Ashby, Metcalfe's Law speaks to the "utility" or "potential" of a network -- not its "value." But even in terms of utility, it is a silly approximation. It simply suggests that the more users or devices connected to a network, the more different ways they can be connected with each other. I'm really not sure what that has to do with utility, considering that many connection potentials will never be realized (and thus have nothing but out-of-the-money option value), and further, that many users and devices could be parasitic or destructive (connecting the marginal hacker or cracker or virus-originator to a network certainly doesn't increase its utility -- quite the contrary). Even if you accept the utility paradigm, that has nothing to do with "value" in an economic sense. Adding additional users and devices may impose all kinds of complexity costs on a network, that may in principle be so expensive that a network becomes less valuable as capital stock the more it grows.

Ashby Foote, Vector Money Management
4:39 PM

A NEW PARADIGM !

Based on my observations of the stock market over tha past 18 months I would like to propose a new paradigm that should help investors, particularly those daring enough to venture into the technology sector. It is called Eflactem's Law. In its most rudimentary form Eflactem's Law proposes that the value of any network is equal to 100 divided by the square root of the number of nodes attached to the network. Determining the value of new era telecom networks also requires corollaries to Eflactem's Law that employ sophisticated AlGorerthms that were designed by Reed Hunt while he chaired the FCC. These AlGorethms contain Golberg's postulate and therefore almost always result in negative numbers. This paradigm requires further work but it appears to have great promise in these perplexing times. cheers, ashby

David Gitlitz
1:12 PM

BoJ Watch

The Bank of Japan's overnight decision to stand pat on its liquidity posture triggered a round of covering of JGB short positions placed in expectation of significant additional easing, with the benchmark 10-year rallying six basis points to close the Tokyo session at 1.5%. We view this, though, as a brief pause in what is likely to be a sustained downdraft in long-term Japanese government debt, as pressures -- both political and economic -- bearing down on the BoJ to open the liquidity spigots become ever more intense. Even as the BoJ was meeting today, Japanese Finance Minister Masajuro Shiokawa called on the central bank to up its outright bond purchases by Y200 billion per month. "I want the BoJ to prepare more money," said Shiokawa. "I want the 800 billion yen raised to one trillion yen." Shiokawa said he would personally press BoJ Gov. Masaru Hayami to adopt the change as the two traveled to Ottawa today for this weekend's G7 summit. The expectations crosscurrents buffeting Japanese markets were visible as well in trading of the yen, which also initially rallied in Tokyo on the BoJ decision before skidding to new 40-month lows just above 135/$ as global markets digested the full implications of today's events.

Donald Luskin
9:12 AM

Ashby, there can be no doubt that the difference in regulation between the telecom industry and the semiconductor industry is night and day. The former is perhaps the most regulated big business in the world, the latter perhaps the least regulated. That alone could explain the difference, because it means that innovators in the telecom industry has to play a challenging game with both hands and one leg tied behind their backs. But that said, I am still tempted to look for structural differences that would obtain even if both industries were equally unregulated. The first one that comes to mind is the fact that, while the semi business is certainly capital-intensive, its product is a physical good that is separable from he capital. In telecom, the capital is the product. You allow the customer to tie in directly to your plant as a network participant, rather than selling him a product that comes from your plant. That suggests to me a paradigm that makes good news into bad news for the telecom industry, because the rapidly obsolescing product as technology evolves in not a "product" as such, but rather your entire capital plant.

Thursday, February 07, 2002

Ashby Foote, Vector Money Management
11:39 PM

Don - Fair enough on rents falling on bandwidth assets. But how does one explain the wealth made by owning semiconductor stocks over the past 10 years in that same context. The last 2 years have been tough but over the past decade the SOX index has done quite well. David Isenberg's logic in his "Paradox" paper still seems convoluted to me. Perhaps the difference between bandwidth and transistors has to do with the Kafka-esque world of regulated telecom. cheers, ashby

Donald Luskin
10:36 PM

Ashby, I know why Microsoft doesn't buy those companies. Can you imagine the headlines? Do you think our benificent leaders would permit a predatory creature of capitalist lust to "take over" America's strategic communications resources? Not on your life -- don't worry, they are here to protect you.

Now how about Cisco? Well, I think we can be sure that investment bankers and desperate CEO's are pitching them on ideas like this every day. And they must not think they represent good value. And I have to say that I agree. In a world in which the price of a unit of bandwidth is collapsing faster than Moore's Law, where is the profit in owning vast fixed infrastructure that earns less and less rents on itself every month? Ashby, this is the flaw in George Gilder's logic -- he didn't link technology vision to investment vision. Cisco sees that, and will pass on this deal.

Tom Demas
8:23 PM

The larger Japanese banks are surging in Tokyo tonight. Is it reasonable to expect that in the short run we could see a significant rally in the financials with a BoJ liquification effort -- the same effort that should hit JGB's. If the reasoning for a liquification is the banks are in deep and need help presumably bank shareholders would applaud this change. If on the margin this hoped for liquification shifts dead liabilities to the breathing column the deep discounting of these assets would have to be backed out in a hurry?

Ashby Foote, Vector Money Management
6:25 PM

Another take on the 3.5% productivity numbers may be that we will have a jobless recovery which might be semi-symetrical with the severe profit recession we have been through with only modest loss in consumer confidence. Out of phase sine waves so to speak. In another perverse oddity the deepest balance sheets (Cisco with $21 billion in cash and MSFT with who knows how much) belong to the leaders in the most hated sector - tech. Why doesn't Cisco snap up Global Crossing for a song? Or go in with MicroSoft and take out WorldCom? cheers, ashby

David Gitlitz
12:47 PM

My note yesterday on the "statistical mirage" that explained the 3.5% gain in fourth quarter productivity has put me in a somewhat awkward position with friends who see the gains as indicative of the New Era wrought by the information technology revolution of the past decade. They subscribe to the idea that such healthy reported productivity growth even in the midst of recession represents confirmation of the permanent structural changes in the economy owing to the technological innovations, and bodes well for sustaining the gains during recovery.

Frankly, that’s an awful lot to attribute to one piece of official data that is itself a statistical residual resulting from changes in two independent variables: output and hours worked. In other words, in isolation the product of the interaction of the two variables (essentially, changes in output minus changes in hours) tells us nothing about conditions that produced the number. The late 1990s productivity acceleration resulted from a boom in high-tech capital investment that allowed businesses to expand output against a relatively steady base of hours worked. It was a classic productivity story, with output increasing per unit of labor as a consequence of the rise in the capital/labor ratio. But what we are now witnessing is something altogether different. Both output and hours worked are contracting, but statistical productivity is rising because hours are falling faster. Moreover, the downturn is largely attributable to the collapse in capital investment that was the major driver of the earlier productivity acceleration. Sorry, but I just don’t see much to celebrate there.

Donald Luskin
9:46 AM

After the opening bell Cisco is gapping lower, and carrying with it the comm-IC chip names that had been touted to benefit from the one shred of good news in Cisco's report yesterday -- that they've been successful in burning off inventory. This is what happens when a market is as severely overvalued as this one has been. It takes a real upside surprise to even support the prices already in place -- to support further gains, it would take a miracle.

Client60
9:35 AM

The dollar has been very quiet for the last several days which I think buttresses your opinion that the recent movement in gold is a function of technical conditions. Given current stability, I doubt the G-7 meeting this weekend will produce anything on exchange rates. However, I think there is a strong possibility that central bankers will quietly give this the appropriate attention and that we will see some real changes in currency valuations in the coming months. My feeling is that the yen must devalue. If it does, and by a measure that is acceptable to the market -- that is, an amount that makes foreign investment in Japan again an attractive proposition -- then I think the dollar will remain relatively stable against European currencies. If the yen is held against the dollar, I suspect problems within our economy will mount and the dollar may come under pressure against Europe.

Wednesday, February 06, 2002

Ashby Foote, Vector Money Management
5:59 PM

To David - Regarding your 10:19 a.m. post on the 4th qtr productivity number of 3.5%, granted number of hours worked certainly indicate sluggishness persists but the flip side is the output is still flowing even with fewer workers meaning of course serious earnings leverage. That is exactly what Cisco demonstrated this afternoon beating earnings and revenue numbers by a handsome margin. Hiring may take awhile to come back as much of corporate America lets the revenue flow right on down to the bottom line thanks to productivity investments made over the past 5 years. cheers, ashby

Donald Luskin
5:56 PM

Call it the "bait and gigabit switch." Cisco's accidentally leaked good news about its 2nd quarter before the opening -- and then the headlines about their big beat after the bell -- were the perfect set-up for the disappointing flat revenue guidance the company gave for the third quarter in the conference call just ended. And to top it off, beyond the third quarter, it's the same old "we ain't got no visibility" thing. Investors who traded in the pre-opening and post-close markets got run over by the same truck twice in one day. This is the stuff that lawsuits are made of. It is most definitely not the stuff that super-V recoveries are made of.

Donald Luskin
3:29 PM

In response to our call to short the Japanese government bond, several clients have asked for our views on the Japanese stock market.

In a perfect world, the Bank of Japan would recognize its deflationary errors and inject enough liquidity to stabilize falling prices. This would result in substantial tumble for JGBs, as expectations of sustained deflation are overwhelmed in the reflationary thrust. At the same time, such a policy change would be very bullish for stocks, as it would signal the preconditions for ending Japan’s recession-cum-depression. That said, dollar-based investors may still find it difficult to profit from investing in Japanese stocks because this policy change would almost certainly result in the depreciation of the yen.

We do not live in that perfect world. Yes, the BoJ has taken some initial steps toward a more expansive liquidity posture, but these have not yet been nearly aggressive enough to convicingly turn the deflationary tide. Our call to short JGBs is based primarily on the idea that the risk of serious economic and financial meltdown is marginally easing deflation expectations by reducing yen demand amid the increasingly realistic possibility that massive liquidity injections may be required to forestall imminent catastrophe. When liquidity is eventually injected, it may well be in the climax of a death-spiral that would occur with the stock market at much lower values than today’s. At that time the Japanese stock market may be a buy for the strong of heart, but even then there would be currency risks that could blunt much of the potential gains.

But in either world, we are suggesting that clients steer clear of Japanese stocks.

David Gitlitz
10:19 AM

Don't be fooled by this morning report of a stronger-than-expected 3.5% annualized gain in fourth quarter productivity, which was instantly interpreted as a precursor to robust economic recovery. It isn't. The higher productivity number is a statistical mirage created by the fact that hours worked (down 3.7%) dropped even faster than output (which fell just 0.4%). How's this for prosperity? In the manufacturing sector, recorded productivity rose 3.5% as output slumped by 7.2% while hours plunged 10.4%! That was the largest decline in manufacturing hours since the 1982 recession. We'll know a healthy expansion is in the works when it makes economic sense for employers to add workers to their payrolls, or when marginal expected returns to labor exceed the marginal costs. Until then, it's best to take such misleading government statistics with the grain of salt they so richly deserve.

Tuesday, February 05, 2002

David Gitlitz
7:28 PM

The surge of the dollar price of gold to levels near $300 per ounce -- a gain of about $20 in the past week, with $8 of the move coming Tuesday alone -- appears to be explained primarily by short-run technical factors, but there is enough of a hint of fundamental support to leave me hesistant to dismiss its significance out of hand. The decision by several major producers to reduce or eliminate the programs under which they have sold gold short to hedge future production has undoubtedly been a key factor. Indeed, the entire move has come since South Africa's AngloGold Ltd. announced on Jan. 28 that it was substantially scaling back its forward-sales book. Announcements like that can give a temporary boost to the market as shorts cover and speculators seek to front-run the short-covering rally. But over any extended time frame they are highly unlikely to overcome the fundamental supply/demand conditions in the market for monetary liquidity which ultimately determine gold's price. Gold bulls can only go so far riding the back of such producer action. The underlying rationale for mining firms to curtail hedging is less a matter of expectations that the price will rise than that it is unlikely to continue falling. Big difference.

Skepticism about the sustainability of the gold move is also justified by the fact that thus far the pop in the price has been almost equally reflected in all the major currencies. Were the rising price signaling a softening in the dollar’s value, it would likely be accompanied by some indication of a less robust greenback in foreign exchange markets. On net, though, the dollar’s trade-weighted forex value has been virtually flat over the course of the gold move. In earlier instances when gold has risen nearly uniformly in terms of the major currencies, it proved to be a good indication that the move was unsustainable.

And yet, it may be premature to entirely dismiss the possibility that a more fundamental monetary shift is in the works. As we suggested last week (“Now What?” January 28, 2002), the end of the Fed’s rate-cutting cycle could paradoxically establish conditions under which the Fed would be compelled to provide more liquidity to the market than it did during the “easing” process. That’s because, to a non-trivial extent, borrowers will wait out a Fed rate-cutting exercise so as to lock in rates at the lowest possible level. Increased credit creation will then induce higher levels of reserve demand, which the Fed will accommodate to keep the funds rate from trading above target. Actually, in the week since the FOMC meeting confirming that the rate reductions likely have come to an end, there have been some preliminary indications that this dynamic may be taking hold. In the past several sessions, the Fed’s open market operations have significantly exceeded the expectations of reserve market analysts, who reason that upward pressure on the funds rate has forced the Fed to adopt a more generous posture. Needless to say, we will be closely monitoring these developments.

Ashby Foote, Vector Money Management
6:23 PM

typo. The post below has an error. The decline in the S&P 500 was 39.1% not 38.9%. The decline in gold was 38.9% so the difference between the two was .2% which is statistically quite remarkable. cheers, ashby

Ashby Foote, Vector Money Management
5:06 PM

GOLD-BUGS: How about this coincidence, Gold hits its 10 year high at $414 in January 96 and fell $161 to its 10 year low of $253 in September 1999, a drop of 38.9%. The S&P 500 hit its all time high of 1553 in March 2000 and then fell 608 points to an intraday low of 945 on September 21, 2001, a drop of 38.9%. Gold as usual was first to identify the draining of liquidity and took 3 years and 7 months to complete its down leg. Numerous parts of the S&P 500 such as energy felt the pain within 18 months but the index didn't top out until 4 years after gold but the down leg was more dramatic climaxing in just 18 months. Many will snicker at this observation but two tenths of a percent is a pretty small differential when comparing a barbaric metal and the complex and sophisticated economy of the 21st century. The good news is gold continues its upward bias. cheers, ashby

Ashby Foote, Vector Money Management
1:50 PM

David or Don - What gives with the surge in gold today! Any rumors on where the buying is coming from? cheers, ashby

Client60
12:40 PM

Ashby – thanks for asking about my thoughts on the dollar. I’ll try to elaborate here, but this can be a daunting (read humbling) subject. Also, I’m attempting to write this as the markets are going haywire.

The dollar has risen in value over the last few years for a number of very good reasons: a political process and military strength the envy of the world, low inflation, a healthy economy, government fiscal surplus, vibrant capital markets and a healthy banking system. These conditions and, importantly, the lack of same in some other countries/regions, have collectively bred a level of confidence in the dollar and in U.S.. economic institutions that has encouraged foreign holders to move into and/or stay in dollar based assets. I say this because it's risky to call a reversal to a trend built on such a solid foundation, but I am concerned that gold is sending a message that the marginal propensity to hold dollars is lessening. Of course, the dollar trades against many currencies, not all alike. The desire to hold dollars versus the yen is in fact increasing so what we might be looking at is a re-ordering of currency values that reflect new emerging conditions.

Why would this happen? I suspect there are at least several possible reasons:

1) U.S.. Economic policy now appears to reflect a "me first, us second" type of reasoning. Our economic policy makers preach free trade but seem to be creating policy based on the exact opposite. Note upcoming decisions on steel imports, also existing policy on textiles and agriculture. Call it a crisis in credibility or a crisis in ability but people who say one thing and do another, especially in financial markets, rapidly lose confidence (do we need any more daily reminders of that?). Current American economic policy, now seemingly a direct reflection of special interest groups such as U.S.. Steel and General Motors, can do real damage to the system of free trade, the same system that has helped bring real benefits to America and the dollar. I am especially concerned about Mr. O'Neill's role in limiting the depreciation of the yen. While I am not a Japan apologist in any way, I believe the only policy option available to them at this point is a massive currency depreciation and an export led recovery. To prevent this from happening, and very quickly, is to risk an implosion in their banking system and their economy. The systemic risks from such an implosion appear far more serious to me than "unfair" competition to General Motors.

2) significant systemic risk exists to the U.S. banking system in the event of a Japanese implosion. Linkages throughout financial markets would quickly transmit shocks. Any threat to the U.S. banking system is a threat to the American economy and the dollar. Of course, banks from many nations participate actively in international finance. But it seems that American banks have been proactive in providing leadership and therefore possibly have the most to lose. An economy in the shape ours is now in would be severely restrained by a retrechment in bank lending when demand returns.

3) Under a floating rate regimen, fundamental over/under-valuations are usually self-correcting at some point. The difficulty is identifying when and to what degree.

Confidence has been badly shaken in a number of U.S. listed companies and metrics by which we typically judge them have been called into question. If, for example, U.S. accounting standards are lower than we have come to believe, the greatest beneficiaries of capital flows could be the most injured by a loss of confidence. That is why, while I don't usually put much stock in politicians, I feel the current hearings, and factual findings, are very important. Full disclosure at every level in economic affairs is now critical, a principle actively being resisted by senior members of the Bush administration. If the administration persists in this "behind closed doors" way of making trade and energy policy, the dollar will suffer to the degree that confidence in the administration's end game is an issue. I think investors will search for currencies they trust. These will continue to include the dollar if our administration pursues policy that is optimized for the best interest of our markets and not for special interests. If it doesn't, capital flows will benefit the euro, sterling and the Swiss franc. That is why short term support levels for the dollar have been broken although it remains to be seen that a real move develops.

In a worst case scenario, the dollar would suffer a big fall. If this was in any part attributable to, or in the company of, a banking crisis, Greenspan would again pump up liquidity. It's perhaps a little ironic, but this might be a great policy solution for a man who probably wants to retire. Depreciate an overvalued dollar and make the car companies happy, push short term interest rates even lower and keep the American consumer happy and steepen the yield curve and let the commercial banks name their profits in order to cover their various mistakes. Of course, if you were Greenspan, it would be wise to get out of town quickly because gold would be much higher and for good reason.

Donald Luskin
9:17 AM

The rupture in the fabric of trust induced by the Enron scandal picked up steam yesterday, and provided the perfect day for us to reverse a quarter of our tactical asset allocation trade (short the NASDAQ, long 30-year Treasuries). With more revelations from Global Crossing (an Andersen client) and Tyco drawing down its lines of credit (just in case), this appears to be a theme that has real "mo." And it's perfect for the media and the politicians -- so you can be sure that investors will be whipped into a panic about it whether they should be or not. The salutary result will be an overdue correction in stock market multiples. But the dark side will be an inevitable period of hairshirt-wearing in which all actions and all statements by corporations will be guilty until proven innocent. Already last Sunday the New York Times called for repeal of reforms that made it slightly more difficult for plaintiffs to sue corporations (and thus shake them down with so-called "strike suits," collecting damages from the wealth of the very shareholders purported to be protected -- minus attorneys' fees, of course). And the Democrats just can't stop talking about how Enron and other evil energy companies influenced the Bush administration's energy policy (for goodness sake, who should have influenced it... Greenpeace? College professors?).

So the cost of capital -- financial capital and trust capital -- has just gone up. And that's going to throw sands in the gears of the "super-V" recovery that the consensus continues to insist we are entitled to, as though by manifest destiny. But as the truth about the real pace and magnitude of recovery starts to seep in, markets will continue to correct back to more normal pricing relationships. Tech stock valuations have already fallen from a forward p/e of 50 (on December 10, when we first suggested selling them as part of an asset allocation trade against the long bond), to 42 as of yesterday's close. That has narrowed the "yield gap" versus the long bond to 2.99% as of yesterday, down from 3.58% on December 10. So markets are getting back into whack... and while painful, that's always a good thing.

Monday, February 04, 2002

Ashby Foote, Vector Money Management
9:45 PM

To client 60: Earlier today you discussed the slipping of the dollar through support levels - which was following a move up in gold shares. Could you expand on the ramifications of these trends if they continue and what conclusions you would draw? thanks and cheers, ashby

Ashby Foote, Vector Money Management
6:03 PM

To quote my 12 year old, "The Pats kicked some major Ram booty last night!" Regarding the earlier right column piece by PIMCO's Bill Gross, he says on page 2, "That he(Alan Greenspan) has had to use up most of the tricks in his magical monetary bag to steady our economic boat is more our fault than his. We as a public spend too much money,...." Gross-me-out, Bill. Evidently the vaunted Mr. Gross is still locked in the elitist demand-side tower where wealth comes from saving your excess wages each month at the local Bank & Credit or in T-bills. Can we really trust the common people to do wise things with "their" money? Think of the good that money can do in savings accounts where judicious investment bankers and loan officers can dispense it to the best and brightest of Corporate America where our finest accountants stand watch to insure its prudent use and return. Let me quote another bromide from my favorite writer, George Gilder, on the subject of wealth creation, "Economic growth doesn't come from money in people's pockets, it comes from ideas in people's heads." Gross is always an interesting read but alas he still uses the Ptolemic calendar. Coach Belechik on the other hand must be a supply-sider. cheers, ashby

Donald Luskin
4:55 PM

Ashby -- lest we forget -- that was a great call on the Pats!

Client60
1:20 PM

Dollar is starting to slip even against the yen...perhaps too early to draw conclusions but short term support levels have been broken against all major currencies...gold shares moved first, now the dollar is starting to act...the next several days will be important to see if there is any follow through...

Sunday, February 03, 2002

Donald Luskin
5:57 PM

Ashby -- believe me, I understand exactly the nature of the liquidity indicator function you are ascribing to gold. And in a general way I am quite convinced that it is true. But until the Fed and other central banks align their monetary policies to gold explicitly, it will only be approximately true. Until then we are relying on the rest of the world continuing to regard gold as "money", with all the pretenders to that title being mere IOU's (as you have put it). So what do we do? One way would be to use longer term averages, as you suggested in an earlier post. Another is to look at other similar indicators, that is, other things that represent "money" in competition with the IOU's: forex and basic commodity materials. They are all saying about the same thing as gold, by the way -- they are saying that things have stopped getting worse, but that they aren't getting better when it comes to deflation. And until they get better, then we must sit and wait for the world economy to gradually adjust to a world with the dollar near (but no longer at) record highs, and commodities such as gold near (but no longer at) record lows. Here's that 5-year chart you were talking about. See what I mean?

Ashby Foote, Vector Money Management
5:30 PM

Don - Ref: "until the Fed supplies fundamental support in the form of a reduced scarcity of dollar liquidity." If we aren't going to use gold to determine this liquidity then how do we know. As the old reck-neck said when explaining why the thermos bottle was one of the great inventions of the 20th century, "it keeps cold drinks cold and hot drinks hot - but how do it know?" Gold has that thermos like magic, it tells us when liquidity is too much and when liquidity is too little. cheers, ashby

David Gitlitz
3:30 PM

You've hit on a critical and often-overlooked point about gold, Ashby. One of the major reasons gold has maintained its status as the most monetary of all commodities is that the above-ground inventory of all previously mined gold (the stock) dwarfs the volume both of transactions in the metal and the new supply entering the market (the flow). That means fluctuations in the supply and demand for physical gold can only ephemerally affect its price, and goes a long way to explaining the commodity’s stability in terms of real monetary purchasing power over time.

In this light, it should be clear that reports about Japanese gold buying are telling us much more about expectations for the value of the Japanese yen than about the dollar value of gold. In Japan, gold is serving its age-old function as a store of value in times of heightened currency risk. As the yen declines in terms of the dollar and other major currencies, the yen price of gold has been rising to reflect the real depreciation of the currency, and at the same time protecting the purchasing power of Japanese savings to the extent those savings have been diversified into the yellow metal.

Now, while I have little doubt about gold’s utility as a measure of constant real value across time, it’s also the case that like any commodity traded in an open global market, its price can – and at times does – exhibit short-run volatility that tell us little about extant monetary conditions. In this case, I’d be cautious about reading too much into this latest pop above $280. As with the previous such foray last month, the move seems to be dominated by a lot of technical noise. No question, there are players in this market who are bound and determined to lead a charge out of the depressed ranges of the past few years. But their efforts will end in bitter disappointment unless and until the Fed supplies fundamental support in the form of a reduced scarcity of dollar liquidity.

Ashby Foote, Vector Money Management
3:25 PM

Don; Agreed, watching every wiggle will just get you a serious case of the wigglies and who wants that. Gold isn't perfect just as as 7 months of football doesn't always get you the two best teams in the Super Bowl. A blown call here or there and a team like the Raiders gets sent on early vacation. But if you start with the premise that gold is money and everything else is just IOUs then gold can be an excellent indicator. Over the past 6 years farmers would have been better off watching gold than the weather forecasts. I can't insert charts(perhaps you can) but the 5 year chart of gold, soybeans, corn, cotton, wheat is quite compelling. The fact is the "whackos" who follow gold seriously were years ahead of everyone else in suggesting deflation as a serious problem. DOes gold have to get back to $325 or some other magic level for the world to be allright? I am perplexed by that question although I do believe a continued rise in gold above $300 would be very therapeutic for the U.S. and world economy. Going back to the message and the medium: the daily wiggles in gold are actually wiggles in the many currencies that trade gold while the ounce of gold is rock solid. Now that sounds like just semantics but how else would one get a purer price of currency. Disregarding daily moves as too noisy what moving average would you prefer? 5 day, 10 day, 50 day, 200 day? Tip for the day- take the Patriots and the points - they appear to be the All American team of destiny. cheers, ashby

Donald Luskin
12:39 PM

Ashby, Gilder's metaphor comparing gold to to a carrier medium is a beautiful literary construct, but its high level of beauty is not indexed to its only approximate level of reality. In that sense it is like so many propositions in economics -- most of them are made with elegant math, while Gilder's is made with elegant words, but often they are merely mental mentals or political prescriptions. The reality is that in our chaotic world gold is nothing more than the best we've got -- that leaves it far from perfect. There are political arrangements that could exist someday, such as Fed price-targeting, that would make Gilder's vision more true. But they don't exist today, and until they exist, even gold is a noisy and chaotic indicator. Don't get me wrong -- we take gold very, very seriously around here. But you can't follow all the little wiggles in the gold market as though they were the output of a precision instrument.