The Battle Rages!

Unstoppable inflation on the one side; immoveable deflation on the other. And what’s in between?

You are, dear reader…keep your head down.

At least you know where you are. Most people have no idea. Most middle class Americans are caught in this no man’s land. Inflation is shooting holes in their family budgets. While deflation blows up their assets.

The headline inflation number for 2007, in the United States, was announced
yesterday – at 4.1. Still manageable…but it was the biggest annual increase in 17 years.

But yesterday, deflation was on the offensive. The Dow edged down…and when we look at the charts of almost any market – France, England, Japan, tech stocks, shipping stocks (keep reading), retail stocks – we see bear markets.

And yesterday, we thought we saw the first signs of a bear market in commodities too. Oil dripped below $90…and materials and energy stocks suffered, as investors bet that a slowdown would mean less demand for primary products.

France’s Le Monde chose this for its leading story today: “The Menace of Recession in the U.S. Grows Clearer.”

And now, even the candidates for the White House are taking a page from Bill Clinton’s playbook, entitled: “It’s the Economy, Stupid.” As Ed Hadas puts it: now the candidates are saying stupid things about the economy.

Mitt Romney won in Michigan, largely by telling an outrageously stupid lie. According to Le Monde, which is our source for American political insight, Romney pledged $20 billion of taxpayers’ money to revive America’s auto industry. We take this readily from Le Monde, because the French know how these tricks work; they have more experience with them. You take the money from the people who earn it, pass it out to the unions, insiders and party supporters; the auto industry goes wherever it is going anyway…but the insiders travel in style.

The voters are ready to believe anything…especially if it sounds as though someone else’s money is headed their way. Besides, everyone feels entitled to a bailout…from the lowest assembly line worker to the richest Wall Street bank.

“The source of the problem is debt,” Lord Rees-Mogg explained at Wednesday’s lunch. “There’s too much of it. There’s so much that the financial authorities and Britain and America have no choice. They have to try to bail people out. They have to inflate the debt away.”

Too much debt is precisely what you’d expect to find at the end of any credit boom. When you give money away, you have to expect that people will take it. At least, as long as they believe they will be able to pay it back.

Presently, the yield on 10-year treasury notes is lower than the consumer price inflation figure. Which means, they’re giving money away. A shrewd investor would probably sell Treasuries and buy something with a higher return – say, gold.

Gold does not typically have any return at all. While its price was fixed to the dollar – it had a rate of return of zero. Which was a good reason not to own the stuff; you’d get a better yield from almost anything. But when the dollar was tied to gold, you didn’t need to own it.

Every dog has his day. And it looks to us that the mangy cur that sits at the number 79 slot on the periodic table is having his day at last. He is worthless at producing a profit, a dividend, or an interest coupon. Most of the time he just lies around, doing nothing…like a rich man’s pet. But there are times when he earns his keep…when he is worth every pound of meat you give him: he can be one mean junkyard pooch when he has to be.

If we are right, that stocks are in a bear market…and that America is headed for a slump…the wise Markets and Money reader will stop worrying about making money and begin to fret about keeping it. He will wish he had befriended gold when the price was around $300…or $500. He will think twice about taking it in at $900. He will think even a third time on the day after gold goes down $20…as it did yesterday. (Yes, deflation hit gold too…) Still, our guess is that this gold bull market has a lot further to go.

How many of your friends own gold? Probably not many. How often do you see articles in the mainstream press about buying gold coins…or gold stocks? Almost never

The last time a major credit contraction and bear market came around, circumstances were different. A top in stock prices was reached in 1968. From there, stock prices fell while loose monetary policy goosed up consumer prices. In nominal terms, stocks held up fairly well. But in real terms, the losses were staggering – about 70% to 80%…from the top in ’68 to the bottom 14 years later. Meanwhile, gold soared…up to a high of $850. Gold and the Dow actually came within a few cents of each other in 1980 – when a single ounce of gold could have bought nearly the entire Dow.

Adjusting the gold peak to today’s dollar, it would be about $2,500. Adjusting the Dow to its ’82 low, it too would be about 2,500. Is that where the Dow is headed? Is that where the price of gold is going?

We don’t know. We don’t know the destination…but we suspect that’s the right direction.

*** “Shipping shares sink” says the London Telegraph. All of a sudden, investors are putting two and two together. A recession in the United States would be bad for the shipping business. Americans are the world’s champion consumers. One out of every five consumer sales on the globe is made to an American. It may begin as ore dug up in Western Australia…melted down in smelters fired by oil from the Mideast…or coal from Korea…and worked up into rolled steel in Guangzhou and assembled into a finished products in Shanghai. Which means, a lot of stuff has to move around in order to deliver the goods to New Jersey or Long Beach.

And if the American consumer decides he doesn’t really need a new gadget, there is suddenly a hole in a shipping container where formerly there had been paying freight.

China’s COSCO fell almost 10% on Tuesday. Pacific Basin a similar amount. And China Shipping Container Line was down 8%.

This sell-off followed two months of declines in the Baltic Dry Index, which registers freight rates for bulk commodities, mostly iron ore. The index has dropped a third from its high. And last Friday, it suffered its worst one-day fall since it was born in 1985.

*** In Britain, housing prices just showed their worst monthly decline in 17 years. “Returns plunge to all-time low,” says another headline in The Telegraph. The paper defines “returns” as capital values combined with rental income. Over the whole of ’07, returns went down 5.5%.

“Confidence in housing market drops to lowest level since 1992,” adds the Financial Times . The results come from real estate agents and have proved to be a reliable early indicator of trends. Agents report that many owners are rushing to sell property in order to avoid more losses.

Bill Bonner
for 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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5 Comments on "The Battle Rages!"

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It may sound silly but have you thought about the possibility of a great famine, Bill? Like the 7 great years then followed by 7 famine years in Egypt described in Gensis? People exchange their gold for food, then their land, and at last sold themselves as slaves. Gold is not food. Most of the times it is just sitting around Given the climate change and competition from biofuel production, famine could be a possibility when our land is overused year after year. In this rare scenario, it there any point to accumulate gold? I would value your opinions on… Read more »
Jackie, I can agree with you to an extent. Marc Faber has been advising the purchase of commodities: sugar, wheat and soybean futures, etc. And he has said that rural acreages, country property, is going to have real value in future. The battle in the years to come will perhaps be between the urban landless and the rural, samll town or suburban landowner? In any case, food prices will shoot up. But these things play out over time periods far longer than we initially believe: it might take another lifetime for what you envisage to come about. I suspect the… Read more »
Hi everyone, my Dad remembers when he was in the war in Greece when he was a kid. (My Dad was born in 1935) I just thought I’d share the story with youse all. My Dad and his family lived on a farm that grew fruit and vegies, so they always had plenty of food. My Dad said that he remembers hoardes of people from the city in Athens and flocking to the farms in the villages to try to get some food to eat. My Dad said that people from the city used to come to their house on… Read more »
I don’t think it would ever come to a food crisis. Energy costs are more of a concern. Farm land values will only rise to a point where it becomes more economically feasible to grow food in multi-storey greenhouses/hydroponics. These greenhouses can be located closer to populations centres/ports, reducing the cost of fuel to transport them. There will be a number of further advantages that a agricultural expert will be able to list. My belief is: rising cost of transportation fuel combined with erratic weather conditions will force food to be grown in controllable environments. This will also allow for… Read more »
“if global warming is to happen, rendering large tracts of productive agricultural barren, then it may lead to a thaw in the colder and inhospitable regions of the world (e.g. Siberia) and open them up for farming.” If the ice on Siberia really melt due to global warming, wouldn’t we be in more serious trouble? It mean the icebergs near North/South Poles would melt too, the sea level will rise leaving us with less land to inhabit and produce food. Is gold the best option in such as event? Presently, famine seems to be a result of resource mis-allocation between… Read more »
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