidates the comparison.
My point is that it's easier for many to believe they made a bad trade than it is for them to believe that they bought a great coin at a fair price. We Americans (and I'm guilty too) always believe a bad report a lot easier than we do a good report.
Another area that can really distort the shopping process is comparing a "sight-seen" priced coin with a "sight-unseen" coin. The differences are like night and day. Sight-seen simply means that the buyer has had a chance to view the coin before he or she buys it. Sight-unseen prices are the prices that dealers will pay for coins they have never seen and have no ability to return if they don't like the quality or look of the coin. Simply put, sight-unseen coins are generally bottom-of-the-barrel (ugly) coins that most reputable dealers reject--or generic coins that are just used to fill orders, without regard for quality. Many newcomers to the market will buy the lower priced coins and hold themselves out as the "real market" on coins. Baloney!
Speak to anyone knowledgeable in coins, and they will tell you to always pay a little more and get the better quality coin. For years David Hall, founder of PCGS, would recommend only MS-65 or better. Why? Simple. He knew that you should always buy the best you can afford. Many times when comparisons are made, dealers are quoting sight-unseen ( lowest price) against a sight-seen (highest price)--making the client think he didn't receive value. When we made the distinction, all of a sudden, the coins are neck-in-neck on pricing. Also, I have personally seen coins from other dealers being compared to Swiss America coins that were down right ugly. In one instance, a coin offered by another dealer had so many copper spots that it sold for 15% below the current Greysheet price.
Here are six very practical steps that can help you to determine that "the price is right," when buying coins.
1. Always buy from a recognized national dealer or broker who has the experience of the ups and downs in the market. (A dealer with a minimum of a 10-year track record).
2. Be sure the coins can be bought and delivered at the prices quoted. In other words, don't just buy the quote, buy the coin. I can sell coins 10%, 20%, 30%, even 75% less than the other guy IF I don't have them. Make sure the dealer can actually deliver the coin at the price quoted.
3. Buy only sight-seen coins that have an inspection period. Have the option of exchanging the coin if you don't like the way it looks. Also, make sure that the coin you buy has been bought by the dealer on a sight-seen basis and has been inspected for copper spots and other detractions by at least two Numismatists.
4. Be sure the dealer offers you a two-way market. Be sure that the dealer will not only sell you the coin but buy it back. Closely examine the buy-back policy. Make sure the buy-back price does not vary on a basis of quantity. Also inquire on the time factor for repayment. Most reputable companies will settle a trade within 72 hours.
5. Truthful disclosure. Be sure the dealer has presented both the upside and downside risks associated with the coins you are purchasing. Short-term versus long-term positioning should be explained and understood.
6. Buy from a dealer that you have complete trust in. Check references. Most importantly, ask a many questions and get satisfying answers. Get facts, not hype.
[ED. NOTE: This article first was published in 1997, then reprinted in Rediscovering Gold in the 21st Century in 2001. TO request a free review copy of the book, click here]
Social Security 'trust fund' is anything but secure -TNS
By Tom Guthrie, Ft. Wayne News-Sentinel
Mar 29, 2004
There is an impending crisis in that the baby boomers (those born between 1946 and 1964) did not produce enough children to fund their parents' Social Security payments, which can begin as early as 2008 -- a person born in 1946 will be 62 in 2008.
But you have heard that the Social Security trust fund -- whatever that is -- won't be depleted until around 2040, plus or minus depending on future economic growth, so really there isn't a crisis. There is still plenty of time to address the issue.
Enter Federal Reserve Chairman Alan Greenspan with recent testimony before Congress that there is a crisis, and politicians would be well advised to address the crisis now. What gives? What's the truth?
Of course, Greenspan is correct. The truth is the Social Security trust fund is the federal government's equivalent to the accounting shell game played by Enron executives that ultimately imploded. Greenspan simply called attention to the sham at a most uncomfortable time -- immediately before a presidential election.
Picture the Social Security program whose source of revenue is a separate (specific) tax on income paid both by the employee and his/her employer. Most of the revenue is paid (transferred) immediately to current Social Security recipients; however, the program has been collecting marginally more than it has been paying out. These relatively small surpluses are deposited into a special account called the Social Security trust fund.
Now picture the federal government's "general" fund whose primary source of revenue is income taxes. Those income taxes are used to purchase defense (the military), national parks, some roads, some education, etc. Furthermore, the "general" fund typically spends more than it takes in -- it runs a deficit.
Therefore, the "general" fund is always borrowing money. Guess the first place the "general" fund looks to borrow money -- the Social Security trust fund. Whatever money has accumulated in the trust fund is removed and the trust fund is given an IOU. Additionally, the "general" fund promises to pay interest on the funds borrowed, but it does this by simply putting more IOUs into the trust fund.
So, the Social Security trust fund consists of nothing but IOUs from the "general" fund to the trust fund.
Unfortunately, in 2017 ...
Related Story:
SOCIAL INSECURITY: Research Report -- Part I: An Overview of the Social Security Crisis and Proposed Solutions. 77 million baby-boomers are about to retire. What can be done to avoid a funding crisis NOW?
BE BRACED FOR A BUST AS BUBBLES BURST -Mark Faber, FT
March 29 2004
Credit has to be given to Alan Greenspan, the Federal Reserve chairman.
He is the first head of a monetary authority who has not only managed to create a series of bubbles in the domestic economy but has also managed to create bubbles elsewhere - in the New Zealand and Australian dollars, emerging market debts, government bonds, commodities, emerging market equities and capital spending in China.
In fact, over the last 18 months, US monetary policies have boosted all asset classes. This is most unusual since it ought to be obvious that in the long run commodities and real estate inflation is incompatible with a bond bull market.
Mr Greenspan's monetary tribulations mark an achievement no one else in the history of capitalism has accomplished. It is also one investors will never forget once this credit-driven, universal bubble bursts and it will fill entire chapters of financial history books with economic and financial horror stories.
We simply don't know how the end game of the current speculative wave will be played out and when the bust will occur but a painful resolution of the current asset inflation and global imbalances is as certain as night follows day.
So, given that consumption driven by asset inflation is unsustainable in the long run and always ends badly, what should the contrarian investor do?
The least desirable asset in the world is US dollar cash. The investment community can take everything in stride - even a 70 per cent decline in Nasdaq stocks. But interest rates, as low as they are now, compel people to speculate on everything from commodities, homes and bonds to equities.
Therefore, investors in the current speculative environment should be extremely defensive and not be tempted by short-term gains, which could be swiftly erased. Daily moves of 5 per cent in investment markets will become common. Nickel recently fell 8 per cent in a day, copper by 5 per cent, and the euro by 5 per cent within a week. Gold and, especially, silver may offer some protection but, once the current asset inflation bubble ends, they could also be in for a rough time.
http://www.ft.com
THE MAN WITHOUT MEDIA -Bill Bonner, Daily Reckoning
Mar. 30, 2004
We did not think about investments yesterday. We opened no newspapers; nor did we consult any websites... or even turn on the television... which makes us especially qualified to give an opinion on what is going on...
Our opinion is that the tide has turned; after 20... or
50... years of flooding in, it is going out. Almost all
boats - that is, asset prices - will sink lower as credit-
soaked growth ebbs away.
In America, over the last half century, people gradually shifted from production to consumption. Now, they depend on credit from the rest of the world to continue spending. While they grow older... and look forward to retiring on money they haven't got... younger, more vigorous workers in China, India, and elsewhere offer to do their jobs at lower rates of pay.
The rally wrought by the feds with lower lending rates and increased public spending was merely a backwash. Now, it seems to have crested. Stocks and the dollar are headed down.
These are just opinions. But at least they are uninformed ones. Many are the 'facts' that might be shoved in our faces to prove we are wrong. If we'd read the paper or watched TV, we'd know that houses sold well last month. People bought them by the dozens - as if they were Viagra pills. Consumers continued spending their silly heads off.
Stocks, we see in today's headlines, rose 128 points yesterday. "Stocks are attractive with earnings growth being pretty good," the International Herald Tribune quoted someone this morning.
Well, there you are: stocks are attractive. All is well. Another item tells us that the dollar is expected to rise, not fall... and that gold "may disappoint" investors.
But that is the trouble with the 'news.' People take it seriously. They read the paper and think they know something. But what they know is nothing more than the prejudices and illusions of their fellow investors and media hacks... which they mistake for reality.
You're better off avoiding it, dear reader. But few people can. An investor, for example, feels the need to 'inform himself.' If he doesn't watch his investments, he fears they may get away from him.
He would do better to go fishing. If he tunes into the news, he finds out what other people already know... and what other people already think. If he finds a stock that sounds appealing, it is usually one the smart money is already selling.
The typical investor does not inform himself in any real way - digging into a company's annual report and studying its business model as Warren Buffett might do. Instead, he merely absorbs the latest mass sentiments and feels no need to think. Thus does the poor schmuck fulfill his role as a bagman for modern capitalism.
The man without media is in a better position. He knows nothing. But he knows he knows nothing. He can buy and sell in complete ignorance of investment fashion. Immune from the currents of investment fashion... at least he has even odds.
But we give you the news anyway... and urge you not to pay too much attention to it.
HIGHER INTEREST RATES; SOONER OR LATER? -Martin Weiss, SafemoneyReport
March 26, 2004
Personal income rose .4% in February. The dollar is getting pummeled again against the yen. The housing bubble continues to expand. And energy price increases seem to have no limit. All of these factors should contribute to inflation, which will then likely cause interest rates to rise.
Although consumer spending was a bit light, the strong income numbers indicate consumers can continue their buying sprees, which should give retailers and wholesalers the ability to raise prices.
It's been no secret that over the past several months the dollar has been trashed. While in theory that should help U.S. exports, in reality it makes it more costly to purchase imported goods. Think about it - if it costs Sony X amount of yen to produce a big screen television, but now Sony is receiving fewer dollars for that TV, they're going to raise the price in order to ensure a certain level of profitability.
The housing bubble is showing no signs of letting up. In fact, in some parts of the country you need to get on a waiting list just to get a realtor to help you buy a home! As home prices continue to soar, people are able to take more and more cash out of their homes by refinancing at forty year low rates. As that new found cash finds its way into the economy it will put inflationary pressures on prices.
And finally -- energy prices. Some experts are calling for $3 per gallon gasoline this summer. If that's not inflation, we don't know what is! Eventually interest rates will rise. But the latest data and trends make us wonder if that day is coming sooner than most people anticipate.
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Consumers More Sanguine, Spending Less
AL-QAEDA: WHO'S THE ENEMY NOW? -TIME
With al-Qaeda's leaders on the run, the terrorist threat is evolving—and getting scarier. Here's why
By JOHANNA McGEARY
March 21, 2004
Along Pakistan's border with Afghanistan, there is no shortage of spies and informers. In that mountain lair where al-Qaeda and Taliban fugitives are burrowed in amid local tribes that pay little heed to the government in Islamabad, at least five rival Pakistani agencies run networks in search of Osama bin Laden and his cohort. The snitches seemed to have come up with gold last week.
TIME has learned that Pakistani troops, already engaged in an offensive to flush out foreign fighters, pounced on an informer's tip that al-Qaeda sympathizers were hiding with foreign militants in the village of Kalosha. Before dawn last Tuesday, 400 members of Pakistan's Frontier Corps swooped in, only to be ambushed by heavy fire; at least 22 troops died. In response, Pakistani President Pervez Musharraf ordered 8,000 troops to converge on a cluster of villages deep in South Waziristan, drawing a cordon around 20 sq. mi. of hills and apple orchards dotted with mud fortresses. Somewhere inside, Musharraf announced, his forces had surrounded a "high-value target." Soon a variety of sources were giving the target a name: Ayman al-Zawahiri, the No. 2 leader of al-Qaeda and bin Laden's closest aide.
The Army's spokesman, Major General Shaukat Sultan, acknowledged that no one had definitively spotted al-Zawahiri in the area since fighting flared on Tuesday. Lieut. General Safdar Hussain, the Frontier Corps commander, told journalists that a vehicle that may have been carrying al-Zawahiri managed to crash through militia roadblocks and escape. Yet what made the military believe they might still have a trophy in their gunsights was that al-Qaeda fighters normally vanish when confronted with a sizable force. This time they resisted fiercely, as if to protect someone special. Somewhere between 200 and 400 militants kept 8,000 Pakistani soldiers half a mile away with a steady barrage of small-arms fire, anti-aircraft guns and rocket-propelled grenades. After a day of battle, the army commander called in helicopter gunships, jets and artillery. By Saturday night a cloud of dust hung over the area, but the army had still not defeated the militants. "We've tightened our cordon," said Sultan. "Nobody will escape."
As the battle raged, Bush Administration officials played down expectations. Officials said U.S. intelligence could not confirm reports of al-Zawahiri's whereabouts. But the possibility that he might be cornered sent pulses racing. Since the late '90s, the Egyptian has served as bin Laden's chief tactician, personal doctor and spiritual guide. His elimination would mean the al-Qaeda command structure that plotted the 9/11 attacks would be almost completely wiped out.
No one hoped he was caught more than George W. Bush. A picture of al-Qaeda's second in command dead or in chains would give a boost to the President's insistence that, even as chaos mounted in Iraq and the world reverberated from the shock of the commuter-train bombings in Madrid, the U.S. is winning the war on terrorism. With Bush's election campaign picking up speed, the stakes for finding al-Zawahiri and bin Laden have never been higher, especially now that terrorist forces seem to have developed a keen eye for political calendars. The Islamists charged with slaughtering more than 200 Madrid commuters struck on March 11. Three days later Spanish voters tossed out the ruling party allied with the U.S. in the war in Iraq.
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Madrid Bomb Ringleader Blows Self Up -Reuters
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Apr 4, 8:26 AM (ET) -- By Estelle Shirbon
LEGANES, Spain (Reuters) - The Tunisian suspected ringleader of last month's Madrid train bombings blew himself up with three accomplices after police cornered them in a suburban Madrid apartment, officials said Sunday.
Hamas Leader Calls Bush Foe of Muslims -NYT
By GREG MYRE
The new Hamas leader, Dr. Abdel Aziz Rantisi, said Sunday that President Bush is the enemy of Muslims and that God has declared war on the United States.
TERRORISM THREATENS WORLD MARKETS -- Israel's assassination of Sheikh Ahmed Yassin, the #1 Hamas religious leader has followers vowing immediate retaliation on both Israel and America. Hamas said "the doors of hell have been opened" by Israel. I hope and pray it doesn't hit our shores, but I have a simple financial strategy to protect your assets from a prolonged market decline, no matter what happens.
WHO DO YOU BELIEVE? -Harry Chernoff, Economist
March 26, 2004
Who do you believe? John Templeton is maximum bearish on the housing market. Jim Rogers expects a long, deep decline in the dollar. Warren Buffett is negative on stocks, bonds, and the dollar. George Soros foresees a bond market rout. Bill Gross expects a recession at least as deep as in the early 1980s. On the other hand, President Bush and the U.S. Congress are certain we're only one good employment report away from everlasting prosperity. It must be true because Alan Greenspan said so.
Clearly, we have a difference of opinion here. Templeton, Rogers, Buffett, Soros, and Gross versus Bush, Congress, and everyone else in Washington, D.C. This is a hard call. One group wants return on capital and interest on principal. The other group is interested in returning to the capital and has no principles. Nevertheless, conventional wisdom is that politics trumps economics.
In a historical sense politics does prevail -- until the situation becomes unsustainable -- and then economics returns with a vengeance. Whether it's John Law and the Mississippi Company three hundred years ago, the rising sun of Japanese stocks and real estate fifteen years ago, or the sovereign bonds of Argentina last week, when bubbles reach unsustainable levels it doesn't matter whether the politicians want to keep them inflated. They pop. Today the best traders of the last 50 years believe that U.S. markets as diverse as the dollar, bonds, housing, and stocks have all become unsustainable. The common theme, of course, is credit. Easy credit, excessive credit, politically-directed credit, and good credit on top of bad credit - no questions asked and no debt service capability required. The signs are everywhere: the Federal budget deficit, current account deficit, and long-term fiscal and generational imbalances; soaring household mortgage debt and non-existent household savings; and manufacturers like General Motors and General Electric pretending to be finance companies while finance companies like Fannie and Freddie pretend to be central banks. The question is what will cause these bubbles to collapse.
The simple answer is that the bubbles will collapse when the credit situation changes for the worse. The spread between the 10-year T-note at 4% and Federal funds at 1% is 300 basis points. There is nothing unusual about a 300-point spread. Although these rates are historically low, low rates do not necessarily cause or imply bubbles. It is the explicit guarantees that the rates will remain low and the spread will remain wide that are extraordinary. For a couple of years now, the Federal Reserve has locked down and guaranteed the short-end of the yield curve and the Bank of Japan has locked down and guaranteed the long-end. With certainty on both ends, the yield curve carry trade has been a moneymaking fantasy straight out of Grimm's Fairy Tales. Borrow short, lend long, leverage it up, and walk away rich. This is the trade of a lifetime for the hedge funds, with the betting in the hundreds of billions if not trillions of dollars.
All it will take to pop this bubble is a meaningful upward shift in the yield curve. Someday, for any number of reasons (employment gains, weak dollar, commodity prices, etc.), the Federal Reserve will increase short-term interest rates and signal inflationary expectations. The yield curve will shift upwards across all maturities. The spread of long rates over short rates may or may not decline but the price of bonds will decline significantly. The expectation of a return to at least a long-run neutral rate posture (e.g., 3% short, 6% long) will start to take hold. Heavily leveraged traders will be forced to reverse their long bond positions.
At the same time but for different reasons pressure will be applied to the holders of mortgage-backed securities (MBS). When long rates fall, as they have been doing more-or-less continuously since early 2000, mortgage prepayments increase and the duration of MBS portfolios declines. To match assets and liabilities, MBS holders, such as pension funds and insurance companies, must buy duration (i.e., buy long Treasurys). This buying creates a cycle of rising bond prices, falling bond yields, falling duration, and more rising bond prices. As interest rates rise, however, prepayments fall and duration stabilizes. These same MBS holders must now sell duration (i.e., sell long Treasurys) to rebalance assets and liabilities, forcing rates up. This relationship has always been obscure, technically complex, and highly dynamic. What is new this time around is its size.
The last time interest rates rose by a large enough amount over a long enough period of time to affect mortgage prepayment rates was 1999. Since that time total mortgage debt has risen more than 50%, to almost $10 trillion. It is now far in excess of Treasury debt. Over the same period, Federally-related MBS (primarily obligations of Fannie, Freddie, and Ginnie) rose at a similar rate and will reach the $4 trillion level by the end of 2004. This time around, a significant rise in long rates will force the sale of billions and billions of dollars of long Treasurys to maintain portfolio duration.
While the contractionary effect of higher interest rates will reduce the demand for commercial and mortgage credit, the overall level of credit demand is likely to remain high. The Federal government continues to operate with no constraints on borrowing and spending. Simply maintaining the Federal budget and current account deficits requires a trillion dollars of new credit each year. Countercyclical fiscal policy in the next recession is certain to add hundreds of billions of dollars on top of that. More ominously, there is no certainty that the Asian central banks, and in particular the Bank of Japan, will be willing to supply credit at today's levels on today's terms if interest rates are rising and bond prices are falling. If the Asian central banks do nothing more than step away from the market, long rates would probably rise 200 basis points and the dollar would fall at least 10%. If these banks choose to sell or are forced to sell, then it's a 1929-like event for the credit markets and the dollar. Speculation that U.S. long rates will plummet the way Japan's did in the 1990s ignores the fact that Japan was the largest net creditor in the world when its bubbles popped. It is still the largest net creditor in the world. The U.S. is by far the largest net debtor in the world.
And then there is the credit derivatives market. As fast as the credit market has grown over the past several years, the credit derivatives market has grown much faster. The credit derivatives market has a notional value exceeding $100 trillion, all of it opaque, leveraged, and in large part (read: Fannie and Freddie) implicitly guaranteed by the U.S. taxpayers. This market is central to what Alan Greenspan swears is the increased financial flexibility benefiting the economy. He should add that it benefits the economy only as long as the Fed can guarantee rate stability. When rate stability falters and a reinforcing cycle of rising long rates takes over, Mr. Greenspan will need to come up with a new story, especially when the Congressional hearings begin. The banks and hedge funds (including Fannie and Freddie) will be asked to explain how they missed the chapters on liquidity, correlation, and six-sigma events in the How Not to Be Like LTCM handbook. Of course, every senator and representative will say that no one saw the credit market debacle coming. In fact, every comment will be some variant of the question: "Who, besides Fannie, Freddie, and every member of my party, is to blame for this mess?" A great deal of hand-wringing will take place while Congress quietly finds some way for the taxpayers to indemnify constituents who swapped fixed for floating before the bond market blew up. Fortunately for Fannie and Freddie, most politicians think of them exactly the way Dorothy thought of the Wizard of Oz before Toto pulled back the curtain.
The inevitable bottom line is that in an economy addicted to easy credit, cheap credit, and excess credit, there is no way that increasing interest rates can be other than excruciating. Greenspan is hoping that some smooth and slow deflation of the multiple bubbles in the economy can be brought about by a very gradual, very well-telegraphed increase in rates when the time comes. Financial history says otherwise. For President Bush Jr. and Congress, financial history is limited to the belief that Greenspan cost President Bush Sr. the election in 1992 by increasing interest rates. Any actual economic factors in play at that time are of no concern to them. Then there are the big-money traders - men who actually have to take responsibility for their financial decisions - like Templeton, Rogers, Buffett, Soros, and Gross. Their reading of financial history leaves them very, very worried. Who do you believe?
Harry Chernoff is an independent economist in Great Falls, VA
EMAIL: hchernoff@cox.net
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ABOUT THE EDITOR
David M. Bradshaw is Editor of Real Money Perspectives,
publisher of Rediscovering Gold in the 21st Century:
The Complete Guide to the Next Gold Rush (7/01) and
has been an economic commentator since 1987, when he
produced the World Economic Perspectives radio show.
In 1997, he produced a one-hour TV documentary, "Preparing
Wisely for the Next Millennium," which was distributed
free of charge at Blockbuster Video nationally. In 1999, he
produced a one-hour radio special, "The Big Picture: The
Shape of Things to Come" discussing geopolitical,
economic and spiritual trends in the 21st Century.
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DISCLAIMER: All of the information in this story is believed to be true, however errors are possible.
Past performance is no guarantee of future performance. All investments have risk. -SATC
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