Hot and Steamy

“Recently, the president of Iceland, Olafur Grimsson, visited the U.S. to speak at a number of events and testify before the U.S. Senate Committee on Energy and Natural Resources.

“In a speech delivered at Harvard on Sept. 26, President Grimsson emphasized the importance of geothermal energy to the economy and society of Iceland. He stated that Iceland has undergone a “radical transformation” from dependence on coal and oil in the past 30 years. As recently as the 1970s, Iceland was among the poorest countries within what was then known as the European Common Market (now called the European Union). That is, by most measures of gross domestic product and other economic output, Iceland was an economic laggard.

“But then Iceland made a conscious, strategic commitment to develop its domestic geothermal energy resources. From large industrial projects down to the level of family housing, Iceland focused its public and private energy investment on making a geothermal energy vision into an energy reality. Now, according to what President Grimsson told his Harvard audience, Iceland is one of the most affluent nations in the world. Fully 100% of Iceland’s electricity now comes from renewable sources, geothermal and hydroelectric, and almost all buildings in Iceland are heated with geothermal energy. On the whole, about 72% of Iceland’s total energy usage is tied to geothermal sources, which eliminates essentially all carbon emissions and dramatically reduces reliance on imported fossil fuels of any type.”

Byron King
October 30, 2007

Now some views from Short Fuse – back in California…

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View from the Fuse:

The Canadian loonie hit a 47-year high versus the greenback today…actually, most major currencies are gaining in value against the faltering U.S. currency, as anticipation of a rate cut from the Fed tomorrow grows.

So here we are again…waiting and watching. Wondering what in the Fed will do in tomorrow’s FOMC meeting. Most have thought that the Fed will cut rates by at least a quarter percentage point…in fact, stocks have risen on that very belief. However, a Wall Street Journal article saying that the cut may not be a ‘sure thing’ has come and rained on everyone’s parade.

Greg Ip, who is the Journal’s ‘Fed-Watcher’ wrote in an unsourced article that the decision the Fed is weighing is not between whether or not to cut rates by a quarter- or half-percentage point – but whether or not they should cut at all.

The biggest risk central bankers face, according to Ip, is delivering a serious blow to an already-fragile market psyche.

“But the current market environment is more fragile than usual, and thus the consequences of disappointing the market are potentially more damaging. Against that, the Fed will have to weigh the risk that a cut will stoke inflationary psychology,” wrote Ip.

The Fed-Watcher also noted that there is little evidence that the housing decline has spilled over into the ‘broader economy.’ Hmmm…

We have Treasury Secretary Henry Paulson saying ‘no bottom’ for the housing slump has been found, and that we still have further to go…and the S&P/Case-Shiller home index showed that home values dropped 4.4% in the 12 months that ended in August…an eighth consecutive decline.

Now, we’re not sure if that falls into the ‘broader economy’ category, but falling home prices mean American consumers have less equity to take out of their homes…in essence, the ATM consumers have come to rely on is tapped out.

Oh, and what’s this? The Conference Board reports this morning that consumer confidence continued to decline in October, hitting a level not seen since the months following Hurricane Katrina.

Whoops…perhaps there is some sort of link between the economy and real estate values after all. Who woulda thunk it?

If you still need convincing, read Mish’s special report. It could be an eye-opening experience for you…after all – are you sure you know how much the real value of your home is?

The stock market rose yesterday. The dollar fell. As incredible as it would have sounded two years ago, oil now seems ready to go to $100…gold seems ready to cross the $800 mark.

Ai yi yi…the dollar is below $1.44 to the euro (EUR). But who cares? The experts tell us that the lower dollar is making it easier for U.S. exporters. American companies will prosper, they say.

The Fed is expected to favor U.S. exporters when it meets today and tomorrow. Many analysts are betting that rates will be cut another quarter of a point. Bernanke is much more worried about troubles in the housing market, they say, than about the falling dollar. They’re surely right. No one seems particularly concerned about a falling buck.

A dollar is a pound (GBP)… is a euro…is a peso. Our taxi ride from the train station in Köln to our hotel in Bad Godesburg was 70 euros. In Buenos Aires, it would have been 70 pesos. In the United States, $70 would be about right.

In Paris yesterday we had lunch with a colleague. It would have cost us about 40 pounds in London…40 dollars in the United States…or 40 pesos in Argentina. We paid 40 euros. But the real cost varies with the currencies. Americans are aghast at how much it costs to live in Europe…and pleasantly surprised when they get their luncheon check in Buenos Aires. Argentina is a cheap country.

“Well, it may be cheap for you foreigners,” Gabriela had told us, “but it’s not cheap for us.” Salaries are lower too. We’re outsourcing some of our publishing work to Buenos Aires because we can hire people for less money down there. And so as to economize your time, dear reader, we will jump directly to our forecast: soon, foreigners will outsource work TO the United States!

Aha…we’re ahead of the crowd on this one, aren’t we?

But look at what is happening. The dollar is falling. It may fall gently. It may rally. Or it may fall hard. But one thing is almost certain; it will be worth less in the future than it is today.

Everyone thinks the stock market is doing well…but look what it has done in terms of real money – gold. Richard Russell reminds us that you could have bought an ounce of gold on January 18th, 1980, for $835. On that same day, the Dow was only a little higher, at 867. In other words, you could have bought almost the entire Dow for one ounce of gold.

Oh, if only we had been around then to give you a Trade of the Decade – sell gold, buy the Dow. You could have watched your stocks go over 13,000…while gold fell below $270, at which point you could have traded your Dow stocks for 43 ounces of gold! What a trade!

Unfortunately, the Internet hadn’t been invented…The Daily Reckoning hadn’t been imagined…and your editor hadn’t the sense to make the call anyway. He was convinced, along with the rest of the gold bugs, that gold would keep going up. He was, of course, dead wrong. Gold fell and the Dow rose…not just for one decade…but for two!

But 20 years is a long time to suffer a bear market in your favorite commodity. It gives a man a reason to think…and time to do it. If he is still solvent…and still compus mentis…at the end of it, he has a great advantage over other mortals. He has made such a huge mistake for such a long time, the law of averages begins to work for him. Nobody can be that stupid forever.

Finally, the porch light comes on. ‘Hey…’ he says to himself. ‘Markets go up…and down.’

And so, with the confidence of the recently humiliated, your editor gave his legendary Trade of the Decade signal in January 2000: sell the Dow, buy gold. Since then, price of gold has more than doubled…and the Dow has edged up a tiny bit. Instead of getting 43 ounces of gold for the Dow, today, you will not even get 18.

We are only about half way through this cycle, we reckon. The Dow and gold will meet again, somewhere in the future. Probably somewhere in the middle – around 7,000…when investors have been turned off to U.S. stocks, and the Dow has sunk…and when speculators have bid up the price of gold to dizzy heights.

Then, trust us this time, dear reader, we will remember to give the ‘sell gold, buy the Dow’ signal. At least, we hope so.

Outstanding Investments’ Byron King tells us that no matter how high the price of gold goes, there’s a hidden way that you can get in – for just a penny per ounce.

In the meantime, America is probably getting cheaper. And Americans are probably getting poorer. That’s how the global accounts get settled. Americans owe a fortune to foreigners. As their paper money is marked down so is the fortune they owe. They will owe less. But they will own less too – because the value of their own dollar holdings…and dollar incomes…will go down. Foreigners will take advantage of the situation in two ways. They will buy U.S. assets at low prices. And they will take advantage of low U.S. wages by outsourcing some of their low-wage business to America.

America is a cheap country already; our guess is that it will get cheaper.

Back in the beginning of September, Frederic Mishkin, a Fed governor, estimated that housing prices might fall 20% by the end of 2008, and that it would reduce GDP by as much as 1.5% within three years.

That didn’t seem like much to us…certainly not enough to worry about. But Mishkin felt like a passenger on the Titanic; he wanted to find the lifeboats.

“Monetary authorities have the tools to limit the negative effects on the economy from a house-price decline,” Mr. Mishkin told his colleagues.

Then, in a speech October 19 on ‘monetary policy under uncertainty,’ Mr. Bernanke argued for acting sooner rather than later when risks become apparent.

“Intuition suggests that stronger action by the central bank may be warranted to prevent particularly costly outcomes,” he told a group organized by the St. Louis Fed.

The thought has been followed by the deed. ‘Strong action’ is what the Fed has already taken. Stock market investors have been reassured as a result. It’s the currency markets that are troubled. So far, so good. That is, so far no one seems to care much about the dollar losing its value. People hold trillions of them…earn them…invest them…foreigners even save them…and all of them seem convinced that this is only a temporary weakness in the greenback. Otherwise, they’d surely want to get rid of them, wouldn’t they?

Our old friend Rick Ackerman comments:

“We’ve long assumed that a collapsing dollar would take the global economy with it, but perhaps we were being too pessimistic? After all, the Dollar Index has fallen by 45 percent since 2002, but life goes on. Moreover, when the greenback slipped to historical new lows on Friday, hardly anyone seems to have noticed. Or rather, if they did notice, it was deemed reason to celebrate. The Dow Industrials shot up 135 points as stocks rose across-the-board – especially precious metal shares, which may finally be starting to reflect fears that there is nothing to prevent the dollar from slipping still lower. Perhaps much lower…

“Some years ago, when bullion turned feisty after dipping briefly below $300, [Larry] Kudlow suggested in a Wall Street Journal op-ed piece that gold would find ‘equilibrium’ at around (if memory serves) $330 an ounce. Any higher would mean that U.S. monetary policy was too loose, explained Kudlow, and any lower would indicate that money was too tight. Now, with bullion quotes about to blast through $800, we would surmise that the pathologically bullish Kudlow, and just about everyone else with a listing in Who’s Who in Economics, have simply ‘adjusted’ to that likelihood. Gold bugs have adjusted too, in their anxious but canny way, and are poised to reap a huge windfall. As that timeless trader’s adage reminds us, ‘He who panics first, wins.'”

“Time is money,” say economists. If time is money, what isn’t it? It struck us recently how shallow economic thinking is…which led us to think about how shallow all thinking is. Economists tell us that all our decision-making is, or should be, based on rational calculations involving quantifiable – or at least appreciable – results.

When a woman – or a man, for that matter – leaves the home and enters the workforce, the total output of the economy tends to go up. One more person has taken his place in the big machine…producing an incrementally observable quantity of extra output. GDP rises. Now the person is doing something measurable! Something that modern life can appreciate! And now we know that the person is worth something; he earns money. We can tell how much he is worth by looking at the money he earns.

But what about what he has given up – free time…time with the family…time for other things? Well, say the economists, he does a calculation…he figures out what those things are worth to him and compares it to what he gets out of working.

Yes, but that is where life begins to imitate academic theories. People do not make their calculations in a complete void. They make them in the context of popular tastes and attitudes, which are shaped – in part – by the dead economists who tell people how they’re s’posed to act.

Until tomorrow,

Bill Bonner
The Daily Reckoning