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An explanation about Jim Sinclair''s essay

Section: Daily Dispatches

The Streetside Chat with
Peter L. Bernstein,
author of quot;The Power of Goldquot;

By Brett D. Fromson
Chief Markets Writer

Originally posted at 8 a.m. ET 9/30/00

Peter L. Bernstein puts most Wall Street economists and
money managers to shame.

He's been a proven money maker, managing billions for
institutional investors until he sold his firm in 1967
to Sandy Weill and what we know today as Citigroup. He
has advised Fortune 500 corporations and the biggest
nonprofits on where to invest and how to stay out of
trouble. He's a big picture guy at a time when so many
analysts are specialists. He's also an independent
thinker when many sell-side analysts are in the pockets
of the investment bankers and their underwriting
clients. He knows his history when most know only last
quarter. He lived through the Depression, served in
economic intelligence in the CIA's predecessor, the
Office of Strategic Services, or OSS, in World War II
and has observed numerous bull and bear markets. And
most importantly for readers, he can write. Peter has
written seven books on economics and finance, including
such well-reviewed texts as Against the Gods: The
Remarkable Story of Risk and Capital Ideas: The
Improbable Origins of Modern Wall Street.

And Bernstein has a new one just out: quot;The Power of
Gold: The History of an Obsession.quot; He sat down
recently with's chief markets writer,
Brett D. Fromson. In a wide-ranging conversation, they
discussed the rise of gold, the role of the dollar as
today's gold standard and the scary chance that a sharp
decline in the dollar could trigger within five to 10
years the next great financial crisis. You won't want
to miss what this wise man of Wall Street has to say.


Brett D. Fromson: Peter, why has gold played such a
prominent role in history?

Peter L. Bernstein: It was easy to get out of the
water, out of the rivers, or to mine in eras when
slavery was commonplace and you had people that would
go in and do this really horrible digging process. And
because gold is chemically inert, it doesn't ever
tarnish, it gives people a sense of being in touch with
eternity. I think this is the magic of it. It stands
for security and assurance.

Brett D. Fromson: In an impermanent world.

Peter L. Bernstein: And it's also wonderfully
beautiful. It's nice to have gold jewelry on. It gives
you something. It's also malleable and easy to shape,
so even in very primitive times, people made works of
art out of it, decorated themselves with it and because
of its unusual qualities it conveyed a sense of power
to the person wearing it or the statue that was adorned
with it. That's why the Egyptian Pharaoh Ptolemy II,
every time he went on parade, had a 150-foot phallus
made out of gold to march in front of him. This was a
really special power.

Brett D. Fromson: Gives new meaning to, quot;Mine is bigger
than yours.quot; Moving on, when did gold become a store of

Peter L. Bernstein: It was owned originally only by
rulers or by the ruling class. And this gave it further
value and therefore it became a form of money, where,
if you gave it to somebody as a gift or in exchange for
something, you were giving that person something that
purportedly had some value. It has another quality
that's important: It's very dense.

A little bit of it goes a long way, or a little bit of
it has a lot of value. So it has naturally lent itself
to money. It has survivability. It's hard to tear apart
or blow apart or crack. It has the magic associated
with it and the density. So starting about the middle
of the sixth century B.C., Croesus, the guy who was
literally as rich as Croesus, sat by a river full of
gold in Eastern Turkey and made the first gold coins.

Brett D. Fromson: He was king of the Lydians, right?

Peter L. Bernstein: Yes. He had a little empire in
Eastern Turkey that was on the main trade route between
the western Mediterranean and the East. So he was very
strategically situated, and when he developed this
currency, this kind of money, it was the first money
that was acceptable in a number of different countries.
Sort of like the euro. It was carefully stamped, so
when you got each coin you knew exactly what it was
worth. Until people started playing games with it, you
didn't even have to weigh the coins. You knew the value
right away.

Brett D. Fromson: Of course it was stronger than the

Peter L. Bernstein: (Laughs) It was gold. This is about
550 B.C., very early. And then it was taken up by
everybody, the Greeks and the Romans used gold coins
throughout their empires. Before the Romans, Alexander
went through Asia with gold coins. Most of the gold at
that point came from Nubia, in darkest Africa, south of
Egypt, although there were deposits throughout Europe
and in Turkey. And we're talking about small numbers of
people then, so there didn't have to be large amounts
of it. The idea of coinage was developed further in the
Middle Ages. Silver began to be used for smaller
transactions, and gold for larger transactions. You had
this kind of two-track monetary system going on.

In the 13th century, after the Dark Ages came to an
end, Genoa and Florence and Venice had genoins and
ducats and florins, a monetary system more like what we

Brett D. Fromson: Which is to say what?

Peter L. Bernstein: Well, with these generally accepted
monies and growth in international trade, a huge amount
of trade was going on both north and south in Europe,
and beginning with the East.

Asia is a tremendously important part of the story.
Asia had stuff that Europeans wanted, particularly
spices, because they were necessary to preserve food,
but also textiles and lovely works of art. So
developing trade with Asia was very important in those
markets. Marco Polo in the 13th century went and came
back with all of these fabulous stories, and the Asians
have always coveted gold.

There's not a great deal of gold there, although Marco
Polo came back and talked about houses in Japan that
were roofed with gold, there was so much. Whether there
really was, we don't know, but they have always coveted

Brett D. Fromson: Even more so than the West?

Peter L. Bernstein: Well, they haven't used it so much
as money as kind of a hoard against insecurity. We know
still, today, that people in India get their dowries in
the form of gold jewelry, and jewelry was a means of
keeping gold, and even in Europe, but also in Asia
there were literally hoards kept underground. We keep
finding them. When archaeologists dig, they find these
hoards of gold.

Gold was very acceptable to the Asians, and although
the Europeans complained because they had to give up
their good gold to the Asians, they were getting
something useful in place of it.

Brett D. Fromson: What were they getting?

Peter L. Bernstein: Spices were the most important
thing because they preserved food.

Brett D. Fromson: So when did gold segue from coinage
to actually being the underpinning of a paper-based
monetary system?

Peter L. Bernstein: Nobody planned this. This wasn't
something where somebody woke up one day with a vision
and said, quot;Hey, this would be a great way to run the
world.quot; It just developed by a series of accidents.

We get now into the 17th century, when you have the
real beginning of capitalism -- substantial growth in
finance, insurance was beginning to develop very
rapidly. Ships and navigation methods were improving
and so trade was growing very rapidly. When you think
1688, the Glorious Revolution in England was the
turning point of the modern world.

Brett D. Fromson: When the English overthrew James II?

Peter L. Bernstein: Yes. At the end of the 17th century
the religious wars had come to an end; we witnessed a
lot of technological development during the
Renaissance. The scene was really set for 100 years
later when the steam engine was developed, and we were
really off and running. But, at that time, because gold
was expensive and valuable, silver was also very much a
part of the monetary system.

If I could digress for just a minute: The Chinese had
long since developed paper money. I think it was in the
13th century. They thought it was silly to use stuff
you might have some other use for. Why not use paper?
And for a long, long time, a number of centuries, they
were able to do this without yielding to temptation.
It's easier to print paper than mine gold. So paper
money was also beginning to circulate. It's important
to mention that at the end of the 17th century, money
was ceasing to be something that you could bite into.
Because trade and finance were developing so rapidly,
there were private pieces of paper that were really
promissory notes. They were called bills of exchange
and were growing very rapidly as people traded not only
within their countries but across international
borders. The money system now begins to look like that
of today's world.

They were moving pieces of paper and pieces of metal
rather than computer bits, but the process was very
similar to today. But the thing was that a promissory
note by me to you is OK if somebody knows who I am or
if there's something to suggest that I'm a reliable
source. There had to be something that that this paper
was convertible into to make the paper acceptable. And
so just by usage they began to say, well, it has to be
convertible into gold, that somehow it has to be
something that you get in the end.

Brett D. Fromson: Other than another piece of paper?

Peter L. Bernstein: Other than another piece of paper.
The pieces of paper grew much more rapidly than the
pieces of metal.

Brett D. Fromson: So you end up with gold underpinning
the paper.

Peter L. Bernstein: Yes, gold underpinning the paper.
Also, silver becomes convertible into gold. Gold and
silver were competitive, really competitive for a very
long time. Can I tell you about Isaac Newton?

Brett D. Fromson: Sure.

Peter L. Bernstein: Late in the 17th century, late in
the 1690s, Isaac Newton was the director of the Mint in
Britain. Newton had been the world's greatest
scientist, who discovered the law of gravity and had
been the nerd's nerd teaching at Cambridge. He lectured
regularly, yes, even though there was often nobody in
the classroom.

Brett D. Fromson: I had professors like that.

Peter L. Bernstein:A totally withdrawn, introverted,
strange man who in his rooms was practicing alchemy. He
was trying to use chemicals to create synthetic gold.
Anyway, he suddenly got interested in politics. He
decided he wanted a job in the government, so he gave
up science, gave up Cambridge, gave up a celibate life
and began to go out with women and became fascinated
with economics. He got in the mainstream in London and
was made director of the Mint, which was a much more
powerful job in those days than being head of the
Bureau of Printing and Engraving in Washington is

At that point, there seemed to be more gold coming into
England than silver. The result was that gold was
getting cheaper relative to silver. Part of it was
trade, but part was also the relative prices between
the two metals. Gold was cheaper in England than in
other countries.

Brett D. Fromson: So they would bring silver in and
exchange it for gold, and take it out of the country to
resell at a profit?

Peter L. Bernstein: It was a real arbitrage process.
But this was a concern for the British government,
because there was a shortage of silver in England. So
they turned to Isaac Newton, and he had studied
economics and discovered the law of gravity and knew
the answer to everything.

He set a great tradition for economists of the future
because he made a famously bad forecast. He said if you
just leave things alone, the price of gold will fall
and then people won't want it as much any more and
after, silver will go up, because it will look more
valuable. But what actually happened was that the
market, without anybody saying anything, had decided
that gold was the standard, not silver. So while it was
true that the relative price of gold and silver changed
in the way that Newton predicted, it was the price of
silver that went up rather than the price of gold that
went down. So gold became the standard against which
everything else was measured.

In those days, the wealth of a nation -- and I use that
expression purposely -- was determined by its gold
stock. And because Britain was a very powerful trading
nation, they had a lot of gold at that point. It was
100 years later that Adam Smith rose up and said, quot;This
is stupid. What's the point of piling up this useless
stuff? That's not wealth. Wealth is what you can eat
and wear and enjoy.quot;

Brett D. Fromson: And this was 1776?

Peter L. Bernstein: 1776. And if the wealth of nations
is determined by how productive they are, and therefore
how much they can get in exchange for what they export,
then this is what life is really about, not piling up

Let me talk about Europe now. This was where the fixed-
rate currency system developed. Your currency was
always exchanged at the same rate with other currencies
among the major European countries.

The devotion to this fixed-rate system was so great,
and the credibility was so great, that if a country got
into trouble it would raise interest rates even if it
created unemployment. I'm talking about the 19th
century world, in which unions were not yet strong and
even democracy was not yet fully developed. A ruler did
whatever he could to protect the currency, regardless
of the human cost involved. So the credibility was very

Consequently, if a country began losing gold -- was
having difficulty because they were growing faster than
other countries and therefore importing more and gold
began to go out -- they could borrow from one another
extensively. In fact, speculation at that time was
stabilizing rather than destabilizing. If the value of
sterling began to go down in the foreign-exchange
markets, speculators would buy it because of their
conviction that Britain would get its house in order
again. That is so unlike today, when a currency that's
under pressure from speculation just gets worse. The
speculation is self-fulfilling. In the old gold system,
speculation was stabilizing.

Brett D. Fromson: What was going on in the United
States at that time?

Peter L. Bernstein: We were much more democratic than
Europe. In addition, the silver lobby was very powerful
because they produced silver in addition to the gold
found in 1848 in California.

And silver was seen as the money of the common man, the
small denomination stuff. Americans distrusted bankers,
foreigners, all those kind of people. So we didn't have
the kind of credibility the Europeans had. It wasn't
that easy for us to borrow in a pinch when gold started
to flow out. So if we got into difficulty, and gold
began to move out, it moved.

Brett D. Fromson: Let's move to the 20th century.

Peter L. Bernstein: The U.S. came out of World War II
with most of the world's gold. But we were very
generous to Europe and then Asia. These countries began
to get their economies in order and to grow very
rapidly and become serious competitors. The gold began
to go out.

Brett D. Fromson: What was the mechanism by which it
went out? Through trade deficits?

Peter L. Bernstein: Trade deficits were settling in
gold. Under Bretton Woods, exchange rates were fixed,
but only the U.S. dollar was convertible into gold.

Brett D. Fromson: So it was a dollar-based
international monetary system.

Peter L. Bernstein: Yes, much like today, really,
except that the rates of the other countries didn't
change. We maintained millions of troops outside the
U.S. because of the Cold War. We were importing more
and more, and we were investing very heavily because
Europe and Japan were getting under way now. It was the
opposite of today, when everybody wants to invest here.

Foreigners were owning more and more dollars and
beginning to cash them into gold. So we were in a real
bind, and finally, in 1971, Richard Nixon shut the gold
window, which meant the dollar was no longer
convertible into gold.

This is the last gasp of the gold system, the gold
standard. The issue involved there -- and this went all
through the 20th century up to 1971 -- was the same as
the issue that William Jennings Bryant was talking
about in 1890: Do you tie yourself to the rest of the
world in this very fixed way, or are you the master of
your own fate?

Brett D. Fromson: We now have a dollar-based floating
exchange rate monetary system. Are we any less, are we
any more masters of our fate than we were in 1971, when
we had the old gold-supported fixed exchange rate

Peter L. Bernstein: This is one of those economist
questions -- on the one hand, on the other hand. It
depends on who you are.

On the one hand, if the United States of America has
one set of problems, Malaysia or Thailand or even
Brazil has a different set of problems. These smaller
countries have had terrible problems of adjustment as
it is, but it would have been much more difficult for
them without floating exchange rates. We see Asia
reviving today, coming back really strong from what
happened in 1998, and one of the main reasons is that
their currencies were devalued, and therefore their
goods are cheaper in world markets. Their goods and
services are cheaper in world markets than they were

And imports to them are more expensive than they were
before. And so the dramatic change in their balance of
payments in their international financial relationships
is very important. The U.S., in a funny way, doesn't
have the same freedom of movement. If the dollar were
to become weak, I think we would be in a very
frightening situation.

Today, speculation is not stabilizing, but
destabilizing. The dollar has an aura of strength in
world markets that is valid, but this is where people
want to keep their money. But were we to have an
inflation rate that's higher than that of the rest of
the advanced countries, or if the Europeans and the
Japanese ever get their act together ...

Brett D. Fromson: Economically?

Peter L. Bernstein: Economically, and began to develop
in the same way that we have in the last five, six,
seven, eight years -- technologically and rapid growth
and low unemployment and high productivity and all the
wonderful things that have happened here for reasons we
don't quite understand.

Brett D. Fromson: The euro and the yen would give the
dollar a race?

Peter L. Bernstein: The euro and the yen would give the
dollar a race. If the movement were in the opposite
direction, it could gather momentum and history
suggests there are only two ways to go, so what would
be so terrible about that? Suppose this began to

Brett D. Fromson: An incipient flight from the dollar.

Peter L. Bernstein: Yes, if there were flight from the
dollar, what would this do to us? Why should we be
worried about it?

Only within the last couple of weeks or at least within
the last month, [Federal Reserve Chairman Alan]
Greenspan himself said this is something that could
happen eventually, and that we have to be concerned
about. And he's the guy with his hand on the trigger,
so it's going to be his job to try to take care of it.
It's a very different kind of crisis from the kind he's
used to dealing with.

Why should we care? A weak currency is inflationary.
Otherwise, it really doesn't matter a hell of a lot,
but it means that instead the pound is now $1.40, that
instead of an Englishman wanting to import something
from the U.S. ... Then he'd get $2 for his pound. So
that one pound would be $2 worth of stuff instead of
$1.40 worth of stuff. Then we'd see our exports going
up, and we'd have to pay $2 for a pound's worth of
English merchandise. To go over there to have dinner in
London is expensive enough now, but it would be that
much -- 50 percent -- more expensive than it is now.

So, we would be exporting more, and we'd have less
import competition. And the consequences would be
inflationary. The only way to prevent this is to raise
interest rates sky high, and that certainly makes the
stock market go down and the bond market go down.

Brett D. Fromson: And the real economy?

Peter L. Bernstein: And then this hits the real
economy. And that's really the classical medicine, you
see. Then the real economy gets weaker and we don't
import so much. Because we're now importing about $30
billion more than we're exporting. That would change.

Brett D. Fromson: Are you concerned about the dollar
flight question in the near term?

Peter L. Bernstein: Near term, no. I have a basic
philosophy -- I guess because I'm a child of the '30s -
- that anything can happen. And that economic
conditions change and that good times develop
maladjustments and lead to bad times. Bad times can
lead to readjustments that lead to better times and
this is how the world works, and there's absolutely no
reason to believe that's ever going to change. So,
while I'm not concerned about this near term, all the
necessary ingredients are there for something of that
nature to occur.

Brett D. Fromson: Meaning a dollar crisis?

Peter L. Bernstein: Meaning a dollar crisis.

Brett D. Fromson: How important is the federal budget
in a currency crisis?

Peter L. Bernstein: In every case where a country's got
into currency trouble, the fiscal position is in
trouble. They were running into or moving toward the

Brett D. Fromson: That was a necessary precondition?

Peter L. Bernstein: To get the gold flowing back in,
they had to get their fiscal house in order. This was
before the bankers in other countries would lend to
you. You had to take these steps and this is really the
awful crises of the early 1930s, when Britain got into
trouble. In 1931, with millions of people unemployed,
raising their interest rates, the gold still kept going
out of Britain. Then we did the same thing, raised
taxes and interest rates in 1931 -- banks failing,
prices falling, unemployment going up, but we had to
protect the gold. To some extent, although we don't
have the gold standard anymore, we would face the same
kind of danger if the dollar were to become very weak.

Brett D. Fromson: Explain that.

Peter L. Bernstein: There would be a run on the dollar,
as I said before. I think that as long as the budget is
in surplus to this extraordinary amount, the crisis
might not occur or might be much more muted because the
U.S. would still look like a stable place. But if the
surplus begins to shrink, that could be a problem, and
there are a lot of reasons to think that it may.

You've just got to read the daily paper ... these
budget projections are based on very fragile kind of
substance, any one of which could easily be wrong. That
takes away a very important prop under the dollar. I
think we could survive weakness in the dollar if the
surplus was strong, and we could see the surplus
diminish if all the other factors stayed in place, but
all of the necessary ingredients for a dollar crisis
are there. I'm not sitting here and predicting it, but
in painting scenarios, which is I think the only
rational way you can do it as a forecast, you need to
look at all the different possibilities. It sure as
hell belongs in there.

It's more of a likelihood, but I think if you're
talking about a five- to seven-year time span, I think
the probabilities are good.

Brett D. Fromson: What do the Europeans get out of the
current dollar strength? We don't hear them complaining
too much.

Peter L. Bernstein: If you can't sell at home, sell
abroad. You can still do business. And the weak
currency helps that. And I guess they'd be in worse
trouble in some ways if they didn't have the export

Brett D. Fromson: Has the dollar replaced gold? And can
any currency ever replace gold in its role as the means
of exchange?

Peter L. Bernstein: The dollar has replaced gold vis-a-
vis the rest of the world because it's the standard
that every other currency is expressed in terms of
dollars. The ultimate reserves that other countries
hold are dollars. They pay their obligations in
dollars. Huge amounts of world trade are denominated in
dollars even between country A and country B, where the
U.S. doesn't even come into it.

So that, in this instance, the dollar is playing the
role of gold. But the dollar is also the currency of
the United States of America and its value is subject
to what happens in the U.S. economy. Gold stood outside
the system. It was a stateless currency. It therefore
played a different role from the dollar.

The dollar plays the same role as gold in all of the
rest of the world at this moment, because the dollar is
perceived to be as good as gold. But the gold standard
was a rigidly enforced system of exchange rates that
didn't vary, and where speculating against a change in
exchange rates would be a losing proposition. I don't
think we'll ever go back to such an arrangement. It
puts each country in too much of a corset. You crucify
the world on a cross of any standard. Each country
gives up a certain amount of domestic freedom.

Brett D. Fromson: Let's look at the euro. One of the
reasons it appears to be so weak is obviously that the
fundamental economy in Europe is not as strong as the
U.S. economy. But another problem they have is that the
European Community is perceived to be weak as a
political entity, and they have essentially created a
common currency without a common government.

Peter L. Bernstein: So they don't have credibility.
This is the big word. What the gold standard really
conveyed was credibility -- credibility that a country
would not let inflation run away, that its currency
would continue to have purchasing power. This was the
promise that the gold standard conveyed because the
gold would begin to leave if they weren't behaving. But
that was a world in which you could create unemployment
without creating a revolution. Today's world is much
more difficult. This is why I think that going back to
that kind of arrangement is very unlikely; the corset
is too tight.

Brett D. Fromson: Which currency today seems most
vulnerable to you?

Peter L. Bernstein: I think the most vulnerable
currency is the dollar because we have this tremendous
deficit in our current account.

But, except for us, there aren't any major currencies
that are exposed. The more we buy abroad, the more
other currencies accumulate dollars and therefore seem
to have plenty of reserves to take care of them if
there were a run on their currency.

The only country that is exposed to that kind of crisis
is ourselves. Because we have some reserves of foreign
currency but not an awful lot, relative to the
magnitude of what our foreign liabilities are. But if
there were reasons to move out of the dollar, then
there would be a lot at stake, and the speculators
would be right out there bidding and it would not be
stable. It would be very destabilizing.

Brett D. Fromson: Just paint very quickly what that
might look like.

Peter L. Bernstein: The pound is now costing $1.40 for
Americans and it might cost $2. You'd get maybe 50 yen
for a dollar instead of what you're getting now. It
would make the purchasing power of dollars in terms of
foreigners go down. But more importantly, it would be
an attack on the capital market.

Brett D. Fromson: In the United States?

Peter L. Bernstein: In the United States. Foreigners
would begin to liquidate their assets.

Brett D. Fromson: Stocks and bonds.

Peter L. Bernstein: Yes. And there's no reason why an
American sitting by and seeing a foreigner selling
wouldn't join in, because the consequences of holding
might be bad. So it would be real bad, it would be the
mother of all crises. Certainly it could be the worst
since 1974 because the dollar is so overowned in the
rest of the world today.

Brett D. Fromson: How might the Fed cope?

Peter L. Bernstein: Greenspan's experience and skill
and his ability to put his finger in the dike at
moments of crisis has created liquidity when there was
a liquidity crisis.

This would be the opposite kind of a problem, in that
creating more dollars would only make the situation
worse. And the only answer is to push interest rates
up, not down. And that's very painful medicine.

It's really a scary possibility. This could be a moment
when gold suddenly regains its luster, because maybe
the euro and the yen don't look like the answer to
everything, and so there's a reversion, in a really
scary time, to more primitive kinds of things.

Brett D. Fromson: How so? Because gold represents some
kind of absolute value at a time of panic?

Peter L. Bernstein: If you visualize something like
this in the very complex financial system we have
today, which is a world of derivatives, all of which
have a huge amount of counterparty risk attached to
them, gold is something for which there isn't any
counterparty. That's it.

In that kind of crisis we'd see the price of gold way
up again. I'm sure there would be some reversion back
to that, because it would look like the only thing that
people would be willing to take if they began to lose
confidence in the value of paper money.

Brett D. Fromson: Final question. You're not only an
economist, but for many, many years you were an
investment manager. What would you say about where
money should be invested today? How do you position
yourself now so that you don't get wiped out in a panic
seven years hence, but you don't forego the
appreciation in, say, U.S. equities in the meantime?

Peter L. Bernstein: I have a very simple answer to
that. And it's a stuffy, old-fashioned answer, but it's
delivered with great conviction. Diversification is
very important. We do not know the future, and
diversification is the only rational way to deal with
the future.

The theme of the book is that greed gets you nowhere.
So, 100 percent of anything is a terrible, terrible mistake.
If I'm 60 percent in equities, and the market keeps going up,
I'm not going to make as much as the guy who has 100 percent
in equities. But I'm going to do all right.

But if it's wrong to be in equities, I'm also going to
be a survivor. And I don't know whether it's right or
wrong, but I don't have to maximize -- maximizing is
taking very big risks. I don't know, if I were 25 years
old I suppose I would take a different view, but for
people who are accumulating for their retirement, which
is kind of the big motivation today for being in the
market aside from having fun, and it is a lot of fun,
surviving is just as important as seeing it grow. If
you don't know which way the cat is going to jump and
you're 60 percent in equities, you'll get richer. You'll come
out OK.

Brett D. Fromson: And the other 40 percent?

Peter L. Bernstein: The other 40 percent? Look, I'm not
picking 60 percent as a number, but less than 100 percent. I just
don't buy the 100 percent theory at all. I read one just the
other day I shouldn't mention -- the PaineWebber one.
It's very well done, but it's pure extrapolation of the
past into the future. You can have something that looks
perfect and it's not durable.

Cash is the ideal hedge against this kind of crisis
that we're talking about. Because when interest rates
go up, Treasury bills are what really serve you best.
If you have a hedge against an extreme outcome like 10 percent
in bonds or 5 percent in gold, and the worst happens, these
things pay off big.

Brett D. Fromson: And gold?

Peter L. Bernstein: In 1980, the value of all the gold
in the world, the monetary gold in the world, was more
than the value of the New York Stock Exchange. So if
you had taken just a small position in gold in the
1960s and the early 1970s, it would have exploded into
an enormous amount when everything was hitting the fan,
so you don't have to have a big position as a hedge
against an extreme outcome like that for it to pay off.

So I think I would have small positions in bonds and
maybe gold stocks. But cash is the primary hedge
against the stock market. It also has a cost. The
return is low. But in an inflationary period, it's a
wonderful thing to hold because you're rolling it over
as money market fund rates just go up. But I would not
be 100 percent in stocks. This is the main thing. What you do
with the rest, you fiddle around, but I would not be
100 percent in stocks for anybody under any circumstances,

Brett D. Fromson: Peter, thank you very much.

Peter L. Bernstein: Thank you.