Heads up: our Crash Alert flag is flying again. More about that in a minute.
Our old friend, Lord Rees-Mogg, writes in the TIMES :
“Daniel Webster’s opinion should never be forgotten. Of paper money he says: ‘We have suffered more from this cause than from every other cause or calamity. It has killed more men, pervaded and corrupted the choicest interests of our country more, and done more injustice than even the arms and artifices of our enemy.’
“In the 1930s some nations tried to beat the slump by competitive devaluations. In the present crisis, Britain has already experienced a very big devaluation of the pound, taking it down by a quarter against the dollar. Every country, led by the United States, has been issuing money, often in very large amounts, in order to bail out its banks. No one knows the total value of these national injections of cash into the banking systems. As the earlier injections have not restored stability to national economies, further injections inevitably will be made. All will be made in unconvertible currency, and over-issue will occur.
“Governments need to create a new world system, in which gold, as a stabiliser, should play its part. For individuals, gold remains the best insurance against future shocks and the best store of value.”
Yesterday, the Dow fell another 297 points…as the market continued to react to Obama’s $787 billion bailout. “Too little,” say some. “Too late,” say others.
But the worst may not be over for this market. Earnings are falling…for the very simple reason that people are spending less money. People spend less. Business makes less. Lower revenues; lower earnings. As we mentioned yesterday, for the first time in history, S&P stocks are losing money.
Savings rates are climbing in the United States. The trade deficit is falling. These are healthy trends for the long run. But they are hard to take in a depression.
Not only are earnings falling, P/Es are falling too. Stock prices are adjusting not only to the lower earnings, but to the new psychology of a depression era. There are times when people will pay $20 for one dollar’s worth of earnings. Other times, they’ll be reluctant to pay even $5. We’ve seen the $20 figure as recently as a couple years ago. Now, the trend is moving in the opposite direction. We’re headed towards 5 bucks. That’s what people will pay for $1 of earnings when this market finally reaches its bottom. Or thereabouts.
The combination of falling earnings and falling P/Es does to stock prices approximately what the Romans did to Carthage in the third Punic War. That’s why we have our Crash Alert flag flying. Stock prices delenda est.
Typically, depressions come with bear markets. And bear markets come with bounces and rallies. We expected an O! Bama! bounce after the election. We got one…but much less than we expected. Stocks only rallied about 15%.
A stronger bounce will come, sooner or later. But we’ve put up our Crash Alert flag again – just in case. Stocks could go down another 30% – 50% first.
The news from the economy is not all bad. The shipping index has rallied – up 147% from its bottom. So, somebody must be moving something.
Beyond that, the headlines are grim. The automakers are headed down a dead end road, say the papers; they say they need $18.5 billion. Where are they going to get that kind of dough? The corporate bond market – to which corporate borrowers turn to raise money – is dead. When it comes to borrowing money, private borrowers just can’t compete with the U.S. federal government. Even the states can’t compete; they don’t have printing presses either. California is facing a “lockdown” of public services, Bloomberg reports.
All over the world, the search for the bottom continues. Ireland seems to be edging towards default. And Japan is in a “dreadful state,” says the Economist .
Things are so bad in Japan that the finance minister, Shoichi Nakagawa decided to drown his sorrows in drink. Alas, he chose the G7 meeting – at which he represented his country – to get drunk. Now, according to the New York Times , he is being forced to quit.
From what we can tell, Nakagawa is the only G7 finance minister who should stay on the job. The rest of them clearly don’t know what’s going on. Otherwise, they’d be drunk too.
*** Gold, as Lord Rees-Mogg notes, is the “best insurance against future shocks.” A lot of people seem to think so. Gold rose $25 yesterday, to $967, and soon will be crowding $1,000 an ounce again.
Technical analysts are warning that gold is headed for a correction. “What should we do?” asks a colleague. “It looks like gold might go down in the near-term…but we don’t want investors to sell out and risk being out of the market when the big move comes.”
Unless you enjoy the thrills and spills of trading in and out, we don’t recommend that you try to time the gold market. It’s too treacherous. Yes, gold may go down in the next few months. But that has been true for the last 10 years – ever since we began recommending it. It goes up. Then, it corrects. And then, before you know it, it goes up again.
We don’t think that pattern is going to change anytime soon. Gold is in a bull market that will only end when the final bubble pops – the bubble in paper money. How that will happen is anyone’s guess. When it will happen is a matter of guesswork too. But the dollar delenda est too. In the meantime, we hold onto our gold and await developments.
And we suggest you do the same. Yes, the price has gone up in the past couple of days…but that doesn’t mean you can’t still get the yellow metal at a bargain. In fact, you can still buy an ounce of gold with the change you find under your couch cushions…no joke. Learn all about penny-per-ounce gold here .
*** Here’s an interesting little item: “US Military Will Offer Path to Citizenship,” says the New York Times . Why not? It worked for the Romans – for a while. Then, when the barbarians in the ranks became numerous and powerful, they took over.
Richard Florida, writing in The Atlantic :
“‘One thing seems probable to me,’ said Peer Steinbrück, the German finance minister, in September 2008. As a result of the crisis, ‘the United States will lose its status as the superpower of the global financial system.’ You don’t have to strain too hard to see the financial crisis as the death knell for a debt-ridden, overconsuming, and underproducing American empire – the fall long prophesied by Paul Kennedy and others.
“Big international economic crises – the crash of 1873, the Great Depression – have a way of upending the geopolitical order, and hastening the fall of old powers and the rise of new ones. In The Post-American World (published some months before the Wall Street meltdown), Fareed Zakaria argued that modern history’s third great power shift was already upon us – the rise of the West in the 15th century and the rise of America in the 19th century being the two previous sea changes.
“But Zakaria added that this transition is defined less by American decline than by ‘the rise of the rest.’ We’re to look forward to a world economy, he wrote, ‘defined and directed from many places and by many peoples.’ That’s surely true. Yet the course of events since Steinbrück’s remarks should give pause to those who believe the mantle of global leadership will soon be passed. The crisis has exposed deep structural problems, not just in the U.S. but worldwide. Europe’s model of banking has proved no more resilient than America’s, and China has shown that it remains every bit the codependent partner of the United States. The Dow, down more than a third last year, was actually among the world’s better-performing stock-market indices. Foreign capital has flooded into the U.S., which apparently remains a safe haven, at least for now, in uncertain times.”
We remember our Five Big E’s from a couple of years ago.
They were the underlying trends that we thought were unstoppable. Let’s see…
1. Our Experimental money system – with faith-based paper dollars at the foundation – was doomed
2. The U.S. Empire was peaking out
3. Energy was becoming more expensive
4. Wealth and power were moving to the East.
5. And the Economy was headed for a crisis.
The only one of those that looks like a bad bet is number 3. Energy is a lot cheaper now that it was a year ago. But does that mean that the trend towards more expensive energy is over? Maybe…maybe not.
The price of crude oil dropped below $35 this week. Yesterday, it traded at about $37.
“I think we’ve seen the bottom,” says colleague Simone Wapler.
Simone explains that many of the projects that were supposed to bring more oil on line have been abandoned. That will mean shorter supplies than forecast. Economic growth forecasts have been cut too…which will cut consumption. But inevitably, Asian economies will grow…and they will use more energy. There are 700 cars per 1,000 people in the US, she points out. In China, the figure is barely 20. One way or another, Asia is probably going to use more energy in the future…which is probably going to increase the price of oil.
for Markets and Money
P.S. Colleague Byron King warns that although it’s easy to be lulled into believing that low energy prices are here to stay, he wouldn’t get too used to the idea. In fact, Byron thinks we are heading into what could easily be the most vicious and unpredictable financial cycle of the past 150 years. Learn how to prepare yourself (and even profit) from the ‘forever oil crash’ by clicking here .