Balance Sheet Recession - or Depression?
Zurich, Switzerland
Monday, November 24, 2008
---------------------
*** The stock market’s eyes are open – but what does it see?...the world probably isn’t coming to an end, but it is definitely changing...
*** The whole dollar-based monetary system is being washed away...gold in an upward trend in the near future?
*** Deflation now, inflation later...even Berkshire Hathaway has been cut in half...and more!
We’ve come to Zurich to attend a special conference on the future of the world. Nassim Taleb, author of The Black Swan , is giving the keynote address.
We’ll let you know tomorrow what we find out.
As you know, the stock market is said to “look ahead.” Sometimes it doesn’t bother to look very far ahead. Instead, it goes along at full speed without noticing that the bridge has been washed away! And when it finally puts on the brakes, it’s too late.
At least now, the stock market’s eyes are open. But what godawful thing does it see?
On Friday, the Dow bounced a bit – up 494 points. But the collapse since Labor Day has been breathtaking. Even Warren Buffett’s stock – Berkshire Hathaway – has been cut in half.
What does the stock market see that would make it want to treat the Sage of Omaha so roughly? What evil omen has the market noticed? What devil-on-the-loose does it fear? What plague, what war, what depression, what bankruptcy, what hyperinflation...
...did we say ‘hyperinflation’?
Wait a minute. We’re getting ahead of ourselves.
Whatever the world’s stock markets see – it must be a damnable mess...as if the world didn’t have a future.
So far...all we’re sure of is that there is a “balance sheet recession” setting in. And maybe it will turn into a balance sheet depression. Asset prices are falling. People are cutting back. Companies, individuals and investors are all desperately trying to rebuild their balance sheets – by getting rid of debt. We’re all Japanese now, in other words.
There will be Hell to pay...but it’s not the end of the world. Stocks will come back...buyers will get out their wallets again...life will go on as before. Won’t it?
Colleague Porter Stansberry thinks so:
“Today...I bought a broad range of stocks with the intention of holding on to them for the very long term.
“The last two months have been grueling for me. It is very difficult to watch stock prices fall. I know many of my subscribers will lose interest in the stock market. I know the next few years are likely to be very tough on my business. I'm worried about the financial security of my family and my friends.
“I can't recall a more difficult time – financially – in my entire life.
“Ironically and paradoxically, these emotions that I'm feeling now – the anxiety, the sadness – are how I know it is time to make long term investments. Without these emotional difficulties and the huge amount of uncertainty in the markets, these stocks would not be available to me at any reasonable price.
“None of us know the future, but my bet is that the world doesn't come to an end.”
*** Porter is right; the world isn’t coming to an end.
But our guess is that some things ARE coming to an end. The myths of Wall Street – “stocks for the long run”...“buy and hold”...hedge funds that don’t hedge...derivatives derived from nothing...millions in ‘incentive’ bonuses for executives. Or maybe the whole dollar-based world monetary system is going away? Keynesianism? Monetarism? The Efficient Market Hypothesis? Surely these silly theories have to go sometime too.
One thing we know that is not going to disappear is the idea that you can get something for nothing. If people ever come to believe that they can’t get something for nothing, democratic government will disappear. Why bother going to the polls if you can’t get anything out of it?
We’ll take some further guesses about what is ahead as Mr. Market reveals his intentions.
But let’s take a quick look at gold. Doesn’t gold look ahead too? What does it see?
Judging from the evidence, gold sees a slump too – but a slump that won’t be nearly as bad for the yellow metal as for other metals...and equities. Stocks are down nearly 50% worldwide. Gold is down only about half that much.
What else does gold see?
Our Oracle on gold is our old friend, Issy Bacher. Issy wrote a few months ago and warned that gold was going down. Friday morning Issy sent this note:
“I am sending you a graph of the Gold Price at yesterday’s closing fix of $ 738.
“The bottom cycle graph clearly shows that the cycle has bottomed and is rising in the future zone.
“The top line graph shows that the gold price did find support just below $ 738
Conclusion is that for the immediate future the gold price is now in an upward trend.
“By the way, the Dow has very strong support round the 7500 level and the cycles are bottoming.”
We don’t know what kind of “cycles” Issy is looking at, but by the end of the day the Dow had gained nearly 500 points and gold was up 50 bucks, rubbing up against $800 an ounce.
As you know, dear reader, it’s deflation now...inflation later. It’s Japan now...Argentina in the future. Gold may be looking further ahead...to the pampas. Or else, inflation may be coming sooner than we think.
*** A news report on Friday afternoon: “Somali Pirates in Bid to Buy Citigroup.”
“We need a bank to keep our ransom money,” said the Pirates’ leader.
*** “Matthias, are you by yourself?”
The boy was about 8 or 9 years old. He had come in the bar by himself and told the woman he wanted to have lunch.
“Why are you here alone? Where’s your mother?”
“She’s at home...but she’s having some trouble with Dad.”
The scene took place in a little town in rural France this weekend. We had gone out to work on our house – redoing the cement joints between the walls and the new windows. On our own for lunch, we went to the local bar, which offers a handy restaurant in the back room. A complete meal for only 10 euros, it advertises. In this time of financial crisis, it seemed like a good deal.
While we were finishing our entrée, Matthias came in...a good-looking kid with the well-defined head of a 12-year old and the body of a younger boy.
“Go take a seat,” said the woman behind the bar.
After the boy had sat down, she turned to a man also working behind the bar. Both were in the mid-40s...the kind of people who run small businesses in France. Pleasant. Hard working.
“This is terrible. We can’t let him eat lunch alone.”
“What do you mean? His mother sent him here. It’s none of our business.”
“Well, it’s not right. He shouldn’t have to eat lunch by himself. The poor little fellow...”
“It’s not our problem...”
“But it’s our restaurant...and we don’t want a lot of sad, lonely people eating here...especially, children.”
Your editor tried to look cheerful.
“Go get Georges... He can eat with Matthias.”
“He’s already eaten.”
“Well, he can eat again. He won’t have any trouble.”
A couple of minutes later, a big boy with a big grin came from upstairs. He appeared to be about the same age, but twice the size. He sat down opposite Matthias.
“Hey...how you doing?”
“Okay...”
“You eating by yourself?”
“Yeah...”
“Mom wanted me to join you. She said she’d pay for both of us.”
“Oh...good...”
A minute later, the two boys were talking happily about TV shows...or video games.
Your editor finished his cheese...and left.
Until tomorrow,
Bill Bonner
The Daily Reckoning
P.S. We may not be able to predict exactly where this market is headed – but there is still time to secure your financial future and rebuild your portfolio.
Get the latest in the Agora Financial FREE Emergency Retirement Recovery webinar series. This time Chris Mayer tackles the market and spells out exactly where you should (and shouldn’t) be putting your money. See here for all the details .
The Daily Reckoning PRESENTS: Whenever you hear Keynesian economists try to wax philosophical about modern economic theory, the Mighty Mogambo’s chilling cackle can always be heard in the background. This week, he takes on the G-20 meeting, the abandonment of the Bretton Woods agreement, and his not-so-secret plan to maintain personal wealth. Read on...
ROASTING G-20 WEENIES ON A GOLDEN SPIT
by The Mogambo Guru
The recent G-20 meeting in Washington, D.C. is where the world’s 20 biggest and/or most important economies got together to change the world’s economic architecture, with everybody promising to spend like maniacs right now, but to one day act honorably and adhere to some future agreement that really isn’t worth the paper it will be written on.
The problem is that since 1944 the United States had promised to act responsibly and hold the value of the dollar constant, controlling the money supply, and thus preventing inflation and runaway booms like the gold standard did, so that all the other countries could take the easy way out and merely use the dollar as their “gold” reserves against which they could value their own currencies, instead of hassling with all that metal back and forth.
As for our adherence to the Bretton Woods agreement, hahahaha! That’s why everybody is so angry with us; we are all freaking doomed!
Coincidentally, I have the same problem at work. Last year’s Employee Annual Evaluation did not go well, at all, and they were going to fire me with what appeared to be overwhelming justification, but I begged and cried so piteously, for so long, and made so many vague threats against them and their families that they finally said, with words that are burned into my brain and into my Personnel File, “Okay, we won’t fire you if you promise to adhere strictly to the Employee Handbook, the Standard Operating Procedure manual, make an effort to use minimal social skills, and to stop accusing everyone of plotting against you, because there are actually a few people who are NOT plotting against you for one reason or another, as far as we can tell. And shut the hell up about how the Federal Reserve under Alan ‘The Economic Antichrist’ Greenspan has destroyed the USA with its insane over-creation of money and credit, which, according to history and the Austrian school of economics, always results in the ruination of the currency and collapse of the economy! And ditto yelling at us to buy gold!”
I naturally suspected a trap, but it wasn’t; and I reluctantly agreed to their stupid demands, even though they got really frosty when I then tried to bargain a raise and a nice boost to my benefit package.
Anyway, the point is that I was sincere when I agreed to do that stuff to keep from being fired again, but instead, I’ve spent the whole last year since then doing the same crappy job, taking a lot of time off, finding excuses and blaming scapegoats for all my problems, and yelling at my moron co-workers to “Buy gold, silver and oil, you morons! Can’t you see that the dollar is being devalued, more and more, by all of this new money that is being created? So if the dollar is going down in value, but gold and silver hold their value like they have for the last few thousand freaking years, doesn’t it ever sink into your tiny, little pea-brains that they will be going up in price? Or how about oil, you morons? Do you really think that the sheer intrinsic value of oil will NOT be going likewise up in price as the purchasing power of the dollar falls?”
But you are not interested in hearing about my dread, concerning my new upcoming Employee Annual Evaluation, or about my Clever Mogambo Contingency Plan (CMCP) to sneak into the office one night and take my Employee File, along with all its incriminating evidence and Breathalyzer results, thus forming the basis of my “wrongful termination” suit that ought to, by my estimate, keep me on the payroll just long enough to start collecting Medicare benefits, and then it’s, “So long, suckers!”
As with my own future, Big Bad Things (BBT) are coming with regards to the value of the dollar and these G-20 weenies. And since simple prose seems so inadequate at a time like this, I give you a Mogambo Economic Poem (MEP):
So, will the new G-20 monetary architecture be based on the dollar? Hahaha!
Will the new G-20 monetary architecture be based on gold? Ahhhh!
But since they are all a bunch of scumbags, even though they should install a global gold standard for all monies, I figure they won’t, so I say, “Naahhh!”
But the good news is that their insane create-more-global-money philosophy means that inflation in prices is a certainty, and that means buy gold! Whee! This investing stuff is easy!
Until next time,
The Mogambo Guru
for The Daily Reckoning
Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.
Posts
