The Daily Reckoning | Wednesday, August 24, 2011 
All Eyes on the Future A Look at What’s Ahead and How We Might Get There 
Joel Bowman Who gives a damn about America’s credit rating?
I’m SICK of hearing about Keynesian vs. Austrian, fiat currency vs. Gold, US credit ratings and other BORING economic theories you have ZERO control over.
“WHO CARES!?”
Truth is, if you want to make money in the markets, none of that stuff even matters!
Let me prove it to you by showing you.
The Daily Reckoning Presents First in Line for New Money 
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It’s the secret behind some of the most successful, iconic S&P 500 firms over the last half century...
Now you can use it to boost your retirement nest egg higher than you’ve ever dreamed.
Find out how here in this FREE presentation.
Bill Bonner The Turns of the Century 
Bill Bonner
Thursday, 25 August 2011
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Reporting from Buenos Aires, Argentina...
“Heaven and Hell seem out of proportion to me: the actions of men do not deserve so much.” — Jorge Luis Borges
The Dow rose by more than 300 points yesterday. Gold tumbled $60. And it’s down by as much again today. What’s going on? The whole world wants answers. Ever eager to disappoint, we’ll offer a few more questions instead.
The primary line of inquiry, of course, runs along some version of “where do we go from here?” Investors want to know tomorrow’s gold price, Friday’s Dow reading and next week’s lottery numbers. And they want to know them now, if not yesterday. They want to know what Ben Bernanke will say when he wags his bearded chin later this week. And they want to know want affect his words, his “credible threats of action” will have on the above-mentioned unknowns. Probably they won’t impact the lottery numbers greatly...but they may encourage a few more people to take a punt, to roll the dice, either in the stock market, the gold market...or the state lottery racket. We’ll have to wait and see.
Gold is taking a well-earned breather. Over the past month, the Midas metal stacked on about $300, more than its entire, nominal dollar value of just one decade ago. From $1,600 it galloped all the way to $1,900 per ounce. Now it’s whacking the Johnnies-come-lately. That’s probably to be expected. As we’ve said before (borrowing a line from someone we can’t now remember), straight lines are for geometry class, not for markets. Asset prices move in fits and starts, ducks and weaves. They are as cagey and deceptive as a politician’s campaign speech.
But, as Fellow Reckoners well know, crowds don’t make money. They chase it. Then, when they arrive to find that all the loot is gone, they whine and moan...and look for another crowd to join. Then the same thing happens all over again. This latest blowoff in gold ought to disperse a few orderly queues. When the crowd is broken up, when their mettle has been tested and their pockets sufficiently emptied, the metal will take off again, leaving the masses behind it to scratch their collective head and wonder what the Hell happened.
Bill has more about gold below, including an “historic Daily Reckoning forecast,” so we’ll move on to other uncertainties, unknowns and unbelievables...
Satisfying all three “uns,” we turn our attention, as they say, back to the future. We wonder not what next week or next month holds, but next year, next decade...and beyond. A while back, Chris Mayer penned a characteristically thoughtful essay in which he drew a parallel between the decade preceding the Great Depression, a decade sometimes known as “The Gatsby Years,” and the late 1990s early ’00s. It was these roaring twenties that inspired F. Scott Fitzgerald’s masterpiece. It was a decade of excess, of Fed- sponsored credit expansion and all the trappings of fleeting luxury that tend to accompany such a phenomenon. Then, just as the crowd was firmly in step to the Charleston, beginning to enjoy the good life, reality hit.
Enter the Great Depression, the “Grapes of Wrath” years, as Mayer described them. Readers may see here a kind of “past is prelude” analogy emerging. The 1930s were a period of suffering, prolonged by the overreaching hand of the FDR administration, of dustbowl migrants and stricken Joads. Some, not convinced by the “Summer of Recovery” rhetoric they see on TV and in the papers, are preparing, right now, for this possibility. They see a period of harsh adjustment, of increasing government intervention and of strangulated markets. They expect the Great Correction, as Bill calls it, not only to continue...but to worsen.
We wrote Monday about the “Third World America” already expressing itself across various parts of the country. Addison has a whole presentation discussing it (including ways to avoid becoming one of its victims).
But looking further down the road, we want to see what rests around the Correction corner. What might jolt the nation out of misery...or send it deeper into despair? Some, like breakthrough technology specialist, Patrick Cox, believe advances in science and technology present a virtually unlimited vista of possibilities and opportunities. He seescures for all types of diseases within reach, disruptive breakthroughs in computers, nanotech, biotech and more that will elevate our species to an existence beyond our present ability to even imagine.
Others foresee a repeat of the late 1930s early ’40s, where war visited destruction and devastation upon millions, where the “Grapes of Wrath” years gave way to the “Anne Frank” years, Orwell’s “1984” decade. What Hell or what Heaven, if any, do we men deserve?
We’re going to revisit this topic in future issues, so feel free to write in with your own views. In the meantime, guest essayist, Doug French, takes a look at a party to which none of us were invited...and why it might portend a “financial blowup” of another kind. Please enjoy...
The world of high finance was still in full flight in February 2007. The cracks in the mortgage market had not yet begun to show and Stephen Schwarzman’s Blackstone Group had just completed its $39 billion purchase of Equity Office Properties in what was the largest leveraged buyout ever.
There was plenty to celebrate, so Schwarzman threw himself a party for his 60th birthday, a 3 million dollar affair for 350 of the billionaire’s closest friends, including Barbara Walters, CNBC money honey Maria Bartiromo, the Donald, Cardinal Edward Egan, and former New York governor George Pataki.
It was lobster, filet mignon, and baked Alaska for everyone, washed down with expensive vino, with comedian Martin Short as emcee. Composer-pianist Marvin Hamlisch played a number from A Chorus Line. Patti LaBelle sang a song written for the birthday boy, and Rod Stewart sang a medley of his hits, reportedly for a fee of a million dollars.
A year and half later, in September of 2008, it appeared the financial world was coming to an end. Lehman Brothers filed for bankruptcy, the once “bullish on America” Merrill Lynch fell into the arms of Bank of America, and AIG held out its tin cup in need of a quick $40 billion from the Federal Reserve.
The nation’s M2 money supply was an unadjusted $7.8 trillion that month while Ben Bernanke, Tim Geithner, and Hank Paulson were working weekends to patch up their wounded Wall Street friends. Meanwhile, it didn’t seem all that bad on Main Street with unemployment at 6.1 percent, despite the economy losing 605,000 jobs in the first eight months of the year. Home values had fallen 7.1 percent from the previous year, but few were underwater yet.
But the Fed chair was not interested in Main Street. On September 10, 2008, the Fed’s balance sheet totaled $927 billion; by October 1 it had grown to $1.5 trillion; and on New Years Eve, the Fed rang in the New Year with $2.2 trillion in assets.
All this purportedly so that when normal folks used an ATM machine, their money would spit out on command. It all worked so well that Bernanke was TIME’s Person of the Year for 2009, “providing creative leadership [that] helped ensure that 2009 was a period of weak recovery rather than catastrophic depression,” Michael Grunwald wrote.
Two years on, one wonders if Grunwald realized that the weakness would continue indefinitely.
The M2 money supply has marched steadily higher to the $9.2 trillion mark last month. The monetary aggregates have gained traction, increasing at a 15.3 percent clip in the past three months.
Increases in money aren’t sprinkled from the sky, floating indiscriminately into whoever’s hands are in the right place at the right time. Money-supply increases occur through the commercial banking system and Federal Reserve. Those who receive the money first benefit at the expense of those receiving the money last.
“The fiat dollar is an ‘elite’ system,” Jim Grant told the Wall Street Journal recently, “and Wall Street is its supporting ‘interest group’ — those nimble, market-savvy, plugged-in folks know how to shuffle assets and exploit cheap funding from the Fed to leverage up their profits and soften the downside.”
After plunging to 666 on the S&P in March of 2009, the stock market has recovered up until the recent volatility, with that same index reaching over 1,350 earlier this year. Wall Street paid out $27.6 billion in bonuses in 2009 and $20.8 billion last year. Mergers and acquisitions have been all the rage and leveraged buyouts can’t be too far behind. The demand for trophy office space has even heated up. But Craig Karmin, writing for theWall Street Journal, worries the trophy-property bubble is already overdone.
An index of commercial-property values by Green Street Advisors, which is tilted toward high-end and trophy buildings, has risen more than 45% from its 2009 lows and is only 10% below its all-time highs. Although the index has been flat for the past two months, the run-up nevertheless raises questions about whether the surge in prices is getting ahead of sluggish economic fundamentals.
Bankers have been stingy toward lending to commercial businesses and private individuals, with total loans falling 3.4 percent from last year at the end of the first quarter. At the same time, bankers can’t get enough of the government’s paper, buying $500 billion in Treasury and agency securities during the past two years, reports Bud Conrad, economist for Casey Research. Bankers are returning the favor, “using their bailouts to help the government, albeit somewhat indirectly, using money from the Fed.”
So while all this money has rushed into stocks, real estate, and especially government bonds, by the looks of it, none has found its way to Main Street except in the form of higher prices. John Williams at Shadowstats.com says prices are increasing at a 10+ percent clip. And while the Fed’s QEs were supposed to stimulate hiring, unemployment soared in 2008 and ’09 and hasn’t recovered. According to Williams’s numbers nearly one in four Americans is out of work.
While Williams says consumer prices are roaring upward, the government claims there has been no increase in the consumer price index from the third quarter of 2008 to the third quarter of 2010, so those receiving Social Security have seen no cost-of-living increase.
A record number of Americans now look to Uncle Sam to put food on the table. The US Department of Agriculture just announced that 46 million people — 15 percent of the population — are receiving government aid to buy their groceries.
And now the primary asset of the middle class, their home, has become a liability for 28 percent of homeowners according to real- estate-data provider Zillow. “We get tired of telling such a grim story, but unfortunately this is the story that needs to be told,” the company’s chief economist Stan Humphries told Bloomberg. It’s likely more homeowners will be underwater if Robert Shiller is right. He believes home prices may fall another 5 to 10 percent.
Bernanke’s crisis policy was called into question by Richard von Strigl in Capital & Production. Strigl pointed out that the creditworthy will not be interested in borrowing in a crisis. But those industries forced to liquidate during the crisis are all too eager to borrow.
However, satisfying this demand implies delaying the liquidation of the crisis, lengthening and strengthening it. For it is essential to this situation that a significant demand for credit by those who would like to work towards continuing the boom, that is an “unhealthy” demand for credit, exists along with a significantly reduced demand for new sound investments.
While times are tough for normal folks, Wall Street royalty had another birthday party to attend recently. Private equity billionaire Leon Black celebrated his 60th with a couple hundred folks at his oceanfront estate in Southampton. Elton John earned $1 million for an hour-and-a-half of serenading the likes of Vera Wang, Mayor Michael Bloomberg, Senator Chuck Schumer, Martha Stewart, and Howard Stern, who bellied up to a buffet featuring a seared-foie- gras station.
“While much of the nation’s economy has struggled to recover from the financial crisis,” Peter Lattman writes for the New York Times, ”Mr. Black’s firm — and the rest of the private equity industry — has snapped back.”
Former Lehman Brothers partner and financial novelist Michael Thomas believes the party to be in bad taste. “This behavior suggests they are isolated from the rest of the world, living behind these great big hedges, and in a way they are.”
Blackstone’s Schwarzman attended the Black affair along with Goldman Sachs’s Lloyd “we do God’s work” Blankfein. “Your 60th got us into the financial crisis,” Mr. Blankfein is said to have told Schwarzman. “Let’s hope this party gets us out of it.”
Not likely, Mr. Blankfein. The Fed’s Wall Street Band-Aid looks to be peeling off. Another 60th-birthday blowout is signaling another financial blowup.
Regards,
Doug French,
for The Daily Reckoning
Ed. Note: Douglas French is president of the Mises Institute and author of Early Speculative Bubbles & Increases in the Money Supply and Walk Away: The Rise and Fall of the Home-Ownership Myth. He received his master’s degree in economics from the University of Nevada, Las Vegas, under Murray Rothbard with Professor Hans-Hermann Hoppe serving on his thesis committee. French teaches in the Mises Academy.
Reckoning from Dublin, Ireland...
Listen up, dear reader...herein we announce an historic Daily Reckoningforecast.
Here’s your north star...your compass...your GPS to the future. Print it out. Paste it to your refrigerator.
About the turn of the century, two markets turned
Gold turned up
Stocks turned down
These major trends will end
Whence they meet
There you have it. Two markets diverged in a lonely wood. And that has made all the difference! Stocks went up 332 points on the Dow yesterday. But so what? It’s just a bounce. Noise. Or misinformation put out by Mr. Market, intended to trap unwary investors.
Our view is that the bear market began in January 2000. The feds fought it off with two huge extravaganzas of spending — the first beginning in 2001...the other after 2008.
Stimulus does wonders for stock prices...but it no longer works for the economy that sustains them. For every dollar that the Fed has put to work to fight the crisis since 2008, for example, it has produced only 80 cents worth of GDP. It didn’t work.
Fighting a credit contraction with more credit is a losing proposition. Eventually, investors are bound to realize that stocks are headed down. Eventually the bear market will resume. And eventually it will come to an end.
But when?
Our guess is that it will end when the Dow and the price of gold arrive at the same point — probably around $3,000. Whatever the number, you’ll be able to buy the entire group of Dow stocks for the price of one ounce of gold.
Of course, our view is a minority one. Warren Buffett doesn’t buy it. Most investors don’t buy it. We don’t even suggest that you buy it, dear reader. Just remember it. If it turns out as expected, we want to be able to say ‘We told you so.’
And if it doesn’t work out? Please have the grace to forget we mentioned it.
We would like to be able to predict the future, but we’ve never gotten the hang of it. We’re just guessing.
But since we’re just guessing, we don’t see why we should hold back.
We’re also guessing that...
..the weight of so much debt is depressing growth...and will soon depress stock prices too...
..that the economy is becoming zombified from too much government money...especially the military...
..that Mr. Market is ready for a long bear market anyhow; he’s tanned, rested, and ready to go to work
..that the US is following in Japan’s footsteps...towards a long period of on-again, off-again recession
..that the recession of ’08-’09 in the US never actually ended...
..and that stocks will go down over the next 5-10 years until they finally hit a real bottom.
But wait. Here comes the San Francisco Fed. Can you believe it? It agrees with us.Bloomberg reports:
Aging baby boomers may hold down US stock values for the next two decades as they sell their investments to finance retirement, according to researchers from the Federal Reserve Bank of San Francisco.
Americans born between 1946 and 1964 are beginning to retire as the US stock market is still recovering from the financial crisis that began in 2007 with the collapse of the subprime-mortgage market. The timing is “disconcerting” and, since stock prices have been closely tied to demographic trends in the past half century, “portends poorly for equity values,” adviser Zheng Liu and researcher Mark Spiegel wrote in a paper released by the bank today.
The equity-price-to-earnings ratio of US stocks tripled from 1981 to 2000 as baby boomers reached their peak working ages, and has declined since then, according to Spiegel and Liu.
Overseas investors’ demand for US stocks might help mitigate the effect of a baby-boomers’ sell-off, yet the impact would probably be limited, they said.
“For many primary purchasers of US equities outside the US, their demographics are even worse than ours, in particular Europe and Japan, which have older age profiles prevailing than the US does,” Spiegel, vice president of the bank’s research department, said in a telephone interview today.
At the same time, foreign investors, including sovereign wealth funds, may decide to hold a larger share of US equities, Liu and Spiegel said. Also, emerging market countries such as China may ease capital controls, allowing their citizens to invest in US equities, they said.
And more thoughts...
Now, let’s look at the gold market. Gold went down $30 yesterday.
Is it too late to join the party?
Investors don’t know what to do. They were buying gold this week because the Fed is putting on its annual shindig at Jackson Hole, Wyoming. Everybody knows the Fed sees itself as a booster for Wall Street. They know, too, that QE2 came out of the Fed last summer. That program didn’t do anything for the economy...
..but what a gift to gold holders!
Gold is up 33% so far this year. And by the look of the chart...it could easily finish the year above $2,000. Maybe above $3,000.
But — remember we’re just guessing — gold looks like it has gotten ahead of itself. It looks over-bought. Besides, investors may be expecting too much of the Fed.
Of course, if the Fed comes out with some more high-octane market hooch...this party could really go wild. But, it isn’t likely. Everybody’s watching. Bernanke needs to give the markets enough juice so they don’t fall apart on Friday...but not enough so the gold market goes blind.
Most likely, he will encourage investors. But he won’t cause a panic. Not yet.
And most likely, gold will fall.
Look, we’re gold bugs here at The Daily Reckoning. We have more faith in gold than we do in the fellows running the world financial system. Not that they’re not nice men. And they’re plenty smart. It’s not that we think they’re stupid. It’s just that we think they’re human. They put on their pants one leg at a time, just like everybody else. And just like everybody else, if you put them under pressure...they’ll crack.
But not yet. Our views on the stock market were severely tested during the big rallies of the ’00s. Now, it is the gold bulls who face a test. Gold has gone up every year since 2000. It’s been too easy. So, it’s time for Mr. Market to pull a fast one on gold buyers.
The process of de-leveraging the private sector, following in Japan’s footsteps, will be long, slow and hard. The feds will fight de-leveraging. They’ll zombify the economy. They’ll make a bigger mess of things...
..but they won’t create conditions for the real Third Phase of the bull market in gold. Not yet.
Yes, dear reader, you pried it out of us. We were trying to be coy. We wanted to hold off. We thought that maybe if we gave it to you all at once, well...maybe you wouldn’t respect us.
But there...we’ve gone and done it anyway. You have our Big Prediction on gold right in front of you. And it didn’t cost you a penny.
We’re gold bugs. But we’re not always gold bulls. And our guess now is that Mr. Market is going to throw us a curve. (Bugs...bulls...curves...why the hell not?) Yep. He’s drawing in millions of Johnny-come-lately gold buyers into the market. And now he’s going to massacre them...and test us.
Because gold is going lower...not higher.
Yep, you read it here first. Stocks are going down. But so is gold.
“Bill, you’ve been saying that gold is going higher for 11 years. Are you now really saying that it’s probably going down?”
“Yep.”
“But didn’t you just urge readers to sell stocks and buy gold?”
“Yep.”
“So you now think it’s going down, right? “
“Yep.”
“So, are you selling your gold?”
“Nope... You think I’m crazy? This is just a temporary setback...maybe a few years, that’s all. This bull market in gold won’t end until gold and the Dow meet.”
Our guess is that gold goes down...shakes out the speculators and weak investors...and then — perhaps a couple years from now...perhaps longer — begins its third and final phase.
Regards,
Bill Bonner,
for The Daily Reckoning
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