Le Metropole Members,
Editor's note: Yowzer- no sooner do I put out Greg Noland's astute commentary to you that I received Barry Riley's FT April 8 (tomorrow) commentary from Cafe members. You should all know that, in repeat fashion, that I had the privilege of having lunch on Monday with Chris Sanders, Director of Sanders Research Ltd., out of London. His firm is a very, very prestigious one and GATA has been honored in that we have been requested to give our gold views to his audience. That audience includes the European Central Bank and the Saudi Monetary Authority, among others.
Chris took me to lunch at Cafe Pacific in Highland Park, Texas last Monday; it is regarded as a "best." We had never met before but Chris, who is quite the brilliant erudite, told me that he knew the Cafe's Marshall Auerback and thought that Doug Noland was right on the money. He also said that he was drawn to www.LeMetropoleCafe.com because of Barry Riley and that is why he wanted to meet me. He has known Barry for many years and he told me he is the last person who would expose "conspiracy" commentary as he views Barry Riley as the most convservative and "elite" journalist in all of Great Britain.
Without further ado, I present the latest from the
the greatest from Her Majesty's best thinker:
Long view: Waking up the bears
By Barry Riley
Financial Times, April 8, 2000
Even the ringing tone of the telephone seemed
unusual: low-pitched and rasping. I picked it up
with a degree of instinctive fear - and rightly
so because it turned out to be a call from Mortimer
Duhm, the arch-bear.
Bears are forced into hibernation for long periods;
then, they burst out of their caves with renewed
energy. In Mort's case, though, it was a cold wind
from the markets that woke him up, not spring sunshine.
"I see that the London Stock Exchange has shut down,
" he hissed, referring to this week's computer
glitches. "You remember that the last time it
happened, after the October 1987 hurricane, was only
days before the global stock market crash."
Wall Street was wobbling badly, I agreed, but there
was still plenty of resistance. After the 500-point
collapse in the Dow Jones Average on Tuesday, and
the 11 per cent crash in the Nasdaq index, the
markets bounced straight back again.
"Yes, the manipulation continues for the moment,"
snapped Duhm. "It was suspiciously similar to the
dramatic recovery in October 1998. Wall Street now
believes that the US government and the big
investment banks will always organise a rescue, helped
by the occasional Saudi billionaire. But moral hazard
is piling up and time is running out.
"The bull run has become ever more intense and
concentrated, finally climaxing in an eccentric
technology bubble. The old economy had plainly
become overpriced, so the concept of the new economy
was invented by Wall Street and Alan Greenspan,
with stock market ratings justified by ever-rising
prices. But it has become a vast Ponzi scheme."
I was aware, I said, of all the conspiracy theories
about the role of the US authorities in fuelling
the great bull market which had done so much to
restore President Clinton's popularity. But why,
then, was the US government threatening to break
up Microsoft, the biggest technology company of
them all?
"It's simple," snapped Duhm. "The financial and legal
sides are just not working on the same wavelength.
The whole bubble has been pumped up by the US
Treasury working in cahoots with the Federal Reserve.
It began in the mid-1990s as an idea for boosting
economic growth. Then it got out of control, and
has regularly had to be propped up through liquidity
injections and interest rate cuts."
It was certainly interesting, I replied, that bodies
like the Institute of International Finance were
accusing the Americans of generating economic
fragility and encouraging wild volatility in asset
prices. The current account deficit had hit $28bn a
month. You could add that an incredible binge by
American consumers was in progress and the US was
mopping up the world's savings. The surge in the
oil price was an early warning signal; but that
was easily presented by politicians as the fault
of greedy sheikhs rather than the American love of
unnecessary off-road gas guzzlers.
I remembered that the last time I talked to Mort
Duhm, he was obsessed with alleged similarities
between Thailand, which crashed in financial ruins
in 1997 after a currency collapse, and the US. All
that had happened since, though, was that the US
had boomed ever more strongly, hitting a 7 per cent
economic growth rate by late 1999. Even so, Duhm
insisted: "We are getting very close to the edge.
Being the world's biggest debtor is safe only when
you have complete political mastery.
"The Asian problem was solved by transferring the
financial imbalances to the US itself. That is a
-up, not a solution. The Americans have squared
the circle temporarily by persuading foreigners
to invest in US technology. But now, that illusion
is collapsing. The US depends on foreign
governments being willing to keep piling up
dollar assets - especially Asian countries and
oil producers.
"True, the US deliberately left Saddam Hussein
in power in Iraq in order to keep the Saudis and
Kuwaitis frightened and submissive. That's recently
helped to buy the Americans time over the oil price. But now they face China which, through its massive trade
surplus with the US, has acquired an economic
weapon: it can attack the dollar as part of the
political battle over Taiwan."
"Hold on," I replied. "You could also argue that
China has acquired a big stake in the dollar and
needs to keep it healthy. I'm rather more
interested at the moment in the internal risks.
Investors have chased ever more risky investments,
in a classic mania. Safe companies have collapsed
in price. As we have seen in the past week or two,
the risks of equities have increased. Logically,
the prospective return must go up to compensate,
which is another way of saying the market must
begin again from a much lower level."
"Yes," said Duhm, "and it will wipe out many
investors in the process." I could just imagine
the rare smile on his face. "Watch those hedge
funds, in particular. Julian Robertson, who has
just shut down Tiger Management, was not typical
but he demonstrated the level of instability. This
was an orderly withdrawal. Just imagine what will
happen when real disaster overwhelms some of the
others who have been leveraging their positions
in technology stocks. This week, there have already
been signs of forced selling by small investors
financed by margin debt but, when the big funds
collapse, the impact will be much greater."
Perhaps so, I answered, but should we be so afraid
of a stock market crash? Admittedly, the 1987
collapse had hurt quite a few investors, but the
underlying economies had continued almost unaffected. T
he worst aspect was that the central banks had
overcompensated by cutting interest rates at the
time, which had proved inflationary.
The line began crackling and Mort became more and
more difficult to hear. "Irresponsible credit growth
and stock market gains have fuelled this US consumer
boom. There's a 20 per cent growth rate in real
estate lending," he snapped. "When the bubble bursts,
there will be colossal bad debts and a slump in
demand. But the Fed won't be able to cut interest
rates because the dollar would tumble and inflation,
so far suppressed by cheap imports, would soar. My
new web site has the detailed arguments."
The line got worse. "Disaster....derivatives....
depression...." He finally faded out. I didn't
complain to the telephone company.
Mort certainly provides a challenging alternative
to all the bullish talk that comes out of the
stockbroking fraternity. Sometimes, I think that,
if he didn't exist, I would have to invent him.
Contact: barry.riley@ft.com
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All the best,
Bill Murphy
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