12/11/2002
IN THIS ISSUE
MARKET NEWS DIGEST
-Former Stock Exchange Chairman Bush's S.E.C. Pick - NY Times
-New team has economic past to live down - FT.com
-Why Business Isn't Investing - Bloomberg
-Look out! Insiders are bailing - CNN/Money
-Safety in second homes - Dallas Morning News
COMMENTARY
-INVESTING OUTSIDE THE BOX - Craig Smith, CEO, SATC
-2004 GLOBAL ECONOMY: BACK TO TREND (BARELY)- Stephen Roach, MS
-FIGHTING DEFLATION AT PT. BLANK RANGE - John Mauldin, Wave2000
-US EQUITY FUNDS SUFFER RECORD OUTFLOW IN 2002 - FT.com
-PAT BOONE IS BACK ON THE CHARTS - Marc Silver, USN&WR
LETTERS TO THE EDITOR
"If paper money, i.e. dollars, is such a worthless commodity,
why is that dealers accept it for the purchase of gold?"
-Buycoin subscriber, Dec. 9, 2002
Dear Subscriber,
Good question. The short answer, from Swiss America CEO Craig Smith, is that they accept U.S. dollars in payment for gold because it is the accepted medium of exchange in the U.S. But because modern 'dollars' have no intrinsic value, Swiss America quickly converts client dollars into gold which does have intrinsic value.
I might add that some day in the not-too-distant future, the value of paper money will come under the same type of scrutiny that other deceptive practices in government and business recently have...then watch out!
It is our deeply held conviction that our modern 'dollar' is an "I.O.U. nothing," in the words of John Exter, former Fed economist. Listen to John Pugsley and John Exter, circa 1991, discussing the debt crisis from The Warfare Series.
The illusion of a dollar's value is maintained based on two major facts of modern culture: 1) Public CONFUSION (as to the nature of coin, credit & currency and 2) Public CONFIDENCE (in the ability of the Fed, Treasury and government to create enough money to bail the U.S. out of any financial crisis.)
Misplaced confidence (and confusion) are increasingly being exposed to economic "transparency" and I expect they are both in a long term decline. For that reason, we suggest that you seriously consider converting some of your confidence-dependent assets ('dollars') into confidence-producing assets (gold).
At your service,
David Bradshaw
Editor, Real Money Perspectives
***********************************************************
ATTENTION: ALL PROOF SET COIN COLLECTORS ***********************************************************
The 1975 "no S" proof set now has a $30,000 bid (according to the Coin Dealer newsletter DEC 6, 2002). This San Francisco minted proof set consists of six coins; the penny, nickel, dime and the clad bicentennial quarter, clad bicentennial half dollar and clad bicentennial dollar. However a mistake took place with the dime. It DID NOT have the "S" mint due to the dies being clogged up. If you have a 1975 Proof Set with the "no S" dime, please give us a call at 1-800-289-2646.
***********************************************************
QUOTES OF THE WEEK
"As my mother used to say many years ago, it's time for all
of us to pull up our socks."
-WILLIAM H. DONALDSON, who was named chairman of the Securities
and Exchange Commission.
* * *
"In my 30 years in the industry I've never seen more buyers
of U.S. rare coins at every level... ranging from the common
coins like Morgan dollars or modern commemoratives (seen on
TV) to the gold bullion eagles (new US mint ads) all the way
up to the low mintage U.S. gold commemoratives (1903-1926)
and exquisite coin collections sold at auctions ... including
many six-figure ultra rare coins. 2002 has already broken all
the records! Given the market uncertainty, 0% real returns on
cash, gold coins are on the fast track to becoming mainstream
in 2003."
-KEVIN LIPTON, KLRC, 12/9/02
* * *
"Forecasting remains more of an art than a science, in my
view. That’s especially the case in today’s unique macro-
climate. I remain highly suspicious of forecasts based on
extrapolating from models of the typical post-World War
II business cycle. The current cycle bears no resemblance
at all to its predecessors over the past 50 years. The
modern-day world economy has never been this US-centric.
And the United States -- the unquestioned engine of the
world -- has never had to deal with the wrenching
aftershocks of a post-bubble business cycle like the one
still unfolding today. The combination of these two forces
has not only pushed the world closer to deflation than at
any point in half a century, but it has created
unprecedented disparities between nations with current
account deficits (the United States) and surpluses
(Asia and Europe). Our baseline case presumes that the
world can neatly finesse these extraordinary imbalances.
I continue to have serious doubts that it will all unfold
that neatly."
-STEPHEN ROACH, Morgan Stanley, Dec. 9, 2002 (see below)
"The Global Economy in 2004 - Back to Trend (Barely)"
* * *
"It's wishful thinking to predict another bull market,"
It won't get back to the way it was. If nothing is in short
supply, then how can profits rise? all the factors reducing
profits will prolong the bear market."
-LEON LEVY, Wall Street financier quoted in FORBES, Dec.
* * *
"California Is at Fiscal Brink...It's not a pretty sight.
"Nobody expected the loss of revenues due to the drop in
the stock market to be as severe as it has been," said B.
Timothy Gage, the state finance director. "Nobody anticipated
the truly staggering extent of the hit we took. States
have not seen such drops since World War II."
-NY TIMES, 12/9/02
* * *
"The investing public remains in denial. This is in regards
to the true state of the stock market as well as to a number
of additional financial conditions and situations. They have
already sustained trillions of dollars in cumulative equity
losses. Yet, they are unswayed from continuing their personal
spending patterns. Further, they remain convinced that common
stock ownership is a prudent form of savings. Despite the
loss of a significant part of their wealth they refuse to
believe that they may be forced to alter their retirement
plans. They continue to spend, spend, spend, while the outlook
for their future incomes, employment and retirement
requirements, deteriorate in an unchecked fashion."
-DR. RICHARD S. APPEL, Goldcorp, 12/8/02
* * *
"CNN warns refinancers to watch out for the "dirty secrets" of the mortgage industry. Consumers, so eager to reduce monthly payments, are being seduced into "negative amortization" loans - where their payments don't even cover the interest. The principal grows even though the homeowner takes out no more cash.Other dirty secrets will come to light, we suspect, when the refi bubble finally pops. But mostly, people will wonder what they were thinking. Why did they add to their mortgages when they should have been paying them off? Why did they buy stocks when they should have been selling them?
"And then, when the secrets are out...when the P/Es have collapsed...when yesterday's excellent CEOs and maestro central bankers have become scoundrels and incompetents...mediocrity will be popular, once again."
"When central bankers come right out in the open and
announce their intention to destroy the value of the paper
currency they sponsor, who can blame investors for looking
for an alternative? We admit that the whole inflation/
deflation discussion is a waste of time. Nobody reads
tomorrow's papers. Maybe consumer prices will slip into
outright deflation and maybe they won't. Either way,
gold is good protection."
-BILL BONNER, Daily Reckoning, 12/9/02
* * *
"The wobbly economy and the woeful job picture are two big
reasons why we're convinced that the sharp rise in equity
prices these past two months is nothing more than a
bear-market rally,"
-ALAN ABELSON, Barron's, 12/9/02
* * *
"O'Neill has been unable to maintain
the illusion that the dollar is worthy of
being the world's reserve currency,"
says James Turk, founder of gold
payment system GoldMoney.com.
"So he's gone. Very bullish for gold."
-THOM CALANDRA, CBS, 12/6/02
LAUGH/CRY OF THE WEEK
"The best way to alleviate poverty is to increase people's
incomes."
-PAUL O'NEILL, U.S. Treasury Secretary (soon former)
* * *
Homeless Man Found with $30,000 in Pockets
Dec 6, 2002
MILAN (Reuters) - It was a rags to riches story at a hospital in northern Italy when a homeless man turned out to be carrying some $30,000 in his pockets.
The 80-year-old bearded man was checked into the psychiatric ward of the hospital three days ago when he was found aimlessly wandering around the city of Como, police told Reuters on Thursday.
The man, apparently without family, had been living in a shelter and on the streets. But to the hospital staff's surprise, they found 10,000 euros (dollars) and 40 million lire, equivalent to another 20,000 euros, in his pockets. "He said it was his life's savings," the police source said.
But the Bank of Italy has foiled a happy ending, by refusing to exchange the lire, which are no longer in circulation, for the euro currency because the man's identification papers expired 13 years ago.
Under Italian law, currency exchanges can only be carried out
with proper identification and in many cases a tax number,
which the homeless man does not possess.
-REUTERS, 12/8/02
* * *
"Instead of dropping, as reported early last week,
unemployment actually seems to be going up. Among those
losing jobs were the nation's Treasury Secretary,
Paul O'Neil, and economic advisor, Lawrence Lindsay. Here
at the Daily Reckoning, we'll miss both of them...O'Neill
because he was such fun to listen to, and Lindsay
because...well...it was just fun to look at him."
-BILL BONNER, The Daily Reckoning, 12/9/02
* * *
"Only three weeks left to fix your portfolio...time to buy
stocks."
-WSJ, 12/11/02
MARKET NEWS DIGEST
Former Stock Exchange Chairman Bush's S.E.C. Pick - NY Times
By STEPHEN LABATON
WASHINGTON, Dec. 10 — President Bush turned to Wall Street today and selected William H. Donaldson, a former head of the New York Stock Exchange, founder of a successful brokerage firm and longtime friend of the Bush family, to be the next chairman of the Securities & Exchange Commission.
At the same time, the president made a policy U-turn on the budget of the cash-starved agency and announced he would support an increase for 2004 that he said would be "nearly double" last year's budget.
Mr. Bush's selection of Mr. Donaldson and his announcement of the proposed budget increase seemed to be aimed at ensuring that the commission regains its footing by the 2004 elections. The moves came after sharp criticism from lawmakers and experts that the agency's turmoil had been caused by a leadership crisis, White House neglect and a lack of resources and staff.
Mr. Donaldson, 71, is a well-known figure on Wall Street, and a founder and the first dean of the management school at Yale University. Like many other top appointees of Mr. Bush, he served in the Nixon and Ford administrations.
On Monday, the president selected John W. Snow, chairman of the CSX Corporation, to be the next secretary of the Treasury.
In contrast to Mr. Pitt, a figure widely regarded as combative who made many enemies in Congress, Mr. Donaldson is seen as more polished, and his previous government service includes a diplomatic stint as an under secretary of state.
Mr. Donaldson said little today about his specific policy priorities after the year of corporate scandals and market turmoil.
"Confidence in the U.S. corporate and financial industries has been seriously eroded during the past few years," he said in a brief appearance with Mr. Bush in the Roosevelt Room of the White House. "Corporate managers, boards of directors, operators, regulators of our financial markets, as well as those who advise, including bankers and lawyers and accountants, must be constantly mindful of the trusts that shareholders have placed in them. Each of us must take that trust seriously."
"As my mother used to say many years ago, it's time for all of us to pull up our socks," he concluded.
SOURCE: http://www.nytimes.com
New team has economic past to live down - FT.com By Andrew Hill, James Harding and Alan Beattie, Dec. 10 2002
If the problem with the old economic team was that it could not control its mouth, the challenge for the new one is that it will have to choose its words with unusual care.
On the most sensitive economic and business issues facing the Bush administration - tax cuts and the deficit, corporate malfeasance, the confidence crisis in corporate America and, above all, the interests of other businesspeople - President George W. Bush's new appointees will have to step around some of the things they did and said in their former, executive lives.
William Donaldson, the Bush appointee to take over at the SEC, is the founder of a Wall Street investment firm still being investigated for offering analysts financial rewards tied to investment banking deals.
Stephen Friedman, whose name was touted early as a replacement for Larry Lindsey at the National Economic Council but who has yet to be formally nominated, was previously chairman of Goldman Sachs, one of the banks being investigated by Congress for its distribution of IPO shares to influential clients.
John Snow, Mr Bush's nominee to replace Paul O'Neill as Treasury secretary, is one of the US's best-connected corporate chieftains. The CSX chairman and chief executive sits on more boards - seven including the railroad company - than any other CEO in the country.
That makes Mr Snow a firm friend of corporate America, a position underlined by the fact that he is a former chairman of the Business Roundtable, the chief executives' lobby group, and a member of the executive committee of the Business Council, the invitation-only association of chief executives.
On Tuesday, praise from Leon Panetta, the chief of staff in Mr Clinton's White House, tarnished Mr Snow's reputation in the eyes of tax-cutting conservatives. Mr Snow was until earlier this year on the board of the Committee for a Responsible Federal Budget, a bi-partisan group aimed at fighting the deficit. Mr Panetta, the Democratic co-chairman of the group, said Mr Snow could not be described as a conservative, supply-side tax-cutter.
SOURCE: http://www.ft.com
Why Business Isn't Investing - Bloomberg
By Craig Torres, Dec. 9, 2002
So far, businesses haven't responded to resilient consumer spending with large investments in plants or equipment or by boosting payrolls. There are two reasons.
First, companies are meeting demand by squeezing more output per hour out of the U.S. workforce. Productivity growth averaged 5.7 percent over the past four quarters, "one of the largest advances, if not the largest, posted over the last 30 years," in the words of Fed Chairman Alan Greenspan.
Second, businesses don't want extra capacity or inventories should a war with Iraq prompt consumers to retrench suddenly.
"Nobody wanted to be caught with excess inventories with the prospect of an Iraq war on the horizon," said Kurt Karl, chief U.S. economist at Swiss Reinsurance Co, the world's second largest reinsurer.
SOURCE: http://www.bloomberg.com
"Fed Isn't Likely to Change Rates Tomorrow
Look out! Insiders are bailing - CNN/Money
December 10, 2002: By Paul R. La Monica
NEW YORK (CNN/Money) - The stock market's two month long upswing is starting to fizzle, leading investors to wonder if maybe this was just a trader's rally and not the start of a new bull market.
Skeptics have argued that stocks have moved higher simply because short sellers are closing out bearish bets and fund managers are chasing performance in order to boost their moribund year-to-date returns. Optimists point to an improving earnings and economic outlook.
But now there's another reason to think that this rally might be on its last legs. Corporate insiders, presumably the people who know the most about their companies, dumped shares aggressively last month. So much for a display of confidence by Corporate America.
According to Thomson Financial, insider selling skyrocketed 125 percent in November to $2,6 billion from $1.2 billion in October. Tech insiders were especially busy as the level of selling increased to $861 million from $244 million, a whopping 250 percent rise. And insider buying? That was up just 5 percent, to $193 million from $184 million.
Kevin Schwenger, insider research analyst with Thomson Financial, stops short of calling the recent selling a bearish sign, noting that there was about $13.71 in insider selling for each $1 of insider buying last month. Schwenger says that a ratio between $10 and $20 is usually a neutral indicator for the market.
SOURCE: http://www.cnnfn.com
[Ed. Note: Rich Spohr has some good advice for stock buyers... "At this present time, 'insiders' are selling 13 times more stock than they're buying. Oooooh.... Just look at those corporate whizbangs heading for the exits.... here's a link to 'insider' stock transactions. I hope you 'bookmark' it. I have a sneaking suspicion that this is one seldom-discussed economic fundamental indicator that might actually mean something."
Safety in second homes - Dallas Morning News
BY STEVE BROWN, Dec. 9, 2002
Americans seeking a haven from the ravages of the stock market are putting more of their money into second homes.
The number of buyers using money cashed out of securities to acquire second homes has more than doubled during the past two years, according to a study from the National Association of Realtors. Some economists predict the flight of capital from securities to property investments will continue.
"The stock market, I think, is going to continue to be weak," said Timothy Ryan, an economist and dean of the University of New Orleans' business college. "But baby boomers still have a lot of money to invest, and I think a lot of that will go into real estate."
Individual investors will re-evaluate their strategies when the securities market begins showing solid gains, Ryan told real estate agents. "I think baby boomers are still in love with the stock market."
Many second-home buyers are finding that their purchases are some of the best real estate buys they make, said Clark Thompson, president of California-based Escapehomes.com.
"It's like buying California real estate in the '70s," he said. "I really believe there are areas that will be phenomenal for investment."
The appeal is so strong that some second-home buyers are leveraging their first house to make the purchase, he said.
SOURCE: http://www.dallasnews.com
COMMENTARY
INVESTING OUTSIDE THE BOX - Craig Smith, CEO, SATC
Dec. 10, 2002
"If Not Stocks, What?" -Kiplinger's, January 2003 Issue
"If you're looking for winning alternatives to Wall Street, you'll find slim pickings," writes David Landis, in the January issue of Kiplinger's magazine.
Late last October, I took a call from David Landis who said he was writing a new article on investment alternatives to Wall Street for Kiplinger's. A hour later I hung up and hoped that I'd given him a clearer picture of how U.S. gold and silver coins can compliment a portfolio by offering tangible asset diversification and balance to a portfolio.
It appears that I was wrong. The only thing Mr. Landis chose to report to the public in his article was the "huge spread" between wholesale and retail prices of rare coins compared to stocks, concluding "we'll take our chances with stocks."
Incidentally, the writer did not seem to find many redemptive reasons to invest in anything except paper assets. All of the alternatives that he reviewed were knocked, including; art, rare coins, collectibles, grain, oil, livestock, precious metals, hedge funds and real estate.
True, all investments have risks that should be disclosed to investors before they jump into any market, including U.S. rare coins. And also true, the 14% to 28% wholesale to retail spread may seem high compared to stocks, bonds or mutual funds.
However, rare gold and silver coins can serve multiple purposes in a portfolio (insurance, privacy and growth) and when held a minimum of 2-3 years, often provide above average net returns.
For example, I recently spoke with a client (Mr. Redinger) who purchased a Walking Liberty Half Dollar in June 2001 for $900 net. In December 2002, he liquidated the same coin for $1,800 net. That is a 100% net return over 18 months. So, the 28% spread was of little concern because he bought the right coin at the right time and then sold it for a nice profit.
Many other examples of excellent growth can be found in the coin market today, like U.S. gold commemoratives (1903-1926). As a whole this market is up 75% since 1999, that's an average growth of 15% per year after all commissions/spreads. I need not remind you of the miserable performance of stocks over the same three year period... do I?
Other clients are more concerned with hedging their other paper assets (stocks, bonds, funds) and may not sell their coins for many years ... or decades. Do the "huge spreads" for high quality collectible coins bother them? Rarely, because they view their coin portfolio is a fire insurance, in that if their other assets perform well, they're happy, but if a protracted bear market or recession zaps the value of their paper assets, they're very happy that they hedged themselves with tangible assets like gold coins which usually move up.
For those who are scared of the "huge spreads" I also recommend buying gold and silver bullion coins, which have a small spread of just 5% or less. These products still offer a hedge from paper assets, but do not offer the same type of asset privacy and profit potential as rare coins.
The bottom line: Own stocks, bonds, mutual funds, bonds, CDs AND gold in one form or another, just in case. So, in answer to Mr. Landis' question, "If Not Stocks, What?" I say "Not Just Stocks, Gold!" Read the full story: 2003: Not Just Stocks, Gold!
2004 GLOBAL ECONOMY: BACK TO TREND (BARELY)- Stephen Roach, MS
Dec. 9, 2002
This is the time of the year when we stretch our collective imagination and peer another year into the future. Our first look at the world in 2004 points to a gradual improvement in the pace of global growth following two years of recession- like outcomes in 2001-02 and an anemic recovery in 2003. But it’s an improvement that barely gets the global economy back to its long-term trend rate of growth -- a most disappointing recovery by cyclical standards of the past. And it’s a recovery call that we make with considerable trepidation, for it perpetuates many of the imbalances that have built up the US-centric global economy over the past decade.
Our forecast for world GDP growth in 2003 remains unchanged at 3.0% -- a modest improvement from average gains of 2.1% estimated over the 2001-02 interval. By way of comparison, anything below the 2.5% global growth threshold is generally considered to be a recession in the world economy. By that metric, we reckon next year will mark the first year of recovery from a two-year global recession. Our first cut at 2004 calls for world GDP growth to accelerate further to 3.9%, fully 30% faster than gains estimated for 2003 and, in fact, the fastest year of global growth in four years. While seemingly vigorous by comparison with gains in recent years, our 2004 prognosis hardly qualifies as a year of rapid growth; that’s especially true when judged against the world economy’s trend rate of growth that has averaged 3.6% since 1970. Our initial estimate for 2004, therefore, can be characterized as only fractionally above trend -- symptomatic of a global economy that continues to struggle after three of the most anemic years of growth on record.
While such subdued price pressures still stop short of outright global deflation, the risks, in my view, remain very much skewed in that direction. Three forces are at work -- the first being the cyclical pressures of a still wide global "output gap." Second is the lingering excess capacity sparked by the bubble-induced surge of capital spending in the late 1990s. And third are the powerful forces of globalization -- increased global supply in goods and services, alike, exerting ever-powerful impacts on pricing leverage in increasingly open economies around the world. In the subdued global growth climate we envision through 2004, aggregate demand growth will remain sluggish, at best -- insufficient to outweigh the persistent excesses on the supply side of the equation. For that reason, alone, deflationary risks can hardly be expected to vanish into thin air -- despite our expectations of increasingly aggressive reflationary policy actions by monetary and fiscal authorities around the world. The jury is out, in my view, on the key issue of policy traction at low levels of inflation and nominal interest rates.
SOURCE: http://www.morganstanley.com
FIGHTING DEFLATION AT PT. BLANK RANGE - John Mauldin, Wave2000
Dec. 6, 2002
As Stephen Roach continually and adeptly points out, "Guns are blazing on the anti-deflation front.....The full force of the global policy arsenal now seems aimed at arresting deflation. And that's very good news.....The bad news is that there's no guarantee the medicine will work. Policy traction is most difficult to achieve at low levels of inflation and nominal interest rates. Just ask Japan. In the case of the US economy, stabilization policies typically work their charm on three sectors - consumer durables, homebuilding, and business capital spending. With all three sectors having gone to excess in recent years, any response to policy stimulus could be surprisingly muted....History tells us that deflationary remedies must be administered early and aggressively. Only time will tell if it already isn't too late."
Let's look at why he may be right. American families used mortgage refinancing to pull cash from their homes at a record 12.2% annual pace in the third quarter, and household debt climbed at a 9.6% pace, substantially faster than in the hottest years of the 1990s boom. (LA Times) While this partially helped fuel a 4% GDP growth in the third quarter, it doesn't seem to be doing much for this quarter.
We may be coming to the end of the mortgage financing merry- go-round. "Homeowners will take out $751 billion in home loans next year to repay older, costlier debt, often taking cash out of equity in their homes, the Mortgage Bankers Association estimated. That would be just over half the projected record of $1.4 trillion this year and down from $1.2 trillion in 2001."
If it takes record re-financing to maintain consumer spending growth, yet by all appearances this will be a weak Christmas (except for Wal-Mart and other discounters), then what does that bode for 2003? If less money is taken out of home equity by consumers in 2003, where is the impetus/stimulus for growth coming from?
Home prices showed just a 0.84% rise in the third quarter (Dow Jones Newswire). While US factory orders rose 1.5% last month, the overall ISM manufacturing index still is not growing. Capacity utilization is still hovering in the mid- 70's, a very poor showing. While business spending does show some signs of improving, it is from a very low level.
I acknowledge that all the stimulus will have an effect, but I think it is far more likely to simply keep us in the mode of the Muddle Through Economy than to propel us back to the future of 4-5% annual growth.
Inflation? What Inflation?
Now let us examine the possibility that inflation comes roaring back. Marshall Auerback/for Prudent Bear gives us a convincing article that shows that the recent rise in inflation is not what it seems.
Quoting Stephen Perlstein in the Washington Post: "Government statistics show that average prices for products have declined in the past year, including those of cars, clothing, computers, furniture, gasoline and heating oil. So, too, have the prices for services such as telephones, hotel rooms and airplane tickets, even as costs for other services such as health care, housing, education and cable television continued to rise. The broadest measure of prices in the economy shows they rose less than 1 percent during the 12 months that ended in September, the smallest increase in 50 years."
Merrill Lynch economist David Rosenberg "has noted that if it were not for a handful of items that comprise a mere 7 per cent of the CPI - auto insurance premiums (+9.5% y-o-y), tobacco (+9.2% y-o-y), hospital services (+9.0% y-o-y), and tuition (+6.5% y-o-y), the US inflation rate would already be running below the one per cent level."
Auerbach quotes extensive data to show that corporate profits are sustained by cost-cutting rather than profits from operations. For cost-cutting substitute job lay-offs. This is what contributes to today's "surprise" rise in unemployment to 6% (predicted in this column months ago). It is also why productivity improved. There are fewer workers producing the same amount of goods.
In short, there is no incipient inflation in the corporate world, expect for isolated sectors. Granted, these sectors are big when you are buying their products, but with the exception of health care, they are not big employers nor are they exceptionally profitable.
So what is a Fed to do as they are seemingly between a rock and a hard place? I still strongly believe, as I wrote almost two years ago, that rGreenspan has raised rates for the last time in his career. They need to fight deflation and still keep from igniting enough inflation that they are forced to raise rates. If mortgage rates are allowed to rise, it will choke off the growth or even the stability of the housing and consumer sectors.
The clue for me is in Bernanke's speech: they are going to try and bring down long term rates (see last week's letter for an explanation of how). They will try to keep the economy moving along through what Greenspan calls a "soft patch" and what I call the Muddle Through Economy, all the while hoping that business spending picks up. They will continue to grow the money supply at the present high rate, but I do not think it will be enough to stimulate inflation, unless they really step up the pace.
If they do that (bring back 4% or more inflation), then long term rates shoot through the roof, which aborts even my Muddle Through Economy. They cannot risk that. If they do, and overshoot, which as Gross notes is typically what happens, then the implications for the economy are very negative. They are, therefore, left with working on the long end of the rate curve.
So who is right? Have we seen the lows for interest rates as Gross suggests? Or are we headed lower?
Let me first state that I agree with Gross that inflation is in our future. As for how much, I think it is likely they will overshoot. (Just for the record, I do not think we are in for hyperinflation, as some suggest.) I believe the statements from the Fed accurately reflect their intentions.
The disagreement is as to when the inflation starts. Gross thinks sooner rather than later. I think later rather than sooner. Still, I would caution readers to not bet more than a very modest part of their portfolio on my view of the Fed's likely aggressive action to lower long term rates. It is not altogether clear that just because the Fed attempts to lower long term rates while avoiding deflation that they will be successful.
SOURCE: http://www.wave2000.com
US EQUITY FUNDS SUFFER RECORD OUTFLOW IN 2002 - FT.com
By Julie Earle, Dec. 9, 2002
This year was one the US mutual fund industry would probably rather forget. Investors have pulled nearly $100bn net from US equity funds in the year to date, the biggest outflow ever in dollar terms.
According to early estimates from Merrill Lynch, $97bn flowed out of US equity mutual funds in the past five months alone, including an estimated $7.7bn in October. During the first half of the year, inflows and outflows were fairly evenly balanced.
Merrill estimated there would be small equity fund inflows of $13bn for November, as stock markets rallied.
The worst month was July, when investors pulled a record net $52bn out of funds as scandals such as WorldCom and Enron weighed on the market.
SOURCE: http://www.ft.com
PAT BOONE IS BACK ON THE CHARTS - Marc Silver, USN&WR
December 5, 2002
Who's the boy singer du jour? Pat Boone, age 68. His new single, "Under God," leapt from No. 35 to No. 20 on Billboard's Hot 100 sales chart last week. The impassioned power ballad endorses the deity's role in the Pledge of Allegiance.
Your single is outselling Ja Rule's "Thug Lovin'." Does that surprise you?
BOONE: That makes my day. I've been so chagrined to see the stuff in the Top 10 – gangsta rap and salacious themes that I feel have been dragging middle America into the ghetto.
Would you ever record a rap song?
BOONE: I've actually written a rap song called "Backbone." I'll do the singing and Kool Moe Dee will do the rap. It addresses the three plagues killing young people: drugs, violence, disease-producing promiscuity. The answer to all three is individual backbone.
Anything you wouldn't sing?
BOONE: I'm not going to do songs that call women bitches and ho's.
Any advice for up-and-coming singers?
BOONE: Make God your agent. I prayed about being a singer, and opportunities have been put in my lap. You think God gave me "Ain't That a Shame" to sing and "Tutti Frutti?" Yes, I do.
SOURCE: http://www.usnews.com
LINKS: Read the lyrics and listen to a clip of Boone's new song "Under God"
Rediscover Gold with Pat Boone
ABOUT THE EDITOR David Bradshaw is the editor of Swiss America's Market News Digest and Real Money Perspectives. He is the founder of Idea Factory Press... publisher of Rediscovering Gold in the 21st Century... and The Big Picture... Contact at ideaman@swissamerica.com
|
|
