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Marc Faber's latest report written on November 1 was titled
"Why Market Interventions by Governments worsen Economic and Financial
Conditions!" I might have called it "Vengeance of the Barbarous
Relic". John Maynard Keynes granted gold with this pejorative, giving
license to governments to intervene, print, and distort to their heart's
content. In the long run we are all dead...right? Wrong! The long run is now
and the chickens are coming home to roost.
Keynesian
economics has forced us into this mess and Austrian economics will get us
out...but not willingly. Only after the world's paper currencies has been
totally trashed and nations are forced back to metals-backed currencies will
the transformation and adoption of sustainable economic policies occur.
Clearly
we are caught in deflation for now. The correct trade was and is to short the
popular indices and buy gold. You would have made money doing this. See my
commentary, "The Party Is Over." When I wrote
the commentary the market still had not violated its bull market trend line
dating back to 1982. We have since blown through that support line and just
about every other support line you can imagine. There is no more
support...only more plunges to come in the market averages and, since we have
become such an asset-dependent economy, we should only expect extremely hard
times. Negative feedback loops between the financial markets and the real
economy are going to wreak enormous havoc.
Deflation
and US dollar strengthening continues for now, but two points are in order
concerning this. First, this is not a positive development. Paul Kasriel,
director of economic research at The Northern Trust Company hammers home the
point:
"In
conclusion, falling consumer prices are a symptom of weak consumer demand,
not a reason for hope of a rebound in consumer demand. To be sure, if
consumer demand is contracting, it is better for consumers that the supply of
consumer goods and services is not also contracting. But the circumstance of
falling consumer prices would only be "good" for consumers if the
decline were being brought about by expanding supply. Journalists can be
excused for writing articles arguing how the current decline in consumer
prices is good for consumers. Journalists are not economists. But it is
inexcusable that economists would be spreading this malarkey!"
Secondly,
as foreigners, companies, and investors continue to accumulate cash and the
government continues to owe it, the only party which is harmed from a further
strengthening of the US dollar is the US Government. There is just way too
much incentive for the US Government to concoct a way to squirm out of its
debt obligations. It is simply the only path. It will not default, but will
inflate its way out, reducing the 'real' price of current obligations.
That is
why it is important to be long gold and short the market. For now gold is
holding up better than the market in the current environment of asset deflation.
But when the pendulum swings back to inflation (I suspect months not years)
the price of gold will rocket much faster than the nominal prices of stocks. I'll
place my bet alongside the 5000-year history of failed paper currencies
against hubris of economists who think they have figured out a better system.
I have seen some estimates that would place the price of gold north of
$50,000/oz. to back all of the money in the world. However, this number could
come down dramatically with a few more months or years of asset deflation
and/or issuances of new currencies to replace worthless ones.
Notwithstanding
the drubbing portfolios have recently experienced, I believe there is still
too much optimism out there..."the Great American spirit lives on...we
have overcome worse than this...we made it through the Great
Depression", etc. The levels of panic and fear are not as low as they
were earlier in the year when the markets began to crater in earnest. See chart from
Barron's below:
I would
dub this unhealthy condition as "irrational optimism" (clearly no
longer irrational exuberance). There are still too many financial media
experts comparing this to 1929 or 1974 and calling for a short-term bottom
and "tradable bounce" going into next year. There are too many
people looking to morsels of good news in a sea of bad. Just a couple of days
ago when Hewlett Packard announced their better-than-expected earnings and
lifted guidance, the giddiness of the "objective" financial
commentators reporting the news was palpable and the knee-jerk reaction of
the futures market was to rise sharply higher. Well, ultimately, the markets
ended that day lower as the reality of the other 499 companies (only a slight
exaggeration) are expecting their fortunes to rapidly decline set in.
This
morning news that Saudi Prince Alwaleed is boosting his stake in Citigroup is
giving the bulls' false hope once again. Futures have rebounded again as
investors cling to their irrational optimism.
You
should employ investment strategies that exploit this human fallacy to be
optimistic when the evidence clearly points otherwise. Optimism is a virtue
which propels society forward and moves individuals ahead in 'normal times'. The
period we are entering is going to be unlike anything this country has ever
experienced.
Kurt Kasun
www.greenfaucet.com
A contributing writer to GreenFaucet.com, Kurt Kasun writes a
high-end investment timing service, GlobalMacro, which is focused on
identifying opportunities that produce returns in excess of market with
reasonable risk. He is strategically located in Washington, D.C., a key to
maintaining contacts and relationships which help Kurt understand global
policy and economic factors as they emerge. His investment approach has
always been macro in nature largely due to his undergraduate studies at the U.S. Military Academy at West Point (B. S. National Security, Public Affairs, 1989) and his
graduate studies at George Mason University (M.A. International Commerce and
Policy, 2006).
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