Investing in Gold

Bill Bonner writes:

The only reliable bull market of the last ten years has been in gold. The yellow metal lost $2 yesterday, closing at $1,248. That is only $14 below its all-time high. Which means, while we’ve been watching Bernanke, Jackson Hole, and stocks – gold has been quietly creeping up…

…stocks go down; stocks go up – and gold keeps moving up…

…fiscal stimulus, monetary stimulus, quantitative easing – and gold keeps moving up…

…recovery…no recovery – gold keeps moving up…

…inflation…deflation – and gold keeps moving up…

Are you beginning to see a pattern?

Yes, gold is in a bull market. It moves up on bad news. It moves up on good news. It moves up on no news at all...

But here’s the important thing. Gold is money. You can use it to buy things. In terms of what gold will buy, it does not seem undervalued to us. Much has been written on the subject. But as near as we can tell, gold is now fairly priced.

Go ahead; buy all you want. It is a good way to maintain your wealth and protect it against the monetary and economic calamities that are doubtless coming. And if you expect to make a lot of money on it, you’ll probably succeed. When the Bernanke Fed loses its grip – which it will – and when the public gets on board the gold bull market – which it will – gold speculators will probably make a lot of money.

We’ve been a gold bug for the last 30 years. Two thirds of that time was miserable, punishing and humiliating. Only the last 10 years have been rewarding. We expect the next 10 years to be even more rewarding.

But the reward now is different. It is speculative…not inherent. When we bought gold in ’99, we were buying an undervalued asset. We were buying real money, cheap. We made our money when we bought.

Now, gold is fully priced. It is a still a good way to save money. But we cannot expect to make money by waiting for the metal to revert to the mean. It’s already at the mean. Gold is now a speculation.

A warning: we still have not had the sell-off in the financial markets that we expect. The Dow has still not sunk down to 5,000. The lights are still on at banks that should have been put out of business months ago. The public still believes another “stimulus” effort might do the trick. Leading economists still believe they can manage the economy back to growth and prosperity.

We have not hit bottom yet. Far from it.

When we do, the price of gold could be substantially lower. Which is okay with us. We bought years ago. We’re happy with our gold holdings and don’t really care if the price drops. Heck, we’d be happy to see the price back below $1,000; we’d buy more.

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Fighting the Correction

This correction is a good thing. Consumers have too much debt. They’ll be better off when they get rid of half of it. But the feds want to fight this correction in the worst possible way. What’s the worst possible way? Adding more debt!...

When stocks go down, they will drag inflationary expectations. It will probably bring down stock markets in the emerging economies…possibly causing the Chinese economy to blow up…and bring falling commodities prices and deflation too. The idea of a “bond bubble” will disappear. People will see the “depression/Great Recession” as real…and permanent. They will try to protect themselves by buying US Treasury bonds. This will permit the feds to go further and further into debt.

Thus begins the world’s long day’s journey into night.

The US economy will become a Zombie Economy, with more and more activity dependent on government spending and government support. Banks are already Zombie Investors. Rather than lend to viable businesses that expand the world’s wealth, they borrow from the feds and lend the money back to them. We’ll see private investors become Zombie Investors too – putting nearly all their savings into US Treasury paper, just as the Japanese did.

The Dow will sink down towards 5,000. The feds will announce program after program to boost up the economy. Household savings rates will head to 10%. Unemployment will go to 12%…maybe 15%. Bond yields will collapse to new record lows. Ben Bernanke will threaten to drop money from helicopters…but as long as the US remains in an orderly decline, he will not dare to do it.

Eventually, the whole system will blow up in a spectacular fireball. But not until America’s investors are fully committed to US paper. Then, after having suffered huge losses in stocks and real estate, they can be finally ruined in what they thought were the safest investments in the world – dollar-based US Treasury bonds.

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Bill Bonner on the Great Correction

Bill Bonner writes:

After 18 months and $2.5 trillion in counter-cyclical budget deficits, people have begun to realize that the ‘recovery’ is a flop. What they haven’t realized – yet – is why. But, it’s summer…no one is doing too much thinking now...

Obama, Geithner, Summers – none seems to have a very clear idea of what we are pushing forward towards. You may want to forward this message to them. For it is fairly clear to us: we’re headed into a long spell of de-leveraging. Not many jobs? Slow consumer spending? Falling house prices? Tumbling stock market? Zombie-like, shuffling economy? Get used to it! The US economy continues its Great Correction.

read the entire essay

The Great Correction and Phony Recovery

Bill Bonner writes:

In 1999, the US stock market – led by the NASDAQ – clearly topped out. The bubble in the tech sector blew up. Equities started down...

It was time for a bear market/credit contraction. That is, it was time for a correction.

The correction began in January 2000. The NASDAQ collapsed. And in 2001, the economy entered a recession.

But this recession was phony. Consumer spending didn’t go down; it went up. Consumers kept borrowing money. It wasn’t correcting the debt problem, in other words, it was making it worse...

The correction of 2001 had been held up and made much worse by the feds’ efforts to stop it. At least $10 trillion of additional debt was added to the system in the decade of the ’00s...

Stocks boomed. Spending boomed. Real estate boomed. Finance in all its formed boomed.

Growth was positive. But it was phony. Because it was almost all based on debt. It was a debt-fueled bubble – particularly in real estate...

The bill came due in 2007. Subprime crashed. Then, the whole financial sector crashed, followed by the economy itself.

There are a number of ways to look at it, but we think it is most accurate to look at 2000 as the beginning of the present correction. That’s when stocks hit their peak in real terms. Since then, stocks have gone nowhere. And probably 90% of the “growth” since then was phony. Certainly, the average person did not get richer; he got poorer.

But having learned nothing in the ’00s, the feds set to work in ’08-’09 repeating and magnifying their mistakes. Instead of running $500 billion deficits, they ran deficits of $1.5 trillion. Instead of dropping rates below inflation, they took them down as far as they could go – to effectively zero. In addition, they nationalized whole industries, bailed out big businesses, and proceeded to add immense new financial obligations that nobody really understood.

You have to hand it to the Obama administration. We didn’t think anyone could be worse than Bill Clinton’s bunch…but then along came George W. Bush. In comparison, Clinton seemed like a great president. And then, just when we thought we’d seen the worst administration ever, here comes Barack Obama and his team. Obama has continued all of Bush’s programs (save torturing people). The war in Iraq continues. The war in Afghanistan continues. And the war on the correction continues. And Obama even added a new front – a health care initiative that is almost sure to be a financial and administrative disaster.

Not that we’re complaining. To the contrary, we find it all very entertaining. But we don’t think people are going to like the consequences.

The economy has been trying to correct since 1999. Every effort to stop it merely increases the size of the eventual correction. In round numbers, the US economy currently has debt equal to 350% of GDP. It averaged about half that much in the ’50-’80 period. If it were to go back to that level, it would have to eliminate about $25 trillion in debt. According to the last number we saw, the private sector was currently writing off, defaulting on, or paying down about $2 trillion per year. Not bad. But that would mean another 12 years of correction.

It would go a lot faster. But, remember, the government is helping.

read the entire essay

Fragile Recovery or Great Correction

Bill Bonner writes:

We continue to live in a gray zone.

It is not as black as the Great Depression.

But it’s certainly not as bright as the go-go Bubble Era, either.

What is it, exactly?

Is it a correction?

What is it correcting?

We don’t know. Not exactly.

When will it be over?

We don’t know that either.

What will happen next?

Wish we could tell you.

Let’s keep it simple: will prices go up or down?

Hey, stop asking so many questions!

Look, we’re way ahead of most people. Most people – including most economists – think we are in a period of ‘fragile recovery.’ They think we had a recession. Now the economy is in recovery. If the recovery doesn’t seem much like other recoveries in the Post-War era, it doesn’t trouble them particularly...

So far, the economy gives no sign of normal ‘recovery.’ We’d be deeply concerned if it did. Because what it had before the crisis of ’07-’09 was not something to have again. It had the bubble heebie-jeebies, if you know what we mean.

Now, the economy gives every sign of being in a Great Correction…

…unemployment is not recovering. In fact, it seems to be getting worse. It would not be at all surprising to see the official unemployment rate go up to 12% in the next leg down…

…housing is not recovering. It has stabilized…but only tentatively. There is still a huge overhang of inventory and underwater mortgages to be resolved. And the latest figures show they’re not moving. Under these circumstances, you’d have to be one heckuva optimist to think prices would ‘recover’ anytime soon…

…credit is not recovering. Instead, it is shrinking… Last week’s figures show more contraction.

These things do not point to the end of the world. They point to the end of the credit expansion that ballooned up the economy from the first Reagan administration through the last administration of George W. Bush.

That expansion is over. Kaput. Finished. What’s coming next? We’ll see…

read the entire essay

Hayek v. Keynes Again

Gerald P. O'Driscoll Jr. writes:

The debates raging over what policies will pull the U.S. economy out of its Great Recession replicate one that occurred during the Great Depression. Thanks to the efforts of Richard Ebeling, a professor of economics at Northwood University, we have compelling and concise documentary evidence. He has unearthed letters to the Times of London from the two sides that mirror today's debates.

On Oct. 17, 1932, the Times published a lengthy letter from John Maynard Keynes and five other academic economists. Keynes, et al. (Keynes for short), made the case for spending — of any kind, private or public, whether on consumption or investment.

"Private economy" was the culprit that impeded a return to prosperity. If a person decides to save, there is no assurance that the funds "will find their way into investment in new capital construction by public or private concerns." They cite a "lack of confidence" as the reason that savings is not intermediated into investment. Accordingly, "the public interest in present conditions does not point towards private economy; to spend less money than we should like to do is not patriotic." They conclude by endorsing public spending to offset unwise private thrift.

Two days later, on Oct. 19, 1932, four professors at the University of London responded to the Keynes letter, and one of the signers was Friedrich A. Hayek who more than 50 years later would win the Nobel Prize in Economics.

Hayek, et al. (Hayek for short), identified three areas of contention. First, they correctly identified Keynes's argument about the futility of savings as actually being an argument about what has classically been known as the dangers of hoarding, i.e., the potentially pernicious consequences of an economy-wide increase in the demand for money that is not met by a corresponding increase in the supply of money. "It is agreed that hoarding money, whether in cash or in idle balances, is deflationary in its effects. No one thinks that deflation is in itself desirable."

Second, the London professors disputed that it mattered not the form spending took, whether on consumption or investment. They saw a "revival of investment as peculiarly desirable," as do today's proponents of supply-side economics. They distinguish between hoarding of money and savings that flows into securities, and reaffirm the importance of the securities markets in transforming savings into investment.

Their third and greatest disagreement with Keynes was over the benefits of government spending financed by deficits. They demurred. "The existence of public debt on a large scale imposes frictions and obstacles to readjustment very much greater than the frictions and obstacles imposed by the existence of private debt." This was not the time for "new municipal swimming baths, &c" (Keynes's example). In our contemporary context, no stimulus...

Was Keynes correct that savings become idle money and depress economic activity? Or was the Hayek view, first articulated by Adam Smith in the Wealth of Nations in 1776, correct? (Smith: "What is annually saved is as regularly consumed as what is annually spent, and nearly in the same time too.")

Is all spending equally productive, or should government policies aim to simulate private investment? If the latter, then Mr. Obama is following in FDR's footsteps and impeding recovery. He does so by demonizing business and creating regime uncertainty through new regulations and costly programs. In this he follows neither Hayek nor Keynes, since creating a lack of confidence is considered destructive by both.

Finally, is creating new public debt in a weakened economy the path to recovery? Or is "economy" (austerity in today's debate) and thrift the path to prosperity now, as it has usually been considered before?

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Double Dip Recession?

The closest we've seen to a "double dip" was in the early 1980s - and the NBER dated those as two separate recessions...

Based on these graphs and the NBER memos, it would seem pretty easy to date two recessions in the early '80s. However, if another recession starts this year, it will almost certainly be dated as a continuation of the "great recession" that started in 2007.

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The Greater Depression Lies Ahead

If policymakers do not understand the real cause of a problem, they will in all likelihood be unable to provide a genuine solution...

The cause of the Great Depression in the 1930s, and the Great Recession beginning in 2007, was one and the same: an overleveraged economy. Excessive debt levels are the direct result of the central bank providing artificially low interest rates and of superfluous lending on the part of commercial banks.

The easy money provided by banks eventually brings debt in the economy to an unsustainable level. At that point, the only real and viable solution is for the public and private sectors to undergo a protracted period of deleveraging. The ensuing depression is, in actuality, the healing process at work, which is marked by the selling of assets and the paying down of debt.

Unfortunately, our politicians today are focused on fighting this natural healing process by promoting the accumulation of more debt...

To make matters even worse, during this current crisis our government's response has been to dramatically increase its own borrowing. At the start of the Great Depression, gross federal debt was 16% of GDP. It peaked just below 44% when the Depression ended. While the national debt did increase significantly during that period, it was still relatively benign when viewed from a historical perspective.

The U.S. entered the current Great Recession with gross national debt equal to 65% of GDP. It has since exploded to 90% of GDP! Comparing the relatively innocuous level of the 1930s with today's pile of government debt clearly illustrates the perilous state of the economy...

Many observers--unfortunately including most of those in power--have concluded that the government must spend more while consumers rein in their debts. Their strategy is based on the belief that once the economy perks up they can unwind that debt.

There are two problems with this Keynesian theory. One is that government spending doesn't increase GDP; it only chokes off private-sector growth. The other is that politicians never regard the present as a good time for the government to pay off its debts...

read the entire essay

Bill Bonner: The Great Correction

The latest from the G20 meeting in Toronto. As you recall, the meeting was billed as a showdown between the Germans and the Americans…that is, between the deficit cutters and the big spenders…

That is, between the people without a hope and the people without a clue...

As near as we can tell, the recovery has been on the wrong road since it started its motor. And the folks in Toronto couldn’t put it “back on track,” even if they knew what they were doing. All they can do is get out of the way.

The system has too much debt. It needs to get rid of some of that debt – by write offs, defaults, and pay downs. Things that must happen, must happen sooner or later. Better sooner than later.

But what IS happening now?

World trade is breaking down – the Baltic Dry index, a measure of world trade, recently fell 17 days in a row.

Consumer spending is breaking down – the “consumer discretionary” sector has turned ominously negative.

Stocks are breaking down – the Dow fell 9 points on Friday…145 points the day before….

Employment is breaking down – you know the story.

Housing is breaking down – not since 1963 have people bought so few new houses.

Does this sound like a recovery? Of course not.

What it sounds like is a defeat. A failure for the recovery team.

But don’t worry, boys, sometimes failure is the best you can hope for. And come to think of it…defeat is not so bad. Think how much better off the Chinese would have been if Mao’s long march had ended in the total collapse of his army. And suppose George W. Bush hadn’t been such a total failure? People might not have elected Barack Obama. And what if the invention of the television had never caught on? Americans might still have some dignity and brains….

Not only do collapse and failure help prevent bigger mistakes, they also correct mistakes after you’ve made them. Running up debt equal to 362% of global GDP was probably not the smartest thing the human race ever did. Trying to ‘recover’ the economy and reproduce the system that produced those debts is even dumber.

Instead, let’s have a good old fashioned correction…a collapse…a failure of the Geithner, Bernanke, Obama team. We’re going to have it anyways. Bring it on. Get it over with!

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