The Vicar of Bray

The Daily Reckoning Weekend Edition
May 22-23, 2004
Baltimore, Maryland

"And this is law, I will maintain Unto my Dying Day, Sir. That whatsoever King may reign, I will be the Vicar of Bray, Sir!"

— The Vicar of Bray (chorus from a traditional English Folk song)

"And so it is with Greenspan," writes our friend Chris Mayer in an email sent yesterday, "who was nominated
again for another term as the chairman of the Federal Reserve, a position he has held since 1987. Like Simon
Aleyn, the Vicar of Bray in Berkshire, England from 1540-1588, who survived the power struggles between the Catholics and Protestants to remain Vicar of Bray, so too has Greenspan survived the political squabbles of Democrats and Republicans over the years to maintain his position as a widely respected Fed chief." More on Greenspan’s political and economic quislingism below…

The market action was boring this week, which, in itself, is rather interesting. The Nasdaq gained 8 points over the week, to close at 1,912. The Dow lost 46 points to end the week at 9,967. And the S&P lost 0.2%,
closing at 1,094. Volume was anemic… the Nasdaq had it’s lowest volume day of the year on Tuesday. Corporate earnings were strong, while economic data were scarce.

Geopolitical news hogged the limelight… on Monday, an electoral snafu spooked Indian markets, knocking 11% from the senior stock index in Bombay. Troubles persist in Iraq… the head of the Iraqi governing council was assassinated in Baghdad and more bombs were seen in Turkey. Gold and bonds were the only winning asset classes last week, as investors sought shelter. Bonds had their first winning week since early March; the 30- year Treasury bonds currently offer 5.46%, having closed the previous week at 5.5%. Gold added $6, reaching $382 in London’s Friday fixing.

Gold was helped by Federal flatulence. Governor Ben Bernanke let the market know that he thought that: "a
significant portion of the financial adjustment associated with the tightening cycle may already be behind us." Although interest rates still remain at 1%. Ben ‘Printing Press’ Bernanke is comfortable with current levels of inflation, and sees little threat of price instability in the future. Bob McTeer, of Dallas Fed infamy, echoed his sentiments, saying that he was unconcerned by inflation, although the recent acceleration in price indices had caught his attention.

Gold appeared to rally on the news that Greenspan had been reappointed to serve a fifth term as chairman of
the Federal Reserve. Greenspan is gold’s greatest ally… he loves to print money. But it wasn’t always so…

"As of the mid-1970’s," writes Justin Martin in a book titled ‘Greenspan’, "Greenspan was an inflation hawk of the first order. ‘If inflation continues, our system will not hold together in its present form,’ he said
[Greenspan] during the fall of 1974."

"By the summer of 1975, the economy was showing the first tentative signs of recovery. The trough of the
recession had been reached in March, and unemployment had peaked in May at 9 percent. From there, the economy began a long slow climb.

"More than anything, the economic resuscitation confirmed a view that both Greenspan and Ford shared in
the primacy of a laissez-faire approach. There had been five recessions since World War II, and the economy had always come back. While some would argue that the recovery was due to savvy intervention, Ford and
Greenspan would counter that it was in spite of intervention. Markets are smarter than the government
bureaucrats who meddle in them, or so goes the classic argument.

"’One thing that we know about our economy is that it attempts to eliminate imbalances. In other words, it
leans more toward some state of equlibrium,’ Greenspan told U.S. News and World Report, explaining the swing from recession to recovery. At a later date, he amplified this view: ‘I often come out almost ad nauseam with free market solutions not because I have an ideology, but because I believe it works. Where it
doesn’t, I recognize that it doesn’t. But my inclination would be to believe that the system works. There are
others that believe that unless you prod it all the time, it will never function.’ Intervening in a serious
Keynesian way might have done even more harm, at least in Greenspan’s estimation." Hmmm…

The Vicar of Bray served his parish during the reign of no less than four monarchs. Greenspan has now served no fewer than four presidents. Ronald Reagan first appointed Greenspan in 1987, replacing Paul Volcker. Geo Bush Senior, Bill Clinton, twice, and now Geo Bush Junior, have all re-nominated him as Chairman. Of course, it always helps if you can change your allegiances at the drop of a hat…

Regards,

Tom Dyson
The Daily Reckoning
May 22, 2004

THIS WEEK in THE DAILY RECKONING

ASCENSION DAY 5/21/04
By Bill Bonner

"… One of the wonders of the modern world is the dollar. The U.S. is not Thailand and the dollar is not
the Baht… but like the Baht, the dollar is paper… backed by nothing… and minded only by an organization – the Federal Reserve System – whose motives are suspect and whose competence is doubtful… "

BOB THE PLUMBER 5/20/04
By Karim Rahemtulla

"… Bob came through and we met for lunch. He was very excited about the stock market. He was making a lot of money using this new system that worked solely by using standard deviations and trading in the first ten minutes of the day. I pretended to care. I was actually upset. "Bob, I thought you gave up day trading after getting killed in the tech-bubble." I prodded… "

FLASH BUBBLES 5/19/04
By Dan Denning

"… Third, however, and greatest of the policy blunders is the assumption that monetary policy can cause wage inflation. Because of this error, the Fed is about to discover that its entire effort to reflate the economy
through low rates has failed. And it is nearly out of interest rate bullets… "

RUNNING OUT OF GAS 5/18/04
By Dan Ferris

"… That’s right. A lone, part-time employee was charged with the responsibility of auditing the entire reserve base of the second-largest company in the largest industry on the planet… "

WORTHLESS VIRTUE 5/17/04
By The Mogambo Guru

"… After spending his entire freaking career providing more money and credit so as to finance the world’s all- time record-setting bubbles of debt in every market that you can name, NOW he takes the time to ask if market forces can take care of debt? Hahaha… !"

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HEADLINE, NEWS And INSIGHT:

E-Ring Hubris
by Byron King

"… A loss of face by the U.S. in the Middle East, through death of a thousand cuts at our people and interests, could end the willingness of the American people to go abroad ‘looking for dragons to slay,’ in
the words of John Quincy Adams. After 90 years, G.W. Bush might preside over the undoing of the Wilsonian
drive in American foreign and military policy… "

Al-Addin’s Lamp
by Sean Corrigan

"… Indeed, the recent history of bail-outs, emergency rate cuts, the instant provision of vast swathes of
‘liquidity’, and other such interventions undertaken by the central banks in the face of anything from the
Mexican crisis of late-1994, through the Asian Crisis of 1997/8, the Long-Term Capital Management fiasco, the Dot.com bust, Y2k, 9/11, and so on and so forth, argues strongly that whenever the US financial system (in particular) is threatened, the floodgates are opened without further ado, even if ‘rules’ have to be infringed and the dictates of best practice eschewed in the process… "

Mawkish Investing
by Lord William Rees-Mogg

"… Apparently the Ambassador bought the painting for $30,000 in 1950. That did give me a tinge of regret. I did not have $30,000 in 1950 – it was then a far bigger sum than it is now – but I did pay about $10,000 for my first house in 1952, so I could have potentially raised enough money to buy a lower-market Picasso… "