Desperate Times Call For Desperate Measures

The Daily Reckoning PRESENTS: More and more investors are becoming – how should we put it? – distressed in today’s unstable and uncertain economy. However, there is a silver (no pun intended) lining in all of this. The Mogambo Guru explores…

DESPERATE TIMES CALL FOR DESPERATE MEASURES

I want to talk not about the horrid and ugly world outside my window, but rather, the more beautiful world of gold, and how gold will save you from the depredations of the government and the banks. For example, David Bond at SilverMiners.com has read Salman Partners’ opinions about the proposed silver exchange traded fund, and summarizes “The average ETF-impacted ROI of the eight companies Salman looked at was 47.625 percent. It basically means for your average silver stock, it’s trading right now at about two-thirds the price it will be when the silver ETF struts its stuff.”

Apart from sheer supply and demand, Franklin Sanders, of The Moneychanger newsletter, says that the silver/gold ratio is pretty interesting from an historical perspective. “When any commodity returns to the same levels two, three, or four times during 100 years’ trading,” he writes, “I begin to suspect a pattern. And while past performance is no guarantee of future, a reasonable man would bet that from 1991’s 100:1 we are headed toward 16:1 before this bull market ends, say, 10 years from now.”

I know that he is expecting me to say something, but all these numbers swirling around and around make my head spin, and now all I can think about is how much longer it will be until lunch, and then I remember I already ate lunch, and now I am even more bewildered and depressed.

Seeing the blank expression on my face, he tries a different tack: “If gold reaches $1,250 (a modest target only five times its bear-market low) and returns to a gold/silver ratio of 16:1, silver would reach $78.80.”

Again, he pauses with that expectant look on his face as he is waiting for me to say something, but I am completely lost. I am thinking, “Gold will be up, and oil will be up, and soybeans will be up. So, $78.80 silver may be ho-hum.” I stare at him. He stares back at me. Finally he snaps, and yells at me, as I remember it, “In other words, it would outperform gold 400 times over!” Suddenly, I am galvanized! I leap to my feet! Gold is going to zoom one of these days soon, and silver is going to zoom 400 times more than that? Wow! The Greedy Side Of The Mogambo (GSOTM) says, “Let me have some that that silver action, and right now!”

Speaking of ETFs, Adam Hamilton of Zeal Intelligence implies that the recent downdraft in gold may have something to do with the gold exchange traded funds. Beyond that, he notes that there are lots of other gold ETFs around the world, and “Together all these ETFs are creating conduits for global mainstream stock investors to take a small stake in a gold-tracking asset. Small stakes times hundreds of millions of investors equals enormous amounts of capital.”

And small-time guys, it seems to me, are all out to make a lot of money quickly, as they don’t have much money to invest, their other stupid retirement plans (stocks, bonds, mutual funds, real estate, Social Security) don’t seem to be working out, and time is getting shorter and shorter. It’s “desperate times calling for desperate measures,” especially now that they are drowning in oceans of debt of all kinds. And if I don’t get some big money fast, then I am going to be in a lot of financial trouble.

So, we small-timers are dashing in and out of gold like crazed day-traders, trying to make that fast buck, churning up the markets and creating wild volatility. And with volatility like this, it will bring out the other small-time fish looking for an easy, fast buck, too. That will bring out the sharks, looking to eat the little fish.

In the middle of it all, are the central banks of the world that have either:
1.) Sold some or all of their gold
2.) Leased out some or all of their gold
3.) Both, and are horrified that gold is rising in price, which demonstrates, for all to see, that the investors of the world have lost faith in the management of the economy by the idiot banks.

And the central banks are in that swamp with the bullion banks, which borrowed the gold and sold the gold. They are still officially promising that they will return the gold to the central banks from which they borrowed it, good as new. But with gold soaring in price, that is turning out to be an impossibility. And because they pay less than 1% a year on the borrowed gold, which they sold and then used the money to buy interest-paying bonds, with rising interest rates, they are getting doubly killed! Hahaha!

Each time the price of gold goes up by another dollar, it increases the losses of the bullion banks, and every time that interest bonds prices fall by another fraction of a percent, it also increases their losses, and makes it evermore likely that the bullion banks are going to go bankrupt and central banks are going to get stiffed. So, both of these corrupt agencies want gold to go down in price, and you can bet your sweet patootie that they are doing everything they can to get gold back down in price, no matter how corrupt, slimy or illegal.

But the Mogambo is not worried that the price of gold will go down, and neither are the Chinese, as we read in the China Daily, “China is planning to set up a gold investment fund, hoping to capitalize on the surging price of the metal.”

Even as I watch this gut-wrenching fall in the price of gold, I really have to keep myself from laughing at how cheap gold and silver are, and how people who are buying them now are going to make, probably, the biggest capital gain in the history of investing, so much so that, years from now, the stories of how much money was made by those investing in gold and silver and commodities will be urban legends.

Dan Denning, the editor of Strategic Investment newsletter, hears me yammering about gold, comes out into the hall, and looks right in my eyes to tell me that he predicts that the “bull market in energy (oil, gas, electric, nuclear) was going to be one of the longest and strongest you and I would see in our investment lifetimes. The big drivers are the growth in demand from China and India.” Then he stops and looks at me with this smile on his face, like he just trumped my ace or something!

So, I am naturally thinking, as I usually do, that Mr. Denning is smart and handsome and tall and successful and happy and popular, whereas I am none of these things. I secretly hate his guts for it, but since I hate everybody, and for these exact same reasons, I quickly “get over it” and extrapolate that a bull market in energy means higher-priced energy. That means that everyone who uses energy will have higher energy costs, and higher energy costs are passed along in higher prices. Since “higher prices” is one of the definitions of inflation, then gold, which historically tracks inflation, will go up, too…which was my original point! Hey!

Indignant, I charge into Mr. Denning’s office and demand my ace back, but he acts all surprised, like he doesn’t know what I am talking about, and while he is frantically dialing the security guards on the phone, I am ransacking his office, looking for my ace that he trumped in a previous paragraph. But this not about energy, or gold, or how The Mogambo never got his ace back, but about inflation in something other than stocks, bonds or real estate. This time, it will be inflation in commodities, which includes precious metals, but particularly precious metals. You can store gold, silver and palladium forever, at zero cost, and without ever getting dirt and filthy crud all over you, as when you try to store oil, corn, or (big mistake) live hogs in the garage.

And speaking of gold, the Times of London newspaper reports, “Former Federal Reserve Chairman Alan Greenspan said that the high price of gold is due to investor concern about major geopolitical conflict.”

Greenspan was speaking “to an audience of international investors in Tokyo via video link from his apartment in New York,” which is good, because I expected those unnamed investors to laugh in utter contempt at that statement, because they knew that the price of gold went up mostly because Greenspan had devalued the dollar so much! Geopolitical tensions are just icing on the cake.

Until next week,

The Mogambo Guru
for The Daily Reckoning
February 20, 2006

Mogambo sez: As it gets weirder and weirder with each passing day, the reasons for owning gold, silver and oil get stronger and stronger with each passing day, too. If you are as weak-willed and greedy as I am, you cannot resist the temptation to make a killing in these commodities. Go ahead! Buy some! You will be glad you did. Trust me.

Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter, and a vocational exercise to heap disrespect on those who desperately deserve it.

It is raining in France this morning. It rained yesterday morning, too. The farmers all walk around with broad smiles. They had been scowling at the prospect of another dry year.

Meanwhile, back in America, today is a holiday. We can’t remember what holiday it is, but we’ve been told it is one.

So, we take advantage of the lull in market activity to check out our Five Big Es.

“Wait a minute,” skeptics will say. “What difference do these big trends make? They’re so long term you can’t really trade them, can you?”

Well, yes and no. It may be difficult to make money from the decline of Western civilization, but some of these big trends are more immediate and investment worthy than others. The important thing, from a financial point of view, is that if you’re investing against these trends, you need to be very careful.

Take the world’s Experimental money system, for example. History tells us that it will collapse some day. The dollar has lost half its value since Alan Greenspan took over at the Fed. Measured by gold, the dollar’s decline is picking up speed. Does this mean you can’t make money buying 30-year U.S. Treasury bonds yielding 5% interest? No, but you should be aware that the currency in which those bonds is quoted is likely to be worth a whole lot less in 2036 than it is today – if it exists at all!

Another example: The price of oil goes up and down. Money is made in both directions. We don’t know what the price of oil will be a year from now, but if you’re planning your life around $2-a-gallon gasoline, you might want to reconsider. Every year that goes by, there is less easily- accessed oil and more people who want it.

On the other hand, it’s hard to know when the U.S. Empire will peak out, or what it will mean to anyone…except that it might help explain some things. Americans seem eager for war, we notice. In no other country we know does talk of war find such a ready audience.

The frogs do not ask for a “guerre” against diabetes. The huns do not build a “wehrmacht” to fight hunger, drugs, or poverty. No, war is serious business in other countries. They’ve had more, and bitter experience with it. People don’t use the word ‘war’ so casually…so nonchalantly. Only America declares a jihad against everything that displeases it. And only America sends troops all over the world in pursuit of whatever foreign policy goals it fancies at the moment.

The U.S. now spends as much on “defense” as the rest of the world combined. You don’t spend that kind of money on defense – not unless you expect to take on the entire world. No, you spend the money because you are an empire. And empires must throw their weight around; otherwise they wouldn’t be empires. Americans favor war because they think war favors them. They have the best army on the planet; they can’t wait to use it.

But using military force is extremely costly. An empire has to do it, to project its own power, maintain order throughout the world, and hold onto its position as cock of the global walk. And since it has to spend the money, it has to go broke.

Meanwhile, other countries are taking advantage of the situation. While America pays for world order, Asia steps up the Exodus of power and money in its direction. “China seeking auto industry, piece by piece,” says a NY Times headline. “China plans to buy a sophisticated engine plant in Brazil,” the article explains, “take it apart, ship it to China and then put it back together again.” Bit by bit, Asia is gaining economic power. Can military power be far behind?

Finally, the Economic cycle is the one trend most likely to do most harm to investors in the short run. At today’s prices, U.S. stocks are unlikely to provide much in the way of real returns for the next 10 years or so. That is true of houses, too.

Stocks are holding at their 1997 levels. Houses are at least twice as high. But house prices seem on the verge of tumbling. In the 1990s, houses in the Los Angeles area fell nearly 30% when the aerospace industry went into a slump. People lost jobs; house prices fell. The downturn was cushioned by falling interest rates – especially after the dot.com bubble collapsed. We have full employment – albeit at low wages – but interest rates are not falling, they’re rising. And now, on about the same incomes as 10 or 20 years ago, consumers are spending twice as much on housing. One out of every five homeowners in California spends more than half his income on housing. The typical mortgage in the Bay Area is $2,867 – more than twice the typical rent of $1,324.

What will happen when the cycle turns and the ATM machine stops working in the bedroom? Will they drop their houses like dot.coms? Will the marginal buyers go back to renting? Speculators could get hit hard; house prices might drop 30% or more…and stay down.

Watch out, dear reader. Watch out – and prepare:

The Hidden Drop That Will Shock Homeowners

More news from Aussie Joel and the team at The Rude Awakening…

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Joel Bowman, reporting from Manhattan:

“I do a double take at the price tag. Surely they can’t expect people to pay this much for a simple photograph, I think to myself. And black and white no less!”

For the rest of this story, and for more market insights, see today’s issue of The Rude Awakening

————–

Bill Bonner, back in France with more views…

*** We left London at 8:00 AM and drove down to the Channel Tunnel. We boarded the train at about 10:45 and got to Calais about 30 minutes later. It was the first time we’ve taken the Channel Tunnel – in a car. You just drive onto the train and stay in your car. It’s very efficient and easy. From Calais, it was another seven-hour drive down to Ouzilly, where we are spending the next two weeks.

The drive provided us with plenty of time to talk.

“I don’t think it’s as gloomy a picture as you portray it,” began Elizabeth. “It may be true that relatively speaking the East is growing faster than the West, but they have so much distance to cover, it will be a long time before they catch up. And in so many of those countries there’s no real law and order. That’s what is really nice about the West.

“It’s not that we have factories or banks or internal combustion engines. They can imitate all those things in Shanghai. But we have something that took hundreds or thousands of years to accumulate. People call it ‘democracy,’ but it’s not really the fact that there are voters and elections…it’s the fact that you can generally trust that the land you own will stay yours and that no one will take it away from you arbitrarily, you won’t be rounded up by the police because you are a member of some group and for the most part, you won’t be shot down in some tribal gang war.

“But the globalized economy doesn’t care if you’re a democracy or not. People don’t care what system of government or society you have. They just care how good the product is, and how expensive it is.

“And now, the problem in America is that too many people have had it so easy for so long, they no longer think they really have to save money, or really learn anything. What we’re seeing is that the hourly wage earners are having trouble competing with the hourly wage earners in India and China, because they don’t really have anything to offer an employer that is any better than an hourly worker in Asia.

“And the only way they can possibly expect to earn more money is to go to school and learn something. I guess it makes sense; if the Asians has access to the same amount of capital and technology, the only reason an employer would hire an American at much higher wages would be if he had better skills – that is, if he could turn out more or better products.

“I wonder how they are going to do that.”

[Ed. Note: Manufacturing is usually the key for an economy…but America has no advantage in industrial exports anymore. Instead, we’re buying more and more from industries overseas. Worse, we’re dismantling our factories and shipping them – and our jobs – overseas too. Dr. Richebächer says that there is no way out of this mess.

*** It will be tough. Excerpt from the NY Times article: “Mr. Yin has no doubts that China can also compete with the United States. “Americans work five days a week, we in China work seven days,” he said. “Americans work eight hours a day, and we work 16 hours.”

*** Economist Paul Craig Roberts offers some more thoughts on the Exodus of power and money to the East:

“Occasionally, real information escapes the spin machine. The National
Association of Manufacturers, one of outsourcing’s greatest boosters, has just released a report: ‘U.S. Manufacturing Innovation at Risk,’ by economists Joel Popkin and Kathryn Kobe. The economists find that U.S. industry investment in research and development is not languishing after all. It just appears to be languishing, because it is rapidly being shifted overseas. The report states, ‘Funds provided for foreign-performed R&D have grown by almost 73 percent between 1999 and 2003, with a 36 percent increase in the number of firms funding foreign R&D.’

“U.S. industry is still investing in R&D after all; it is just not hiring
Americans to do the R&D. U.S. manufacturers still make things, only less and less in America with American labor. U.S. manufacturers still hire engineers, only they are foreign ones, not American ones.

“In other words, everything is fine for U.S. manufacturers. It is just their former American work force that is in the doldrums. As these Americans happen to be customers for U.S. manufacturers, U.S. brand names will gradually lose their U.S. market. U.S. household median income has fallen for the past five years. Consumer demand has been kept alive by consumers spending their savings and home equity and going deeper into debt. It is not possible for debt to forever rise faster than income.”