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sign that this level, at least on a microscopic scale, no longer represents a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*.
