GIC
A Weekly Outlook and Analysis of the
Global Investment Climate
November 13, 2000

The Misinformation Highway
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Many very correct analyses have been made recently, which point to the similarities between today's financial excess and other historic bubbles. But there is irony in the difference also. At the dawn of a global information revolution, where entire industries previously endowed with a monopoly on information flows will find themselves competing with the truth, this enormously dishonest financial bubble is going to be recorded in detail, with many perspectives on it from all over the world. Someone other than the establishment will write its history this time. At the same time, and here is where the irony is, the Greenspan Fed advocates a transparent monetary policy.

In doing so, it is effectively allowing for the recording of the plot of the Mississippi Bubble, and thereby risking the dismantling of the Federal Reserve System. I know you think I must be kidding, but I am not. The question, which I cannot answer, is whether it is deliberate (Ok, here I might be kidding a little bit).

Seriously though, few would argue that the central value of the Internet to society rests with its capacity to organize and disseminate large amounts of information and ideas so that an economy's participants can engage in productive business transactions. Because we know how valuable information can be, it should come as no surprise that in order to achieve a maximum benefit to society, large information dependent industries might have to re arrange themselves first. While you may think that this is happening, it really has not yet. The reason is that many industries, which in the past have taken for granted their information monopolies, have yet to reposition themselves for what is ultimately going to be their newest challenge… to reacquire control of their information monopolies.

Perhaps that is somewhere behind the kind of decision that Time Warner had to make when it acquired AOL. But regrettably, when this does begin to happen, it may in the end become the biggest obstacle to maximizing the benefit of the Internet to society. And yet, in between now and then, lies a window of opportunity like none other in history. The battle for content and information real estate is open for anybody and everybody. If the battleground is kept fair, objectivity ought to prevail. If all is done right, the real new economy lies somewhere in the future, along with an honest monetary system. Who am I kidding?

…But what they said, isn't quite clear
That being said, it appears that there is something odd about public psychology today. No one knows what the heck to believe or do. There is inflation, but gold and the Fed tells us there is not. Government debt is rising, but the Treasury is bickering about what to do with a surplus? The stock market is overvalued, but Wall Street says it is oversold. Palestinians are dying by the truckload, but they are the aggressors. And now, on top of all of that, US politics is becoming a joke. The ridiculous litigation frenzy has finally manifested at the highest office of the United States, or is really quite close to it.

Have we lost our objectivity somehow?
…in the middle of an information revolution? What is really happening here? Is this the product of information overflow and what good is the information anyhow, if charlatans disguising themselves with credibility decide for you which is good information and which isn't? What good, for instance, is the well-supported (and documented) knowledge that an increase in money supply IS inflation if the Fed tells you that it is not? So which is better, no information or lots of information?

The answer is obvious it is more information. Unfortunately, we just haven't figured out quite how to organize it, and yet many of us have eagerly gone on to indiscriminately disseminate it. Of course, this will eventually work to the benefit of the seekers of control over information flow and possibly, it will work against freer speech. It may also work against the grain of true productivity. I think that before a nation (or planet) can optimize the productive elements of the Internet, information needs to become completely commoditized. It needs to be as available to society as water is, for it is as necessary to the proper functioning of the free market price mechanism, which allocates our scarce resources, as water is to our daily survival and the circle of life.

But as with any commodity, including water, there are varying degrees of quality. How are we going to discriminate between good information and bad? Perhaps by the qualifications, track record, and/or public standing of the source? That's what we've been doing so far. That's how the current establishment has been able to monopolize the flow of information. And that's why most of us are confused today. To be sure, I don't have an answer but I have a dream… honest money and honest information = true profit and really, a new economy.

Granted, today it is difficult for most of us to stay objective about US politics when most of us are so "long" (investment slang) the American paper dream… sold to us by men who make potions in a traveling show.

Now here's a surprise
Singapore, Nov. 13 (Bloomberg) -- "Crude oil rose to a one- month high after OPEC said it won't boost output this year and may cut production as early as January, even as U.S. heating oil inventories are a third below year-ago levels."

This is very bullish for oil markets and bearish for the dollar even if the potential production cut is presumably to anticipate a slowdown in US demand… after winter. But winter hasn't even started yet. Again, we find ourselves confused about the oil market. What message were they sending when they raised output only recently, if they think that there is now too much supply? Does the action then imply a political favor, and therefore does the action yesterday imply a political statement? In light of recent political developments, it is likely. So while Al Gore, the American media, and the Fed insist on explaining rising oil prices in terms of an oil shortage, OPEC is suddenly telling us that there is too much supply.

Accommodating the Fed's explanation for rising crude prices, therefore, means that OPEC is being a bully, while accepting OPEC's position implicitly means that the price rise in oil is more likely to do with an oversupply of dollars than a shortage of crude product. So despite the alleged oil glut, prices jumped overnight on this news… even while Asian stocks got clobbered in the early Monday morning session, and even while US stock markets take out new lows in their Monday morning session, as I write this.

From Bloomberg again... "The Fed has little reason this week to raise interest rates for a seventh time since June 1999 on expectations figures set for release this week will show the U.S. economy has cooled."

What in the heck has that to do with inflation? This is very typical of the kind of general misinformation that the media reports today, though it increasingly seems like a "slight of hand" to me. Look, if the FOMC moves toward an easier money policy with today's inflation pressures, these journalists are going to have to go back to school and try to figure out what stagflation really means. For if it does so, it is either extremely ignorant of the nature of the current economic situation, or if not ignorant of the risks of such a move, certainly arrogant to think that they can be contained with a little push on the liquidity lever.

Let me show you something

{Chart S&P500 Year over Year total return; M3 YOY growth rates}

Note that while US money supply continues to grow at a good clip, the year on year rate of return on financial assets (as represented by the total return of the S&P500 stock index) has declined ever since 1998. Where is all the new money going then?

{Chart the Bond and the CRB}

Looks like a reversion to objective valuation for the US dollar is under way here. Please refer to last week's GIC, Declining Dollar Utility, posted at www.safehaven.ca, for an explanation of the term. Despite this, Wall Street believes that if the Fed pushes down on the interest rate level, stocks will go up. What if they don't? What if commodity prices and the Euro explode instead? Wouldn't that be fun?

This market wants to crack wide open
The Nasdaq 100 quickly broke to new lows on the Friday afternoon session, and took the composite with it this morning, confirming the bearish resolution of the hi tech advance decline line the week before (show charts).

{Chart both the ND 100 and the composite}

The blue chip averages have also turned down in sympathy of our October 30 stock market call, and also on falling cumulative breadth. If the S&P breaks through the 1300 mark and the blue chip barometer, General Electric, breaks through the $48 mark, there will be about an 80% chance for showers and thunder throughout the new and "real" economy alike this week.

{Chart GE and SP}

Friday's moves were accompanied by an important up tick in the Volatility index, and almost no change in the neutral Put/Call ratio, leaving the market wide open to a big surprise.

{Chart the Put/Call}

European stock markets, led by the French CAC and German DAX, have fallen right back through their 200 day moving averages, but they aren't moving as fast as American and Asian markets are. And while the Yen stays firm, the ECB continues to support the Euro independent of the gang at the US Treasury… note the higher low made last week.

{Euro chart}

The reason for the ECB action is to head off the inflationary pressures, which result from a weak currency. The message is its confidence and action, which imply that the bank thinks it can now turn things around for the currency.

So as long as oil prices move higher and higher, while bond prices ebb, the US economy slows faster than expected, equity prices continue to fall, and the political wrangling over the US presidency continues, the fundamentals for the dollar will slip s-l-i-d-i-n-g away. Increasingly, it seems as if the entire world knows this, but us. Hmmm… the information age?

Three cheers for the new economy…

 

Sincerely,

Ed Bugos