 | | The Daily Reckoning | Tuesday, December 14, 2010 |
- Honesty and gold: still the best policies,
- Five things to get straight about a sound money system,
- Plus, Bill Bonner on printing until the world blows up...
|  | | Ruminations on the Contrarian
Mindset
| Why gold investors are still in the minority
| |  | | Joel Bowman |
Reporting from Buenos Aires, Argentina...
Why do smart people do dumb things? Or, more germane to our Daily Reckoning beat, why do smart investors make stupid decisions?
More on that in a second...
We returned to the "Paris of the South" over the weekend after a quick trip to Baltimore for an editorial meeting and, of course, the annual office Christmas party. Rarely do we find ourselves surrounded with so many outcasts and oddballs as when we attend Agora-sponsored events. We doubt The Maryland Club - the jacket-and-tie venue where the shindig went down - had ever seen such a motley crew. Not since last year's celebration, anyway. Agorans, if you haven't yet met one, are a quirky bunch; a little adrift of center on almost any topic; a tad eccentric; not quite "all there" in any generic sense of the definition. Needless to say, it is a pleasure to work with such a group...and to be in the service of an "outsider" readership. A very Happy Holidays to you all!
Chatting with a few old friends at the party - and some new - we started thinking about the contrarian mindset. How does such a state arise in one's own brain? Is it inherent? A genetic predisposition? Why is it that some folk tend to stray from the herd, while others follow in perfect step and with nary a question as to their position in the line...much less to where it is headed? Why, in other words, are some people so delightfully independent while others are forever setting the cut of their jib to whatever the prevailing theory of the day happens to be?
Forgive our post-flight ramblings, Fellow Reckoner. There is a point to all this.
There is little doubt that, in the world of investing, it pays to be in the minority. Some commentators divide the crowd into unequal portions: the minority constitutes the "smart" money; the majority represents the "dumb" money...on which the minority happily feeds. We are reminded here of Rick Rule's famous line: When it comes to investing, you are either a contrarian or a victim.
Necessarily, the smart money must be a minority. The moniker is afforded, at various times, to bond traders, short sellers and industry insiders. Whatever their position, this renegade outfit must be ahead of the curve, ready to sell at the point of maximum demand and to buy at the moment of minimum interest, when there is "blood on the streets," as the old adage goes.
Though not entirely dependent on the status quo, a contrarian's position is almost always in opposition to it. It is helpful, therefore, to ask what the accepted norm of this day is. Bill Bonner helpfully identified the accepted wisdom of our time in yesterday's column.
"Lies!" said he.
The financial system is built on lies. Economic and political systems likewise. There is the lie that people can grow rich by spending more than they earn...that companies can achieve success by producing stuff that people don't buy...that real estate prices always trend higher...and that, when the entire economy is in a debt-induced funk, it can dig its way out by piling on still more debt, by debasing its currency and by fibbing to the masses about what it is doing all the while.
"Lies, lies, lies," commented Bill.
Where then is the truth? Gold, for one, is notoriously, incorruptibly honest. You can tell this because fiat-money pimps won't go near the stuff. It is indisposed to the creepy advances of central bankers who would seek to compromise its virtue. It is, as one friend likes to say, nobody else's liability. It is honest to a fault, Fellow Reckoner. Has been for thousands of years. That is why to the majority of it remains a barbarous relic. But for the rest of us, like honesty, it's still the best policy.
In today's guest column, Nathan Lewis, author of Gold: The Once and Future Money, lends us his insights on the Gold Standard and how we might go about getting back to one. Enjoy... |
| The Daily Reckoning Presents
| The Biggest Obstacle
| |  | | Nathan Lewis |
Keynesianism has reached its natural extreme. The floating-currency status quo, in place since 1971, is becoming more and more intolerable. Before too long, the soft money fanatics will give way in disgrace, and the hard money traditionalists will begin to get the respect they deserve. We are already on the path to a new gold standard.
At this point, I ask myself: what is the biggest barrier between us today and that happy conclusion? What is the limiting factor? Is it the criminal instincts of today's politicians? The cow-like acquiescence of the masses? The immense gains still being enjoyed by the bankster class? The endless prevarication of academia's high priests of Keynesianism? The sycophantic parroting of the establishment spin by the mainstream media?
All of these are important factors. But they are not the most important factor.
The biggest barrier today is - us! The gold standard advocates themselves.
Their motives are pure and their ideals are high. But can they deliver the goods? Do they have the practical, technical knowledge that would allow them to build a world monetary system that could last for a thousand years, and could be implemented with no disruption?
Unfortunately, the answer is "no." This condition can be remedied. However, it had better be remedied quick, because we don't have that much time left.
If you had twenty minutes with Barack Obama, Angela Merkel, or Hu Jintao - we will assume they know little about monetary economics - and were asked to explain the basic tenets of a gold standard system, what would you say? Here is what I would say.
Tenet #1: Stable Money is superior to Unstable Money. "Stable Money" is money that is stable in value. Capitalist economies work best with conditions of stable money. "Discretionary" monetary policy doesn't really solve any problems, and actually causes new ones.
Tenet #2: Gold is stable in value. Unlike other commodities, gold does not go up and down in value. For this reason, it is the premier monetary commodity, and has been for literally thousands of years. Although it is a bit of a stretch to assume that gold is perfectly unchanging in value, nevertheless, after centuries of experience, we have established that it is sufficiently stable in value to serve its purpose as a monetary benchmark. Also, gold is a better measure of stable value than any other available reference or statistical concoction.
Tenet #3: Therefore, if your currency's value is pegged to gold, that currency will be as stable as gold. A gold-value peg is the best means to accomplish our goal of stable currency value. For the last 500 years, every government that has wished to implement a stable-currency policy has used some variant of a gold standard. It is proven, it works, and there is no need to invent another, inferior solution.
Tenet #4: A token currency, whether coins or notes, can be pegged to gold via the adjustment of supply. "Supply" is technically known as "base money," which consists of notes, coins, and bank reserves. If the currency's value sags below its gold peg, then supply is reduced. If the currency's value is higher than its gold peg, supply is increased. No gold bullion is needed to maintain this peg - only a mechanism to increase and decrease the supply of base money. Central banks accomplish this today by buying and selling government bonds in "unsterilized" transactions. This is effectively the same as currency board systems in use today.
Tenet #5: A "lender of last resort" can be provided within the context of a gold standard. The original "lender of last resort," or what we today call a central bank, was the Bank of England during the 19th century. The Bank of England was also the world's premier champion of the gold standard. The Federal Reserve was originally constituted in 1913 to serve as a "lender of last resort" within the context of a gold standard system, and did so for 58 years until 1971. Central banks' original purpose was perverted during the 20th century due to the rise of Keynesian soft-money ideology, causing them to come into conflict with the proper operation of a gold standard system.
These tenets probably seem familiar, and, except perhaps for the last one, not very controversial. However, in my view, today's gold standard advocates have not properly internalized and mastered these core concepts. I suggest that they do so as quickly as possible.
When people who are unfamiliar with monetary economics listen to the speech and arguments of today's gold standard advocates, I think they get the impression that the gold standard advocates have a tendency towards ideology, and a rather poor grasp of practical issues. They might not be able to explain why, but for some reason, it seems like the gold-standard advocates don't have all their ducks in a row.
There's a simple reason for this: it's true! However, once the gold standard advocates expand their understanding and master the core concepts, this quality would also become apparent in their speech. The lay observer would have a different impression - that the gold standard advocates have a viable alternative, and are able to deliver on their promises with complete expertise and understanding.
We need a small group - perhaps twenty people, in the English-speaking world - who have achieved this level of mastery. We fall somewhat short of that today, but this problem is easy to remedy.
It's hard to change the world. But, it is not too hard to change yourself. Start with this, and the rest will follow.
Regards,
Nathan Lewis,
for The Daily Reckoning
| | | Bill Bonner
| Gold or Stocks: What to Hold During the
Great Correction
| |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
Gold or stocks?
Gold will go up another $300 next year, says Goldman Sachs. Bloombergreports:
Gold rose 27 percent this year, heading for a 10th consecutive annual advance. Investors are seeking hard assets as governments and central banks led by the Federal Reserve pump more than $2 trillion into the world financial system.
Gold will reach $1,690 an ounce in 12 months, from $1,390 now, and probably peak the following year, Goldman estimates. Gold in exchange- traded products backed by the metal reached a record 2,105 metric tons on Oct. 14 and holdings were last at 2,093 tons, according to data compiled by Bloomberg. That's equal to about nine years of US mine output. Hey, making money is easy. Gold goes up every year. If you believe Goldman it will go up another 20% next year.
But if you believe Goldman, you'll make money in stocks too. Here's another Bloombergreport:
The benchmark gauge for American equities will rise 11 percent to 1,379 in 2011, bringing the increase since 2008 to 53 percent, the best return since 1997 to 2000, according to the average of 11 strategists in a Bloomberg News survey. Goldman Sachs Group Inc.'s David Kostin, the most accurate US strategist this year, said sales growth will spur a 17 percent rally in the S&P 500 through the end of 2011.
Market analysts say earnings will hit record highs, keeping valuations below historical averages at the same time government spending aids the economy. Reaching their average forecast for 2011 would give the index annualized gains of 15 percent over three years, twice the rate anticipated by Pacific Investment Management Co.'s new normal theory that anticipates deficits and increased regulation will limit returns.
Kostin, Goldman Sachs' New York-based strategist who said last year the S&P 500 would end 2010 at 1,250, wrote in a note Dec. 6 that below- average bond yields help create a "superb backdrop" for equities. He expects the S&P 500 to finish 2011 at 1,450, the second most-bullish call among 11 firms surveyed. So, Dear Reader, you have a choice. Gold or stocks? Goldman says you'll make money no matter which one you choose.
We're not so sure. The way we look at it, we're still in a Great Correction. Trouble is, if you read the newspapers you'd barely realize it. The financial press says the economy is "recovering." The analysts are calling for higher asset prices. Advisors are overwhelmingly bullish. And shoppers are said to be going back to the malls that once knew them.
And what's this? Outstanding consumer credit - the key measure of leverage in a society - went up in September and October. The economy isn't de-leveraging. It's adding debt, not subtracting it!
But hold on. If you look at the composition of the "consumer" credit figures, you discover that:
1) The total credit numbers are actually going down; it's the adjustments that make them appear higher
2) The positive (increasing credit) numbers come from government- supported credit (such as student loans)
3) Take out the government-backed debt and you will see an impressive collapse of credit The Great Correction is real. It's a fact of life. And it won't go away anytime soon.
And more thoughts...
So, what will it be? Gold or stocks?
We'll take gold.
Stocks are a bet on an improving economy - on growth...on profits...on prosperity.
If we're really in a Great Correction, it could be many years before the economy begins to grow again.
But isn't the economy recovering? What, are you kidding? There are 15 million people without jobs. If the economy continues to "grow" at these rates, they'll never find work again. Every month, the workforce grows with the population. The number of new jobs barely keeps up.
In order to get a real recovery, the economy will have to grow much more strongly. And that isn't very likely, not as long as so many people are reducing their debt levels and saving for their retirements.
Sooner or later, investors are probably going to realize that the economy isn't really recovering. They've gone for a dozen years with no net gains from stocks. They're bound to give up, sooner or later. Once they see that this economy will not make their stocks more valuable they'll begin to shift their focus from capital gains to income. They'll look for dividends.
But at current stock prices, investors are lucky to get a dividend yield of 2%. Not enough to compensate them for giving up their money. They'll want 3% to 5%. And in order to get that level of dividends stock prices will have to go much lower - down by as much as 60% or so.
Could gold go down too? Yes. And it probably would - if the feds would permit the economy to de-leverage in an orderly way. Instead, they're fighting it...digging in their heels...and holding onto the furniture to try to avoid getting dragged along.
They've tried monetary policy. They've tried traditional fiscal policy. Nothing worked. So, now they're trying QE2.
Will that do the trick? No. If you could really make people more prosperous by printing money, QE would be a lot more popular than it is now.
Of course, it won't "work." But the feds have already shown that they have no intention of giving up. Obama appointed a bi-partisan panel to figure out how to reduce the deficit. The panel made some modest proposals. And both Congress and Obama himself rejected them. If there is to be de-leveraging of the public sector, it will be over their dead bodies.
Which is the way we'd like to have it.
But it won't happen soon. Instead, they'll continue on this route until they can't go any further. The Fed has already printed up $1.3 trillion trying to avoid the correction. And they're now working on another $600 billion.
And when that doesn't work, they'll probably print up some more...
..and they'll keep printing (why would they stop?)...
..until the whole system blows up.
THAT'S when you'll be glad you bought gold rather than stocks.
Regards,
Bill Bonner,
for The Daily Reckoning
-------------------------------------------------------
Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com
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