The Crazy Markets You Are Invested In (Part 2)

The Negative trade balance began in the mid-70s, less than 30 years later both the government and consumers were running up debt at an alarming rate. See Chart on the left-hand side of this page.The only way America can continue in its role, is to borrow. How is this borrowing made possible? Let’s first look at gold.

Gold has a past and a present and it has not been a great preserver of wealth during the last 30 years and in this respect it has not been any better than paper money. A bull market in gold or in technology shares or in real estate are all the same, no real wealth is being created, people are just switching their preferences. In the end, trust in gold is the same as trust in paper money until you go back even further in history and then you realize that gold has a much longer history than the paper dollar and because of this, both gold and paper dollars have a future, but gold has much more of it.

Jesus said, “Render unto Caesar that which is Caesar’s” referring to gold and silver coins with Caesar’s head on it. America has dead presidents on its money too but the difference is that a gold denarius is worth today, in terms of buying power, what it was worth 2,000 years ago. And US paper dollars lose 2 to 5 percent of their purchasing power every year. What do you think they will be worth 10 years in the future?

The world’s two largest currencies, the US dollar and the British Pound have both lost 95% of their value in the past century, which is especially remarkable because gold was linked to these currencies for most of this time. For the dollar the final link with gold finished 37 years ago. 70% of the world’s central bankers and Warren Buffet have been increasing their reserves in Euros since 2005.

That is not so surprising given this background of rising debt against the dollar. The dollar is in fact and rational thought, nothing more than electronic information that exists to keep track of it. Relatively few dollars ever make it to paper and many end up in the pockets of drug lords and African politicians. Therefore, most of the US dollars made are not even useful for starting a fire because they do not even tangibly exist.

Gold is the only money that exists in tangible form. Sure it goes up and it goes down just like money say the economists. You can protect yourself from inflation in other ways say the speculators. Gold pays no dividends or interest, gold will not make you happy, but it is better in the long run than anything else. Longevity is not the best recommendation, especially if you do not live as long as the ½ life of gold which is already inert, or nearly immortal. But this feature, gives it staying power, and this is what gives it virtue.

Gold is money that no central bank promotes and none destroys. The world’s improvers will always be with us. They spend more than they have to boss us around, they use civil service jobs and bombs to get their way. Given enough money, the poor can be fed and housed, the middle class can be given free medical, low cost housing loans and social security, and the rich get contracts and favors. Enemies can be created, then bombed, and then reconstructed into seeing the world from our point of view. It is all a circus show and it all costs money.

How do you get more money for these spectacles? Gold refuses to cooperate. US dollars and other paper money barely needs encouragement, the printing presses are already hot. But everything in life has a beginning, a middle, and an end, just as surely as each day passes. Each day that passes in which the present trends don’t come to an end brings us a day closer to when they will end. Stability, leads to instability. The longer things remain stable, the more people are convinced that they will never change.

Today’s house flippers are taking on riskier positions, instead of buying one house, they buy two. Instead of living modestly, they live large, they gush in the direction that the market leads them. What does this really mean? It means that investor’s perceptions of risk are over influenced by recent history. It means that people look for meaning in things where there is none, that they misapprehend the randomness of events. Over the broad sweep of market history, prices have gone up from barely 100 after the crash of 1929 to over 10,000 where it is today. However, adjusted to inflation, the Dow is only about 500, and most of that increase is cyclical.

The Dow, having moved from under 1,000 to over 10,000, from 1982 to 2008 investors would have to believe that the tendency is to go up, that’s its recent history, right? Today’s current investors have made their bets as to whether prices will go up or down, and this is reflected in the stock market or real estate markets currently. Some believe it will go up and some believe it will go down and so the cycle repeats itself as investors eventually come to realize (by a feeling) that they are paying too much for the opportunity to follow the prices going up, and then, some event, and things tend to crash.

Over the last 100 years the average price investors tend to pay for $1 of stock market earnings is $12. Today, investors are paying $20 on the S & P 500. They believe it will go up, they are not wrong, they are just paying too much to find out when. What were the odds that Bear Stearns would disappear this year, let alone in 2 weeks? A crash in the stock market would be accompanied by the usual complaints, but a crash in the real estate market would be much worse.

Households that have come to rely on equity build-up to keep themselves solvent will have to cut back on consumption. This would produce job loss, personal bankruptcies, mortgage failures, and falling prices. We know how America was built on debt and an increase in the money supply to feed it. We don’t know how it will end or when it will end. It is rather like thinking about your own death, you would rather not, and generally you tend to avoid the subject. Still, it is the kind of thing you ought to be prepared for! A sensible man may not know the hour, the day of his demise, but he does not doubt that it is coming! He does not want to wake up to a market crash with a portfolio of junk bonds, tech stocks, multiple homes or US dollars. He wants to pour himself a drink of Tequila Gold.

After 20 years of mostly falling interest rates, mostly falling inflation rates, and mostly rising asset prices (stocks and real estate) Americans have come to believe that this is the way the world works. Interest rates mostly go down, real estate prices mostly go up. It’s a beautiful thing. What would happen if real estate prices start to go down as they already are? The answer is, nobody knows. Everyone is scrambling to add more money, re-write the rules, and change the benchmarks.

Go figure, the world richest economy lives off the savings of the world’s poorest. Americans buy what they cannot afford, and the Chinese build factories to produce stuff that we cannot afford, but buy anyway. It is the dandiest thing, the whole global “economy” advances apparently so long as U.S. Housing prices continue to rise, as long as more and more money is made.

Whatever this new “economy” is, it is not a traditional economy. Income that should be helping consumers spend is not there, manufacturing jobs are disappearing or being outsourced overseas. Savings have disappeared. Most of what we read is “noise” – more meaningless stuff. In America the average home went up in value 44% in real terms between 1995 and 2005. People buy property now like they did in the tech stock bubble, there are demographic factors they say, earning don’t matter. It is all a greater fool’s game, betting that someone else will come along and pay you more for it. There is no real economy in that. How the new homeowners are going to pay higher prices on falling incomes is not clear, is it?

Remember when people felt the reason why stocks would continue to go up was because baby boomers must save money and they had to put it somewhere? Then, when stocks went down after 2000, they reasoned for the same reasons, why real estate prices would go up, and so they end up chasing bubbles while the real story of what is happening in America is lost in the “noise”.

Well, after an unprecedented rise in real estate, the biggest boom ever, twice as big as the last one in 1980s according to the FDIC, we are nearing, one day at a time, the edge of the abyss. Perhaps the real story is prices for houses have risen in real terms 66% since 1890, but most of the increases happened in two periods: right after WW II and since 1998. Other than these two periods the real prices for real estate have been either flat or going down. Today lenders have come up with creative means to lend money to people who can’t pay it back. Go Figure, and now maybe you can understand why the Fed has increased our money supply and reduced interest rates, to keep the consumer economy working, to increase our apparent standard of living at the expense of great indebtedness (40trillion) payable ultimately, by the many generations of the non-voting unborn.

Things have changed since the last real estate bubble in the 1940’s, then the U.S. economy was growing and healthy. America had a positive trade balance, the biggest in the world. Wages were going up, families were expanding. Now, families are getting smaller, incomes are stable or declining, and for culture of consumers who spend more than we earn, we desperately need housing prices to go up in value and we need the saving of the poor in China and elsewhere in the 3rd World.

The more things change the more things remain the same. The time is now, the rational man and the prudent man get prepared while the crowds wait anxiously for the next signal.
The probable reality is that the Feds will “fix” the problem by throwing more money at it, continuing to devalue the US dollar knowing it holds a trump card in its military that has a vested interest into convincing the rest of the world from seeing things from the American point of view, and that is to keep using the US dollar.

This means that the dollar continues to be the world’s primary currency, backed by a stable government of laws and order. You see, our US dollar is really the equivalent to Imperial currency. As long as it is the world primary currency and everybody wants it to trade with, then it has intrinsic value to foreigners. This is also why it is in the US military’s strategic interest to advance a net work of trade routes around the world, so the 3rd world will continue to invest their savings in US dollars and so the American consumer will continue to consume, so long as housing prices keep increasing and so the dance goes until it stops and it always will.

Purchasing Power Meltdown
Since the US dollar began falling and emerging markets began booming in 2003:
Corn is up 39.5%
Coffee is up 71.1%
Wheat is up 133.9%
Crude Oil is up 140.8%
Gold is up 149.8%
Soybeans are up 159.2%
Gasoline is up 203.6%
Platinum is up 224.2%
Silver is up 257.7%

And thousand s of products that contain these things cost you more everyday.
Cheers!


Author’s note: This discussion paper for the dental audience is largely re-edited content taken from Empire of Debt: The Rise of an Epic Financial Crisis by Bill Bonner and Addison Wiggin, 2006, John Wiley & Sons. Its academic use and private study is permitted under the "fair dealing" guidelines which allow for its use here for the purposes of criticism and review.

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