Chicken!

The Daily Reckoning Weekend Edition
July 31-August 1, 2004
Baltimore, Maryland
By Addison Wiggin and Tom Dyson

Here’s another market anomaly for you, dear reader. Crude oil posts a fresh multi-decade high and stocks go up! That’s what happened last week.

"It’s almost as if there’s a game of chicken being played by the oil and stock markets," says the Speculative Investor. "The stock market appears to be banking on a weakening in the oil price while the oil price refuses to fall as long as the stock market remains elevated."

Oil rose 5% this week and now sits at $43.80 a barrel. For once, the heat was on in Siberia as the world’s gas-guzzlers blamed Yukos for oil’s surge. Readers already know that the Kremlin has the oil company trussed up in a straightjacket. But last week, they told Yukos to stop selling oil. As it happened, Yukos chose to ignore the order and carried on pumping; it didn’t matter: the oil traders still carried on buying.

Meanwhile, U.S. stocks plowed ahead…the S&P snapped a six-week losing streak with a 1.4% gain. It closed Friday at 1,102, up 16 points. The S&P is now only down 0.9% for the year.

The Dow was even stronger, adding 178 points or 1.8%. We are now back above 10,000 – 10,140 to be precise – and only nursing a 3% loss on the year. The Nasdaq added 38, equivalent to 2.1%, closing the week at 1,887.

A solid performance indeed and a remarkable victory for blinkered investors. Not only did they ignore oil’s cry for attention, they gave the cold shoulder to the latest poor growth statistic. It turns out that the U.S. only grew by 3% in the second quarter against Wall Street’s expectations of 3.8%. This second anomaly is easier to explain: GDP reports are backward looking while the stock market looks forward.

Still, the news must be of some concern to President Bush. This quarter’s reported level of consumer spending, which accounts for two-thirds of American economic activity, is at its lowest since spring 2001. Greenspan reckons it was a "soft patch," but year-over-year M2 growth – an excellent leading indicator of real GDP growth – just hit an 8-year low. "[This] suggests that the U.S. economy will continue to slow during the third and fourth quarters of this year," writes Steve Saville.

Gold roared back on Friday with a gain of $4.10, erasing the losses of the previous 4 days. At $391.4, the ‘relic’ was unchanged on the week…it had been as low as $386.2 on Wednesday. The euro is still trading above 1.20, but only just. On Friday it closed at 1.2009.

Can the Greenback continue to defy its fundamentals? We shall see on Friday with the release of July’s employment report…

Plain sailing,

Tom Dyson
The Daily Reckoning
July 31, 2004

P.S. It’s starting to snowball…housewives’ favorite Addison Wiggin is quickly becoming a radio star! Here’s another great interview…(when you are done with Addison, there’s also an interview with Jim Rogers. Enjoy!) Internet killed the radio star?

THIS WEEK in THE DAILY RECKONING

GIVE ME LIBERTY, OR GIVE ME PEPPERONI                    7/30/04
By Bill Bonner

"…In the early years of the 21st century, anno domini, America seems especially bent towards self-deception. The last thing we want is a leader who will jeopardize it. What the two candidates have in common is that neither threatens America’s happy delusions. One pretends he is not smart enough to see them; the other is plainly not dumb enough to disturb them…"

MAKE THE DESERT BLOOM                                          7/29/04
by Dan Denning

"…Stephen agreed with that and asked me to imagine a world where the basis of the currency is the faith we have in each other as human beings, as wealth producers. What kind of great societies could we produce if we abandoned the mental trap of scarcity thinking and unleashed human capital on the world…?"

MISESIAN FOR LIFE                                                      7/28/04
Llewellyn H. Rockwell, Jr

"…But there are other aspects to his life and career you may not know. Sennholz was the first student in the United States to write a dissertation and receive a PhD under the guidance of Ludwig von Mises. Mises had only recently completed "Human Action". Imagine how having such an outstanding student, and a native German speaker no less, must have affected Mises’s life…how it must have encouraged him to know that his work could continue through outstanding thinkers such as this…"

FENDER BENDER                                                        7/27/04
by Gary Shilling

"…When those foreign producers started to build auto plants in this country, Detroit welcomed them, reasoning that these foreign-owned automakers would be saddled with the same oversized costs and inefficiencies that had infected the U.S. companies. But the transplants soon proved that they could utilize American workers efficiently and pay them much less than the United Auto Workers’ scale…"

HOWLING WOLF                                                      7/26/04
by The Mogambo Guru

"…In fact, it is exactly what the American government SHOULD be doing too, but they don’t. Instead, our idiotic government spends all their time and money growing the bureaucracy like a cancer, and installing every idiotic socialist, communist, and fascist entitlement program that they can think of. And now look at us…!"

————————————————————————————————

HEADLINE, NEWS And INSIGHT:

The Law of Perverse Outcomes
by Dan Denning

"…Bondholders of the world beware. Those that have guaranteed your debt (the US government, British government, Washington-back mortgage lenders Fannie Mae and Freddie Mac, derivatives insurers) are running tremendous risks. I say "those" but what I really mean are individual traders now responsible for managing complicated positions AND making a profit. There’s a long history of traders in risk making faulty calculations…"