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The Sword of Damocles (and gold)Craig Harris Lehman Brothers has a neural net aptly named Damocles. I presume the reference is to "The Sword of Damocles" which has come to mean a dreaded tragedy that may strike at any moment. If you are a fan of Greek theatre then you remember... .Dionysius held a grand banquet and invited Damocles to sit at the place of honor. Just as Damocles was starting to relax and enjoy himself, he looked up and saw a sword hanging over his head, suspended by just one hair. Anyway... this version of Damocles job is to predict currency crises in advance, presumably (my presumption) so they can make a lot of money by taking a large position prior to the crisis. Interestingly, Damocles current view is reportedly similar to the neural net in my head. It's arguing that there is a one in three chance of a dollar crisis within the next year. Keep in mind that some people (including myself) would expect a real dollar crisis to cause a global financial crisis, and put gold into the stratosphere. A topical article on this Damocles prediction can be found here. So how could the US be headed for a dollar crisis just when everyone is feeling good about the economy, earnings are doing better, and the US dollar has already fallen so far? In my opinion, that's an extraordinarily complex question to answer in a short essay, and I'd invite anyone that wants to hear the long version to read my newsletter. In the interest of full disclosure, I am both short the US dollar and long gold, and I have been so for some time now. The easy money has been made with the dollar now off nearly 30% and gold over $100 from its lows, but what's in store for the future? In my opinion (which is supported by recent overseas opinion polls), the short version is that the US is systematically alienating its allies due to its current foreign policy and political decisions, and then we have this "not a religious war" quagmire happening. I've found that it's very difficult to get an accurate assessment of the current geopolitical backdrop unless you venture outside of the US media. I am using google news a lot to follow the twists and turns of the current geopolitical environment and I highly recommend that free resource. In comes in several international flavors, and the US version can be found here. The current custodians of the US seem to have forgotten that the US is reliant on these allies (like old Europe, China and Russia) to fund the current account deficit to the tune of 40 billion dollars a month. If you've been following the numbers, you see that while the dollar has already fallen 30% or so, the balance of trade with China has gotten worse, not better... one reason being that their currency is pegged to the US dollar and they are not going to willingly break the peg because they have a long term strategy in place for global economic dominance. We are seeing increased economic cooperation from what I call former allies between themselves at the same time we see increasingly high tech US jobs shipped offshore at a dizzying pace. We have the new G21 trading bloc which includes Russia, China, India and maybe more importantly Brazil and the rest of Latin America. We have the EU strengthening and hardening its tone against the US. We have the new emerging Asian trading bloc... the point being that the US who is (unknown to many) reliant on these countries has done tremendous damage to the international relations that support it the status quo... so the status quo is changing. We have had Russia recently rumbling about pricing oil in Euros, which I have long said would be the death of the US dollar as the worlds reserve currency, which is currently the US chief export. If that single event were to happen, I fear that Damocles would be proven correct. Will Damocles be correct? I'm really not sure... but I think we are living through the most dynamic and most risky period in the past 50 years for certain... and I believe much of what the future holds depends on geopolitical decisions that have not been made yet. It's very difficult to keep up. There is a lot to learn about and keep up on... lately I've been discussing Leo Strauss and "noble lies." It's a complicated world, getting more complicated by the day. Caveat Emptor ! ! ! October 22, 2003 Mr Harris offers a free 30 day trial subscription to his daily market letter. For a free trial please contact bcharris@gate.net. The risk of trading commodity futures contracts can be substantial. You should therefore, carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. If you choose to open an account with Harris Capital Management, a Risk Disclosure will be sent to you. Please read it carefully before you invest. ### Harris Capital Management, Inc. CTA is a futures broker and registered Commodity Trading Advisor, meeting the needs of futures traders worldwide. They provide a high level of personal service to discriminating clients around the world, while offering commission rates comparable to discount brokers. All clients are handled directly by Mr. Harris. Copyright ©1995-2004
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