January 16, 2004

Newmont Weekly Close Chart

Since I looked at Anglogold, I thought I'd take a look at Newmont (NEM) below, too. Note that both charts cover the last two years, with weekly closes, and a 20-week moving average. I built them this way (with the always helpful bigcharts.com) to filter out the daily noise and show you what the more durable underlying trend is right now. You can see that NEM did close under its 20-week MA yesterday. But unless it moves well below that, I'd view now as an opportunity to accumulate more. Spot gold may hold above $400 before making its next big move on the dollars next big move. And gold stocks might move sideways and consolidate their good run. This is the time to buy them, though. Not bail on them.

What Gives With Gold?

Two questions in the hopper today from readers... Question: What the hang-doodle is happening with gold? Newmont Mining(NEM)and Anglo-Gold(AU) have dropped dramatically over the past three days....like $8.00 per share for both of them! Question: Dan, What's going on with AU. I'm getting slayed! Answer: part profit taking part dollar strength. The dollar has stopped making new record lows against the euro....and this probably looked like a good moment to take some profits for investors who've watched gold stocks roar up in the last year. My contention for the last three years has been that this is a multi-year bull market in gold that will see an ounce of gold equal a share of the Dow. That means gold stocks, even at current multiples, have a long way to go. Holding on to a stock during a bull market is an emotional challenge. You'll want to take profits. And frankly, if you can't sleep at night, or eat a decent lunch, or need the money, then maybe you should take some profits. But I think if you hold on now, or view these moments as chances to accumulate more gold at lower prices, you're going to be rewarded later. If it's any consolation, take a look the chart below. It shows Anglo Gold (AU) in the last two years, during its rise from under $20 to over $50. The yellow line is the moving average...which while flat now, is not down...and you'll notice the stock is trading right near it. The blue line is a flatter line of support...which would mean in my worst case scenario, the stock could go as low as $35 before finding support. Based on today's action (up 0.44%) I think the profit takers, the weak hands if you will, are out. Now is a good time for the strong hands to get even stronger.

Government Spending and Revenues as a % of GDP Over Time

Mucking my way through IMF and Federal Reserve data....I found a chart put together by Daniel Schmelzer at Carried Away, another blog (there are tons of interesting blogs out there.) The chart shows that total government spending as a % of GDP has been fairly constant since the Depression...but that it's rising recently....

More "Stealth Financials"

Hat-tip to August Cole at CBS.marketwatch for this story showing that two big industrial giants are making most of their money as financial companies, not as manufacturers. It's a point I made in the Housing Report I just finished. A lot of economic activity in corporate America is now leveraged to low interest rates and the huge market in Freddie Mac and Fannie Mae bonds. Cole says (emphasis added), "The finance operations at both companies have been a cornerstone of their profitability. Fueled by the housing boom, General Motors Acceptance Corp. and Ford Credit can be expected to be the most profitable units. In the prior quarter when GM beat Wall Street's profit expectations, the finance operations of more than $600 million. The worldwide auto operations earned just $34 million." In a page from the playbook of the bizarre, GM's Q3 earnings were 79 cents a share, down from $1.57 from the previous quarter. Yet shortly thereafter, the stock rallied from $43.55 to $53.90--largely on the strength of the news that GM had cleaned up its underfunded pension mess. Wall Street is looking for GM to come in with EPS at $1.26 per share. That sure WOULD be an improvement over 79 cents. But it doesn't really bother anyone that the finance arm is making 17 TIMES MORE MONEY than auto operations? If you think GM is bad, check out Ford's most recent quarterly filling. I've excerpted a piece of it and posted it, with highlights. You can find it here. But if you want just the facts, try this on for size...in the nine months ended September 30, 2003...97% of Ford's pre-tax income came from its financing operations NOT its automotive operations. Here is a company borrowing money to lend to its customers so they can buy its cars. It counts those loans as assets...but it must borrow money to extend the credit in the first place. That...or buy a mortgage-backed bond and use the proceeds from American homeowners to lend to American car buyers.....does it get any more bizarre? If a rise in interest rates precpitates a default on mortages...GM and Ford lose income on their bond portfolios...and probably lose monthly payments from car buyers (after all car buyers and homeowners are the same person...the American consumer.) It's all come down to interest rates now.... Do either of these dogs deserve to be taken out back and put out of their financial misery? Well....Wall Street has taken them both out to the woodshed in the last few years. But on a shorter-term basis, you can see from the chart below that when GM cleaned up its pension mess....investors sent it well above its 50-day moving average. At $55, it may have run out of gas...

Personal Balance Sheets in 2004, Up in Flames?

Ran across the figures below in an IMF report on the global economy. Two questions pop into my mind looking at. 1) Will savings continue to rise if the Bush tax cuts aren't permanent? It was the tax cuts that led to the rise in the savings rate. Without them, the fiscal position of the American consumer will deteriorate even more. 2) Rising housing and real estate values supported consumption (mostly through home equity withdrawls). What happens if housing and real estate values imitate the trajectory of stock prices? It wouldn't even take a collapse in real estate prices to deliver a blow to consumption growth...just a slow down. Through tax cuts and low interest rates and a huge Federal deficit, the government and the Fed shot a lot of monetary and fiscal bullets to keep the economy growing and Americans solvent. Can they do the same in 2004? I'm not betting on it...

On Pace for $512 Billion

Yesterday's release from the Treasury Department showed a $128 billion dollar deficit in the first quarter of fiscal year 2004. The Federal government is on pace to rack up a $500 billion deficit. John Snow says it doesn't matter because, the deficit, as a percentage of GDP (4.5%) is still smaller than it was during the Regan years (around 5%). Dick Cheney, (if you believe Paul O'Neill), says Reagan proved deficits don't matter at all. They might, especially to voters...and to the bond market. Total government spending will hit around $2.3 trillion this year. That's 20% of GDP. GDP is $11.1 trillion. Remember, this is just the Federal government we're talking about. Total government spending as a percentage of GDP (including state and local government) is nearing 30% of GDP-- a level it has not reached since the Great Depression. So...government at all levels is doing everything in its fiscal power to get the economy going....the Federal Reserve keeps short-term interest rates at a 45-year low...and Bush even throws in a tax cut over a $1 trillion in 2003. Isn't it just a little odd that the nation's monetary authorities are resorting to historic measures...and yet no one in the stock market seems to think things are terribly different or intersting right now? The budgetary picture is awful...and yet yesterday the dollar rises against the euro to make it's first weekly gain in a month, bond prices go up, and Fed President Robert McTeer said he's ``in no hurry'' to raise rates. Does anyone care about deficits anymore?

January 14, 2004

Still no luck on Asia 2025

Got some good tips from readers on where to find Marshall's paper on China...especially a version at the National Defense University. However some readers have said the paper may not have been released to the public...even if parts of it have been leaked. I wonder. And I've checked with several webmasters...no response yet. Meanwhile, the plot thickens. Turns out the co-author of the report is non other than James Roche, current Secretary of the Air Force. Roche was the keynote speaker at the UAV conference I attended in Washington, DC in early December.... Why do I care about this at all? It's not so important what "I" think about the strategic relationship between the U.S. and China. But is important to understand how policymakers in both countries view each other. And the short answer to that question is, "not very kindly." What has "leaked" from Marshall's Asia 2025 report and from selected Chinese open-source papers on future warfare...is that both sides view the idea of warfare itself expanding to include, more overtly, economic and financial warfare. Obviously, this has always been true. The U.S. is the master at using the currency and trade policy (most favored nation status) as a lever in foreign policy. No surprise that China would do the same. What's worth considering is whether not this future warfare is just more intense economic competition...or competition in which the financial systems of other countries become targets in a military sense. Finding out just what China and the Pentagon have to say on that subject is the object of my research...and will give us a clue about what kind of investment world we're going to be living in....

Quote of the Day

Can you guess which largely non-laissez-faire central banker said this yesterday? "...material wealth resulting from market-driven outcomes facilitate the pursuit of broader values. They support a system based on voluntary choice in a free marketplace. The crux of the largely laissez-faire argument is that, because unencumbered competitive markets reflect the value preferences of consumers, the resulting price signals direct a nation's savings into those capital assets that maximize the production of goods and services most valued by consumers. Incomes earned from that production are determined, for the most part, by how successfully the participants in an economy contribute to the welfare of consumers, the presumed purpose of a society's economy. "

Painless Devaluation, Scrap Metal Boom

The BLS reported December U.S. Import/Export prices yesterday. The numbers showed that a weaker dollar has not made U.S. exports a lot cheaper, or foreign imports a lot more expensive. They also show that it’s good time to be short-term bullish on oil, long-term bullish agricultural commodities, and ready to tear out the plumbing of the vacant tract homes in the nearest neighborhood when interest rates rise….But first…the numbers. Export prices rose 0.2% in December, after a half a percent rise in November. And over the last twelve months, export prices are actually up 2.2%. That’s the biggest one-year gain since 1995. But when you look closer, higher export prices don’t mean that U.S. businesses were suddenly more competitive because of a weaker dollar. In fact, one-way of looking at the marginally higher export prices is that it inflation in commodity prices, pure and simple. Prices for feed, wheat, and soybeans were up 13.6% in the last twelve months. By contrast, non-agricultural prices were up only 1.3% in the last year. Where is the profit windfall for U.S. exporters? On the export side of the ledger, prices for non-agricultural industrial goods and metals are rising, up 5.9% for the year on the strength of oil. Capital goods prices have fallen half a percent in the last twelve months, while consumer goods prices have actually increased 0.8%. The textbook theory is that higher export prices mean a weaker dollar is working its soothing powers on exporters. Exporters are able to raise prices without raising costs in the local currency. Yet even on a year-over-year basis, the BLS numbers show that the only real growth in export prices (and presumably in profits) is in commodities, not manufactured goods. On the import side of the ledger, the textbook theory is that a weaker dollar raises the price of foreign goods. Nice theory. But does it hold up? Import prices ARE up in the last twelve months, by 1.9%. But again, it was energy and commodity prices driving the growth--and price increases in those kinds of products do not cause consumers to choose a domestic over a foreign producer. It does not make U.S. firms any more profitable. Petroleum prices were the single largest factor in the rise in any event, up 9.1% in the last twelve months. Non-petroleum import prices--prices for everything else--are up ony 1% in the last year. And prices for imported capital goods were actually down 0.2%. So, the dollar can have can be competitively weak, yet it does not cause a substantial increase in the price of foreign goods. And by extension, there is NO windfall for U.S companies. By the way, where import prices WERE rising, they were rising for imports of metal, industrial supplies, and materials (up 6.7% over twelve months). Again, this just confirms that while price inflation may not be showing up in finished goods, it IS showing up in raw materials, i.e. commodities. Why has the theory that a weaker dollar will lead to higher exports and lower imports broken down? A weaker dollar should, repeat should, cause import prices to go up. To compensate for the falling dollar, foreigners raise the prices of their goods to retain profit margins. But that hasn’t happened at all. And that’s one part of the explanation. Import prices haven’t risen much because foreign producers pay such cheap labor and manufacturing costs, they can afford even a smaller profit margin and don’t have to raise prices. What’s more, in Asia at least, the dollar’s fall has been matched by competitive devaluations, keeping Asian profit margins on exports to the U.S. relatively stable. That’s not to say the dollar’s weakness hasn’t caused any pain for some foreign producers. Import prices rose on goods from Europe and Latin America. EU import prices are up 3.3% in the last twelve months. Latin American import prices are up 3.5%. But the price indexes for Japan and the newly industrialized countries in Asia show that import prices actually decreased by 0.4% over the last twelve months. Greenspan (who, based on his recent speech, believes in a free market for everything EXCEPT interest rates) seems to have concluded that all of this is just fine. It’s a painless devaluation. While the dollar’s decline hasn’t had any discernable benefits to U.S. exports, it hasn’t really had any discernable costs either. Since there hasn’t been any rise in consumer price inflation, or in finished goods, Greenspan can look the other way, keep his foot on the monetary gas pedal by keeping rates low, and hope for a more robust recovery. But there HAS been some inflation…namely in crude oil prices and commodities. And here, indirectly, we may finally find an event that forces the Fed to raise rates. Two, even. First, dollar weakness IS putting a big hurt on foreign holdings of U.S. financial assets. When the currency loss on dollar-denominated financial assets becomes prohibitive to owning them, either the Fed will raise rates to strengthen the dollar, OR, foreign holders will cut their losses and get out (or at least reduce acquisitions of dollar-denominated assets.) THAT, as patient readers know, has not happened yet. Keep in mind, though, that the weak dollar is not the only factor to consider here. Stock markets themselves will have a lot to say about the willingness of foreigners to bear the currency pain. Even if the dollar stabilizes at around 1.25 to the euro….stock markets will still have to deliver big gains to continually offset the currency cost of owning the dollar. A month or two of poor stock market performance brings the pain home to Europe even more acutely, and could itself account for the selling of U.S stocks and bonds--with our without more belly flopping by the dollar. But the more indirect cause of higher U.S. interest rates and a move to boost the dollar may come from higher oil prices. Oil, at least in euro terms, as NOT risen that much at all. I refer to a chart produced by my main macro man, Greg Weldon, showing that euro strength has kept crude prices from appreciating in euro terms. But crude is NOT priced in euros, not yet anyway. It’s priced in dollars. Dollar weakness is not leading to huge reductions in U.S. purchases of foreign goods. But it IS leading to higher energy costs for EVERYONE in the world. Dollar inflation is showing in crude oil prices. It’s a double whack for the rest of the world. Whack one, as the dollar falls, the value of your dollar-denominated investments fall too. Whack two, as the dollar weakens, your own energy costs rise. This recent rise in crude oil prices doesn’t have much to do with critical shortness of supplies or high winter energy demand in the northern hemisphere. True, Chinese trade figures revealed that Chinese 2003 crude oil imports were 31% higher than 2002. There IS a huge and sustainable increase in energy demand coming out of Asia for years to come. But right now, higher oil prices are a function of dollar weakness: inflation pure and simple. And so, dollar weakness has taken a rather indirect approach toward forcing the Fed to raise rates in 2004. So indirect in fact, that the Fed will probably shrug it off. The Europeans--who are being punished with higher dollar-energy costs, may decide to do something on their own to arrest the dollar’s ascent. But for the most part, dollar weakness is, as Lord Rees-Mogg said last week, a European problem for now. If the Fed is willing to sit on the sideline and watch crude prices and agricultural commodity prices rise without raising rates, what should investors do? Well, since the Fed is not inclined to raise rates any sooner than it has to, and since the ECB and the rest of the world can only do so much (other than pricing oil in a basket of other currencies rather than dollars) dollar weakness is going to keep showing up in higher oil prices AND, as the export/import price indexes showed, in higher agricultural commodity prices. Should you be long-term oil bullish? Higher oil prices (whether it be in dollars or some other unit) ARE a function of long-term supply/demand dynamics. But oil prices are also political. Energy costs hit voters in a way that makes headlines and causes anger. And so I think the increase in oil prices is “tradeable” event, but not something you want to bank on for the rest of the year. You can trade the oil indexes, though…OIH and the OSX come to mind for options traders. Longer-term, you CAN invest in the growth of global demand for commodities. There are political elements to the price of some agricultural commodities. For example, cotton prices were up 19.8% in the last twelve months, on the strength of the U.S. subsidies and tariffs (or on the backs of U.S. taxpayers, if you want to know the truth). But even without government intervention or a weaker dollar, commodity prices are going to rise on the back of growing demand. In the February issue of Strategic Investment (which I’m working on right now), I’ll tell you how to profit. On top of the Scrap Heap By the way, for data junkies…the category of U.S. exports that enjoyed the single highest growth in prices over the last twelve months was…drum roll please… scrap metal at 38.9% Let’s hear it for a weaker dollar boosting the competitiveness of scrap metal exporters!! I point this out to suggest that maybe the best business you could get into right now is buying up foreclosed homes, tearing them down, salvaging the scrap metal, and selling it to China for a profit. It IS bizarre though, isn’t it? It reminds me of a story a few years ago about a warehouse in London where new computers were being disassembled and stripped of the precious metals and scrap in them that could be sold at a profit. This is the dynamic of “Value Subtraction” that comes at the end of capacity booms. Doesn’t matter if it it’s an IT boom, or a homebuilding boom. What happens is that the overcapacity in the production of an asset leads to value of finished asset being less than the parts. In other words, the parts are worth more than the whole.

January 13, 2004

Weekly and Monthly

That's it for the blogging today. I'm fixing to send out the weekly e-mail...and this is also the week I put together the dead tree version of Strategic Investment. And off I go...

Ownership, Insurgency, and Indirect Experience

Below is an excerpt you can from the Strategic Issues Research Institute you can find here, or, if you prefer cutting and pasting your links, here... http://www.siri-us.com/backissues/2003/SIT_03-08-07-Iraq-Transformation.rtf It's a list of books recounting the British colonial experience in Mesopotamia. It's interesting he mentions De Soto. When Addison Wiggin and I went to De Soto's lecture on "The Mystery of Capital" this fall, I was struck by how simple the conept is, but how complicated the execution is. In a nutshell, freedom and property are related. Where title to property is transparent and recognized, people flourish. Where it isn't, the "capital" that comes when you apply ownership to the land is wasted, or at least lays fallow. "Titling" existing landholders is one way to move forward...not a bad idea in a country where the State could confiscate or distribute property according to the whims of the dictator. Then again...if there's no tradition of private property, finding out who really DOES own it could be mess. I'm posting this excerpt as a follow up to the New York Times Magazine article, "Major Nagl's War," that I mentioned last night (registration required at NYTIMES.) The Times article is outstanding. Ironic, I know, given that I made the claim earlier this week about big media not having any substantial advantage over anyone when it comes to information. Newsgathering itself--which the Times story is a great example of--is the collection of raw information that might not otherwise get out. And when it's the kind of newsgathering that sums up the actual experience of a person, it's even more invaluable. It comes from direct experience, but comes to use indirectly...through a written account (rather than actually having to learn it ourselves firsthand). The great military historian Liddell Hart said that, "Direct experience is too inherently limited to form an adequate foundation for either theory or for application. At the best it produces an atmosphere that is of value in drying and hardening the structure of thought. The greater value of indirect experience lies in its greater variety an extent. 'History is universal' experience'--the experience not of another, but of many others under manifold conditions." Here's the excerpt from the SIRIUS paper. And as interesting as it is...after reading the Times article...I'm not sure even the most well-prepared Americans will have much success unless the Iraqis genuinely want to as well. "First and foremost, every soldier deploying to Iraq should get an indoctrination seminar that includes a screening of the director's cut of Lawrence of Arabia, and a post screening discussion. That film addresses all important elements of the Arab culture, including hospitality, courtesy and intertribal blood feuds. Officers should be encouraged to read Lawrence's Seven Pillars of Wisdom (available at B&N or Amazon). "For further insight, commanders would do well to read John Bagot Glubb Pasha's War in the Desert (on fighting Wahabi raiders in Southern Iraq 1929-30) and A Soldier with the Arabs (The Arab Legion 1939-56), then track down Major CS Jarvis' Arab Command: The Biography of LTC FC Peake Pasha, about the foundation of the Arab Legion as a constabulary force in Trans-Jordan from 1920-39. On constabulary matters, British Major General Sir Charles W Gwynn published Imperial Policing in 1934. It is a primer containing The Nature of the Army's Police Duties, and Principles and Doctrine and 10 live-fire case studies between 1919 and 1931. These books are out of print and have long since been discarded by US military libraries. They can be found through www.abebooks.com and the Defense Department would do well to arrange new editions for course work at the JFK Special Operations School, National Defense University and the Army/Navy War Colleges. Copies of some of these books continue to lurk in some state library systems and can be borrowed out. "One anecdote about accountability comes from Jarvis' book: "Up in the extreme north of Trans-Jordan, a British official, short of funds, police, officials and everything that goes to form a government, evolved an ingenious system by which he formed four separate and independent districts which were normally most hostile to each other. By this arrangement he could preserve peace and public security by threatening any recalcitrant district with an attack by the others. This system worked like a charm, and as long as this official was in power, harmony reigned." - Maj CS Jarvis, Arab Command; the Biography of LTC FG Peake Pasha; Hutchinson & Co: London, 1942; p. 66 "Finally, commanders should read Peruvian economist Hernando DeSoto's The Mystery of Capital and, if really curious about the art of reconstruction under fire, "The Other Path." These deal with structural economic reform of developing societies as an alternative to revolutionary movements such as Sendero Luminoso (Shining Path). "

Chart of the Day: Silver vs. the S&P

'nuff said...

January 12, 2004

The Army and Counter Insurgency

Hmmm. It's late in Paris...and I haven't had time to read the whole thing...but looks like some people in the army may know a thing or two about counterinsurgency. (registration at NYT required)More tomorrow....

St. Paul's and "The City"

Wasn't able to get the pictures of the "proper" English Breakfast I'd hoped for. But I did get this nice one, I think, taken from the 12th floor of Centre Point Tower in the U.K. office. And for a little better image quality...try this... DSC00041.JPG

No Better Friend, No Worse Enemy

You're starting to see snippets of stories about the upcoming troop rotation in Iraq. 130,000 soldiers and Marines are leaving...and 110,000 soldiers and 20,000 Marines are replacing them. That means the Pentagon is going to be moving 240,000 soldiers...a heckuva logistics challenge, at the very least. What's more interesting is who will be going where. Right now, it's the Army and especially the digitized 4th Infantry Division that runs the show in the so-called "Sunni Triangle" where the Hussein loyalists are. The 4th ID has taken to some harder-line tactics...surrounding villages with barbwire for example, to bring down the hammer on the insurgents. The commander of the First Marine Expeditionary Force, Lt. General James Conway, says the Marines won't do that. He plans on using a "velvet glove." It's not just semantics. Conway's Marines were stationed in the mostly Shiite south during their first deployment, and didn't have to deal with the restive Sunnis in the north. But the Marines also have a very different approach than the Army...at least it appears that way. I'm working more on this in the Defense Report I hope to have ready by the end of the month. Part of it is just size and money. The Marines are smaller than the Army and are, in fact part of the Navy. The Army is a large bureaucracy. The Marines pride themselves on adaptability and improvisation. And their Small Wars Manual ( a compilation of combat tactics and strategy in the banana republic wars of the 19th and early 20th century) prepares them for asymmetric warfare better than any U.S. service. Where the Marines end up in Iraq, I think, will have a lot to do with how smooth the transition goes for U.S. forces. I asked an old friend of mine (a Marine who ended up in Kirkuk and Mosul during the war) if he was hearing anything about the Marine's different approach come this spring. Here are a few of his comments: "Marines don't go where they don't have to go. Some times it seems like the Army just strolls through the town for no reason and then they get hit b/c they don't have the {sic} ass behind them to back it up. I bet we will base our operations off the British in Northern Ireland" "Now as to the velvet glove theory, apparently a lot think the Army is using a sledge hammer to catch a fly. We don't plan on doing company and battalion sized raids to catch one or two guys, unless we have definite Intel. Apparently the army has been doing sweeps of villages and pissing everyone off. We are not going to do those types of raids. If we have to, we will secure and area and wait for the one we are looking for tries to leave. Apparently we are now doing the "no better friend, no worse enemy" theory now." I had a particular question about the idea of "net-centric" warfare, an idea you saw with the Army 4th ID, and one that, not coincidentally, is very popular with Congress and gets the Army a lot of money. I asked if the Marines as hot on the net-centric, total situational awareness, tactical network concept as the Army? He responded, "The higher levels are, but the average grunt doesn't need or want that crap. We saw some Army guys with computers in their hummv's to keep track of adjacent units, but I believe it distracts from the action at hand. The last observation I found interesting. The Army appears to be sold on the idea that "total situational awareness" is attainable in combat, and constitutes an enormous advantage. They may be right, too. Having a simple graphic screen showing you in red and blue where the good guys and the bad guys are helps lift the "fog of war." You can see your adversary, but he can't see you. That definitely moves the odds in your favor. The Army has embraced the idea that superior information is now as critical war as superior firepower. And of course, intelligence is always--maybe even THE--most important element. What's worth thinking about, and preparing for, is what the logical conclusion of all this is. If technology gives you better command and control, better intelligence, better reconnaissance (UAVs), and better surveillance, then you are more lethal on the battlefield. Your "network" has itself become a weapon. And the question in my mind is, if your way of war is so dependent on the quality of your "network," what happens if you lose it? It becomes imperative that you don't lose it. And it also means that sooner or later, the network itself will become a target for future adversaries. In fact, I'm sure it already is. Next, it's a particularly American way of thinking that technology trumps strategy and tactics. Americans love technology. And the idea that its what makes us better warfighters seems be alluring to a lot of the folks championing the idea. One of John Boyd's key observations, though, is an effective force is built around people, ideas, and hardware...in THAT order. It's a mistake to think your advantage rests entirely on technology. Sooner or later, you'll lose that advantage. And when you do, you'd better have good people and good ideas. And finally...in the realm of the completely abstract...technology and "network centric warfare" probably make us a more effective fighting force...against conventional military foes. But the sheer strength and skill of the American military might do just the opposite of what policy makers hope...it may encourage adversaries (other nation states or non-state actors like drug lords, terrorists, etc) to engage in a non-military war...to take the fight to use where our soldiers aren't...to expand the idea of warfare beyond military combat. This, of course, is exactly what Al Qaeda has done...and we've tried to turn it, at least publicly, back into a contest of military tactics and strategy. In reality, it's a matter of "grand strategy," of realizing that military combat will be only one small part of the campaign. It's all very discouraging to talk about, to be honest. But this is the age of Nation States. And what we're seeing, I believe, is a contest between secular Nation States and those who work outside civil law...for religious or other reasons. It launches us all into the world of total Warfare...not a Cold War exactly...but something like it. Military conflict on a large scale between nations is less likely. But smaller wars, or unconventional ones (trade wars, currency wars, diplomatic shuffling), all these are much likelier, and indeed are ALREADY happening. The Marines have it right, I think. Technology is not the key in a world like this, although it helps. Adaptability is...the ability to orient yourself to new circumstances and take effective action. And of course, now I'm speaking in investment terms as much as any other. Food for thought...no more blogging today. Tomorrow morning, the weekly e-mail for Strategic Investment. Until then, g'night from the right bank.

Gold/Silver Ratio Improving

Pulled the trigger on silver calls today in the Options Alert in part because of what this chart from Weldon is showing us. You hear about the Dow/Gold ratio all the time. And in fact, I've said before that I think the price of an ounce of gold will cross with the Dow Jones Industrial Average at some point...perhaps gold $4,000/oz Dow 4,000. The implications of that are staggering from a bullion bull's perspective, and to traders who want to cherry pick the destruction of the leveraged financial economy lurking underneath the nervous surface of Wall Street. But what does it mean for silver? Well...if the chart below is any indication, it means that gold is no longer rising at a much greater rate than silver. There's two ways for this ratio to fall: one, for gold to get cheaper (which it's not), or two, for silver to get more expensive (which it is). This could be a move where silver makes up for its status as the "other" precious metal, the red-headed step-child of monetary metals...the underachieving hard asset. Or...it could be just a sympathy rally...without any real legs. If the economy fails to reflate...it would kick the legs out of commodity prices. Gold would do fine...as it acts more like money (vis a vis the dollar) than silver. However, I think this is the real deal, and for speculators, well worth taking a flyer on.

"You...the currency in green! Behave!"

This quote from a CBS marketwatch story was good for a bit of a laugh. The emphasis added is mine. Euro 1.30...just where we thought the carnage would stop--for now. Officialdom is comfortable with this level--just barely. But officialdom is just one of many investors in the market. And what it would like to orderlyl is often not. We'll se... "The dollar reversed ground against the euro, improving to $1.28 after reaching a record high over $1.29. Group of 10 Chairman Jean-Claude Trichet, also the president of the European Central Bank, said at a news conference that 'excess volatility and brutal moves were not welcome and not appropriate,' Reuters reported. 'We are concerned. We are not indifferent,' Trichet said. But Trichet said the currency issue did not dominate the meeting."

"Alternative" News Catching On

This doesn't surprise me at all. "WASHINGTON - People are turning increasingly to alternatives such as the Internet for news about the presidential campaign, shifting away from traditional outlets such as the nightly network news and newspapers, a poll found. " It's a big world out there. Picking the stories you read or watch used to be reserved to a handful of editors, producers, and anchormen. Today, the information advantage big centralized national news organizations had has disappeared. What's left is a lot of individuals or groups (like us) who apply our own unique perspective (orientation) as a filter for what matters and what doesn't. I think it's already starting to yield a much more direct analysis of what's going on...as well as more direct opportunities to benefit financially. But we'll see...