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The Daily Reckoning | Friday, October 14, 2011
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Urgent Message From Addison Wiggin
“The Mother of All Financial Bubbles is Just Now Starting to Pop...
“It’s time to learn the truth...and to get prepared. If you have the right plan set up, you won’t suffer when this bubble fully bursts.
“But — and this is the most important point — you must have a plan. And you must be prepared before this epic crisis hits.”
Check out this rare video warning that Addison’s recorded for you... right here!
Giving Up on Gold When the Logic of the Bull Market Suddenly Seems Illogical
Reckoning today from Paris, France...
Bill Bonner
Nothing much to talk about in the markets yesterday.
We had been expecting a bigger sell-off in the price of gold. The metal went down, about $300 if we recall correctly, but not as much as we expected.
In the last major bull market in gold, in the ’70s, the price declined by about 50% before going on to set a new record. The pullback in 1974 caused investors to question the premise of the whole bull market. Many dropped out and missed the big payoff.
Markets always test their admirers. The old-timers — such as Richard Russell — refer to the “50% principle.” A bull market can be expected to retrace as much as 50% of its gains...before going on to fulfill its destiny. If it goes down more than 50%, however, the bull market may be over.
Unfortunately, these are not hard and fast rules. Just old timers’ tales.
Still, they are useful for understanding how markets work...and for keeping you from making a big mistake.
This gold market barely corrected 20% of its gains. Is that all there is? We don’t know. Doesn’t seem like enough. We didn’t feel tested at all; did you?
That was part of the reason we thought the economy was sliding into a Rip Van Winkle slumber. It would be a real test.
Imagine that China slows down. Imagine that Europe lurches from one crisis to another. Imagine that the US economy follows Japan down that long, slow, slumpy road. What do you have?
Falling prices for almost everything — including gold. And with falling prices for other assets, investors, savers, insurance companies, pension funds all put their money into US Treasury debt. This keeps rates low and it allows the US to fund its deficits almost indefinitely. The economy never recovers, but it doesn’t die either.
Bernanke and crew may want to do something dramatic and foolhardy. But they wouldn’t have to. As in Japan, they could just bide their time...
Pretty soon, people would come to think that the world economy had entered a more or less permanent phase of low growth and low inflation. And then, what would happen to the price of gold? It would fall. People buy the inert metal to protect themselves from very ert humans. But if the humans who run central banks and Treasury departments sit still, why hold gold?
The logic of the gold bull market is that the feds have done, and will do, stupid and disastrous things to the monetary system. Perhaps they will. But as long as they are able to finance large deficits painlessly, they have no reason to do so. Instead, they will take economist Richard Koo’s advice and use deficit financing to pay for fiscal stimulus projects. Infrastructure projects...transfer programs...tax the rich...bread and circuses for the poor — this could go on for a long time.
When speculators and savers realize that they need not hold gold to protect themselves from the feds, they will sell it. The price will fall — perhaps below $1,000. Then, we will have a real test.
If the economy is stuck in a low-inflation phase, why own gold?
If the feds do not have to print money, why would they?
If prices — in dollar terms — are stable or going down, why not just stick with dollars?
We can see the headlines now:“Investors give up on gold.”
And then, you, dear reader. What will you do? The logic of the bull market will have disappeared. Will you give up on gold too?
“Even gold-bugs are disappointed by the yellow metal.”
“No need for gold as world economy enters 7th year of stable prices.”External Advertisement
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Click here to watch the new uncensored video.The Daily Reckoning Presents Twisted: The Curious Shape into which the Financial World has Gotten Itself In both Europe and America the financial sector has been on the edge of disaster for the last three years. Each time a crisis flares up, the fixers rush in with a remedy. Bailouts, TARPs, TALFs, ZIRPs, QEI, QEII and now the ‘twist’. In its latest effort, the Fed announced:
“The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.”
Already, short-term lending rates are so low it is as if money-in- hand had less than zero value. Adjusted for inflation, you pay the US government to store it for you. Even with interest, you get back less than you lent. And now, the Fed aims to perform the same dark magic on long-term funds, artificially lowering the cost of money so that people will borrow more of it.
All the fixes have the same effect. They add to the world’s debt and subtract from its ability to pay it. The first proposition is self- evident. The second requires some explanation. Prices — set by willing sellers and able buyers — are information. They tell us where to focus our resources. They tell us when we have too much of one thing and too little of another. When prices are low, generally, we redirect investment to where they are high. This brings forth more supply of the thing that was wanted and less of the thing that was not. Result: real growth.
No price is more important than the price of money. It tells us when and in what it pays to put our money. But bring in the fixers to suborn prices; they make them lie. That, of course, is the demented idea behind the twist program, to mislead investors as to the real price of long term credit. They’re supposed to believe that the world is so awash with money they’d be fools not to take it.
In America, households and businesses generally ignore the signal. Household debt is doing down, despite the fed’s blandishments. Families know the rates are fraudulent. But the least productive sectors — finance and the government itself — thrive on mendacity. They borrow with insouciance and spend with impunity. Resources, which might have been used to add wealth, are tricked away from the real economy. Value is not added to resources; it is subtracted. Wealth is not produced; it is consumed.
Europe has had its own fixers on the job. They put on a fix in one country; then, another in another country when that one springs a leak.
Last week, Angela Merkel and Nicolas Sarkozy said they had reached an agreement on recapitalizing the banks — which could cost as much as $3 trillion. Then, this week, they gave themselves a deadline to do what they said they had already done; now, they will reach an agreement on Nov. 3rd.
This week too, the Chinese fixers swung into action. They will recapitalize their own big banks. China “will support the healthy operations and development of key state-owned financial institutions...” said the official news agency.
What does it mean to “recapitalize?” It means to put in capital, again. Once more. But what happened to the capital that was there? And what is healthy about putting more capital into financial institutions that couldn’t manage to hold onto what they had? Don’t ask. To pose the question is to cast doubt on the whole, earnest fixing spirit.
The problem with the fixers’ fix is that it is exactly what got the fixees into such a fix in the first place. The fixers keep administering more of the thing that caused the breakdown — debt. Adding more of it does not make it go away. It would not seem necessary to say so, but it just makes the problem bigger.
But it hardly matters. The ailment and the cure are both fatal. If the debt is reckoned with now, many banks, businesses, households, investors and sovereign borrowers will be dead. If the fixes continue, they will be even deader.
How much deader? We can measure the direct fiscal spending programs. We can count the deficits. We can count the extra zeros on central bank balance sheets. There are also specific spending programs with specific costs. The US “food stamp” program now helps feed one in 7 Americans. The student loan program is up 300% since 2008. There was the bill for TARP and TALF...and now a new one. Last week, Mr. Obama called for $447 billion in new outlays to put people back to work.
Total public and household debt in the US in 2007 was $22.4 trillion. Now it is a $26.3 trillion problem. We can tell how much good this did by looking at gross output. Growth was spectral, up from $14.30 trillion to $14.58 — with every penny of ‘growth’, and more, attributable not to honest, real increases in output, but merely transfer payments from the government to its zombie clients.
In other words, the problem gets bigger. The solution — real, private sector prosperity -- gets smaller.
Regards,
Bill Bonner,
for The Daily Reckoning
Joel’s Notes: Bill’s bestselling co-author, Addison Wiggin, has convened an emergency summit in Baltimore today to discuss just these themes...how to survive (and thrive!) in a time when private sector prosperity is under constant assault from Washington, DC. At the summit, attendees will hear from fellow reckoner, Eric Fry, as well as Chris Mayer, Byron King, Partick Cox and a host of other independent idea-men.
If you weren’t able to attend the conference, but would still like to hear the presentations in full, don’t worry. We’re recording the lot. They won’t be available on MP3 format until next week, but you can reserve a copy here today. And you’ll want to be quick. The price goes up 40% the minute the summit ends this afternoon. Get yours here.Little-known “loophole” could triple investing income
In 1986, Ronald Reagan signed a little-known “loophole” into law.
Today, the special “10-86 Payback Plans” it created are allowing some Americans to collect as much as three times the income that regular bonds and stocks pay.
We’re talking solid yields — without even touching the stock market.
Click here now for all the details.Bill Bonner Finding Reason in the Irish Real Estate Market In the near term, things are actually looking up for gold. In fact, since it didn’t fall as much as we expected...perhaps our Japan-like disinflationary slump has been delayed...or derailed?
Right now, the central banks are all itching to meddle. Bernanke’s “twist” program is a waste of time. It merely takes the Fed’s money and switches it from short-term US Treasury debt to longer-term Treasury debt. It is a very bad idea — leaving the Fed itself exposed to huge losses. But that’s another story. But it is unlikely to have any advantage for the economy. Mortgage rates are already the lowest in half a century. Pushing them down a little more isn’t going to make any difference.
Several members of Bernanke’s FOMC group are already calling for more forceful intervention — some form of QE III. If the economy deteriorates, there is bound to be more action from the Fed.
Meanwhile, the Europeans are “recapitalizing” their banks (see below). So are the Chinese. The capital has to come from somewhere...or they have to invent it. The more new money they create, the less their old money is worth...and the more attractive gold becomes.
*** “My friends and family warned me. They thought I was making a big mistake by not buying a house.”
An Irish friend tells us what it was like for a renter during the great housing boom.
“The idea was that housing prices always went up. Ireland is a small country. There were new people coming in from Eastern Europe. There were also a lot of Irish people coming back from overseas. We were the ‘Celtic Tiger,’ after all. The land of opportunity.
“So people thought housing prices could only go one way — up. And you had to get on the escalator as soon as possible. Otherwise, you would be left behind. You had to buy a starter home...like one of these new apartments.”
We were driving by a housing development, almost in the shadow of the Wicklow mountains. On the right hand side was a very new apartment complex.
“See all those apartments. They’re empty. They can’t sell them. They were just a little late to the party, I guess. They probably started construction in 2006 and by the time they were ready to sell, the lights had already been turned off.
“You had to buy a starter home when you were in your 20s so that you could trade up to a family home when you were in your 30s. Prices were rising all the time, so if you didn’t have a starter home to trade in you’d never have the money to buy a family home. I guess that meant you couldn’t have a family and your life would be ruined.”
The Irish real estate market has gone bust. But looking in the window of a real estate agent, it appeared to your editor that the boom-time spirit had not been completely crushed. Prices — based on US equivalents — seemed reasonable.
But reasonable is what you get in the middle, not what you get at the top or the bottom. At the top, the house might have sold for twice what it sells for today. At the bottom, it should sell for about half.
In order to reach a real bottom, investors — and ordinary people, for that matter — need to repudiate the idea of the boom itself. That is, they have to come to believe that the premise that drove prices up is false. That is why it is so hard to be a real contrarian investor. It is one thing to recognize that prices go up and down. It is one thing to believe that you should buy when things are cheap and sell when they are expensive. But the person who can resist the logic of a major market trend is rare.
The idea that Ireland’s property was destined to rise was just such an idea. Was it not true that Ireland is a small island? Was it not true that its economy was growing — thanks to integration with the rest of Europe? Was it not true that Ireland had the most attractive business tax rates in all of Europe? Was it not true that people were moving to Ireland by the planeloads...and that they needed a place to live?
Of course it was true. It was irrefutable. Until it wasn’t true anymore.
Regards,
Bill Bonner,
for The Daily Reckoning
Friday, 14 October 2011
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