by
Bill Bonner
“Gold continues to climb…stoked by inflation worries,” says a headline in the International Herald Tribune. Yesterday, it touched a new record – $1,050 – even as the dollar rose, oil slumped under $70 and stocks dipped very slightly. Well, what do you expect? The United States added $1 trillion to its monetary base in the last year or so. The federal government is running a deficit of $1.7 trillion this year. And along comes Barack Obama with an idea to stimulate employment – spend more money! This time, Obama’s plan is a kind of “Cash for Workers” program…in which businesses get a tax credit for hiring new employees. Gold investors must think the new program will be the straw they’ve been waiting for. Government has piled bales of costly new initiatives on this poor camel’s back. Still, he stands up straight. So, is gold at $1,000 a bargain…or a trap? Or both. We begin by asking: where’s the inflation? We don’t see any inflation. What we do see is deflation. Barclays Capital says gold could go to $1,500. We don’t know where they got that number. It could go to $15,000 for all we know. Or it could go down, too. Our guess is that it will go down enough scare the bejesus out of speculators. Then, it will soar. But, hey, we’re just guessing – along with everyone else. Sooner or later gold is probably headed to the lunatic moon. We’re sticking with the yellow metal. We don’t want to miss that ride. But when? Ah…we’re going to stick our necks out and say “eventually.” We’re sure we’re right about this. Just don’t ask us for more precision; we have none. And what bothers us is that between eventually and now there could be a lot of time and a lot of trouble. And one trouble that could come up pretty fast is another crash in the stock market. If the stock markets of the world take another dive…like they did last year…gold will probably go down with them. Not as much, but down nonetheless. So, if we were speculating…we’d probably be short gold and short stocks too. We’d bet against bonds too – even though we think they will probably go up in the short run. The smart, long-term money – in both stocks and bonds – is probably on the short side. However, we never speculate – except in print. As to ideas about how the world works we have plenty. We speculate daily. As to gold, stocks and commodities, we prefer to hold onto our long-term positions. What seems fairly sure to us is that this recovery is a fraud. It’s a mountebank and a flimflam. And now approaches a moment of truth – earnings announcements. Stock market investors bid up shares on the theory that sales and profits would rise. Will they? We don’t think so. We think sales are going to be disappointing…and earnings will be even worse. If so, we’ll see analysts begin to change their expectations…and announce that the results are “not as bad as expected.” If we get a few really bad announcements – with results much worse than expected – it could sink the rally. Then again, if we’re surprised with exceptionally good reports…it could send the market in the other direction. Good results will also cause us to question our position. Maybe the economy is not sinking into a chronic depression, after all. Could we be wrong? Ha ha…are you kidding, dear reader? Of course, we can be wrong. When we were younger we were uncertain about things. But now that we’re older, we’re not so sure. Here is what we’re pretty sure about: 1) The credit cycle has topped out. Americans are saving – think of the poor boomers, 10 years older but not a penny richer than they were in 1999. Stocks have gone nowhere but down in real terms. Houses hit a high in 2006…now, they’re off 30%…and still going down. Jobs? Forget it…there are already 15 million people who are unemployed and about 200,000 more every month. The job market is unlikely to recover for another 6–13 years – that is, after many of the boomers are retired! And if you are lucky enough to have a job, you’re not likely to get a raise…not with so much spare capacity in the labor market. Under those conditions, a consumer boom is very unlikely. 2) We know that a period of credit contraction is deflationary. Prices go down as demand falls. Buyers disappear from the malls that once knew them, while the factories that produce stuff grow dusty and quiet. But we know the feds hate falling prices. And we know they are taking extraordinary actions to get prices to go up. So far, their efforts have been a giant flop. Prices are falling in the United States at the fastest pace since the ’50s. Most of the feds’ efforts have been directed towards keeping the bankers fat and happy…and getting themselves a bigger share of America’s output. They took funds designed to relaunch the US economy, for example, and used them to buy themselves a big position in the auto industry, the financial industry and the insurance industry. 3) We know too, by the way they conducted themselves in those affairs, that the feds have become much more aggressive…throwing their weight around in the private sector as never before. What we don’t know is how this affects markets in the short term. So far, consumer prices are falling, but the stock market is enjoying a bounce. Is it a real, new bull market? Or just a bear market bounce? It is probably a bear market bounce…but it has been going for long enough that we have to at least consider the idea that it is a genuine bull market. That’s why the numbers from this quarter are important…they’ll tell us if the companies themselves are expanding earnings fast enough to justify investors’ optimism. 4) We know too that there is a whole lot of ’flation going on. We are just unable to tell you what kind of ’flation it is. The monetary base is way up – it increased by $1 trillion in the last 12 months. But the money-in-circulation has barely budged. The feds give the banks overnight loans at practically zero interest. Then, the banks lend it back to the feds at nearly 4% more. What happens to it then? Well, what do you think…it is wasted on typical federal government scams and humbugs.
5) Most important, we are dead sure that the people running America’s financial policies are jackasses. We say that with all due respect, which is probably not much. They have only one idea – and it is a bad one. They think economies are improved by more consumer spending. They don’t seem to care why consumers occasionally cut back on their spending. All that matters to them is finding ways to get the consumer shopping again. So they try tax cuts and government spending…bailouts and boondoggles…zero interest lending and federal takeovers…cash for clunkers, cash for houses, cash for employees…. …trillions worth of claptrap and folderol. But what a nuisance! The fool consumer still won’t shop! But they’re determined to keep trying. That’s why we can be pretty sure that, eventually, they’ll get inflation rates up. One way or another. And then, gold at $1000 will seem like an outrageous bargain. October 9, 2009 Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis and the co-author with Lila Rajiva of Mobs, Messiahs and Markets (Wiley, 2007). Copyright © 2009 Bill Bonner
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So,
relatively little of the money actually ends up in the consumer
economy. And so, we can’t tell you whether the ’flation
will have a “in” prefix or a “de” prefix. They’re
just two letters. But they will make a whole alphabet of difference
to the economy and to your investments.