Markets…like lovers…always put their admirers to a test…
The summer is winding down fast. We’re already closing shutters and putting away tools. In a couple days it will be time to back up and head back to the USA.
Maryland needs us. The poor Old Line State has sweltered under 100- degree heat…been rocked by an earthquake…and drenched in a hurricane.
All the while, we’ve been sitting pretty here in France…cool as a cucumber; no, cooler than a cucumber. It’s been so cool we’ve had to wear sweaters much of the time. This past weekend we drove down to the Tarn…more below…
Meanwhile, last week in the financial markets was unsatisfactory. No clear trend announced itself. The Dow should have gone down. Gold should have gone down too. But they diddled around…and on Friday, both seemed to be back in counter-trends, moving against the direction we think they OUGHT to go.
As for stocks, everything we’ve found out about the economy since 2007 suggests that our Great Correction view is right. This market aims to correct something; we just don’t know what.
Whatever it is doing, it is NOT responding in a typical post-war recovery manner. The feds have pumped trillions into the economy. They’ve gotten nothing for it except more debt.
Which was just what they DIDN’T need. The real problem — or at least the most obvious problem — is too much debt. Adding more, the feds aren’t doing anyone any favors, except the banks themselves.
It’s just a matter of time before investors realize that stocks are not worth prices in the top of the range. In a correction, they’re worth prices in the bottom of the range. And eventually they should fall to the very bottom of the range…where you can buy the entire Dow group for only one ounce of gold.
But that is still a long way away. And in the meantime, what about gold?
Well, bull markets — like lovers — always test their admirers. Remember the stock market crash of ’87? Stocks had been rising for five years. Then came Black Monday. The Dow lost 508 points in a single day. By the end of October, the Dow had lost nearly a quarter of its value.
Naturally, a group of 30 prominent economists got together and made fools of themselves. They announced that “the next few years could be the most troubling since the ’30s.”
And naturally, faint-hearted investors failed the test. They left the stock market — fearful that another Great Depression…or maybe a repeat of a ’70s-style slump…was coming.
When the crash was over, the Dow stood at only 1,738. Investors who had bought stocks 5 years previously were still up 70%. And the bull market had scarcely even begun. Instead of going down, stocks rallied…and never looked back. The Dow rose to over 11,000 in January 2000 — the most spectacular stock market success story in history. The economy, too, roared ahead.
Stock market investors may anticipate a replay of that post-crash world. They’ll be disappointed. Our world today has nothing in common with 1987. To make a long story short, then we were coming out of a long bear market. Now, we are coming out of a long bull market. Then, we were at the beginning of a long bull market in bonds. Now, we must be near the end of it. And then, households and the government could still borrow in order to keep spending. Now, the private sector is played out; government continues to borrow at record levels….but that’s a different story.
The last bull market in gold tested its admirers too. The price had risen from $41 an ounce — when Richard Nixon cut the last link to the dollar in August ’71 — to nearly $200 in 1975. Thereupon began a sell-off, in which gold lost 40% of its value…coming to rest around $100.
Weak sisters, johnnies-come-lately, and camp followers got shaken out. They gave up on gold at $100 an ounce…before it began its real push to the top, which eventually put the price over $800.
Our guess is that this bull market in gold will test its admirers too. So far, it has closed every year higher than the last. Making money was easy. Our faith was never seriously challenged. Even now, the price of gold is close to $1,800. It’s still ahead for the year. It’s still in its upward channel, well above its 160-day moving average.
Gold is still a winner. Gold investors are still winners. There is no reason to doubt that they will be winners this year…just like they have been every year this century.
But that’s not how it works. Not usually. The gold market needs to make its admirers feel like losers. It needs to cause them to wonder…and question their own faith and judgment.
How so? By letting the price fall to…$1,200…or even $1,000. Then, we will be ready for the third and final stage of this great bull market.
And more thoughts…
We drove from Poitou down the A20 through Limoges, Brive and Cahors…to the Tarn. It’s an area near Toulouse. Drier than the north. More open. Hillier. It reminded us of Tuscany, with large, old houses in vaguely Romanesque style on the hilltops…and brownish fields and orchards.
“There’s a lot of history in this area,” said Elizabeth, reading a guide book.
“Tell us some…” we asked.
“Well, there are ruins of Roman forts, cities and baths in various places. But then, the area was overrun by the Germanic tribes after the Romans pulled out. Things generally fell apart. There was little central order.
“The Moors came through here…this little place on the right, for example, is called ‘Roquemaure’…or the ‘rock of the moors.’
“After the 10th century, the cities were gradually founded, intentionally. They were laid out on land granted by the church. The streets were straight; houses were packed tightly against one another, and they were protected by high stone walls. According to this, the stone walls served to keep out marauders and enemy armies, but they also served to keep the serfs under control. Everything was set up to support the feudal order.
“Not long after the cities were built, the Black Death came along and wiped out a third of the population.
“This was also near the center of the Albigensian heresy…and the bloody crusade against them. Simon de Montfort led the crusade. He is said to have killed all the residents of the town of Albi, after he took possession of it. When someone protested that not all the people of the town were heretics he replied that he would kill them all, ‘and let God choose his own.’
“This area was also part of the region that came with Eleanor of Aquitaine. It was fought over during the 100 years wars. Many bloody battles between the English and the French. Apparently, towns were demolished and rebuilt, often more than once. In this short history, there are so many awful things going on, it is amazing that anything was left standing or anyone left alive.”
The occasion was the 50th birthday party of a neighbor. The woman lost her son to leukemia earlier this year; friends and relatives gathered ’round to celebrate her birthday — in what must have been the worst year of her life.
On hand were several local farmers.
“People say you can’t make money in farming,” said one of them. “They say you can’t make money in France.
“But it’s not true. I didn’t have anything. But I got a job on a farm. Then, I offered to manage the farm. And then, I realized that there were a lot of people with farms who didn’t really know anything about running farms. You know, they inherited them. Or the family had moved to Paris a long time ago. So, the farms were run very badly.
“So I made a business of running farms. I set up a corporation. I get contracts from people who own land. I run their farms. Before, they were often losing money. Now, they’re making money, so they’re happy.
“And then, the lady whose land I was managing died. So I offered to buy the farm. Now, it gets interesting. Because I can get enough income from running a farm to pay for it. And because I’m operating several different farms I can afford the kind of big equipment you need nowadays. You can’t make it on a small farm. But if you have a big farm, you can benefit from the big farm equipment…and you don’t need so much labor.
“Nobody wants to hire anyone in France. Too expensive. And too many labor rules. You spend all your time negotiating with your own employees. That’s part of the reason landowners don’t want to farm their own places. They don’t want to hire anyone. So I get a contract to do it. And then, because I’m working so much land, I can afford the kind of big machinery that you need. I just hope that not all the fields need to be harvested on the same day!
“As long as farm prices continue to rise, I’ll be able to pay for the land and buy more.”
“Aren’t you afraid that farm prices might go down?” we asked.
“No, I don’t think there’s any chance of that. Farm prices are bound to continue to rise. Because there are so many people in the world who are getting the means to buy food. The demand is there. No question about it.
“My real problem is financing. I know that I can have bad years as well as good years. So, I need deep pockets to survive bad years. And I need financing to buy equipment…and to keep buying land, of course.
“The bankers around here don’t want to lend me money. They say it’s too risky. But the real problem is that the banks don’t have any money.”
for Markets and Money