 | | The Daily Reckoning | Tuesday, January 3, 2012 |
- The smart money thinks gold is washed up...but is it?
- Look out world...the new Laissez-Faire Books website goes live!
- Plus, Bill Bonner with a quick review of 2011...and a look forward to what’s to come...
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|  | | | | A Brief Retrospective of the Year Gone By | | |  | | Bill Bonner |
With the first reckoning of the New Year, from Baltimore, Maryland...
Before we say goodbye to 2011, let us pause to remember it...briefly. We spent 365 days with it — 365 days in a row. We can’t just move on to 2012 without a least a backward glance. What kind of a year was it? In what direction did it take the world, dear reader? Should we cheer that it is gone...or merely dry our eyes and hope for the best in 2013?
We are writing this little retrospective from memory. We’re not going to consult the news reports...or the magazine recollections. Instead, we base this only on what we recall, not on the basis of what actually happened.
Why? This way is more accurate.
Not that we remember things more accurately, but that what we remember is more important. History is always bunkum. Facts are remembered imperfectly, to suit a narrative, not to give us a full picture of what went on. That’s why contemporary or recent history is so contentious. Different people remember it differently. Each one recalls some facts and forgets others, depending on the angle from which he saw the events...and what story he is trying to tell about them. Then, over time, these thousands, or even millions, of different honest and fairly accurate historical experiences are fermented into one rich brew...a fiction that is accepted as history, often with little connection to what actually went down.
So, we will tell our version of 2011 events. From memory. Besides, we’re too worn out from the holidays to do any real research.
So, what do we remember? Hmmm...
Ben Bernanke’s plan to goose up spending by printing extra money began in January. That was a big deal. QEII it was called. It was expected to lower bond yields and get the economy going by putting more money in more pockets.
Wrong on all counts. Bonds yields rose. No new jobs were created. The economy didn’t expand. And the money stayed in the pockets of the bankers.
But the new cash — or the thought of it — was enough to drive up the price of oil and food. This didn’t do much for America’s middle class consumers. Their cost of living rose while their incomes and net worth fell. Houses kept going down, month after month, quarter after quarter.
Gold soared...from somewhere in the $1,400 range...to over $1,900, before falling back into the $1,500 range by year end. Another solid year for our friend, gold, in other words. Up about 10%. Who can complain about that?
Meanwhile, the price of oil surprised us. It was as if it didn’t know there was a Great Correction going on. The price was pushed up by the feds’ money printing...and something else. Speculators were afraid that freedom and democracy might catch on in the Mideast. The US government supported practically all the old “strong men” of the region. It slipped them a twenty from time to time...along with a few US surplus handguns and torture equipment. Then, when the winds of the “Arab Spring” shifted direction, the feds went over to the other side. Mubarak and Gaddafi were out of luck.
The old tyrants disappeared. Nobody cared. And oil stayed around $100.
QEII expired in June. Then, a different crisis took over the headlines. Despite all their rescue efforts, Europe’s little boats kept sinking. First the Irish went down. Then, the Greeks began to go under. France and Germany, on Europe’s only dry ground, kept throwing them lifelines. But just as soon as they had one little boat in tow, another one started to ship water.
The Greeks groused because they wanted more money. And the Germans fussed because they didn’t want to give them any more. Investors thought that was all there was to it. But then the Spaniards...and the Italians began to sink too. And then speculators began to wonder about the French. If you studied the numbers, you saw that there wasn’t that much difference between the Spaniards, the Italians and the French. All the Latins were deep in debt. And none seemed to have a serious plan for getting out of it.
It was one thing to toss a line to the Greeks...but who had enough money for the Italians? They were the third largest debtor in the world. And the French? Forget it.
Silvio Berlusconi was a special case. The Italian president didn’t seem to want to play along; he just wanted to play around. The banks wanted him to put on a good show...to pretend to cut spending...to pretend to implement a serious austerity program. Berlusconi wouldn’t do it. Italian bond yields continued to rise. Whether it was speculators...or the Euro insiders themselves...we don’t know. But someone wanted Italy’s elected chief out of the way. Berlusconi stepped aside when Italian bond yields approached 7%, making room for a guy named Monti.
The papers reported that the ‘technocrats’ were taking over. Monti used to work for the Boston Fed, if we recall correctly. And then there was Mr. Draghi over at the European Central Bank, who used to work at Goldman Sachs. Not only that, he was head of the Bank of Italy at the very time Italy was getting itself in financial trouble. The top job in Greece turned over too. Papandreou stepped aside to make room for Papademos. Something like that. Papademos was a banker too.
All of which recalled for us the famous remark of Mayer Amschel Rothschild, “Give me control of a nation’s money; I care not who makes its laws.”
Now, the bankers were in charge. They made the laws...and its money too. The term, “technocrat,” was completely misleading. “Technocrat” makes it sound like they had some useful technical training that they could use in the service of others. Not at all. They were in it for themselves, desperately and recklessly trying to hold the system together — so lenders (banks) got their money.
There was a little mystery in the summer when the President of the United States sent a hit squad to carry out the premeditated murder of Osama bin Laden. If the US ever wanted anyone for questioning, you’d think Osama bin Laden was that man. But instead of capturing him and torturing him, to see what they could get out of him, the feds said they killed him and dumped his body in the Indian Ocean. It was as if they really didn’t want to hear what he had to say. There were many different tellings of the tale. The official version was completely unbelievable. But so were all the others. Some thought the man killed was not Osama bin Laden. Others believed it was bin Laden, but that he was still alive. Still others claimed the whole thing was staged...phony from the beginning to the end.
Another mystery appeared when Occupy Wall Street became a nationwide sensation. Who were these people? What did they want? Even they didn’t seem to know.
Otherwise, the European crisis dominated the financial news for the rest of the year. Finally, in November, the merde approached the fan. Vague promises weren’t enough to hold it off. The bond market was in sell mode. Italy was less than 100 basis points from bankruptcy. France was beginning to wobble too. And Germany had no intention of saving them all. Besides, it didn’t have that much money.
This time the technocrats came to the rescue. The European Central Bank gave the banks more than $600 billion. The bankers happily took the money. Stocks soared. Nobody seemed to know or care where the ECB got its money.
In the last quarter of the year, the public’s interest shifted from finance to politics. Not that voters were suddenly attracted to the issues. But the candidates themselves drew a crowd. People listened carefully; they were sure the candidates would say or do something delightfully stupid. One would forget that North America was a continent. Another would be unable to remember his position on abortion. And a third would be caught in flagrante delicto with a household pet.
Only one candidate had a coherent program and consistent views. Alone in the field, he had a plan for avoiding national bankruptcy. He also seemed to be a decent, sensible man. For these reasons, he was judged unelectable.
More below, after today’s guest column...
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| | The Daily Reckoning Presents | | The Genius of the Price System | | |  | | Jeffrey Tucker |
The other day, a local hamburger joint was advertising a 99 cent hamburger, and I took the offer. It was great. I wondered how they can make money this way. A few days later, my head still swimming with memories of that great experience, I went back. This time, I dug in a bit deeper and upgraded the order, including fries and a drink, and this time shelling out for my passenger too. The total bill came to $16. Wow. That’s how they make money!
This was an interesting case of how a company uses a loss leader to draw you in and then makes up the difference on the upgrade. Of course, I could have stuck with the low-priced burger, but I did not. I behaved exactly as the burger joint hoped I would. This is dazzling in so many ways. They know me better than I know myself. And good for them.
To be sure, some cynical people would regard this as a rip-off. I don’t see it this way. I didn’t have to return to the drive-through window, didn’t have to upgrade my preferences, didn’t have to buy for the person next to me, didn’t have to order fries and a drink. These were all decisions that I made on my own. Nor do I regret them: The food was better than ever. I’m free to refuse to go back, but I will go back.
A wise man once told me that in this life, you can obey balance sheets or bullies. In the end, those are the only two paths. He was drawing attention to an unavoidable reality in a world of scarcity. All scarce things must be allocated among competing ends. This can be done top down by people in control, or it can be accomplished bottom up with the signaling system that emerges from voluntary exchange. The two approaches don’t mix well.
Of course, prices do not exist apart from human will. They can be played with, but not finally controlled, by producers in the market. There are vast surprises along the way. It’s not the case that only the rich thrive in this environment. Who would have thought that the sci-fi machine in old movies that provides instant answers to all questions would eventually be provided for free by one of the world’s biggest companies? I’m speaking here of Google, but the same good could be said of the many alternative search engines out there.
Who would have thought that the world’s largest communication networks — email and social networking — would be free also, funded mostly by selling ad space and upgraded products? In the same way, most of the world’s most-useful software is free, as is the cloud- based word processing system I’m using to type this article. So too for the music that filled my living room for 12 straight hours yesterday, all selections from the 16th and 17th centuries, all provided to me for free. Amazing.
The price system is a constantly changing kaleidoscope that beautifully merges our subjective imaginations with the gritty realities of the physical world. It is the combination of mind and matter that yields an output — a simple number — that never lies. It gives us that glorious balance sheet that tells you whether you are doing sustainable or unsustainable things. No institution can compete with its efficiency, much less displace its indispensable utility in this world.
I once heard of a man’s mother who had an obsession with gas prices. Everywhere she would go, she would look at the price signs and announce to one and all what they said. “Hmmm, they are charging $3.15.” “There’s one charging $3.45.” “That place is charging $3.10.” “They have gas for $3.50.” So it would go for the entire trip. She had no opinion on any of these prices; she just found it interesting to observe and compare. And perhaps her observations reflected a kind of confusion about how the same thing offered in different places could be priced in such different ways.
It is, indeed, intriguing. There are two things we can know for sure. First, the producer — the retailer, in this case — would like to charge more for a gallon of gas, even a million dollars. Second, the consumer would like to pay less for a gallon of gas, even zero dollars. The final price represents a point of agreement. It is arrived at even though the parties to the exchange did not speak in advance; a single number embeds billions of bits of data about human values, resource availability and alternative uses of money and resources.
And it all happens without a central planner — or even so much as a central board of experts — telling us what the prices should be. This is genius at work.
Who could have even a year ago predicted that physical books would sometimes sell for less than digital books of the same title? This defies every expectation. The physical good is a real thing that you can hold and costs money to make (so much for the labor theory of value). The digital goods need only be made once and then can be sold billions of times. So what is the trick? It comes down to consumer demand. We really like ebooks — their convenience and speed of delivery — and are willing to pay for them.
The price system also decides which companies are profitable and which are not. It has nothing to do with the size of the company. If you take in less than you spend, you will eventually go belly up. If you take in more than you spend, you will grow. The vast global network of price formation ultimately reduces to this simple calculation that determines how all the world’s resources are used. Every company faces the same constraint. So whether or not these pricing decisions are rational has much to do with the fate of the world.
The point is that it is impossible to predict these things. No matter how smart the team of experts, how powerful and prestigious the price setters behind the curtain, there will always be surprises out there. That’s because no one can fully predict the values manufactured by the human mind nor know enough about the world to foresee every possible alternative use of a resource that goes into the production process. When economists say that something should be “left to the market,” they are really saying that people should be left to work all this out for themselves. This is the only way of dealing with all the uncertainties of this world.
These are some of the insights about the price system that can be drawn from the works of Carl Menger, Ludwig von Mises and F.A. Hayek. They understood that there is no substitute for the price system. And this is why it is also so enormously dangerous for any society to give power to a central bank to manipulate the price system from the top down. Its decisions about the money supply can’t help but be irrational and ultimately destructive to economies and the realization of the common good.
The same could be said of a range of state institutions that distort prices, such as wage floors and ceilings, subsidies and penalties for particular companies and taxes and regulations that extract resources and profoundly affect the profit-and-loss calculation. They all interfere with the fluid functioning of the price system. They all waste resources. They all interfere with the efficiency of the market.
More and more, people of the developed world are seeing the balance sheet replaced by the bully. This is harming both our prosperity and our personal liberty to make decisions for ourselves. If the bully can tell the fast-food joint what its prices ought to be, the same bully can tell me what I can and cannot eat, what and where I can and cannot drive and where I can and cannot work and under what terms.
The price system, premised on the idea of private property and the freedom to choose, is the best friend liberty and prosperity ever had. The next time someone complains about it, ask that person what he would prefer to take its place.
Regards,
Jeffrey Tucker,
for The Daily Reckoning
Joel’s Note: Hooray! The brand new Laissez-Faire Books website is now up and running. We were actually on a Skype call with Mr. Tucker, publisher and executive editor of Laissez-Faire Books, this morning when the site went live. That we could be sitting at opposite ends of the Americas (Mr. Tucker in the US and your managing editor here in Argentina) spoke to the tremendous technological advancements that have taken shape since Laissez-Faire Books was first founded back in 1972.
Back then, the libertarian community was an inchoate movement and, though they brandished big, important ideas, the community was still small, virtually unknown, some say, outside of a few key living rooms and apartments. If the entire libertarian population crammed into an elevator, in other words, the local fire inspector would likely have had no problem. How times have changed...and for the better, too!
Well, Mr. Tucker and his team have been busily toiling behind the scenes to bring you a new experience when it comes to browsing for essential liberty-focused titles. And we reckon they’ve come up with something pretty special. Check out the brand new website here and stay tuned for updates, news items and more freedom-focused commentaries from our mates at LFB.
| | | | | | | | | And now back to Bill Bonner with the rest of today’s reckoning from Baltimore, Maryland... | | Is Gold Washed Up? | | | | | Bill Bonner |
A stitch in time...
Okay... We have left 2011 behind. We are rid of it forever. It won’t come back. Never. Not even if the universe lasts a million years, we will never see it again.
Or will we? One of the intriguing discoveries of 2011 came the giant particle accelerator in Switzerland. Those clever scientists set up a race, from Geneva to a finish line in Italy, 730 kilometers away. It was a race of neutrinos against light. Who do you think won?
The smart money was on light. Einstein said it was the fastest thing in the cosmos. Nothing could be faster, he believed. That’s why planets are “light years” from Earth. For example, other scientists discovered a couple of distant planets — many light years away — that were about the right size and the right distance from their star. They could have liquid water...and water-based life. But what we “see” of these planets is already 950 years old. That’s how long it took the light to reach us.
So, if you want to see 2011 again, you could theoretically race ahead of light and watch it all over again. That is, if it were theoretically possible to go faster than light, which it wasn’t...until a few months ago.
When the scientists released their neutrinos in Geneva, the little critters quickly took the lead and then zipped along, beating light to the finish line. Barely. It was a photo finish. And some scientists think the photo was fumbled.
But unless we can hitch a ride on some souped-up neutrinos, 2011 is gone forever.
Will 2012 be better...or worse? We don’t know.
From our point of view, there was nothing wrong with 2011. It did pretty much what it was supposed to do. We are in a Great Correction. The year just ended felt like a Great Correction is supposed to feel. High unemployment. Falling high prices. Financial crises. Stock prices losing ground. What more do you want?
On that last item, The Financial Times adds detail:
“$6.3 trillion wiped off markets in 2011.”
The FT cites a Bloomberg calculation that tells us the global stock markets lost a little more than 12%, dropping to total capitalization of $45 trillion.
While stocks lost 12%, gold rose about 10%. For the 11th year in a row (we’ve lost track) our “sell stocks/buy gold” formula paid off. Between falling stocks and rising gold there’s a spread of 22%. Not bad.
Dear Readers deserve full disclosure. Towards that end, we didn’t make money on both sides of the trade in every single year. Gold went up every year. But stocks didn’t go down every year. Stocks haven’t had a losing year since 2008. That means they were going up...alongside gold...for 2009 and 2010. And it means that selling stocks wasn’t such a hot idea those years. You could have made more money by buying stocks and buying gold.
Still, if you had followed our approach you would have made solid money every year — even when other investors were getting killed. Let’s hope our good luck continues!
But today, we’re writing not about the known knowns of the past but about the unknown knowns of the future. We don’t know where prices are headed in 2012 — and we know it!
Still, we don’t mind taking a guess. And let’s begin with our favorite investment — gold. Apparently, the smart money thinks gold’s run is over. Here’s Bloomberg with the story:
George Soros, the billionaire who two years ago called [gold] the “ultimate asset bubble,” cut 99 percent of his holdings in the first quarter, Securities and Exchange Commission data show. Hedge fund managers John Paulson, Paul Touradji and Eric Mindich also sold bullion this year. While speculators in New York futures are the least bullish (.MMGCNET) in 31 months, the median estimate in a Bloomberg survey of 44 traders and analysts is for prices to rally as much as 39 percent to $2,140 an ounce in 2012.
The divergence of views is widening after prices declined 19 percent from a record close of $1,900.23 on Sept. 5, or 1 percentage point away from a bear market. As some investors retreated to cash amid a $10 trillion slump in global equity values since May, others bought more metal, taking holdings in exchange-traded products to an all- time high two weeks ago. Bullion’s 8.1 percent gain in 2011 means it’s on track to beat stocks, bonds and the dollar for a second straight year.
“It’s done its job this year of protecting investors,” said Michael Cuggino, 48, who helps manage about $15 billion of assets, including $3 billion in gold, at Permanent Portfolio Funds in San Francisco and correctly predicted in February that prices would keep rising. “Gold has been all over the place. If you bought gold at $1,800 then you aren’t too happy. Some people will get out of gold, but the longer-term investors will remain.”
Dennis Gartman, the economist and author of the Suffolk, Virginia- basedGartman Letter, said Dec. 13 that traders were witnessing the “death of a bull.” He sold the last of his gold the previous day and said Dec. 23 his outlook was neutral. The “megatrend” in bullion is “in all likelihood near the end of the road,” Markus Mezger, co- founder of Zug, Switzerland-based Tiberius Asset Management AG, which manages about $2.5 billion of assets, said in its 2012 outlook report on Dec. 23. Well, what about it? The smart money thinks gold is washed up. It thinks the bull market in gold is over. The smart money is selling. It’s moving on.
But what about the rest of us? What about those of us who cherish good looks more than brains...virtue more than money...a good drink over a good deed? What do we think?
We don’t remember our bad guesses. But we remember our good ones. And you may recall too that when gold got to $1,900 we thought it had gotten ahead of itself. After all, we’re still in a Great Correction. And as near as we can tell, the correction is intensifying. Prices don’t go up in a correction; they go down. Investors don’t fear inflation; it’s the lack of it that makes them sweat.
Besides, it looked to us like gold was over-priced.
In the 1940s, gold sold for $35 an ounce. A new Buick cost about $750. Without putting too fine a point on it, you could get your new wheels for about 20 ounces of gold.
Today, a new Buick will set you back about $26,000. Divide by $1,550. What do you get? About 16. This tells us that an ounce of gold is worth more today than it was then.
How about oil? In 1940 you could get a gallon of gasoline for about 10 cents. Last week, it was $3.50 cents. An ounce of gold would have bought you 350 gallons in 1940 and 414 gallons today.
Conclusion: gold is not too cheap at $1,500. At $1,900 it was too expensive.
So we warned that gold would go down too. Since then, it’s lost almost 20% of its value.
But we’re looking ahead. And ahead what we see is more of the same...more or less. Gold will eventually shock everyone by rising far above $1,900. When the real crisis hits...the crisis coming in the US bond market...gold will be the money that nobody doesn’t want.
But what we learned in 2011 was that when a Great Correction pinches, the dollar is the salve of choice — not gold. When investors fear losses, they turn to the dollar for protection.
Eventually, when they begin to fear inflation, the gold bugs’ day of glory will be at hand.
In the meantime, we’ll probably see a further correction in the gold price...perhaps down to $1,200. Or, perhaps it will stop at $1,400. We don’t know. And it doesn’t matter. Buy gold on dips; sell stocks on rallies.
This strategy may or may not pay off in 2012; but gold is insurance against financial disaster. And one is coming...
Regards,
Bill Bonner,
for The Daily Reckoning |
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