“Bill, you’re wrong about two things,” begins a helpful Dear Reader. “First, you’re wrong about emerging markets. You say they are going up, along with gold and commodities…while U.S. stocks and U.S. property goes down. But so far, emerging markets have been the biggest losers in this financial ‘adjustment’ we are suffering.
“More importantly, you’re wrong about Diocletian. Not about his economic policies, but about the Piazza di Navona. It was not Diocletian who built a stadium there; it was Domitian. Big difference.”
Our reader is wrong and right, in that order. That is, he is wrong about emerging markets and right about the Piazza di Navona. As to the latter, we were misinformed…and realized it when we were having a cup of café latte out in the square and looked over and saw the “Ristorante Domiziano” on the opposite side. Why would they name a restaurant after Domitian in Diocletian’s square, we wondered. Turned out, it was Domitian’s square, not Diocletian’s.
About Domitian, we knew nothing. So we looked him up. (More below…)
As to emerging markets, our Dear Reader has noticed that they have taken a beating. Shanghai was in a bubble – as we pointed out a year ago; it is down now 50%. Vietnam is down 53%. Many others have been hit hard too – although, the Latin American market has held up well.
Emerging markets are among the many things we know little about. But that doesn’t stop us from having opinions. And our opinion is that the world is turning. That will come as no shock to you, Dear Reader. You get up in the morning and see the sun rise. In the evening you see it go down. You took science classes. You know how it works. The planet spins on its axis.
You’ve read the poets too. “Gather ye rosebuds while ye may…” they warn us. Because “this same flower that smiles to-day To-morrow will be dying…”
You know what we’re getting at, in other words: things change. “You’re riding high in April…you’re knocked down in June…”
Well, that’s our point. This is April. June is coming soon. And that bright light that shined so beautifully, warmly, wonderfully on the West…is now headed East – to the emerging markets. Those markets are having a correction…which could turn out to be a buying opportunity.
Long time Markets and Money sufferers know we don’t know…that our ‘big picture’ analysis is just guesswork. We breathe. We eat. We are mortal. And like all mortals, we live in darkness…with only an occasional flicker of light to shine upon our path.
Looking ahead, what we think we see – through the dense fog of news and opinion – is a world of ‘flation.’ That is the fundamental condition of the world economy ever since 1971, when the golden shackles were taken off and the world’s money supply was allowed to run wild. The U.S. money supply is said (the government no longer gives out the numbers) to be increasing at 20% per year. Interest rates are being pushed down by the Fed. The U.S. federal government is running a record deficit…and financing the most expensive war in history with borrowed money. (This ‘world of ‘flation’ is what our documentary I.O.U.S.A. looks at closely. If you’re in the Baltimore area, come see the film at the Maryland Film Festival next weekend. See here for all the details.)
Rome got itself into a similar bind. It couldn’t support the empire from its own resources. It had the reserve currency of the day…but it was a metal-based money. All emperors could do was to send more slaves to the mines to try to dig out more silver and gold…levy more taxes…and squeeze more money and resources from Rome’s far-flung tributary nations.
The population of Rome itself rose to over 1 million people – far more than could be supported by the local economy. What resulted was the equivalent of a huge trade deficit – with shiploads of wheat, marble, wood, wine and other products arriving at the port of Ostia, near the capital, and then shipped up to Rome itself.
By the time of Domitian, this trade deficit – combined with almost constant warfare – had already brought a substantial inflation to the empire. Domitian’s father, Vespasian, had devalued the currency. But Domitian was the Paul Volcker of Emperors. He actually restored the value of the denarius to Augustine levels, increased tax collections, and managed to leave the government with a surplus.
*** Let us return to the news and to our look at the essential picture. From the Financial Times comes the view from the sunny side of the street:
“The optimistic view is based on two distinct elements. First, that the deleveraging process is reaching its natural end as valuations stabilise and institutions come clean about their losses and raise capital; second, that a series of previously unthinkable policy responses have been effective in restoring liquidity to the financial system.
“Both views have merit. Financial institutions, particularly in the US, have recognised the scale of the problem and are taking remedial steps. Just witness the recent round of capital raising by Citigroup, Merrill Lynch, JPMorgan and Wachovia. At the same time central banks in Europe and the US have opened up their financing windows, expanding the size of the financing, the range of institutions that can access it and the list of eligible collateral.”
The report goes on to suggest the alternative…that policy reactions (by the Fed and other central banks) may be “too little, too late.”
And here, we think the writer is wrong on both scores. That is, the real problem is not one that can be fixed by putting more money into the banking system. It’s more basic than that. When a bubble pops, it’s almost impossible to pump it up again. You pump and pump…but the air goes somewhere else. The consequence of the dot.com bubble, for example, was that expectations for the new age of computerized communications were over-bought. New money could be put into the system. But the new money didn’t go into dot.coms. It went into housing and finance. Now, those bubbles have popped too. The authorities are pumping new money into the banking system…but where is it going? We already have plenty of houses in America – more than enough. Don’t expect a boom in the housing industry anytime soon. And take all those leveraged, sophisticated CDOs, MBSs, SIVs, and the rest – please! Who’s going to put more money into those?
No, dear reader, that’s not the way it works. New money looks for a new home…a new bubble to inflate…not one with a hole in it.
Our guess…and again, we warn readers that we are just guessing…is that this inflation is going into gold, commodities, oil…and, yes, emerging markets. Our guess is that the setback for emerging markets is just a correction, not a fundamental shift of direction.
Our guess is that the setback for gold – down below $900 – is also just a correction, not the end of the bull market. Indian stocks…the Vietnamese economy…commodities…gold – all still have a lot of room on the upside.
Our resident commodities guru, Kevin Kerr, couldn’t agree more. “A nasty rumor has been going around that the commodity markets are old hat and will soon go the way of the dinosaur,” says Kevin.
“‘They’ have been saying that since I started on the floor almost 20 years ago. I’m here to tell you that not only are these markets stronger and more modern than ever, but there’s never been a better time than right now for investors like you to make lifestyle-changing profits, and probably more quickly than you ever thought possible. I know, because I’ve done it myself!”
*** But let’s go back to the Financial Times for a look at the dark side of the street:
“Pity the US consumers. Their ability to sustain spending is already challenged by the declining availability of credit, a negative wealth effect triggered by declining house values, and a lower standard of living as the result of higher energy and food prices and a depreciating dollar. Job losses will accentuate the pressures on consumers, leading to income declines and a further loss of confidence.
“While the financial system has taken steps to enhance balance sheets, they speak essentially to addressing the consequences of excessive leveraging and imprudent financial alchemy. As such, the nasty turn in the real economy may fuel another wave of disruptions that, this time around, would also have an impact on mid-size and smaller banks.”
Markets and Money