Frightened Investors Have Knocked Down Stocks

The Dow rose 177 points yesterday, amid a flurry of gloomy headlines.

“New homes sales fall by record amount,” says the Associated Press , referring to the 26% drop in 2007.

In Florida, housing is in a ‘death grip,’ adds the Dallas Morning News .

And the whole U.S. economy “faces the guillotine,” is how Newsweek sums up the situation.

The big battle, as always, is between greed and fear. Greed pushes up prices. Fear drags them down.

As of yesterday, fear was winning.

“Fear stalks the markets,” says the Economist .

Yes, dear reader, fear – the force of deflation – is getting the headline coverage. Recession, say the papers, is either coming…or it is already here.

As we pointed out yesterday, when Mr. Market turns to fear…it is hard for Mr. Market Manipulator to stop him. Frightened investors have knocked down stocks – wiping out more than a trillion dollars worth of implied wealth. Frightened homeowners have sold off houses – taking nearly $2 trillion off the implied value of the U.S. housing stock. The subprime crisis is said to be taking out another half a trillion. A trillion here…a trillion there…

What can the forces of inflation do against these huge attacks? Mr. Politician has come forward with a plan to pump $150 billion back into the U.S. economy. Mr. Central Bank manager has cut rates by 75 basis points…and threatens to cut more.

But the problem, as the Financial Times so elegantly put it, is that the “credit orgy” is over. The liquor ran out. The music stopped. And someone called the cops. Bush and Bernanke show up with a few more bottles of booze, but the guests are already putting on their coats and fumbling for their car keys.

If we’re right, one of two things will follow:

If Mr. Market has his way, fear will dominate the market…and stocks will fall while gold stagnates.

If Mr. Market Manipulator prevails, greed will return…but not necessarily where he wants it. Stocks will stagnate while gold soars.

Most likely, each will have his victories and his defeats as the fortunes of this war shift back and forth.

We got a hint of which way things were going yesterday. The Dow rose, but the real action was in gold, which shot up $16, to a new record of $927. Analysts mentioned that the power went off in South Africa, putting the gold mines out of commission. But a healthy boom wouldn’t care…and investors wouldn’t have cared a few years ago. A healthy boom produces rising stock prices…leaving gold behind. This is no healthy boom at all. It is a fraudulent boom and investors know it, shifting their speculations from stocks to gold.

Thus begins a new stage in the bull market in gold. Do you remember when we were able to buy gold around $300 an ounce – 7 years ago? It rose hesitantly, often giving back gains. People wondered if gold had not been made completely obsolete by sophisticated financial instruments. We at Markets and Money know better. With the decline of the dollar (and indeed the worthlessness of all paper currency) gold is one thing that will always have value.

If you’re worried about a bear market, buy some put options, said the experts. If you’re worried about depreciation of the dollar, buy euros. If you want protection against defaults, buy some swaps.

The experts could not imagine that a day would come when we’d be worried about the whole dollar-based financial structure… about the ability of the biggest banks to survive…and the capacity of the biggest Wall Street firms to make good on their obligations.

But here we are…and gold is rising. And now it goes up by $10…$15…$20 in a single day. And now people are starting to read about it in the papers. And people are starting to wonder how high the price will go…and where they can buy Krugerrands.

Yesterday, Peter Munk, CEO of the world’s largest gold miner, Barrick Gold, told the worthies at Davos that the bull market in gold had a ways to go. He said the price would go into the “$2,000 bracket” before it was over. We couldn’t agree more .

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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