We always look forward to this day. It is the shortest day of the year in the northern hemisphere. There’s something very cozy about the approach to it. It’s as if we were waiting for the end of the world…knowing full well it won’t happen. There’s a cheerful feeling in the streets and in the shops; the feeling of anticipation…celebration…excitement…
We’ve come to Paris where the family is gathering for Christmas. It has been snowing off and on for the last four days. Yesterday, the snow turned to rain and melted on the ground. Still, the streets glisten, reflecting holiday lights and decorations. By 4 PM it is already getting dark and shoppers rush home with the treasures. By 6 PM the cafes are full of people enjoying drinks together…saying farewell to each other for the holidays…catching up…flirting…even discussing business deals.
We warn readers that we lost our reading glasses. Dear Readers will probably notice more errors than usual!
But reading glasses or no…the reckoning must go on.
Nothing much happened in the markets on Friday. So, we’ll stop to think a bit about what has happened this year…and this decade.
You’ll recall, of course, our Trade of the Decade – buy gold on dips…sell stocks on rallies. Well, we’ve been very happy with it. But the decade is coming to an end. It’s time to thinking about the NEXT decade.
You’ll also recall that as gold went up, we became more and more concerned.
When Lehman went down, it seemed obvious that the feds were going to do the wrong thing. We were right. They did. They put up trillions of dollars to ‘rescue’ the economy. Since we knew the ‘rescue’ wouldn’t work, we guessed that they would continue pumping in money they didn’t have in order to keep trying to do what couldn’t be done. Under cover of an ’emergency’ they were able to siphon off billions of dollars for their friends on Wall Street and for their pet boondoggles. And the voters couldn’t complain…at least they were ‘doing something’ to fix the economy! This led to a very simple observation – eventually inflation (and gold) would go up even more. Because the quantity of money would increase faster than the goods and services that it could buy.
What bothered us here at Markets and Money was that this analysis was too easy and too obvious. What’s more, it was an analysis that was widely shared. We don’t like it when our points of view become fashionable. And we don’t like it when the “story” is too easy to tell and too easy to understand. When you have a storyline that everyone picks up, it almost always turns out to be wrong.
Then, the smart money began buying gold. John Paulsen made a fortune in the ’07-’08 period by correctly understanding the bubble in the financial sector and betting against it. A few months ago, he announced his next big bet: gold. He explained that gold was a ‘can’t lose’ investment. If the economy recovered, inflation would come back and push gold up. If the economy didn’t recover, the feds would continue pushing money and credit into the system, making the eventual inflation worse than ever.
John Williams came to a similar conclusion. He noted that the recovery wasn’t working…and that the feds had no choice but to continue piling up inflationary tinder. When the spark finally reaches it, he says, the result won’t be inflation, but hyperinflation of the blazing sort.
We don’t disagree. The logic seems right to us. That is what OUGHT to happen. But what bothers us is that Mr. Market is a contrary ol’ coot. He always does what he ought to do. But he rarely does it when and how you expect.
What is he up to now? Darned if we know. The dollar is going up. Is it just a bounce? Or is it a trend?
What would be the most surprising and most mischievous thing Mr. Market could do? Make the dollar more expensive!
It would undermine hopes for an export-led recovery in the US (American made goods would be less competitive…)
It would whack the carry-trade speculators hard. They borrowed cheap dollars. Now they’ll have to pay back expensive ones.
It would encourage people to save dollars rather than spend them – thus undermining a consumer-led recovery too.
It would also drop the price of gold – temporarily – shaking off the fair-weather gold buyers in advance of the next phase of the bull market.
So, ask yourself, dear reader… If you were as ornery as Mr. Market…what would you do?
for Markets and Money