Out of the Frying Pan and into … Gold
‘And it’s too late Benny, it’s too late, though you really did try to fake it ’
The recession’s over, right? The world economy will return to growth, possibly next quarter, certainly next year. Governments forecast it, central banks are quietly confident of it, 98% of economists are sure of it, and the media are as willing to punt it as fast as they did ‘the end is nigh’ last autumn.
Well, I would go one step further and say the recession never even happened. There has been no recession since the 1990s. Before you spend too much time mentally ripping that idea to shreds, let me explain.
The bad news, or rather the bad fact, is that we have been in a slowly-unfolding deflationary DEPRESSION for the last nine years, and in spite of the most audacious, globally-coordinated multi-trillion-dollar inflationary efforts of governments and central banks the collapse is still only in warm-up (or cool-down) phase. Additionally, analysis and comparison of conditions prior to and during previous similar events since the 1700s suggest that, thanks to the policies of those same central banks and governments over recent decades, this depression should prove itself to be the daddy of the little chap that appeared on the scene in 1929.
Stock markets are up nearly 60% since their March lows (a record for that duration), governments have ‘pumped trillions’ into the financial system, trade is picking up. Who in their right mind would still entertain the doomsday scenario?
Back in March you would have to have asked the opposite question when many were petrified and very few entertained the idea of a 60% stock rally for the next 6 months (I know someone who did). In July 2007 very few entertained the idea of a 60% decline in stocks over the next 18 months, and the same is true of oil in June 2008, and gold today. Markets can spend long periods of time trending upwards. But these trends are punctuated at different degrees with periods of high volatility and rapid movements from one extreme to another.
So in March did we enter a new, ‘steady’, upwardly-trending period, as the usual suspects would have us believe, or is this the last chance for one to put one’s financial house in secure, conservative order and avoid excruciating financial pain?
Extremes in markets occur as a result of extremes in sentiment .. ie. emotions. By 2007 many individuals and most financial institutions had chosen to forget the burst of the tech bubble and the colossal losses that went with it, and were back to the idea that the easiest way of making money was not to produce anything but to dive back into the arena of highly-leveraged speculation in order to take advantage of ever-increasing asset prices. That was the culmination of a period of extreme optimism. In 2008 many frenzied institutions and individuals got their backsides whipped by the market, and deservedly so, yet unfortunately many were prevented from learning painful but important investment lessons by Obe Ben Bernanke and his Jedi Knights.
In the financial world most situations are results of previous events. Necessarily, in attempting to stop nature from taking its course, Bernanke and Co have laid with due precision the final foundation stones of what should be the greatest wealth destruction of the last few hundred years.
Now, in September 2009, the market is again in a froth-filled-frenzy and sentiment indicators are back through the ceiling. Institutions are back to being bullish on a par with levels last seen at the 2007 market highs, mutual funds are back to holding just a few percent of funds in cash, and punters have been desperate to buy the Dow Jones at record prices relative to earnings. Most likely, these current positive extremes do not describe a new long-term bullish environment – they describe a reactive, ‘corrective’ move that started in March and has led to yet another wild extreme in optimism – a move which is now most likely in its last weeks.
Can governments and central banks save the day again with more of the same? Not this time around. They are out of ammo. They have pushed their own balance sheets to breaking point in an attempt to re-inflate the global economy, merrily making the taxpayer accountable for trillions of dollars of private debt in the process.
This socialisation of debt is not a magic spell to make it disappear. In fact, unbelievably the toxic assets that nearly choked the system the first time around are being bundled up again and resold today. The owners of the debt have changed, but not the amount, which dwarfs the amount of actual money in existence. Thanks to a drastically changing social mood, from expansive to ultra-conservative, the credit machine that drove asset prices to shocking levels over the last 20 years is now jammed in reverse gear and will remain so until a downside extreme commensurate with the previous rise has been reached. That implies the destruction of a very large amount of debt.
During the next leg down, which will probably begin in October, darkening social mood and politics will disallow Old Ben and the Jedi Knights from taking unchecked actions to stem deflation quickly enough to avoid a systemic failure. The public has been relatively docile considering the implications of what has happened over the last few years, but the coming violent upheavals in the financial system, almost certainly to include multiple bank runs and corporate collapses, street protests and riots, will change that. For governments, saving financial institutions will not only be financially impossible, it will be politically unthinkable.
And back to gold, which is currently performing its necessary role as the focus of the final asset mania (behind tech stocks, real estate and commodities). The media has made light work of rationalising gold’s high price, referring to it as a safe haven and a hedge against inflation. But gold was a slow starter during the asset mania of the 90s and 2000s, so it is simply playing catch-up with other assets, the bubbles of which have already been and burst. Until there is evidence of a resurgence in inflation, history suggests that owning gold could be a disappointing strategy over the next few years.
During deflation just one asset surely goes up in value, and that’s cash. Granted, part of the reason for today’s precarious state of affairs is the nature of fiat currencies. They are in reality backed by nothing tangible, which is why they were created by governments in the first place. They could, literally, at any time, become worthless. But for the moment cash is still THE means of debt repayment, and as was seen in 2008, if the above scenario is correct it will be cash, not gold, which will be in huge demand as individuals and organisations scramble to find the means to remain solvent.
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September 25, 2009 at 18:04 -
September 25, 2009 at 15:59 -
September 25, 2009 at 12:43 -
What with low flying helicopters and a 12 hour low flying exercise near me anyone would think the military were at war with us!
What?
They are??
Is this another Brown blunder then?
I feel the earth move under my feet……………..
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September 25, 2009 at 11:02 -
The rot set in about the time of the Dot Com crash I reckon. Mass hysteria around the new and the computerised caused a bubble that crapped away enormous paper value when it burst. In the US they slashed interest rates and had a taxpayer spending splurge. In the UK we took things slower but nontheless the Government started borrowing and has not stopped. This combined with a period where, on both sides of the Atlantic, the regulators of the banks looked the other way.
In addition to this there is the subtle trade war with China that has rumbled on for years as well. Cheap imports are a deflationary pressure aren’t they? Yet as prices for tat have dropped like a stone the Governments wanted inflation to stay positive. I’m sure there is an element of political prestige in that – GDP cannot be allowed to fall. There must be growth.
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September 25, 2009 at 10:13 -
“individuals and organisations scramble to find the means to remain solvent.”
Well, leaving the UK would be a good start, thanks to Brown.
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