by Doug French by Doug French
Last week a jaundiced-colored Ben Bernanke graced the cover of BusinessWeek amidst a background of flaming hues that had me scanning for a hammer and sickle. "The current financial crisis — perhaps the biggest since the Great Depression — has turned Federal Reserve Chairman Ben Bernanke into a reluctant revolutionary," Michael Mandel and Peter Coy write to lead their story of how the central bank will save our collective bacon with the creation of more dollars. Even The Economist has signed on to the Bernanke reform: "Modestly higher inflation or jumpier currencies seem a small price to pay for preventing the collapse of America’s financial system."
Meanwhile, outside the mainstream, in sunny Scottsdale, Casey Research attracted a sell-out crowd to their Crisis & Opportunity Summit — Part II last week. While the business periodicals tout the head central banker as the messiah, Doug Casey himself described central banking as "stupidity," in his "Stupidity and How to Profit from It" speech.
Casey said the current unraveling is the beginning of "The Greater Depression" and told attendees that federal and state governments are bankrupt and that soon large corporations will be under water as well. The guy who wrote the book on Crisis Investing: Opportunities and Profits in the Coming Great Depression said it is tough to give advice because "we’re in the twilight zone," and that there are "eight or nine Black Swans circling."
The International Man does think there will be a mania in gold stocks, that interest rates are heading much higher and that the prospects for real estate are "real, real ugly." Casey’s real estate view jibed perfectly with property expert Andy Miller who presciently quit making sub-prime loans in 2004 and has sold most of his commercial properties. Miller contrasted the "American dream" of owning your own home to the "American nightmare" of owning your own apartment building: Renter turnover is now over 100% compared to just over half that less than two decades ago, and now multiple families are occupying units.
In Miller’s view, the slide in residential values is nowhere close to being done and new state laws regulating lenders will make mortgage money hard to obtain. Retail commercial properties "will get slaughtered" while office and industrial projects won’t fare much better and the condo world is set to implode.
Miller believes the real estate market would recover much faster if government stayed out of the process. But because it won’t, a recovery in 2010 "would be very optimistic." There are a number of distressed real estate funds being formed that will likely be too early in buying properties the real estate guru believes.
Although not able to attend in person, Bill Bonner provided a clear analysis of how the current crisis was engendered in his speech played for the Casey faithful during the Wednesday night banquet. When Richard Nixon closed the gold window, the US dollar was then "based upon a fraud," and with central bankers being human, from that point the dollar would be made worthless. The next villain in Bonner’s story is Eugene Fama, who formulated the "Efficient Market Hypothesis," or in other words, the market knows everything, prices just move randomly. Since Professor Fama’s work was published, securities prices became natural phenomena that are supposedly not influenced by human behavior. Thus, stock and bond price movements could be mathematically modeled, and that risk isn’t risk anymore, but volatility.
From this thinking came the derivatives industry that is based upon models devised on historical market statistics during time frames that didn’t include a fiat currency regime, let alone the presence of $500 trillion in derivatives. This mathematical modeling is based upon conceit and pretension, according to Bonner, and the turning of Level 3 assets into AAA-rated paper were "miracles that would stagger Jesus Christ."
Dick Cheney famously said that deficits don’t matter and that view trickled down to individual homeowners, Bonner pointed out. At the same, the Reagan and Thatcher revolution had the wrong-headed view that humans always do the right thing economically, leading to CEOs being paid millions for running companies into the ground. "Capitalism doesn’t make people rich," the co-author of Mobs, Messiahs and Markets explained, "it makes people free, but they can go broke."
Also, the economics field changed from moral philosophy to engineering with John Maynard Keynes. After Keynes, it was thought that economists could engineer a good economy and riches for everyone by simply turning knobs. But there is only one knob they turn, Bonner stressed, "more money and credit."
So what we are left with is credit deflation and price inflation, or stagflation. Just like the 1970’s, right? Not quite, Bonner cautioned. There were no derivatives then and the US was running a surplus instead of a deficit.
The yellow metal does well in both inflations and deflations, Frank Holmes of U.S. Global Investors reminded the audience on the final day of the conference. Indeed, no speaker was bearish on gold, or any commodities for that matter. A bearish commodity view comes from the March 31 Barron’s cover story "Commodities: Who’s Behind The Boom?" Gene Epstein writes that the smart money is betting there will be a 30 to 50 percent collapse in commodity prices. He even found an analyst to quote who believes the "Commodity bubble is nonsense on stilts." That same analyst thinks it’s likely that there will be "negative CPI inflation rates."
However there was no evidence of a bubble in precious metal prices at the Coin, Currency, Jewelry & Stamp Expo held at the Imperial Palace in Las Vegas last weekend. While there were plenty of average Americans practicing bad math with depreciating dollars on the smoky casino floor, there were maybe only a dozen or so quirky types trading in paper money for the harder variety upstairs while we were there.
No doubt, buying a few Morgan silver dollars for $17.50 apiece seems crazy to the commodity bears. But, after reading about loaves of bread costing Z$25 million in Zimbabwe and that Secretary Paulson has a plan coming to "designate the Fed as the primary regulator for market stability" it seemed like a good idea. Count me out of the Bernanke revolution.