 | | The Daily Reckoning | Wednesday, August 31, 2011 |
- Fear scores a victory over greed as the Great Correction continues...
- Why Hurricane Irene was a dead loss for the economy. Period...
- Plus, Bill Bonner on what to do if gold AND stocks go down and plenty more...
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|  | | | Why to Buy Gold in a Deflationary Economy | |  | | Bill Bonner |
Reporting from Poitou, France...
The Dow rose 20 points yesterday...after a fabulous increase the day before.
Gold went up $38.
We’ve already given you our forecast. We think gold AND stocks are going down. But what do we know?
The role of markets is to make fools out of market analysts. So, the shrewd forecaster has to be careful. He shouldn’t be too precise in his predictions. He can say what direction prices are going. Or he can say when. But not both.
If we tell you that ‘stocks are going up,’ we’re sure to be proven right — if we wait long enough!
Likewise, if we say ‘you’ll see gold hit a high this autumn’ we leave ourselves plenty of slack to shape events to fit our forecast. It’s bound to hit some kind of high during that period.
But here at The Daily Reckoning, we have no reason to hedge. No reason to wiggle and slide. You don’t pay for this subscription: you get what you pay for!
For 11 years we’ve told dear readers to ‘buy gold; it’s going up.’ This was good advice. Gold did go up...more than any other asset.
Now, what are we saying? We’re still urging readers to buy gold. Gold is the only true money. It’s been used as money for thousands of years. And it will probably be used for thousands more. At least, we have a strong hunch it will be used when today’s claptrap money system blows up.
Still, the system may surprise us...like an old refrigerator, it may last a lot longer than we think it should.
Did we explain why? Well....here’s the explanation again:
We’re in a Great Correction. Recently, this correction has given every indication of hanging around for a long time — a la Japan.
We’re also in a period when the feds are throwing caution to the winds in order to over-turn the correction. But, here’s what has happened: the feds have not been able to do it. They’ve tossed a lot of caution to the winds already. But the winds don’t care; the correction continues. Just read the headlines. Consumer sentiment is sinking. House prices are still going down. The number of people on food stamps is going up.
This is fundamentally a deflationary economy. It’s not an inflationary economy. It’s not an economy that will take up the Fed’s EZ money and transform it into consumer demand. It’s not an economy that will borrow money from the banks and increase employment and the money supply. The feds have been unable to ignite the kind of ‘animal spirits’ you need in order to get inflation rates up. They’ve tried everything. It hasn’t worked.
No, it’s an economy where demand is falling. We saw that yesterday. Gasoline use in the US has dropped to an 8-year low. Households are saving money. Incomes are going down. The real economy is shrinking.
At the household level, thrift is on the rise. Among the investoriat, fear is the dominant emotion. This stock market could collapse any day; all it needs is the right headline.
The Fed has been forced to tell the world that it will keep its key lending rate at zero for two years. This is an admission that nothing has worked in the fight against the Great Correction. It is a clear signal that the US will follow Japan down that long, lonesome highway...towards a multi-decade slump. The US has already had one ‘lost decade.’ Most likely, it will now lose another one. For now, the feds have been beat.
The victory of fear over greed means that investors are no longer concerned with the return ON their money; they’re worried about the return OF their money. And they think that the safest place for their money is in US Treasury debt. Lend money to the people who print it; what could go wrong?
Well...that’s what we’ll find out when this current stage of Great Correction/de-leveraging comes to an end.
When? How? We don’t know.
But NB...we don’t really know what is coming. So, we try to figure out what we think you should BELIEVE is coming. And right now, there’s a lot of risk in stocks...and in bonds. And in the short term, there’s risk in gold too.
You’re probably best off believing that stocks will go down...gold will go down...and that the economy will remain in a period of fear/demand destruction for months, and probably years, before a major corner is turned.
In the meantime, stick with gold (as insurance) and cash (as ammunition).
At least that way, if the price of gold goes up...you’ll feel rich. If it goes down, you’ll feel smart. And then you can use your cash to buy more gold.
| | | | Forget QE3 — America’s Going Bust, on the Road to Bankrupt Hell |
If America had a credit card, it would get mercilessly cut up and thrown back in her face.
The country’s basically broke and isn’t paying its debts. Harsh, but true.
All of that — and how it could affect your family and your retirement — is revealed in this urgent video report.
Don’t wait, watch now.
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| | The Daily Reckoning Presents | | The Broken Window Fallacy | |  | | Chris Mayer |
So hurricane Irene is over with, but it didn’t take long for economic commentators to make fools of themselves.
David Kotok is the chairman and chief investment officer of Cumberland Advisors. He was on the radio with Larry Kudlow, who asked him about the economic impact of Irene. Kudlow noted how Irene tracked over 1/10th of the nation’s economic output. Here is Kotok writing about it to his investors afterward about Cumberland’s response:
“We are now upping our estimate of fourth-quarter GDP in the US economy. Billions will be spent on rebuilding and recovery. That will put some people back to work, at least temporarily. We speculate that Washington may set aside the usual destructive and divisive partisan political wrangling and act in the interest of the nation. That means there will be a flow of federal financial assistance to the disaster areas.”
This is horrible, horrible reasoning. It is the old broken window fallacy, which we see trotted out by otherwise intelligent people anytime there is a natural disaster. These people say that destruction is an economic boost, as we busily rebuild what was lost.
It’s a shame people continue to repeat this. The great economist Frederic Bastiat killed this idea decisively in an 1850 essay, “That Which Is Seen and That Which Is Unseen.” It remains a classic essay on economic reasoning.
In his usual witty manner, Bastiat wrote a parable about a boy who breaks a window. The “seen” is the glassmakers who have new business they didn’t have before. That’s what people like Kotok focus on. But as Bastiat wrote:
“It is not seen that as our shopkeeper has spent 6 francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his 6 francs in some way, which this accident has prevented.”
Kotok’s point about federal assistance is particularly depressing, because he seems unable to recognize that this is simply money taken from someone else.
Please don’t fall for the broken window fallacy. And please correct anyone you hear using it. It seems the first step in basic economic literacy. Hurricane Irene was a dead loss for the economy. Period.
By the way, Frederic Bastiat is an old favorite of mine and was influential in shaping my economic views early on. I have a handsome two-volume collection of his works, put out by the Ludwig von Mises Institute. I highly recommend the set for anyone looking for sound logic applied to economic questions. Bastiat is enjoyable to read and not like any economist you’ve ever read.
Our friends at Laissez Faire Books will take 20% off Political Economy — collected Bastiat essays — including “That Which Is Seen and That Which is Unseen.”
Claim your discount by going to this link.
For those not inclined to read that much, I recommend Henry Hazlitt’s Economics in One Lesson. Hazlitt devotes a whole chapter to the broken window fallacy. His book is my No. 1 recommendation for anyone looking to learn the key ideas of economics. It’s a classic.
Laissez Faire Books will give you 20% off when you go here.
Now, let’s turn our attention to the volatile stock market...
The market is rallying off its recent lows. This rebound is surprising if you focus on the bad economic news and the potential for another recession. But it’s not surprising if you look at stocks compared with what else you might do with your money.
A couple of weeks ago, I wrote about how “relative to Treasuries, stocks haven’t been this attractive in more than 30 years.” Shortly after the panic, lots of money came out of the market and went to Treasuries. It was a tidal wave of money, which pushed the short- term T-bill negative for a brief moment. But it would be irrational to stay there for long, given where stocks are.
James Bianco, of Bianco Research, added to that thesis in a report to clients. His chart shows price-earnings ratios for the last half- century, along with his projection of 2011 earnings. Take a look:
“Low rates benefit p/e (price-earnings ratios) more” than slowing economic growth hurts them, Bianco maintains. Based on the 10-year Treasury rate of 2.2%, he thinks fair value for the S&P 500 would be at least 14 times earnings. That’s 1,358 on the S&P, which would mean a 13.5% rise from here.
Of course, you could poke holes in this a few different ways. Interest rates could rise. And earnings could fall. So far, neither has happened. Corporate profits for the first half of the year have been strong, for example.
I find the above interesting, but I don’t really care all that much either way. In my investment letters, Capital & Crisis and Mayer’s Special Situations, I never recommend “buying the stock market.” I recommend buying specific stocks. Specific businesses. And I look to hold onto them and not trade them. I will use the market to add to or sell when prices suit me. But otherwise, I let the market do what it will do.
Still, it can be helpful sometimes to have a sense for the backdrop on the overall market. In the late 1990s, it helped to understand the market was frothy. By 2000, it made no sense at all, with even ho-hum companies like Coca-Cola commanding a price-earnings ratio of 50 times. It helped to know in the late 2000s that there was a housing bubble. It meant you skated around banks, real estate and housing stocks.
Today, though, there are no such extremes in the stock market as a whole. I think the market is in some gray middle area — neither cheap nor dear.
Regards,
Chris Mayer,
for The Daily Reckoning
P.S. My next Capital & Crisis alert is due out in a couple of days. If you’re not already receiving my research, you can get yourself on the list here. We’ll be on the hunt for some attractive stocks with compelling investment opportunities going for decent prices over the next few months, a couple of which I have on my radar at present. I’ll check in with my Capital & Crisis readers Friday. Again, please feel free to join them here.
| | | | 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.
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| | | | Bill Bonner | | | | Bill Bonner |
Yesterday, time seemed to stand still. We were sitting at the lunch table on the back porch. No leaf stirred. The sun shone feebly through thin clouds. No sound was heard.
It was as if time has been suspended so mother could talk. Her voice is never strong. Now, the world hushed and cocked its ear:
“I didn’t find out about it until many years later. She actually hung herself.”
Our mother turns 90 in 2 weeks. She has spent the summer with us. We were a little surprised that she wanted to come. She is still able to get around, but she is frail and thin.
On an outing to a neighbor’s birthday party she sat down in a chair and fell over on her right hand side. Then, unable to move her right arm, she fell onto her left arm the next day. Grace a Dieu, she recovered from these traumas and is getting ready to go back to the US.
“You know, my mother made up a story. She said that Eleanor...I think that was her name...had ridden in the barn and somehow gotten tangled up in ropes that were dangling from the crossbeams. But she hung herself.
“She was only about 17 years old. One of the teachers at the high school had had his way with her. I think she was pregnant. Back then, those sorts of things were so shameful that people didn’t talk about them. And they didn’t put up with them either. Robert and Uncle George got out their shotguns. They went after him. This was in the ’20s. But he knew what was coming. He left...nobody ever saw him again.
“But that family was plagued. Almost cursed. We lived with them for a while after the war. Robert was a tough man. Smart. But tough. His son, Tommy, couldn’t stand to be around him. As soon as he could leave home he went out west. We never saw him again. Then, we got word, about 10 years later, that he was killed in a motorcycle accident.
“Robert was a good businessman. He had been buying up farms at tax sales. By the 1950s it seemed like he owned half the county. But Tommy was his only son. And his daughter married a man from Denmark that she had met at the tobacco auction. He was a buyer for a Danish cigarette company. So she left too.
“Robert had all that land...but he was alone when he died.”
Regards,
Bill Bonner
for The Daily Reckoning |
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