Gold, silver and commodities moved higher this past Wednesday on the back
of confusing data about the current state of the "green shoots recovery". Gold
was able to handily regain the $1,000 handle in a clear sign that this level,
at least on a microscopic scale, no longer represents a psychological bulwark.
Oil also surmounted $70 once again after trading as low as $65 at the end of
last week. The U.S. dollar fell, but not as much as one would have thought
by looking at the gold, silver and oil charts.
The confusing data came in the form of conflicting reports that showed the
U.S. economy is not performing as poorly as previously expected but may be
performing more poorly than currently expected. First there was an upward revision
of second quarter 2009 GDP to a final minus 0.7% from a preliminary minus 1.0%.
Second, there was a report that unemployment actually fell in August in 60%
of the metropolitan areas surveyed. Third, the Chicago Purchasing Managers
Index fell to 46.1% for September from a perfectly neutral 50.0% reading in
August, indicating contraction of business activity in the Chicago area. Fourth,
another jobs report that indicated companies are firing fewer people (most
likely because there are fewer people left to fire). Along with recent statements
by wunderbanker Bernanke that the U.S. recession is likely to have ended sometime
in the third quarter, the picture is pretty much complete. Unfortunately it
looks like finger painting by a rowdy group of three year olds who aren't very
good at finger painting. Our interpretation is that everybody seems to be grabbing
at straws in an attempt to be right -- about something in general or anything
in particular-- after being so horribly wrong for so long.
The way we see it, much of the apparent economic improvement has been the
result of temporary stabilizing effects from the various stimuli, rescues,
bailouts and handouts of the past two years. Unlike some others, we don't subscribe
to the dogma that government intervention is always a bad idea -- in this case
it likely prevented (at least so far) a backslide of no less than 200 years
in the socio-economic advancement of mankind.
We also cannot say with 100% certainty that things will be worse going forward
than they would have been if the markets were left to reclaim equilibrium in
true laissez faire fashion (and it should be noted that we are very much in
favor of laissez faire). The reason for our uncertainty is simply that there
are no convincing historical examples of laissez faire triumphing over the
basest instincts of man, which are decidedly not laissez faire. If left to
his own devices, man will not trade freely among his kind but instead simply
take what he covets by force or trickery. We are speaking in general terms
of course but we could put names to our argument as well: Madoff, Stanford,
etc., you get the point. Besides, anybody who has observed unsupervised children
on a playground should know that laissez faire capitalism occurs about as naturally
as Marxism. Both require fundamental altruism in order to properly function
and therefore have to be enforced at the point of a gun. We suspect that is
why the United States was arguably one of the last bastions of it; Americans
have a lot of guns. Meanwhile, China appears to have found a way for the two
competing systems to co-exist. Yin and Yang. At peace for now.
What we can say with great confidence, however, is that the current imbroglio
represents a chronic symptom of the terminal financial disease that must be
eventually faced. In summary, parts of the world have amassed debt they cannot
possibly hope to ever repay while other parts have saved and invested according
to the mantra, "if you build it, they will come". Under these conditions, all
governments can hope to do is stretch the day of reckoning out a week or perhaps
a few years. But debt and capital destruction are unavoidable, one way or another.
The trick, of course, is figuring out which way and investing accordingly.
Case in point is the current confusion about the state of the local and global
economy. It is altogether possible that the recent "improvements" -- including
some of the economic data released on Wednesday -- are already in the rear
view mirror. In other words, we might be in the waning stages of an "economic
upturn" that lasted from perhaps May to September, to be followed by episode
two of business and consumer entrenchment. Actually, it's probably less like
episode two and more like the second act of a tragedy with three more acts
to go. We should all know by now that things don't actually get better. The
intervening "action" between the first and last acts is just embellished space-filler
that cannot possibly alter the pre-ordained course of tragic events.
Which brings us back to gold, silver, commodities, stocks, currencies and
other markets. We note with some trepidation that all of these markets are
currently trading on similarly upbeat sentiment and positive expectations.
Not popular at all for the moment is grim reality. We find this surprising
given the events of the past couple of years. Certainly market participants
should easily recognize fact from fiction by now. But they don't, or rather
won't, because they think they are invincible. The common mental ailment they
share with all tragic figures is hubris. So they focus, for example, on the
possibility that the housing market may not fall another 30% instead of focusing
on the probability that 30% of homes will remain 30% underwater indefinitely
(don't quote us on these figures, we are approximating for the sake of arithmetic
rhythm). We can take virtually any piece of economic data out there and the
odds are that the markets have cherry-picked the parts of it that don't look
absolutely horrific, especially when viewed in total isolation. Back up a few
steps, however, and the big picture looks remarkably like Hell. We suppose
it is the eternal optimism of homo sapiens that conveniently blinds us so successfully.
What else but eternal optimism can explain the time many of us waste watching
golf, tweeting, counting our good fortune and cursing our bad luck, all the
while mortality lurking around every corner?
It turns out that just about the only market that consistently bases expectations
on reality is the bond market. This is a boorish bunch, but more than that,
its denizens are clearly not human. Our version of logic dictates they must
therefore be aliens. In fact, if we had more time and worried less about our
own mortality, we would stake out Bill Gross of PIMCO to snap pictures of him
boarding a UFO for the daily commute home. With our luck, however, the National
Inquirer would beat us to it. So, we are left pondering if this time it might
truly be different. Could the aliens in the bond pits be wrong? Do tepid interest
rates signal a monumental misreading of the economy or inflation? Unfortunately,
answers may not be forthcoming without an alien abduction. Not of us but the
aliens. To be followed by water boa . . . ahem . . . enhanced interrogation
techniques. On second thought, that might not work. Because of the gills.
We're near the end now, so please don't get mad at us for wasting over 1000
words to explain our simple thesis that human beings are rarely right about
the markets compared to aliens. You see, we had a good reason for wasting your
time. Otherwise, you might not have believed us when we warned you to beware
of aliens buying gold. You still might not believe us, but we will persist
nonetheless.
Perhaps we might improve our credibility if we rephrase our thesis as "the
end of the world is near when the smartest of the smart money is buying gold"?
Heck, who knows, you might even put up with our strange ways indefinitely when
we tell you there is a tool that can reveal the precise moment when the buying
starts. It is called the gold and silver basis and we will do all the work
to figure it out. All you have to do is think long and hard enough to realize
we are right, and then act when the time comes.
Alas, the gold and silver basis are not telling us anything smart about the
smart money at this precise moment. Absent that, we'd just as well listen to
something dumb about the smart money, and do the opposite. Please stay tuned*.
*Only loyal Metal Augmentor subscribers are being provided
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timely updates on the gold and silver basis. We hope to soon make these headsets
available to a limited number of additional homo sapiens. If you are an alien,
don't bother, we use special polarized sunglasses that will identify you.
Headsets are compatible with sunglasses but may or may not work with tinfoil
hats. Please visit www.metalaugmentor.com to
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