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NOTE:
This commentary was published at The Metal Augmentor on October
1, 2009 at 7:20 AM EST. Apologies once again to the SILVERAXIS faithful for
not posting recently. I do expect to post more often in the future but during
extremely busy periods it’s only fair that I spend whatever time I have
writing for the benefit of paying Metal Augmentor
subscribers. Our subscription window is currently closed but will open again
hopefully soon. In the meantime, we are putting together a mailing list to
keep everyone up to date on developments. You can sign up for the mailing
list at www.metalaugmentor.com.
Gold,
silver and commodities moved higher on 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at least on a microscopic scale, no longer represents a psychological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 with the special
headsets, constructed from slightly radioactive paper clips held together
with pre-owned chewing gum, that can receive and download our 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.
Tom Szabo
Silveraxis.com
Also
by Tom
Szabo
Tom Szabo
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