*** Mr. Bear is back - Dow and Nasdaq get mauled...
*** The dollar down again...the euro is headed back to
parity with the buck - and beyond...
*** "How Could So Many Have Been So Wrong?" It was no
accident... Mary Meeker, Amazon.com, and more!
*** Is Mr. Bear back on the job so soon? Most investors
were expecting a nice lift in January - the "January
Effect" as it is known. But if the first day of trading is
any indication, the coming month will not be a pleasant
one.
*** The Dow fell 140 points. The Nasdaq fell more than 7% -
or 178 points. And the Nasdaq 100 - home of the biggest
techs - dropped 212.
*** The Internets were down big too - with the Internet
index off nearly 9%.
*** Cisco lost 13%...and now trades at $34. AOL is below
$34. Oracle is below $30. Amazon is below $14. And CMGI is
below $5. Wow.com!
*** There were 1339 stocks making progress on the NYSE
yesterday; 1718 declined. 185 hit new highs. 28 hit new
lows.
*** GE - a stock with a lot of ruin in it - lost 4%.
*** But gold stocks went up. The XAU index rose about 1%.
Why? See below.
*** As gold stocks rose, the dollar fell. The dollar index
dropped 1%. And the euro - the mighty euro - rose to 95
cents. Commentators are beginning to talk about the euro
returning to par with the dollar. What a surprise it would
be if the euro rose much higher! Surprises are just what he
market tends to give us.
*** Bonds rose in what was described as `almost panic
buying' early yesterday. Yields on 10-year bonds fell below
5% to 4.92%. Bond buyers seem to be expecting not merely a
rate cut from Greenspan, but recession too.
*** The latest figures from the National Association of
Purchasing Managers point in the same direction - they came
in lower than expected. But the 'prices paid' figure rose
8%. Hmmm...a business slowdown with increasing prices. We
used to have a word for that - `stagflation'. If so, it is
the best of all possible worlds for gold. More below.
*** "US Syndicated Loan Value Tops $1 Trillion in 2000"
proclaims a headline from Hoover's Online. The biggest
borrower? AT&T, with $35 billion in loans.
*** But lenders beware. Standard & Poors released a report
yesterday showing that credit quality continues to
decline...and predicting even wider spreads between high-
grade loan rates and junk. The S&P report noted that there
were 7 defaults in the telecom sector last year...and that
investors should expect more in the year ahead.
*** There will be no soft landing, according to George
Soros. Instead it will be "bouncy and hard." Another global
financial crisis is inevitable, he added.
*** Floyd Norris, in the NY Times, says that a record $100
billion of IPOs were sold in 2000. But the last quarter was
a disaster - with only $10.8 billion in sales - the slowest
period since 1992. Two-thirds of the IPOs are now trading
below their offer prices.
*** The most interesting item in the financial press is an
article by Gretchen Morgenson also in the NY Times.
Morgenson is providing the grist for tort lawyers' mills,
pointing out how Wall Street analysts misled investors.
"How Did So Many Get It So Wrong?" her headline asks.
*** Well, it was not exactly an accident. Analyst Jack
Grubman made $20 million in '99 touting telecoms for
Salomon Smith Barney. Grubman urged caution on the telecoms
- but only after they had fallen 77%. All of the stocks he
recommended - surprise, surprise - were underwritten by his
own firm.
*** Meanwhile, the Queen of the Internet, Mary Meeker, took
home $15 million in '99 thanks to her recommendation of
Amazon.com at prices over $100...and a host of other
Internet stocks... Amazon, as noted above, is now a $14
stock. Her 10 other Internet picks - which she now rates as
"outperform" - have similarly collapsed. A Dean Witter
spokesman defended Ms. Meeker, saying that her picks were
for the "long term." If they don't come back in this life,
maybe they will in the hereafter.
*** Anthony Noto, analyst as Goldman Sachs finally
downgraded his picks from `buy' to `market perform' after
they fell 98.2%. Seven of the 9 stocks he follows were
underwritten by Solly.
*** And let us not forget Walter P. Piecyk, Jr., analyst
with Paine Webber. Mr. Piecyk made history with his target
price of $1,000 for Qualcomm. Following his recommendation,
the stock rose to a record of $717.24, hit on this day one
year ago. Since then, the stock has split 4 for 1 and now
trades at $82.
*** "There is virtually no such thing as a sell
recommendation from Wall Street analysts," concludes Ms.
Morgenson. The analysts work for their companies - it might
be added - not for retail investors.
*** Is it any wonder people are growing more reluctant to
send money to Wall Street. Companies raised $3 trillion in
equity and debt last year - down 9.6%. Bloomberg reports
that sales of new securities fell in 2000 for the first
time in 6 years.
*** I am still in holiday mode. I write this letter in the
morning and try to leave the afternoon free to work on the
stone walls or take little excursions. Then, after the sun
goes down, I sit in front of the fire and reply to my e-
mail and read.
*** Benoit, the gardener's son, has been helping me on the
stone wall. He's a university student - in economics - who
asks my opinions on the stock market as we work. A couple
of weeks ago, I suggested that he might want to keep an eye
on W.R. Grace - simply because the stock had become
ridiculously cheap. Since then, it has zoomed up nicely.
So, Benoit thinks I might know something. He will find out
later that I don't know any more than anyone else - but I
am enjoying his na‹ve respect in the meantime.
*** Yesterday, we ran out of cement, so rather than work on
the wall, we drove down into Limousine to look at a
derelict chateau. Benoit explained that it was owned by a
countess who had had only one child. When the infant died
in the chateau she decided she wanted nothing more to do
with the property - except to see it in ruins.
*** She should be pleased. It is in ruins. The rooves have
caved in...stones have fallen. It looks at though it might
have been struck by a bomb in WWII and never restored. But
amid the ruins is the most stunning and impressive
fireplace I have ever seen. It is so big that an entire
football team could stand inside. And it is carved in white
stone - with a statue of a mounted horseman set into the
stone face above the mantel and elaborate figures
decorating the entire ensemble.
"Why not give her a call," I suggested to Benoit. "Ask her
if she would sell the ruins. We will do quickly what nature
is doing so slowly - remove the fireplace and destroy what
is left!"
"Okay," was Benoit's reply. "What is there to lose?"
When The Greatest Credit Bubble in History Bursts...What
Comes Next?
No banks or brokerage houses went bust in the 1929 crash.
In fact, many investors and businessmen prospered. The real
damage was done later on - when popular sentiment turned
against stocks altogether. Just as is happening in our
markets today...
Will you profit in the months ahead? You will if you
prepare yourself now - EVERYTHING that is happening in the
markets today has already happened before. Click here to
learn more about:
"Your gold history lesson reminds me of what I consider to
be one of the great open questions in economics," writes
Porter Stansberry. "How does Nixon's action - removing the
dollar from the gold standard - effect the fundamental
monetary conditions you mention in your story?"
Porter's position, shared by many investors, is that gold
has been stripped of its monetary role...and left to
respond to market forces like any other commodity. Under
normal conditions, like other commodities, time and
technology should reduce the cost of acquiring gold,
increase its abundance and lower its relative price. In
times of deflation, the price of gold, along with copper
and pampers, should fall sharply. In times of inflation,
gold should rise in price.
In the 1930s, the only period of significant deflation
since the establishment of the Federal Reserve System early
in the century, the price of gold rose. Gold was still
money then, according to Porter's view.
But in 1968, the `gold pool' was closed down. A person
could no longer trade his paper dollars for gold on the
London market. Then, 3 years later, Nixon `closed the gold
window' at the Treasury - so foreign governments could no
longer trade their dollar surpluses for gold either. Since
these two actions, gold has not played an official monetary
role.
But to Porter's assertion of fact, that `gold is no longer
money' I reply, flippantly:
"Who says?"
To his anticipated response: "The most powerful government
on the face of the Earth, the world's only remaining super-
power and the custodian of the most successful monetary
brand in history..." I retort:
"So what?"
For all his many talents and virtues, it is unlikely that
Richard Milhouse Nixon could have achieved what no emperor,
dictator, or elected official has been able to do since the
beginning of time: eliminate gold as a monetary competitor.
Many have tried. But gold, though malleable, is unyielding
in its monetary rectitude. An ounce of gold is an ounce of
gold. It is neither more nor less than it appears to be.
Paper money is a great aid to politicians. It makes it
possible for them, said President Hoover, to confiscate
"the savings of the people by manipulation of inflation and
deflation."
"We have gold," he added, "because we cannot trust
governments."
Have governments become more trustworthy since Herbert
Hoover left office and Bill Clinton entered therein? I will
leave that to you to decide, dear reader.
Paper currencies are, like so much else that issues from
politics, subject to persuasion, ambiguity and financial
gerrymandering. As a result, paper currencies are very
useful for creating booms and bubbles - they can be readily
multiplied and distributed.
"If your view of gold being a safe haven in times of
deflation is correct," Porter continues, "then it would
stand to reason that gold prices should fall during
inflationary periods, right? That's how gold prices have
always worked throughout history. See Davidson's work from
the August 1997 issue of Strategic Investment. He traced
400 years of gold prices...up to 1970...and found
conclusively that gold went up in purchasing power during
deflation and down during inflation."
Agreeing that gold has acted as a hedge against deflation
from the time of the Flood to the Nixon Administration,
Porter brings us up to date: "But the facts since 1971 seem
to indicate exactly the opposite. Gold went from $45 to
$850 in the 1970s in the midst of an inflationary crisis."
"My view," says Porter, "is that Nixon's action, and the
structure of the US economy - an economy based on credit,
not gold - turn the historic relationships upside down.
Essentially the monetary conditions that we used to call
inflation are now deflation."
Let us stop here or we are doomed to wallow in confusion
for the rest of this letter. The terms `inflation' or
`deflation' refer to the rise and fall in the supply of
money. The increase or decrease leads to an corresponding
movement in the prices of goods and services. As the money
supply inflates, prices rise. When the supply of money
decreases, prices fall.
If the supply of gold is inflated - whether you call it
money or not - it will have the same consequence...each
ounce of gold will buy less of other things. This is what
happened when, for example, Spanish explorers began
colonizing the new world and sending ships back to Spain
laden with gold.
Inflation lowers the value of whatever is inflated: whether
it is paper currency or gold. Deflation, on the other hand,
diminishes supply and increases value. But is it possible
that a decrease in the supply of dollars could produce a
counter effect - an increase in the supply of gold? When
the supply of dollars declines - a deflation of the money
supply - will gold act like money and rise against other
goods and services? Or will it act like any other
commodity...and fall?
Is gold still money, in other words? Or is it just another
commodity? And to those questions, I reply, confidently:
Yes. Gold is both.
More to come...
Bill Bonner
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