Demography is Destiny - Excerpts (Gold, Credit & More!)
Bill Bonner & Eric Fry
The bad news continues to trickle out as though from a leaky sewage pipe.
Credit card delinquencies are at a new high. So are mortgage foreclosures. As people borrowed more and more against the 'equity' in their houses, they found it harder and harder to make the payments. But the borrowers didn't seem to notice...and the lenders didn't seem to mind; refinancings continued to rise alongside foreclosure rates.
In the last two weeks, however, either the borrowers have been distracted by war on prime time...or they've finally begun to come to their senses. Or maybe a slight increase in mortgage rates caught their eyes just as they were getting ready to sign on for another $20,000 slug of debt. Whatever the cause, refinancing activity has fallen over the last couple of weeks, with the most recent week's activity 9% below the previous week.
Consumer confidence is at a 10-year low. And as reported here yesterday, debt is growing at its fastest pace in 15 years.
And how's business? Like the rest of the financial effluent, it is smelly and repulsive. A "Grim Earnings Season" is how TheStreet.com describes the most recent reports.
Even the news from the Iraqi front is a little grim. While the situation could change by tonight's news, so far, the Iraqis do not seem to appreciate their liberators. If this ingratitude continues, the price tag for installing a puppet government - oops, we mean bringing freedom to the Iraqi people - could rise well beyond the $75 billion Bush has asked for to see him through September.
While we have no doubts about the nobility of the cause, we can't help but wonder whether bringing democracy to the desert might turn out to be a little like building an expensive opera house in the jungle: it might look good for a while, but it would soon have vines growing through the unused air-ducts and bird droppings on the carpet - while the bonds sold to pay for the project would still need to be paid.
Not that we have any better idea than George Bush or Alan Greenspan of what will happen. It's just that this Lenten Season finds us unusually worried. Maybe the war will turn out well...but maybe it won't. Maybe the dollar will hold up...but maybe it won't. Maybe stocks and the economy will enter a new boom phase...but maybe they won't.
Eric Fry, reporting from New York...
- President Bush rallied the troops yesterday, but failed to rally the stock market. A cock-sure and confident Commander-in-Chief addressed the troops yesterday at a hangar at McDill Air Force Base. "We will be relentless in pursuit of victory," Bush proclaimed with a half-snarl. Unfortunately, the inspiring oratory did not inspire investors to buy stocks. The Dow lost 50 points to 8,230, while the Nasdaq dipped 3 to 1,387. Weakness on Wall Street pulled the dollar lower against the euro for the third straight day. The greenback fell about half a percent to $1.0687 against the "currency of the doves".
- Meanwhile, a relentless barrage of hostile economic data has the forces of recovery pinned down in the trenches. U.S. durable goods orders dropped in February for the third month in four, while new home sales tumbled to their lowest level in more than two years.
- Orders for durable goods fell 1.2%, according to the Commerce Department, while orders for non-defense capital goods excluding aircraft fell more than twice as much. In other words, the private sector is sitting on its hands...and home-buyers are sitting on their wallets.
- New home sales plummeted 8.1% in February, as the inventory of new homes increased to a five-month supply. That's the largest inventory of unsold homes since December 1996, which suggests that the housing market is cooling, if not heading into a deep freeze.
- Most of the learned economists blame the advent of war for the nation's sluggish economic activity. But we suspect that the postbellum U.S. economy - whenever that might arrive - will bear a striking resemblance to the current one. In fact, we may discover that spending $75 billion - or even $175 billion - to blow up buildings in the Iraqi dessert is distinctly "unbullish" for our economy...although it might be bullish for gold.
- In the months leading up to the Iraqi conflict, stashing a few gold bars under the mattress seemed like a reasonable idea. Accordingly, the safe-haven metal soared roughly 20% between early December and early February, only to relinquish the entire gain over the last few weeks.
- As the build-up to war gained momentum and a swift American victory seemed baked in the cake, the gold price underwent a reverse alchemy - falling like lead. Initially, Defense Secretary Donald Rumsfeld assured us that "shock and awe" would topple the Iraqi regime faster than you can say "fedayeen". But he has since revised his outlook to allow for the possibility that the Iraqi campaign might last for a few months. Given the uncertain duration and ferocity of the Iraqi conflict, gold may quickly regain its luster. In the event, folks may wish to hang on to their ingots, or perhaps stuff a few more of the shiny lumps under their mattresses.
- And let's not forget the U.S. dollar. Even without our expensive war in the Middle East, the greenback would be a currency under the siege of a soaring current account deficit. The dollar has been weakening for months and, as every gold bug knows, the dollar's weakness is gold's strength.
- The reason to own gold is not the battle for Baghdad, but the battered U.S. dollar, says John Hathaway, manager of Tocqueville Gold Fund. Over the long term, he asserts, foreign investors will tire of funding America's ballooning deficits. As they retreat from U.S. assets, the dollar will slide, thereby boosting the gold price.
- "We're about to see some shock and awe in the gold market," my friend Jay Shartsis told me yesterday. "The gold shares are about to mount a major advance." Jay, a successful long-time options trader and occasional contributor to the "Striking Price" column in Barron's, tells me that put-buying on many gold shares is soaring. This contrary indicator reflects widespread bearishness toward gold stocks, which is a bullish indicator.
- Typically, extreme bearishness precedes strong rallies. To illustrate his point, Shartsis notes that put-buying on the XAU Index of gold stocks has reached the highest levels since last October, immediately prior to a major rally. Shartsis also notes that put-buying on Newmont Mining is "the heaviest is has been in several years"...Gold investors take note!
March 31, 2003
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