Waiting Till the Price is Right

Dow…3 ounces!

Our old friend Ronan McMahon has been keeping us up to date. Ireland is going broke, he says.

The Irish foolishly borrowed too much money during the boom years. The banks foolishly lent too much money. And then the government foolishly said it would bail them out…even though the total exposure was four times Irish GDP. Yesterday, they foolishly took over Ireland’s biggest bank, Anglo Irish. And now they’re going broke. The losses are probably more than they can handle.

But it’s been worth it. What a ride the Irish have had! They were the poorest people in Western Europe…then, they became the richest people in Western Europe. And now they’re back to being the poorest…

It would have been better if they had had a better sense of architecture during the fat years… They wouldn’t have blemished the island with so many ugly buildings. Alas, the Irish will have to live with the stain of their prosperous years for generations…

Of course, the same could be said for the USA. All those wretched suburbs and condos… All those shopping malls… All those parking lots…

Not to mention all that debt!

Yes, we will live with the bubble rubbish and residue for many years.

But Ronan said something interesting. We were discussing Irish property. There’s a lot of it for sale. Buyers can practically name their own prices. But the choice properties are still in the hands of the insiders. When they see something go down to where it is a bargain price…they snap it up.

This signals to us that the whole process of debt destruction still has a long way to go. The assets still have appeal. Investors still think they can make money by buying low and selling high. In other words, they still think there is a bias towards the upside.

They haven’t given up. They’re still eager to buy – at the right price.

But just wait. When the end comes…they won’t be interested at any price. Some of the finest properties will go “no bid.” Then, the players…the insiders…the smart money will all be convinced that property is a losing proposition…and that you will never make money by buying real estate – because it always goes down. Then, when the insiders have given up. Then, and only then, can you expect to make any real money.

It’s no different in the stock market. What investors want now are bargains. They think that they can make money, by buying at the right price. Then, as the “recovery” comes their stocks will go up. They think the bias of the stock market is still upwards.

Certain well-known investors – for whom we have an enormous lack of respect – claim that stock prices always go up “in the long run.” These super bulls are forever predicting “Dow 36,000” or “Dow 100,000.” And they’ll probably be right. Someday, the Dow will probably hit 100,000. And you’ll be able to read about it in your $50 newspaper while you’re drinking your $100 cup of coffee.

This week, Jeffrey Hirsch predicted a Dow over 38,000 by 2025 – a gain of about 5% per annum, without dividends. Maybe he’ll be right too.

But stocks don’t really always go up. Au contraire, every stock you buy will eventually go to zero. Your only hope is that you expire worthless before it does.

As for the lot of them, remember that most of their profits and share price growth is an illusion. Let’s say you “buy the market.” You just get an ETF representing the index…or simply buy the Dow stocks. The companies make money. Their share prices go up.

But wait. Where do their revenues come from? Where do their profits come from? Aren’t they just taking money from each other…and from other businesses and consumers (who are also their employees…that is, a cost center)? How can they ALL go up? They can’t really. They can only grow as fast as the economy itself. Competition keeps profit margins with a fairly narrow band. So, their share of the economy is limited. And since the economy is quoted in money…they can’t really go up more than money itself.

In other words, if there were just $100 in a town, and the businesses in the town were worth half that amount, they would be worth $50. Total. No matter how much progress the town made, as long as the amount of money stayed constant, they would still only be worth $50 (though that money could be worth much, much more in terms of what it would buy).

Gold is stable money. It’s the closest thing we have to a fixed monetary unit. The supply increases, but only about as fast as the rest of the economy increases. So, over thousands of years its “price” – in terms of how much you could exchange in for – has been more or less constant.

If stocks were really becoming more valuable you’d expect that they would become more valuable against a fixed quantity of real money – gold. But look at what has happened. At the beginning of the 20th century, the Dow was 66 and an ounce of gold was about $20. “A $20 gold piece” was a unit of exchange. So it took a bit more than 3 ounces of gold to buy the Dow. Then, at the bottom of the bear market in stocks in the ’30s, again it took about 3 ounces of gold to buy the Dow. And again, at the bottom of the bear market in ’82 you could buy the Dow for less than 3 ounces. At one point, a single ounce would do it.

Currently, it takes a bit more than 8 ounces to buy the Dow. Hmm… You could get the Dow for about 8 ounces of gold in the ’10s…again in the ’20s…the ’30s…the ’40s…the ’50s…’70s…’80s…and now finally, once again, in 2010.

And that number is probably going down. The bear market in stocks still hasn’t reached its bottom. When it does, you’ll almost certainly be able to buy the Dow for 3 ounces of gold.

Stocks for the long run? Ha ha….

We’re on zombie watch…

They’re everywhere…but especially here in the Washington metropolitan area. Zombies get their money from the government – directly or indirectly. Or some other perk…some edge…some benefit.

Just open The Washington Post. Skip the international news, which is nothing but humbug and claptrap…usually having to do with Iraq, Afghanistan or Israel.

Go to the local news.

Let’s see…how about this: a little item. Martena Clinton made the news after her car was towed by the Secret Service and then lost. She had parked in a handicapped section. But wait…what’s this? Ms. Clinton isn’t handicapped. She’s not a half-wit. She’s not lame. In fact, in the photo, she looks pretty good.

So what’s she doing in the gimpy parking section? Well, her husband is said to be mobility challenged.

Special parking spaces seemed like a nice gesture when they were originally introduced. But the zombies quickly took advantage of them. Now, they’re used by friends and families of an invalid…often passed down from one generation to the next after the cripple dies.

That’s how zombies do it. They take advantage of an easily-corruptible system. Government salaries and benefits, for example, are typically about 30% better than those in the private sector.

You can see the difference here in Bethesda. The houses are all tarted up. The cars are all new and expensive. The streets and restaurants are full. Everything is modern, rich….

The editor of US News & World Report talks of a “great divide” in the US…those who have government salaries…and the rest of us. People who work for government – or otherwise are supported by the government – have made steady income gains over the last 30 years. Others have not. Government employee labor unions have grown while others have declined.

Being a zombie pays. And it’s likely to pay even better in the future. Because now zombies control the White House (it was the zombie states…those that owed the most money…and those that get most money from the government) that elected Barack Obama. They control the Congress too. Zombies have the time (what else do they have to do?) and the resources (often, direct contact with the government itself) to get involved in elections. They have a motive too – they can pass legislation putting more money in zombie hands. Military contractors, tax lawyers, “educators” and the handicapped – all have a keen interest in elections. The rest of us have our work, business, families, careers to attend to. Not that every tax lawyer is a chiseler, every military contractor is a cheat, and every person who can’t walk is a malingerer – far from it. But they have to be doubly honest and independent to avoid the corrupting gravity of Planet Zombie.


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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2 Comments on "Waiting Till the Price is Right"

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“And that number is probably going down. The bear market in stocks still hasn’t reached its bottom. When it does, you’ll almost certainly be able to buy the Dow for 3 ounces of gold.”

That will make a case for $1700USD/oz +/- 10% for Gold by my way of thinking of where we are headed for the DOW.. 5000 +/- 10%

Maybe it will go a little lower and be 2 times $2500USD/oz +/-

Brian K

quote from ‘Waiting till the price is right’
‘Gold is stable money. It’s the closest thing we have to a fixed monetary unit. The supply increases, but only about as fast as the rest of the economy increases.’

I know this is stretching limits but what happens when all the gold is extracted. Are you saying the global economy won’t be able to grow any more? If your peak minerals articles are accurate the supply of gold is very finite.

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