THE DOLLAR CRISIS

Dec 12, 2003


MARKET NEWS DIGEST


->U.S. Trade Deficit Widened to $41.8B in Oct. -Bloomberg
->Dow conquers 10K -CNNfn
->SEC to tackle bond fund mispricing -FT
->Greenspan's Dilemma: balance on narrow path -USA Today
->China May Need to End Currency Peg to Dollar -Bloomberg
->Gold rises on weak dollar, platinum flies -Reuters
->Gold Rally as Haven From $ Decline, Terrorism -Bloomberg
->Dow 10,000 is irrelevant -MSN, By Bill Fleckenstein
->Dollar Falls to Record Versus Euro -Bloomberg
->White House sees '04 growth over 4% -CBS.MW
->Taiwan Plays Middle Between U.S., China -ABC News


COMMENTARY

->2004 INVESTOR RESOLUTIONS: -Craig R. Smith, CEO SATC
->The Dollar Crisis -Robert Blumen, Mises.org
->“We ain’t seen nuthin’ yet.” -The Gold Report
->Bush Can't Say `Mission Accomplished' on Economy -Sperling
->GREAT EXPECTATIONS -Bill Bonner, Daily Reckoning
->THE PAPER CHASE -Jim Sinclair, JSMineset.com
->The Problem With Assumptions -John Mauldin, FLT
->John Templeton's Warning to EQUITIES Readers -Mark Lebovit
->The Mutual Fund Scandal's Next Chapter - NY Times
->FDR fanciers flip over GOP plan for Reagan dime - PSN


Quotes of the Week from . . . ALAN GREENSPAN on GOLD.


"If you want to know where interest rates are going, watch gold."

* * *

"The soundness of a nation's currency is essential to the soundness of its economy."

* * *

"An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense-perhaps more clearly and subtly than many consistent defenders of laissez-faire -- that gold and economic freedom are inseparable."

* * *

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value."

* * *

"Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights."

* * *

READ: 1966 classic Greenspan Essay, "Gold and Economic Freedom"
Read more from the Greenspan Archives


SPECIAL OFFER -- Read the full Greenspan article along with dozens of other respected economists as they discuss the economy, stocks the dollar and gold looking ahead toward 2004 ... Free review copy of THE NEW GOLD RUSH, PT. II: THE COLOR OF HOPE


MARKET NEWS DIGEST


U.S. Trade Deficit Widened to $41.8B in Oct. as Imports Rose -Bloomberg

Dec. 12 (Bloomberg) -- The U.S. trade deficit widened in October on record imports, led by demand for consumer goods, motor vehicles and business equipment.

The $41.8 billion excess in goods and services imports over U.S. exports followed a $41.3 billion gap in September, the Commerce Department said in Washington. The trade gap with China grew to $13.6 billion, the widest ever, as a record level of imports outweighed record exports.

The increase in imports indicates optimism among companies about the economy, which expanded in the third quarter at the fastest pace in two decades. Retail sales grew 0.9 percent last month, the most since August, the department said yesterday, and business inventories grew for a second straight month, a sign that companies were stockpiling goods.

"In the next few months trade deficits are going to blow out more than people think," said Ian Morris, chief U.S. economist for HSBC Securities USA Inc., a unit of HSBC Holdings Plc, before the report.

http://www.bloomberg.com


Dow conquers 10K -CNNfn
Industrial average crosses key psychological barrier.
December 11, 2003: By Alexandra Twin, CNN/Money Staff Writer

NEW YORK (CNN/Money) - The Dow closed above 10,000, a key psychological barrier, for the first time in more than 18 months Thursday as part of a broad market rally.

Unlike its two failed attempts Tuesday, ahead of the Federal Reserve's monetary policy announcement, this time the Dow Jones industrial average (up 86.30 to 10008.16) was able to cross the 10,000 level and hold it through the close. The last time the Dow closed above 10,000 was May 24, 2002, when it closed at 10,104.26.

http://www.cnnfn.com

[Ed. Note: Wall Street cheered the news that consumers continued to spend, spend, spend in November ... "The tax cuts and rate cuts have done their work. Americans have gone deeper into debt... while believing they were getting richer," says Daily Reckoning's Bill Bonner. Forgive us if we view the hubbub over Dow 10k with the same distrust as the last two times in stepped into the clouds -- in 1999 and in 2002. Why should we party like it's 1999 when the odds are so good that it's another bear market rally trap? Read "Dow 10,000 Irrelevant" below]


SEC to tackle bond fund mispricing -FT
By Deborah Brewster, December 10, 2003

The Securities and Exchange Commission is poised to lay civil charges against a high-yield bond fund amid mounting concern over mispricing of bond holdings by hedge and mutual funds.

US regulators believe that mispricing of bonds allows active traders to take advantage of "stale prices" at the expense of ordinary investors.

The SEC move represents a further widening of the crackdown on mutual fund trading abuses that has rocked the $7,000bn industry.

The valuation problem was underlined on Wednesday when Freddie Mac was ordered to paid $125m for manipulating its earnings over the past three years.

Freddie Mac makes money from packaging mortgage-backed securities, which, along with municipal and high-yield bonds and asset-backed securities, are especially prone to mispricing.

"Where there is room for mis-pricing, there is room for fraud."

http://www.ft.com


Greenspan's Dilemma: balance on narrow path -USA Today
By Barbara Hagenbaugh, USA TODAY
Dec. 10, 2003

WASHINGTON — Federal Reserve Chairman Alan Greenspan is facing a difficult test as he seeks to temper expectations for quick interest rate increases despite an improving economy — the usual trigger for higher rates. His success is crucial for the economy. If investors anticipate sharp interest rate gains, they will likely drive up long-term bond yields to offset the expected higher interest rates.

Long-term yields influence borrowing costs in many parts of the economy. If rising yields lead to higher interest rates at banks and other lenders, a sharp slowdown in borrowing could take steam out of the recovery just as it seems to be gathering strength. It would be an especially big problem if higher rates lead to a slowdown in mortgage borrowing and refinancing, key areas of support for the economy in recent years.

"They're in a dicey situation," says William Hummer, chief economist at Wayne Hummer Investments. "There's a war raging between expectations and real events. The last thing they want is a spike in rates."

http://www.usatoday.com


Greenspan: China May Need to End Currency Peg to Dollar -Bloomberg

Dec. 11 (Bloomberg) -- China may need to end its currency peg to the U.S. dollar in order to keep its economy from overheating, not because such a shift would lead to more U.S. jobs and exports, Federal Reserve Chairman Alan Greenspan said.

U.S. manufacturers and lawmakers have complained that China's 9-year policy of keeping the value of the yuan, or renminbi, close to 8.3 to the dollar gives the world's most populous nation an unfair trading advantage which has fueled U.S. job losses and a record trade deficit.

In a speech to the World Affairs Council of Dallas, Greenspan suggested that wouldn't be the case. A revaluation of the yuan, as the Bush administration has demanded, would more likely simply transfer production to other low-wage countries.

``A rise in the value of the renminbi would be unlikely to have much, if any, effect on aggregate employment in the United States,'' Greenspan said.

http://www.bloomberg.com


Gold rises on weak dollar, platinum flies -Reuters
December 12, 2003

LONDON, Dec 12 (Reuters) - Gold prices firmed on Friday morning in Europe as the dollar moved near to record lows against the euro, while market attention focused on U.S. trade data and the United States wide current account deficit.

Concern that the world's biggest economy will find it increasingly difficult to find funds to finance its deficit has knocked the dollar, highlighting the precious metal's potential as a hedge against economic uncertainty. A weaker dollar also makes bullion less expensive for holders of other currencies.

Platinum also flew up to reach a new 23-year high of $819 on speculative buying in thin conditions.

Dealers said gold volumes were relatively quiet after bullion sprinted to its highest point in almost eight years on Wednesday at $411.70, but the bull market was still very much intact.

http://www.retuers.com

[Ed. Note: MUST READ: If you missed THE GOLDEN MEGATREND, the latest from The Aden Sisters and The $400 Gold Rush Has Arrived by Craig Smith]


Gold May Extend Rally as Haven From Dollar's Decline, Terrorism -Bloomberg

Dec. 9 (Bloomberg) -- Gold may extend a rally that has driven prices to more than $400 an ounce, a seven-year high, as the dollar's decline and the threat of terrorism spur investors to turn to the metal as a haven.

``Having a position in gold gives you protection in a difficult financial period,'' said John Hathaway, who this year added bullion to the $750 million in gold-related funds he manages at Tocqueville Asset Management LP in New York. ``It's like taking out insurance.''

Gold futures volumes on the Comex division of the New York Mercantile Exchange totaled a record 1.4 million contracts in November, the exchange said. Investor interest prompted Gold Bullion Securities Ltd. to list on the London Stock Exchange today, enabling gold trading on the bourse for the first time.

Gold, up almost 50 percent in the past two years, may rise further as a weaker U.S. currency makes the metal cheaper for buyers in Europe and Asia, and as investors hedge against declines in the value of U.S. assets.

``An ounce of gold should always be the price of a good suit and that's around $599,'' said Frank Holmes, who manages $150 million in gold-related funds at U.S. Global Investors Inc. ``It's got a way to go yet.''

FULL STORY

[NEWS FLASH: 12/9/03: CNBC interviewed Frank Holmes, the head of U.S. Global Investors. They asked Frank about the future of gold. He said the dropping U.S. dollar and the Chinese applying to the Shanghai Gold Exchange to offer gold to their clients have put a lot of upward pressure on gold prices. He also said 5-10% of a portfolio should be in gold -- in the form of "gold coins" and no load gold mutual funds. He predicted gold prices would continue to go up to at least $450 to $500 ... and that "gold is in a long-term secular bull market." Sound familiar?]


Dow 10,000 is irrelevant -MSN, By Bill Fleckenstein
Dec. 1, 2003

The index tells very little about stocks and not nearly enough about value. Dow stocks and stocks in general are priced for a perfect world -- in a world that's far from perfect.

What does Dow 10,000 tell us? By itself, nothing. Without other information, the price alone is irrelevant. It's like saying that a bond trades at par. Without knowing the coupon, there's no way of determining whether it's attractive or not. If the coupon rate on a bond were 1%, you'd probably have little interest, but if it were 10%, you might be very interested.

So it is with stocks (or an index of stocks, like the Dow ($INDU)). At one level of earnings, a particular price might seem expensive. At another, higher level of earnings, the same price might be very attractive. That so many people focus just on the price of an index like the Dow and not on the value underlying the index speaks volumes about how speculative the current investment environment continues to be. A bond can't be evaluated only by knowing its price, and neither can a stock or an index.

Yet, far too many people continue to focus only on price and other sound bites, including:

* The market will experience a seasonal rally.
* The market goes up in the third year of a presidential-election cycle.
* The stock is up because the company beat the estimates.

None of that has anything to do with investing. It's just speculating.

The real key is value

Since the market peaked in 2000, millions of people have suffered large losses, discovering that notions like stock splits, Internet companies and other "great" concepts ultimately do not yield profitable results. And yet today, too many people still know the price of everything and the value of nothing.

Investing is about buying value and building a margin of safety. The Dow at 10,000 offers neither.

The Dow's price-to-earnings ratio (P/E) is somewhere between 20 and 25, the S&P 500's ($INX) is between 25 and 30, and the Nasdaq ($COMPX) comes in at around 195. We can't say exactly what these ratios are, because it depends on how exactly we want to calculate trailing earnings. Generally, we have a pretty good idea about the past, while we don't often have a very good idea about the future. (On Wall Street, it seems, folks are always certain that the future will produce higher earnings, even though the future doesn't always cooperate.)

Future? It's even hard to tell the past ... FULL STORY
Read more by Bill Fleckenstein


White House sees '04 growth over 4% -CBS.MW
By Corbett B. Daly, CBS Marketwatch
Dec. 7, 2003

WASHINGTON (CBS.MW) -- President Bush believes the economy's growth next year will top 4 percent, White House Chief of Staff Andrew Card said Sunday. "We are going to find next year's growth to be in the neighborhood of 4 percent, 4.4 percent," Card said in a television interview with Fox News Sunday.

On Friday, the Labor Department reported that the unemployment rate fell to 5.9 percent as the economy created 57,000 jobs in November, significantly lower than the 140,000 increase predicted by economists polled by CBS MarketWatch.

Asked when the economy would begin to create 200,000 jobs per month, the figure economists see as critical to bring the unemployment rate down significantly, Card said "I actually think we are poised for more significant growth and the economists are predicting that next year we will have significant (job) growth as compared to the last year."

http://www.cbs.marketwatch.com


Taiwan Plays Middle Between U.S., China -ABC News

Dec 10, 2003

TAIPEI, Taiwan — The Taiwanese president's plan seemed clever at first: Excite voters, embarrass rival China and make history by holding Taiwan's first islandwide referendum a vote about whether the massive Chinese military should stop pointing hundreds of missiles at the tiny island.

The program began unraveling quickly when one of Taiwan's biggest supporters, President Bush, expressed serious concerns on Tuesday. Now, there's talk that the unpredictable Taiwanese leader pushed too hard, and the referendum could be in jeopardy.

The events highlight a political reality for Taiwan: China can be boldly challenged, but America shouldn't be messed with. As the most important power broker in the Taiwan Strait, Washington's words count the most.

Bush's warning marked the sharpest U.S. rebuke of President Chen Shui-bian since the former Taipei mayor was elected nearly four years ago. The most stinging thing about it was that Bush dressed down Chen while China's new premier, Wen Jiabao, sat by his side in the White House.

Although Bush didn't specifically oppose the referendum planned for March 20 the same day Chen seeks re-election the president warned that he opposes "any unilateral decision by either China or Taiwan to change the status quo."

Taiwan got the message. Any referendum threatens to shake the delicate balance across the 100-mile-wide Taiwan Strait.

Beijing believes self-ruled Taiwan is part of China, and it fears the Taiwanese might vote to reject this sacred belief and chose a permanent split. So for China, even referendums on mundane issues pose a threat of leading to an independence vote which Beijing has threatened to use force to stop.

A war could quickly involve the United States, which has defended Taiwan before.

FULL STORY

Related Stories
Economic relationship playing key role in Sino-US ties -News Asia, 12-7-03

Read more about China at SwissAmerica.com


COMMENTARY


NEW YEARS RESOLUTIONS: 2004 -Craig R. Smith, CEO SATC
Dec 5, 2003

1) I WILL NO LONGER TRUST IN THE U.S. DOLLAR AS A STORE OF VALUE -- ONLY GOLD IS 100% TRUSTWORTHY.

Many foreigners who have traditionally relied on the U.S. dollar as a store of value are not so sure any more. They are looking for a place to put both their confidence and their wealth. Will they turn to the yen... the yuan... the pound...the mark...the franc ... or the dollar? That is the big question, but here's the problem... all currencies have some risk, except one ... GOLD!

This growing international confidence crisis helps to explain why so many investors are turning to gold as the currency of last resort. Gold will not lose it's buying power over time, it is stable, liquid and the ultimate world standard of value.

This decision to 'go for the gold' is just common sense now and will accelerate globally in 2004. Why take a risk on any paper currency when you can convert to a no- risk position in gold. No contest!

American investors still have a fixation on perceived "high returns," but foreigners know better. History has shown them over and over again the devastation that results from watching paper currencies become worthless ... something gold has never done in 6,000 years of history.

2) I WILL NO LONGER TRUST GOVERNMENT TO SOLVE OUR DEBT/DEFICIT CRISIS -- REGARDLESS OF POLITICAL PARTY...

FULL STORY


The Dollar Crisis -Robert Blumen, Mises.org
December 9, 2003

The current international monetary system, based on floating fiat currencies, brings about tremendous distortions which inevitably must be corrected. This much has been known to Austrians for some time. Awareness is now starting to spread to mainstream economists.

Under the current system, the United States year after year imports goods from the rest of the world for consumption and pays for them with dollars. The dollars are then used by foreign central banks to purchase debt instruments from either the Fed or the private sector, in addition to U.S. stocks and real estate. Where these are treasury securities, they are created out of nothing, requiring no savings by any American consumer.

Under this arrangement, Americans are now freed from the ponderous burden of saving and the onerous requirement of first producing in order to later consume. Their consumption is offset by a growing indebtedness of the private sector and the Fed to foreigners. This state of affairs is unsustainable, and will come to an end with a deep fall in the exchange value of the dollar relative to other currencies. That is the argument of a provocative new book, The Dollar Crisis: Causes, Consequences, Cure by Richard Duncan.

A theme of the work is that the automatic adjustment mechanism of the gold standard has ceased to function in the modern world. As a direct result, we have suffered an "explosion of credit creation that has destabilized the global economy." Central bank holdings of "reserve assets," which now consist mostly of debt securities such as other central bank securities (backed up only by the taxing power of the sponsoring government), have soared to staggering heights from the relatively modest levels of the 60s.

The system of floating exchange rates between fiat currencies has put the U.S. in the historically unique position of having the largest trade deficits in history, and of being able "to finance its growing level of indebtedness to the rest of the world by issuing debt instruments denominated in its own currency." By 2001, Duncan notes, the U.S. trade deficit was larger than the entire GDP of all but 13 countries.

Unlike gold, which can only be extracted from the earth with great difficulty, these assets can be created with relative ease or in the case of treasury debt with no effort at all.[5] Under the fiat dollar standard, there is no adjustment mechanism short of a crisis such as a hyperinflation or a debt default implosion that can rebalance world trade.

Duncan writes, "How much longer will the rest of the world be willing to accept debt instruments from the United States in exchange for real goods and services? It is only a matter of time before the United States will no longer be considered creditworthy. It is only a matter of time before the United States will not be creditworthy." The dollar must collapse, forecasts Duncan, because it will become impossible for the U.S. to continue to sell one-half trillion dollars worth of debt securities each year (the amount required to offset the trade deficit) for very much longer.

FULL STORY
Read more from the Mises Archives at SA.com


“We ain’t seen nuthin’ yet.” -The Gold Report
12/10/2003

“We think the bull market in gold has only just begun,” says the author of J. Taylor’s Gold & Technology Stocks Newsletter. “First of all gold has been so severely depressed that even if we had a healthy global economy, it could easily rise another $200 before it became fully priced. However, the world has no end of economic problems, . . . Therefore we think something more like a $3,000 gold price is a kind of number that is even more realistic than Frank Veneroso’s estimate of a $600 “commodity price” for gold, during the best of times, during the second half of the 1990s.”

Doug Casey, author Doug Casey’s International Speculator, believes we’ve only just entered into the second stage of the big bull market. By the time we get to the third and final stage – which Casey says is a couple of years away yet -- “The public will be chasing these things the way they ran after Internet stocks. How do I know? Because I’ve been in this market for thirty years, and I’ve seen it happen five times in the past (1973, 1980, 1983, 1987, and 1996, to be precise as to the peak years). But this one will be the biggest of them all, because not only will gold (and commodities in general) be running, but the public, trained by the 1983-2000 bull market, all have brokerage accounts, and will be looking for the next hot sector. And the gold/resource story will tell exceedingly well. What’s coming up is going to be a mania for the record books.”

Gold analysts have consistently pointed to the weakening U.S. dollar as one of the key drivers behind the latest gold rush. In a much ballyhooed article that appeared recently in Fortune magazine, Warren Buffett caused a stir by telling readers that for the first time in 72 years, Berkshire Hathaway was investing in foreign currencies.

Buffett’s article prompted this response from James Turk, of the Freemarket Gold & Money Report: “This is BIG!!! In the past couple of years a number of respected leaders in finance and investing have recommended diversifying out of the US dollar. They include Soros and Templeton, and now Buffett has joined the parade. For the first time in his life, this top name of finance is betting against the US dollar.

“The trend for the dollar is turning, and its outlook is getting increasingly worse. Consequently, it is necessary to diversify out of the dollar, or as Buffett puts it, ‘to build an ark.’

Is Buffett buying gold? “Buffett does not say in the Fortune article precisely what his ark looks like,” writes Turk. “However, one can assume that he has the euro and perhaps the currencies of the commodity producing countries like Canada and Australia. And when you read between the lines of what he is saying, one has to wonder if he is not buying gold too?”

What does the latest buzz about gold mean for investors in gold stocks? Casey points out that the gold stocks on his monitored list rose 18.74% in November. Some analysts warn that now is not the time to try to turn a fast buck in the market.

“. . . the gold market has had quite a run, and quite a few well-known newsletter writers, especially those who approach the market using technical analysis, are suggesting it may be time to take some gold share profits,” says Taylor. “True, markets never go straight up, even in a bull market. However, when the primary trend is a bull market, it can be very dangerous to try to pick tops to exit and bottoms to reenter. More often than not, folks who try to trade end up missing the next big move upward during a primary bull market. Either the price of the item never declines significantly to get you back in or if it does, getting back in at the right time is never easy because you may be tempted to want a still-cheaper price.”

Taylor says he doesn’t care how good a technical analyst you are, it’s very difficult to win consistently in the trading game. “Remember, only about 10% of traders make money consistently. My view and my strategy for this newsletter is to ride the primary trends with little worry about trading in and out of the various moves within the primary trend. To be sure, we will make judgment calls from time to time on whether to buy or sell individual stocks. But as long as we are convinced we are in a bull market, we will continue to own and add to our positions on the long side of the market in question. Likewise, when we are convinced the primary trend is a bear market, we will either be out of the market in question entirely or when a means of shorting the market is available . . , we will continue to trade from the short side.”

The Gold Report


Bush Can't Say `Mission Accomplished' on Economy -Gene Sperling

Dec. 4 (Bloomberg) -- A recent spate of good news for the U.S. economy has led some commentators and policy makers to claim ``mission accomplished'' on a strong recovery.

News of each positive indicator has been met with the same refrains: Growth is back for good, the economy is no longer a political issue, and the trend is vindication of the Bush administration's economic strategy.

Consider some of the newspaper headlines following October's addition of 126,000 jobs to the economy:

``Economists Hail Increase in Payroll Figure as Sign that Growth is Finally Feeding Through to the Labor Market,'' read the front-page headline of the Financial Times. ``Bush Takes Pride in the Signs of Economic Turnaround,'' was the headline on a Los Angeles Times article. ``Employment News Hailed as the Missing Ingredient in Recovery,'' announced the front page of the Dallas Morning News.

While October's job growth was certainly good news compared with almost three years of job losses, we need to put this and other economic numbers in perspective.

The Numbers

Let's start with the basic fact that even with the recent job additions, the first two years of this recovery -- from the end of the recession in November 2001 to the most recent job report for October 2003 -- represent the worst period of job growth in any U.S. recovery on record since 1939.

Since we are still down 2.3 million jobs and nearly 3 million private sector jobs since January 20, 2001, when President George W. Bush took office, it will take a great jobs expansion to prevent Bush from being the first president to preside over net job loss since Herbert Hoover.

What if we wipe the slate clean? Shouldn't those of us who comment on the economy be willing to put aside the last two years and simply celebrate a job gain of 126,000 as a sign that the U.S. job machine is humming again?

One problem: While an addition of 126,000 jobs is better than a loss, it represents anemic job growth for any month during an economic recovery. Indeed, it would have been the fifth worst month of job growth in the 48 months of President Bill Clinton's first term.

A Growth Signal?

If we assume that October's ``impressive'' job growth continues for an entire year from November 2003 to October 2004, it would still amount to the worst third year of a recovery since 1958.

Even if the release of tomorrow's job numbers shows an increase of 180,000 or more in November, which would be an average for October and November of about 150,000 additional jobs, if extrapolated over the entire year, it would continue to represent an unusually weak third year of recovery by historical standards.

Yet could these modest employment increases signal the type of job growth we saw in the 1990s, which would include new labor market entrants and the millions who are still out of work? Every American should hope so, but it's way too early to tell.

While some of the job growth hype can be forgiven as political spin and an earnest hope for better times, the notion that it in some way vindicates the Bush administration's long- term fiscal policy is flat wrong.

New Standard?

Could it be that our new standard for judging the success of economic policy implemented by the White House is that no matter how weak the economy is, any recovery sign is an immediate slam- dunk validation?

FULL STORY


GREAT EXPECTATIONS -Bill Bonner, Daily Reckoning
Dec. 9, 2003

"Truth, like gold, is to be obtained not by its growth, but by washing away from it all that is not gold." -- Leo Tolstoy

We wander. And we wonder. Whither gold, we ask? We have already given you our conclusion. We don't know if gold will go up or not, but it ought to do so.

Today, we take another look at 'ought' - and hope to discover more of life's secrets.

If 'Ought' were a person, it would not be a bartender or a good-hearted whore. Ought is not the kind of word you would want to hang out with on a Saturday night... or relax with at home - for it would always be reminding you to take out the trash or fix the garage door.

If it were a Latin noun, Ought would be feminine, but more like a wife than a mistress. For Ought is judgmental... a nag, a scold. Even the sound of it is sharp... it comes up from the throat like a dagger and heads right for soft tissue, remembering the location of weak spots and raw nerves for many years.

Ought is neither a good-time girl nor boom-time companion, but more like the I-told-you-so who hands you aspirin on Sunday morning... tells you what a fool you were... and warns you what will happen if you keep it up. "You get what you deserve," she reminds you.

A man who lets himself be bossed around by Ought is no man at all, in our opinion. He is a dullard, a wimp, and a wuss... a logical, rational, reasonable lump. Thankfully, most men, most of the time, will not readily submit.

Instead, they do not what they ought to do, but what they want to do. Stirred up by mob sentiments or private desires, they make fools of themselves regularly. Besides, they can't help themselves.

Of course, Ms. Ought is right; they get what they deserve. But sometimes it is worth it.

Modern economists no longer believe in 'ought'. They don't appreciate her moral tone and try to ignore her. To them, the economy is a giant machine with no soul, no heart... no right and no wrong. It is just a matter of mastering the knobs and levers.

The nature of the economists' trade has changed completely in the last 200 years. Had he handed out business cards, Adam Smith's would have borne the professional inscription: Moral Philosopher, not Economist. Smith saw God's 'invisible hand' in the workings of the marketplace. Trying to understand how it worked, he looked for the 'Oughts' everywhere. Everywhere and always people get what they deserve, Smith might have said. And if not... they ought to!

Today, the 'Ought to' school of economics has few students and fewer teachers. Only here at the Daily Reckoning is the flame still alive, flickering. Most economists consider it only one step removed from sorcery.

FULL STORY

P.S. From Eric Fry ...So often have the editors of the Daily Reckoning cautioned against owning dollars and suggested buying gold that the advice has become a kind of liturgy. Dollar-selling and gold-buying are articles of faith. Gold's ascension above $400 an ounce, therefore, is almost a religious experience. $400 gold has arrived as prophesied, and the faithful are exultant. The world's one and only true currency is finally overthrowing the false monetary idols like the U.S. dollar.

[Ed. Note: Read my review of "the most dangerous book of 2003": Financial Reckoning Day!


THE PAPER CHASE -Jim Sinclair, JSMineset.com
Dec. 8, 2003

There is hardly more important news for the Gold Community today than the recently announced figures that show overseas entities are no longer major buyers of US Treasury paper.

Over the weekend, more fuel was added to this bonfire after a report by Reuters said the pace of withdrawals from deposit accounts in the United States by OPEC countries is accelerating significantly.

OPEC has ceased to fund the spending that has fostered the economic recovery in the US and Asia as a whole is increasingly unwilling to finance our consumer base.

The seriousness of the most recent report concerning withdrawals shows that the financing of the US recovery - and therefore the impetus to world economic recovery - has shifted into reverse as OPEC repatriates record funds from the US and therefore as an adjunct from the US dollar.

This is seriously bad news for an economic recovery in the US which is largely a product of two increasingly expensive wars that have produced huge amounts of fiscal stimulation and monetary super-charging to finance them. This is awful news for the bond market and the value of the US dollar.

BIS (Bank for International Settlements) data shows that Saudi Arabia has removed $12.2 billion US dollars in the latest report as of the second quarter of 2003. Total draw-downs were $13.6 billion US dollars versus $5.2 bullion US dollars in the first quarter. This means that the water is flowing over the dam and soon there will be a breach with every penny held in the US by countries with large Islamic populations flooding out. You don�t want to be downstream from an event like this.

Why is this happening?

1/ Patriot Act 2, which has firm rationale for its existence in an emergency, has by the nature of the beast thrown out the baby with the bath water. Patriot 2 has removed the protection of �Due Process of Law� from deposits made in the US - especially by Islamic entities and foreigners. Would you send money to Switzerland if it had the right to seize your deposits after deeming you had some connection � however remote � to an organization, individual, political party, group or country that had any connection to terrorism and its purveyors? Without due process of law, they could seize your deposits without having to provide any proof of your complicity. You could be the Pope, The Avatar or Mother Theresa and you would not send money there. What makes it any different for countries like Saudi Arabia, Pakistan, India or China keeping money in the US? It is all going to leave and the floodgates have only started to open.

2/ There is a quiet war under way in Yemen and Saudi Arabia that�s being fought by US special forces, the CIA - and I am told FBI operatives - along with local troops. The Saudi Royal Family is hiding in their palaces and trying to buy their way out of harm�s way. Certain Royal palaces have taken direct rocket hits.

3/ Do you think that Saudi money or any Islamic Middle Eastern money is going to stay in the US under these circumstances? Not for a minute.

Conclusion:

Add to this the Triple Deficits and you have a price objective at .60 to .62 for the US dollar. I hope for the sake of the economic, social and political well being of the world, that gold goes no higher than $529.

If the gold market reflects itself as the sole world currency and balances the out-of-balance US balance sheet by appreciating to $1,650 to $1,700 then no one - not even the rich gold owner - will enjoy the world around him.

No manipulating entity can stop gold from doing what it pleases as the world market for gold is growing by leaps and bounds, most certainly in China.

http://www.jsmineset.com


The Problem With Assumptions -John Mauldin, FrontlineThoughts
December 5, 2003

Before we explore the psychological reasons we make investor mistakes, let's look at an even more basic reason for investment difficulties: simple ignorance.

The NASD commissioned a survey of investors, and only 35% got seven out of ten very basic (and simple) multiple choice questions right. They were too polite to say so, but if my kids had brought that test home, I would have noted they had failed and needed to go to their room for more study.

15% of investors thought that if you bought a share of stock you would get your money back with interest or had lent the company money. Only 40% knew that if interest rates drop then bond values will go up. 25% thought it meant bond values would go down and 12% said it does not affect the price. A total of 60% of investors did not understand the relationship between interest rates and bonds. Given that interest rates are likely to rise over this decade, that lack of understanding does not bode well for investors.

Only 21% could correctly identify a no-load mutual fund, and 31% thought it meant a fund with no fees. Maybe it was just a poorly worded question, but a staggering 46% believed that they were insured against stock market losses by (choose one): the SEC (16%), FDIC (14%), SIPC (12%) or the NASD (4%). The survey revealed that despite the recent bear markets, we are still optimistic about future market returns. 40% of us believe that a reasonable average long term return from a broadly diversified mutual fund will be 10%. That, by the way, is the survey answer which was considered "correct." 6% of those surveyed thought that 20% or more was a reasonable expectation, and 15% thought that a 15% was reasonable. That adds up to 61% who think the markets will give them 10% or more over the long term.

They are likely to be disappointed over the next 10 years. Starting from today's high P/E ratios, Yale Professor Robert Shiller clearly shows there has never been a time in which investors saw returns that were better than that of simply parking their cash in a money market fund. The studies, written about in this column for the last few years, of Arnott, Bernstein, Grantham, Alexander, Dreman, Stein, Buffett, Montier, Easterling and many others (along with the work of your humble analyst), all show the likelihood of meager returns over the next decade.

If my kids had chosen 10% or more, I would make them go to their room and read my past letters. Cruel punishment, maybe, but better than making bad investment decisions based upon unrealistic expectations.

Now, let's turn to today's main topic, the psychological reasons for our investment mistakes, as opposed to the ignorance demonstrated above.

FrontlineThoughts


John Templeton's Warning to EQUITIES Readers -Mark Lebovit, VRTrader.com
Dec. 4, 2003

It would be unlikely that the bear market is over when the American stock market is only down about 30%, when in the biggest boom ever, it had been up 10 times over where it had been years earlier... Following such a large increase, a 30% decrease is small.

Every previous major bear market has been accompanied by a bear market in home prices... This time, home prices have gone up 20%, and this represents a very dangerous situation. When home prices do start down, they will fall remarkably far. In Japan, home prices are down to less than half what they were at the stock market peak. A home price decline of as little as 20% would put a lot of people in bankruptcy.

Emphasize in your magazine how big the debt is... The total debt of America is now $31 trillion. That is three times the GNP of the U.S. That is unprecedented in a major nation. No nation has ever had such a big debt as America has, and it's bigger than it was at the peak of the stock market boom. Think of the dangers involved. Almost everyone has a home mortgage, and some are 89% of the value of the home (and yes, some are more). If home prices start down, there will be bankruptcies, and in bankruptcy, houses are sold at lower prices, pushing home prices down further. After home prices go down to one-tenth of the highest price homeowners paid, then buy.

http://www.vrtrader.com


The Mutual Fund Scandal's Next Chapter -NT Times
By GRETCHEN MORGENSON
December 7, 2003

T'S hard to know where the ever-amazing mutual fund scandal will take investors next. But here is a clue. Regulators are setting their sights on two new areas: funds that fail to price their portfolios properly each day and those charging excessive fees.

Funds with stale pricing - net asset values that do not reflect market reality - are coming under scrutiny. "We are going to make sure that funds are priced properly even without any indication that there has been abusive market timing," said Stephen M. Cutler, director of enforcement at the Securities and Exchange Commission.

Of particular interest are corporate or municipal bond funds whose net asset values stay mysteriously inert even as the United States Treasury market is gyrating wildly. Investors in funds whose net asset values have not reacted to major moves may be paying or receiving the wrong prices. Moreover, stale prices in bond funds provide fine opportunities for market timers who jump in and out of funds to take advantage of out-of-whack prices.

FULL STORY


FDR fanciers flip over GOP plan for Reagan dime - PSN
By Lisa Friedman, Washington Bureau, Pasadena Star News
Dec. 4, 2003

FDR, get off the dime.

That's the command from a handful of Southern California Republican congressmen involved in an effort to replace Franklin Delano Roosevelt's image on the dime with Ronald Reagan's.

Rep. Mark Souder, R-Ind., introduced the legislation that would boot the Democratic architect of the New Deal in the Great Depression from all future 10-cent coins to make way for the conservative icon.

"It is particularly fitting to honor the Freedom President on this particular piece of coinage because, as has been pointed out, President Reagan was wounded under the left arm by a bullet that had ricocheted and flattened to the size of a dime,' Souder wrote to colleagues in rounding up support for his bill.

About 80 lawmakers, all Republicans, have co-sponsored the Ronald Reagan Dime Act, including David Dreier of Glendora; Dana Rohrabacher of Huntington Beach; Elton Gallegly of Thousand Oaks; Buck McKeon of Santa Clarita and Bill Thomas of Bakersfield.

"FDR believed the federal government should spend your dimes. Ronald Reagan believed the people should spend their own dimes. I think it's clear that the dimes in your pocket should bear Ronald Reagan's image,' Gallegly said in a statement explaining his support of the bill. Other California congressional aides insisted their bosses have nothing against Roosevelt.

[Ed. Note: May we suggest ending the political debate over which image should don the face of our 2009 dime by reverting back to a classic "Seated Liberty" design created by Christian Gobrecht. Liberty was seated RIGHT and facing over her shoulder to the LEFT. See? That's fair... right and left both represented! Also, may we suggest saving dimes, not spending them. See "FROM SPENDING... TO SAVING"]


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. MORE...


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