I’m a
little gold bug short and stout.
Fill me up,
I’ll tell you what it’s all about.
Gold above 1200,
smiley face.
All the world
stock markets, losing face.
In Greece
they are a bunch of jerks.
They cannot even
conquer Turks.
When Greece
had standard based on gold,
A better story
then was told.
Constantinople
– very rich.
For paper money
got the itch.
A sad, sad tale
did unfold,
And now
they’re running out of gold.
For
some time now, although my main focus was on gold, I have run occasional
articles warning against being in the stock market. To understand what
is going on, we must first understand the two largest cycles in the
markets. A major cycle lasts several years and is usually caused
by an easing or tightening of credit. The stock bear market from
January 2000 to October 2002 was a major term bear. The bull market
from Oct. 2002 to Oct. 2007 was a major term bull, and the bear market from
Oct. 2007 to March 2009 was a major term bear. A grand cycle is
a larger move which itself is made up of several major cycle moves. The
grand cycle bull move in gold of the 1970s consisted of 3 major cycle moves,
bullish from 1970-1974, bearish from 1975-76 and bullish again from
1976-1980. The grand cycle bull move in stocks of the past quarter
century lasted from 1982 to 2007 and consisted of 11 major bull and bear
moves.
The
grand cycle bull move in stocks was caused by the giant Fed easing which
started in 1981 and was associated with Reaganomics. From this time,
both major parties were Keynesian, and there was no significant force to
tighten money and credit. This is why the bull market went on so long
and so far.
The
major term stock bear market of Oct. 2007 to March 2009 was caused by the Fed
tightening of June 2004 to June 2006, and the major bull market of March 2009
to present was caused by the Fed easing of late 2007 to year-end 2008.
Most other countries have their major bull and bear cycles in synchronization
with the U.S.
because their central banks follow the Fed in its policies.
We
can tell that the grand cycle stock bull market was getting long in the tooth
by the new century because it took a great deal of Fed easing to put the
stock market up. The guide here is Ludwig von Mises’ teaching
that a Fed easing is, to the economy and the markets, similar to a shot of
his favorite drug to an addict. It gives him a nice feeling while he
is, in fact, destroying himself. He screams, “I want it; I want
it,” just like the Greek protestors, when in fact it is killing
him. And if you point out to him, “Hey, you just killed three
human beings,” his only answer is, “I don’t care. I
want it.”
The
first thing we noticed in this regard was that the very minor tightening of
1999, led to a nasty stock bear market (2000-02). To continue our drug
analogy, a very small period of abstinence led to a very severe
withdrawal. Then from 2000-2004, an enormous easing (the greatest to
that point in time) could only get the S&P 500 back to its
turn-of-the-century peak. Contrast this with the easings of the 1980s,
which sent all stock indexes rocketing into new high ground.
The
next tightening, 2004-06, was again a minor one, but it caused a giant bear
market (Oct. 2007-Mar. 2009). This time it was Goldman Sachs and a
group of Wall Street hot shots who screamed, “I want it.”
And Ben Bernanke was only too happy to give it to them. He spent 2008
lowering short term interest rates to virtually zero. This easing
caused the bull market which started in March 2009.
You
can see the pattern. The economy is so doped up on paper money and easy
credit that it gets less and less of a high from each dose. Common
sense would say that sooner or later they have to stop, and then the stock
markets of the U.S. and the world will have a collapse very much in the
tradition of either 1929-32 or 1966-1982.
But
here common sense is wrong. History tells us that there is one society
where the authorities did not stop debasing the currency, the Western Roman
Empire of the 4th century A.D. They kept on creating money, and to
stop prices from rising they imposed draconian price controls (enforced by
crucifixion).
All
the businessmen in the Empire went out of business. All the stores
closed, and it was impossible to buy anything. IF YOU WANTED ANY
ECONOMIC GOOD, YOU HAD TO MAKE IT FOR YOURSELF. This is what is called
a barter system, and all peoples at all times and places who have based their
economies on barter have one thing in common. They are dirt, stinking
poor.
In
the early 4th century, Rome converted from a money economy (which
had originally been silver) to barter. Her armies, now poor, could not
afford metal armor and could no longer defeat the barbarians. The
population of Mediterranean Europe (Iberia, Italy, the Balkans and Greece)
fell from 19 million in 200 AD to 10 million in 800 AD. (See, Atlas
of World Population History by Colin McEvedy and Richard Jones (Facts On
File, New York), p. 28.) The specific causes were: famine, brigandage,
plague and war. The larger cause was the abandonment of money.
This is the longest and deepest population decline in European history for
which we have records.
Either
Ben Bernanke will choose to follow Rome and destroy his society, or he will
stop the currency debasement before it gets to that point. Here your
guess is as good as mine. If he stops it, the stock market will
probably return (in real terms) to its 1982 level.
To
have a serious major term bear market, Bernanke will have to tighten, and
that has not yet happened. But it often occurs that, toward the late
stages of a stock bull market, shortly before the top, there is a sudden,
sharp drop. This is a warning (which is easier to see in retrospect).
Stock bulls: you have been warned. If the tightening now comes, I will
predict a vicious major term stock bear market. This is one of the
reasons that I am a gold bug at this stage of history. This stock
market is wildly overvalued, and any number of small events can injure it
badly. I don’t like to play those games. I keep the
probability on my side. In the long run, that is what pays off.
The
last two weeks is a very good example of why I have been warning people away
from stocks. The economic establishment in this country is incredibly
stupid. Their argument today is exactly the same as when I entered the
markets in the 1960s. “The stock market always goes up. Buy
good, sound stocks for the long pull.” At that time, I became one
of the very early gold bugs, and together we beat the pants off of the
establishment as gold went to $875. THE ESTABLISHMENT STOCK BUGS OF
THAT DAY HAD A PERFECT ANSWER. “If we pretend it never happened,
then it didn’t happen. If we pretend that gold did not go up,
then it didn’t go up.” It was as though, when Galileo
dropped the two weights from the Leaning Tower, thus proving that the heavy
weight hit the ground at the same time as the light, all the establishment
physicists witnessing the event simultaneously said, “It never
happened. Since we are the experts in physics, who would believe
Galileo?” Of course, in such a society the great advances which
occurred over the next few centuries in science would have never occurred,
and you and I would live today much as folks lived in the 16th
century. The question you must decide is do you want to get your
economic guidance (with your own money at stake) from people like this?
Under
a free market system (based on sound money), the stock market moves
sideways. Charles Dow invented the Dow Jones Industrials in 1896, but
he was keeping railroad indexes back to 1885. His first 47 years of
indexes (1885-1932) show that the stock market moved sideways (exactly as
theory predicts in a free market). When FDR abolished the gold standard
in 1933, he made it possible for the Federal Reserve to lower interest rates
below the free market. As rates went down, stock yields had to go down
with them, and this of course, pushed stock prices up. That is, the New
Deal did not rob from the rich to give to the poor; it robbed from the
working man (who had to pay higher prices for goods) to increase stock prices
and corporate profits.
The
Dow Jones Industrials were 41 in 1932. Since the Consumer Price Index
has multiplied by a factor of 17 since that date, the value of the DJI should
be 41 times 17 = 697. So if the U.S. Government ever stops its policy
of robbing from the poor to give to the rich, then you can expect the DJI to
go down to about 700 in short order. I am not saying that this is
imminent, but if a new political party comes to power based on the principle
that robbery is wrong, then bear in mind that current stock prices are
enormously overvalued. (Actually, I believe that there was such a party
some time back. Its platform was very short, and I believe that it was
written on stone tablets. But that may just be a rumor.)
Focusing
on the grand cycle trends puts the emphasis where it belongs. It shows
us that the economy is in the grip of giant forces, and these forces can only
be understood as they unfold – which is very slowly.
For
example, nominal interest rates have been declining for 29 years.
Common sense tells us that real interest rates are now below zero on the
short end. This is because long rates cannot fall below 4% even as
short have fallen to almost zero. So 4% nominal long rates must be 0%
real, and the bond market’s estimate of the rate at which prices are
rising must be 4%. 0% real rates are a very hard barrier to scale because
this means that one is lending for free.
At
0% real interest rates virtually no one will lend, and almost everyone wants
to borrow. The free market never creates 0% real interest, and when the
Fed forces this unnatural condition upon us, the economy is wildly distorted.
The last such distortion was the housing bubble of 1997-2006, and that was
caused by Greenspan’s lowering of short rates to 1%. Bernanke is
going him one better.
The
name of my fortnightly (every two weeks) newsletter is the One-handed
Economist ($300 per year). We make predictions with a view to the
long term forces which the Government has unleashed upon the economy.
You can subscribe either by going to our website, www.thegoldspeculator.com and
clicking on the Pay Pal button. Or you may send $290 ($10 cash
discount) to: The One-handed Economist, 614 Nashua St., Milford, N.H.
03055. Now, as gold approaches its Dec. 3 high, we will be debating
whether to step back or to remain aggressively bullish. Much is riding on
the answer.
Howard Katz
The Gold Speculator
Howard S. Katz is
the editor/publisher of the One-handed Economist, a financial letter which
combines fundamental and technical analysis. He was a bug on gold in the
1970s and became a bug on gold again in late 2002.
Subscribe to the Gold
Speculator (the One Handed Economist)
You can subscribe
to Howard Katz’s thoughts on commodities, stocks, bonds and real estate
are available in a letter entitled The One-handed Economist and published
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is available (both electronic and paper copy) for $300/year with a 3-month
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