as usual, Julius has done a concise analysis of gold's move but there are other forces as well. The GATA group is forcing congress to look at other manipulations of the gold price to support the dollar, etc. Will they succeed? they are up against the grey men in their grey towers
This was in my mail this a.m. from the Daily Reckoning, a little bear publishing company but it does pose another reason for the gold move.
I am 50% cash, 40 fsagx and 10 defense& aerospace.
******
SUMMA ARITHMETICA
by Bill Bonner
"In death, all debts are paid."
William Shakespeare
"Credits on the left, debits on the right," said an
ancient professor of commercial law, "that's all you
need to know."
The invention of double entry bookkeeping by Luca
Pacioli in 1494 was one of the great milestones in
business history. For the first time, a person could see
both sides of the ledger and note that the sum of all
our efforts, positive and negative, red or black, plus
or minus, is always zero.
In the words of a 16th century accountant, Pacioli's
great essay, "Summa di Arithmetica", provided a "magic
mirror in which the adept sees both himself and others."
But a real mirror - one that reveals the whole truth and
reduces all human striving and pining to nothing - is
not what people want. Instead, they prefer a more
flattering view...and regularly let their eyes skip over
the parts they would rather not examine carefully.
Until recently, investors hardly bothered to look at the
debit side of the ledger. If a company was beating
earnings by a penny...what else did you need to know?
Besides, corporate bookkeepers and auditors were
famously accommodating. If investors didn't want to look
at the debits, they certainly weren't going to rub their
noses in them.
In an amusing description of double-entry bookkeeping,
Bill Fisher, "The CEO Refresher" describes Pacioli's
invention as "a tremendous breakthrough"...for the 15th
century! "That was then...this is now," Fisher
continues. "The Industrial Age has given way to the
Information Age." In this New Era, "medieval measurement
"is no longer adequate...now "We have computers...!"
We mention Japan so often in these letters that readers
must cringe each time the word appears. We will take the
risk of mentioning it again today...but only briefly...
and only because we can't resist.
Japan had computers, too, in the 1990s. But while
America's "new economy" boomed in the late '90s, Japan
could not seem to make a go of it. What was wrong with
the Japanese? You could say whatever you liked; almost
any slander was acceptable. The Japanese just didn't
"get it." Their system was "corrupt." They were
"cowards"...too old, tired and gutless to reform their
economy. Trillions of yen worth of liabilities were
hidden...off the books...it was said.
We harbored a suspicion at the time - that Japan's
troubles were not a unique feature of the Japanese
character, but a consequence of the bubble economy of
the late '80s and attempts to fix and forestall further
damage. We wondered how long it would be before the
biggest bubble in history - in the U.S. - blew up...and
what horrors would eventually be discovered in the
balance sheets of U.S. enterprises.
Now, we are beginning to find out.
Double entry bookkeeping was not good enough for New
Economy companies. Accountants innovated...adding third
entries. And footnotes. And forgot to mention a few
things.
But when investors' eyes finally do wander over to the
debit side and study the small print, we predict,
adjectives will leap to their lips that were previously
only used to modify Japanese banks.
"Over the last 19 years," writes Chris Byron, "investors
have poured more than $100 billion into this rural
Mississippi telephone company...[Worldcom]...As a
result, the company now sits, as of Sept. 30, 2001, with
worthless goodwill on its balance sheet totaling more
than $50 billion - so far as I am aware, the biggest
such mountain of fake assets in all of corporate
America.
"And here's the really interesting thing," Byron
continues, "over the course of the 1990s, this $100
billion Mont Blanc of waste has not been able to
generate a single dime of net new cash..."
Generating cash scarcely seemed necessary in early 2000.
But now it has become essential. Too bad there's so
little of it.
Investors "want companies that can stand on their own
and generate cash at the trough of a business cycle,"
says Byron. Alas, "there are almost no such companies in
the telecom space, and one by one the losers are being
taken out and shot. Two weeks ago we had Global
Crossing. Sooner or later it will be the turn of
WorldCom as well..."
The mountain of fake assets on Worldcom's books hardly
stands alone. Instead, in the tectonic shifts of the New
Era, a whole range of phony assets and real debt was
pushed up. Not far from Worldcom's Mont Blanc, for
example, lies Enron's Jungfrau and Cisco's Matterhorn...
Frank Partnoy, law professor and former Wall Street
derivatives specialist, recently testified before
Congress:
"Enron has been compared to Long-term Capital
Management...the hedge fund that lost $4.6 billion on
more than $1 trillion of derivatives and was rescued in
September 1998 in a private bailout engineered by the
New York Federal Reserve. For the past several weeks, I
have conducted my own investigation into Enron, and I
believe the comparison is very inapt. Yes, there are
similarities in both firms' use and abuse of financial
derivatives. But the scope of Enron's problems and their
effects on its investors and employees are far more
sweeping.
"According to Enron's most recent annual report, the
firm made more money trading derivatives in the year
2000 alone than Long-Term Capital Management made in its
entire history. Long-Term Capital Management generated
losses of a few billion dollars; by contrast, Enron not
only wiped out $70 billion of shareholder value, but
also defaulted on tens of billions of dollars of debts.
Long-Term Capital Management employed only 200 people
worldwide, many of whom simply started a new hedge fund
after the bailout, while Enron employed 20,000 people,
more than 4,000 of whom lost their life savings as
Enron's stock plummeted last fall.
"In short, Enron makes Long-Term Capital Management look
like a lemonade stand."
How many Enrons are out there? Maybe many.
"Enron was run by smart men," comments Gary North. "They
indebted the company by using what are now standard
techniques: derivatives. These techniques are so
complex, so highly leveraged, that the 'gatekeepers'
spotted nothing wrong."
Certainly, investors - casually eyeing the debit side of
the ledger - saw nothing wrong. But now everyone is
looking harder.
"This debt complexity is worldwide and is growing," Gary
adds. "Derivatives are everywhere; over $100 trillion
worth, at least. No one knows how much money is at
risk."
But, eventually, all the assets and all the liabilities
will sum to zero...For all of life's books must balance,
sooner or later. Dust must come to dust...Then, we will
feel more sympathy for the sushi eaters.
"It is almost as corrupt here as it is in Japan," Gary
concludes.
Bill Bonner |
