|
Some questions were raised by my article
on unemployment of last week and so I want to continue the same subject.
Unemployment
has become the central issue of our day and perfectly illustrates the genius
of Ayn Rand in putting the spotlight on altruism as the central concept which
is destroying our society. Today (but not when Rand
wrote) the conservatives have adopted the left-wing’s ideas on economics.
They are screaming that Obama has failed because, after little over a year in
office the unemployment rate is 10%.
The
conservatives are doing well in the polls and are looking forward to a big
victory in November. Hopefully, Obama will keep talking about health
care because every time he opens his mouth about that subject he digs both
his own grave and the graves of his fellow Democrats. But if the
attention of the American public ever shifts to economics, the conservatives
are dead meat.
Last
week I touched on cyclical unemployment. This is the kind that makes
the headlines and stirs people up politically. For example, from early
2007 to late 2009 unemployment in this country rose from 5% to 10%.
From 2000 to 2003, it rose from 4% to 6%. From 1989 to 1991, it rose
from 5% to 8%. All of these increases were caused by previous Federal
Reserve increases in the rate of interest: e.g., the Fed tightening of
2004-06, the Fed tightening of 1993-2000 and the Fed tightening of 1986-89.
Whenever
the Fed changes the interest rate, the effect is to influence
interest-sensitive areas of the economy. For example, I have data on
the U.S.
economy going back to the 1940s. Every time the Fed eases, housing
(which is a very interest rate sensitive area) booms. The number of
housing starts then goes from approximately 1 million per year to 2 million
per year. The same thing happens in all other interest-sensitive
areas. The total effect is to significantly reduce unemployment.
Then the political left brags that they have reduced unemployment.
Of
course, the money that the Fed has to print to promote all this employment
then threatens to cause “inflation.” To head off this
threat, the Fed then allows interest rates to come back up toward their free
market level. Then the interest-sensitive industries suffer a loss of
sales, and they lay off workers. In short, the workers are initially
drawn into jobs which are fundamentally unstable, and when these jobs disappear,
they are thrown out of work again. With regard to housing, I have proof
that this has been going on since the 1940s, and chances are that it has been
going on for a lot longer than that. Ludwig von Mises coined the term
malinvestment to indicate how the central bank is distorting the
economy. By analogy, we can speak of malemployment. False
employment is created for a few years. It draws workers into jobs which
will ultimately disappear. And then, through no fault of their own,
they are back on the unemployment rolls.
Who
is to blame for this recurrent cycle of unemployment? It is the New
Deal version of the Democratic Party, which poses as the party of the working
man. Now applying this theory to today, what do we find? We find
that interest rates last peaked in 2006 and have made an incredible fall
between 2007 and today. This fall in rates will have the same effect it
has had every other time. It will stimulate the interest-sensitive
areas of the economy. These areas will boom, and they will start to
hire unemployed workers. The exact timing on this is hard to predict
because it depends on exactly how fast the private banks lend out the money
which the Fed is pumping into them. But it is a good bet that we have
already seen the peak in unemployment (at the 10% level) and that the
official unemployment rate will be down for the remainder of this year.
In
short, by drawing the public’s attention to unemployment and saying
that Obama has failed to lower it, the Republicans are shooting themselves in
the foot. They are also giving credence to the Democratic argument that
unemployment is a measure of the economy. It is things like this that
give me the impression that everyone is crazy.
Haven’t
the conservatives of 2010 heard of a country called the Soviet
Union? This was a country that was based on the principle
of full employment. The Soviet Union
had full employment. However, it did not have (hardly) any
wealth. The purpose of an economy is to create wealth. An economy
where no wealth is created but there is full employment is a good definition
of a prison camp (and this is also a good description of the Soviet
Union). Notice that the Soviet Union
began to break down its prison camp aspect at the same time that it began to
abandon its Marxist (full employment) economic system.
As
I noted last week, the free economy of 19th century America
had so little unemployment that the language did not even have a word for it
until the 1870s. It also produced more wealth than any
other society through the entire course of human history. Even this
understates the case. Britain
and the Commonwealth countries also had a (largely) free economy differing
only in having a central bank. And if one compares the English speaking
world of that period with the rest of mankind, the wealth gap is absolutely
amazing. The English speaking people not only beat the rest of the
world. They ran away with the prize.
On
the other hand, the full-employment Soviet Union
voluntarily dropped out of the race. In 1959, Nikita Khrushchev
(head of the Communist Party of the U.S.S.R.) visited the U.S.
He challenged the U.S.
to a peaceful competition to see which system could produce more wealth (as
opposed to the military competition of the Cold War). He predicted that
in 25 years the U.S.S.R. would surpass the U.S.
in economic production. This prediction was ignored in the West, but it
was taken very seriously in the Soviet Union.
They had been trying to catch up with the U.S.
ever since 1917, and time and again they had failed (badly). Khrushchev
gave them one last hope. The leaders of the U.S.S.R. focused on
Khrushchev’s prediction. 25 + 1959 = 1984.
What
happened in 1984 in the Soviet Union?
Its top leaders finally gave up hope of besting the U.S.
The Soviet Union finally gave up faith in
communism. Communism was not defeated in a great military battle (as
many conservatives were looking for). It was defeated from
within. In 1989, it abolished itself.
So
indeed, we have to ask, why is it that American conservatives are pretty much
the only people in the world who are still peddling Marxist economics?
A
reader named Mac at asks the following question:
“in regards
to stocks and the broader commodities – if we see a pullback/crash in
these asset classes, my thinking is that capital will shift back into the US
dollar, at least in the short term….I am of the view that it is still
possible for gold to take a short-term hit in the event of a global market
sell off….I am wondering if a panic in global markets will take the
form of ‘sell first, ask questions’ later, where even holders of
assets like GLD might start unloading en masse while running to US
Treasuries.”
As
a theoretical matter, it is important to keep in mind that it is highly
unnatural for a stock market to continually go up. In a free market,
wealth initially is created by the great producers. Then it passes
through to the general public. The stock market is a capital market
and, as such, is in competition with all other capital markets. For
example for most of the 19th century, safe (what we today call
AAA) bonds yielded 5%, and stocks yielded 8%. The extra 3% was what the
market felt was a fair return for the extra risk on stocks. This means
that the P:E ratio on stocks was always close to 12:1. And since
earnings remained constant, stock prices could not climb. (Different
companies on the stock market are always in competition with each
other. If Ford makes more money, GM probably makes less. For
NYNH&H to make more money, other railroads had to make less.)
Charles
Dow invented the Dow Jones Industrials in 1896. But he had constructed
a rail average as early as 1885. This rail average remained flat from
1885 to 1896. And his Dow Jones Industrials, despite a few ups and
downs, did not change from 1896 to 1932. In short, for the 47 years in
which the U.S. economy was a free market (and for which we have real time
stock prices) these prices did not go up. This validated the prediction
made by the free market economists of the 19th century that under
a free market (including a gold standard) wealth flows through to the average
person and does not remain concentrated in a few hands.
But
of course you know what happened next. The U.S. stock market rose by a
factor of 341 times between 1932 and 2007. Over the middle of the 20th
century, the real wages of the average working man slowed their gains.
Once the last tie to gold was cut in 1971, real wages went into the worst
decline in American history, and that is the condition which obtains
today. That is, it was the revolution instituted by the New Deal to rob
from the average working man and give this wealth to the rich people who
trade in the stock market. This is, of course, the exact opposite of
what you have been taught, and the reason is that your education has been a
pack of lies. Whenever there has been a redistribution of the wealth,
in any society, at any time in history it has robbed from the poor and given
to the rich. (Under the New Deal, the graduated income tax was used to
hide this fact, but the wealth transferred via taxes could not approach the
wealth transferred in the opposite direction via monetary policy.)
Therefore,
the U.S. (and all other) stock market(s) are wildly over priced. If the
DJI were to drop to 41 (its 1885-1932 value) or 697 (its 1885-1932 value in
real terms), it would be a long overdue correction which would restore the
country to economic health. Note the stock bear market of Oct. 2007 to
March 2009. It was caused by the Fed tightening of 2004-06. The
price structure of the markets is so distorted that even a return to
semi-normal interest rates caused a 50% bear market in stocks. What the
(U.S. and world) power structure is desperately trying to do is to keep
pumping up the markets and prevent such a return to health. However,
this gets harder and harder, and we must continually be on the alert for a
major stock market decline. This is not imminent and will not occur
until Bernanke tightens, but when that happens, it will be beautiful to
behold.
Note
that gold stocks are affected both by the price of gold and by the price of
stocks. They sort of follow a middle-of-the-road path between gold and
stocks. So if (when) the U.S stock market tanks, one should switch
one’s precious metals portfolio away from gold stocks and into gold or
silver bullion.
We
will not see another replay of late 2008 where everything went down.
That was a very unusual event where the New York Times hit the panic
button, scared the blazes out of the entire country and almost caused their
own bankruptcy. Their fight with the Boston Globe unions was one
for the history books and violated all of the left-wing labor relations
principles that they have been preaching to the country for much of the past
century. For the most part, gold (and other commodities) can ignore a
rise in interest rates for a much longer time than stocks. For example,
the Fed tightened in 1973. Over the next two years, the stock market
fell almost in half, and the price of gold went from about $65/oz. to almost
$200. The Fed next tightened in 1978. From ’78 to
’82, the stock market went sideways, and from ’78 to early
‘80 the price of gold went from $350/oz. to over $800.
A
stock market decline will have to be preceded by a Fed tightening, and this
tightening will almost certainly be triggered by an outbreak of rising prices
(itself caused by the commodity pendulum). When the Fed does tighten,
the best strategy will be to be in gold because the lag between the Fed
tightening and stocks declining is much shorter than the lag between the Fed
tightening and gold declining. You should be in gold, but watching
stocks out of the corner of your eye because stock bear markets are easy to
predict. They start off slow and build momentum. After a certain
point, all signals are lower, and you can safely go short (especially if the
play looks to last until October as many stock bear markets end with an
October crash).
These,
however, are general considerations. For specific plays and near term
analysis, I invite you to subscribe to my newsletter, the One-handed
Economist. OHE is published fortnightly (every two weeks) at a
price of $300/year. Cash customers (via the US mail) get a $10
discount. Write to: The One-handed Economist, 614 Nashua St. #122,
Milford, N.H. 03055. Computer people can visit my website, www.thegoldspeculator.com, and
press the Paypal button. We do not take credit cards. Regular
issues of OHE are written every other Friday and are usually in the mail by
Saturday. Normally, issues are sent out via e-mail, but you have the
right to request a regular mail copy at no extra cost. From time to time,
if the market moves suddenly, I may put out a short special bulletin between
issues to clarify the situation.
This
world in which we live evokes the old Chinese expression, “May you live
in interesting times. Thank you for your interest.
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
every two weeks giving specific advice on trades in stocks and futures. This
letter is available (both electronic and paper copy) for $300/year with a
3-month trial for $100. Send to: The One-handed Economist, 614 Nashua St.
#122, Milford, N.H. 03055.(Include both electronic and mailing address.)
|
