Hard to believe it’s already December. What a year it has been… and 2007 will have even more in store.
The broad market appears to be firing on all cylinders. About the only thing getting sent to the wood shed is the U.S. dollar.
The action in the greenback looks exceptionally ugly. Yet if you step back and look at a monthly chart of the U.S. dollar index, we haven’t even broken the December 2004 lows.
There is more to come… much more to come. As Jesse Livermore, the greatest speculator of all time, once said: “The speculator’s greatest and truest ally is underlying conditions.” That about sums it up when it comes to the dollar — and gold.
Bloomberg columnist Chet Currier thinks equities are getting a boost from the lack of appealing alternatives – a tongue-in-cheek “benign conspiracy” of sorts. In his piece, entitled “Costly Bonds, Real Estate Make Stocks Look Good,” Currier observes:
“Yields on government bonds are just plain miserly. Ditto for corporate bonds all up and down the quality scale… Yields offered by money market mutual funds and similar short-term vehicles have flattened since the Federal Reserve stopped increasing its target rate… the housing market is undergoing a much-discussed shakeout in many parts of the country.”
Currier goes on to note the “sloshing sea of cash” that is desperate to earn a return, forcing investors to bid up everything in sight.
Meanwhile, private equity players are busy privatizing everything in sight. Raymond James strategist Jeff Saut reports, “Almost 2% of the NYSE’s entire market capitalization has been taken private… since the beginning of this year.”
Meanwhile Ben Bernanke, the Fed chair, continues to blame the “global savings glut” for this foamy tide that has lifted all boats.
One of Gentle Ben’s key directives, I suspect, is looking out for his friends. I may have shared the following excerpt with you before; even if so, it is worth sharing again. Consider this intriguing observation from portfolio manager Chris Dialynas of PIMCO:
“The Clinton and Bush administrations, as well as the Greenspan Fed, have relied upon many internal and external advisers. Without doubt, most of these advisers are of Ivy League vintage. It is particularly noteworthy to understand that the endowments of most of those universities – endowments that substantially accrue to the benefit of the respective professors – are primarily invested in very high-risk assets and high-risk strategies (as are numerous other investors in their quest for high returns in a low interest rate world). It is, consequently, of little surprise that policy advice has tended to aggressive stimulus. A disciplined, ‘take-your- medicine/rebalance-the-economy’ set of policies would most likely be detrimental to the endowments of many of this country’s leading educational institutions. As long as these institutions maintain high-risk portfolios, the policy advice from the ivory towers will be highly stimulative based upon new, bizarre economic ideas. The global imbalances will grow.”
“Professor Bernanke is a member of this fraternity… There is an extraordinary challenge for a very high-quality person. My concern is his presumed pro-reflationary bias.”
An extraordinary challenge, indeed. So challenging, in fact, that it must be asked: Why “take the medicine” at all, when one can simply wade further into the soup instead?
This is certainly the best choice from a short-term utilitarian perspective: It maximizes the distribution of happiness for an extended period of time. Look at it from Gentle Ben’s point of view, and backdoor reflation is the way to go. Your friends are happy… Wall Street is happy… the president is happy… trading partners looking a bit peaked, but are happy nonetheless… no one gets left out except those cussed Austrian types. (And there’s no satisfying them anyway, right?)
Bernanke has chosen to be a stand-up guy and keep the taps flowing for his friends. As I type these words, and as you read them, “cash” is being turned into “trash” at a steady pace. The smart money is buying with abandon because it knows the paper bits floating around today will be worth less than the paper bits floating around tomorrow.
How long can this go on? No one really knows. It’s sort of like a game of musical chairs. As long as a veneer of psychological stability is maintained – i.e., as long as cash doesn’t become trash too quickly – we could continue to see an upward trend in nominal values, even as real values stall out, or even decline.
Sooner or later, gold is going to break its 1980 highs in nominal terms. (This could easily happen in 2007.) After that, it will break its 1980 highs in inflation-adjusted terms — which will prove a much more noteworthy feat.
It’s always been sort of assumed that the conditions in which gold does this would be very ugly. Equity markets will have crashed, all Hades will have broken loose, and so on. That could certainly still be the case.
But it could also be that the Dow marches steadily higher along with gold, calm as a flat and glassy sea; if the fiction of prosperity is maintained, investors might be content to keep riding the merry-go-round, smiling like mildly sedated children.
In this scenario, everyone stays happy except the poor man in the street, who doesn’t have enough paper asset holdings to cancel out the steady rise in day-to-day living expenses. A slow debasement of the currency, to the benefit of paper asset holders, is thus a rather ingenious way to rob hundreds of millions of unaware citizens. Not all at once, of course, but in dribs and drabs… a little bit at a time.
Currier’s “benign conspiracy” is perhaps not so benign after all.
Since we’re laying on the quotes this week, here is one more from Aldous Huxley, author of the dystopian classic Brave New World. The quote is twice as old as I am, but could have been written yesterday:
“There is, of course, no reason why the new totalitarians should resemble the old. Government by clubs and firing squads, by artificial famine, mass imprisonment and mass deportation, is not only inhumane (nobody cares much about that nowadays), it is demonstrably inefficient and in an age of advanced technology, inefficiency is the sin against the Holy Ghost. A really efficient totalitarian state would be one in which the all-powerful executive of political bosses and their army of managers control a population of slaves who do not have to be coerced, because they love their servitude. To make them love it is the task assigned, in present-day totalitarian states, to ministries of propaganda, newspaper editors and schoolteachers… The most important Manhattan projects of the future will be vast government-sponsored enquiries into what the politicians and the participating scientists will call ‘the problem of happiness’ — in other words, the problem of making people love their servitude.”
The problem of happiness. Hmmm. Sound familiar? Not the most pleasant thought, I know. The world can be a depressing place at times.
But in spite of all the chicanery and deceit, there is much to be joyful for and much to be grateful for. If you see all this madness as a game – a game you are forced to play, but a game nonetheless – it becomes easier to take things less seriously. Best of all, with a little skill and determination, it is a game you can win.
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