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SS "Paper Assets" Begins to Take On Water
by Professor von Braun

August 27th, 2000

There should be no doubts in the minds of most readers of the gold-flavored internet websites' collections of excellent articles by a wide variety of commentators, that all is not well in La-La land.

The paper asset boom that began in the early 80's is slowly but surely grinding to a halt. It may even appear to continue for some time yet, but it has the appearance of a very sick bull. Perhaps there are even a few cows to be chased but they too are getting old, tired and a tad worn.

While the US government insists it has a budget surplus even though the national debt figures are rising -- figure that one out -- all is not well in Corporate America. Allegations of cooking the books by CFO's to meet analysts' expectations are increasing as are examples of auditors' firms receiving large payments for non audit work. The issue of employee stock option schemes is also receiving more attention as it should. Is it an expense or is it not?

It needs to be remembered that the rot always starts at the top. Very rarely do you see an example of it starting at the bottom. If the boss is doing it, then it must be ok. Strong corporate cultures are kept together by people following an example set by the CEO.

Strong leaders lead by example, Churchill comes to mind. Weak leaders tend to destroy that which they started with, trashing most of the old fashioned values that held things together in the first place and replacing them with "new deals and new values".

Cooking the books is not an acceptable practice as it is one that eventually, in the fullness of time, gets found out. There is always at least one weakness in a book cooker's presentation of funny numbers that is outside of his control. Booking profits on uncompleted sales (as in not yet paid for) will result in larger losses if the sale does not go ahead. It's that simple. Don't count your chickens before they hatch. Even if you have a contract with a counterparty to buy all the chickens 'tis best to wait until they hatch. It's tough to enforce a contract to buy on a dead chicken.

Then we have that wonderful little three-letter commodity called oil. Rising oil prices are impacting on Corporate America. Have no doubt about this. While the press will blame OPEC, Saddam Hussein, the oil companies or anybody else, they find the bottom line is that the US has not increased its refinery capacity since the early seventies and all those large SUV's do make a difference to demand. There is a shortage of tankers as well. A cold winter will send heating oil prices in one direction only, up.

What has the Secretary of Energy been telling his boss about? Did anybody run some numbers on refinery production? The booming economy does tend to create a focus on the good times and governments prefer to take credit when times are good, as opposed to being accused of throwing a spanner in the works. That's the problem with cooking the books, there's always that one little aspect that's been overlooked that just pops out of the woodwork when you least expect it.

Suspicious paper profits, auditors not doing their jobs, employee expenses that are not expenses, insider selling, rising real costs and falling real demand for widgets. All the ingredients that strongly suggest the bull market is over are there. Own paper assets at your own risk. There is only so far these practices can go before Mr. Murphy of Murphy's Law appears.

Oil is the Achilles heel of this bull market in stocks and the CRB index is the stumbling block that lies directly in its path. How long can rising commodity prices be ignored? My guess is twelve months at the most. We have before us a presidential election supported by a very powerful Wall Street based propaganda machine that can, and has, learnt how to manipulate every aspect of paper assets, along with a few hard assets as well. Gore will win this election and there will be a honeymoon period until Wall Street realizes that he does intend to do something about the promises he is making and has a crack at the drug companies, tries to deal with rising oil prices and tries to do what democrats always do, keep everybody happy. President Carter all over again.

The precious metals will make a serious move at some stage, but not this year. Last year's $80 + move was halted in its tracks very quickly and I believe any rally here will meet the same fate. Next year, as markets begin to fall apart, well that's a different story. The coming clean out that is a result of previous deceits does not exclude mining companies either. There is risk attached to gold producers with large forward sales books. Buying and taking delivery of physical metal at these levels is still a good strategy if you have a time frame that exceeds 12 months. Otherwise be very selective. As a speculative play look for companies that are not yet in production but have the ability to move quickly and produce gold, albeit unhedged. We know of one that is preparing for this event.

The grain complex looks like its getting ready to do something to the upside as well. The problem with commodities is that they are commodities and can't be materialized with a book entry. Fancy accounting techniques never did produce a barrel of oil, an ounce of gold or a bushel of wheat.

The Prof can be contacted by email at

Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.

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