01/25/10 Taipei, Taiwan – “It seems nothing can keep a bad market down,” we opined last week, adding, “If this bounce goes much higher, we’re going to have to review the laws of financial gravity.”
Just when we were on the verge of losing faith in those immutable laws…the market put them to the test for us, leaping off a cliff with barely a cocktail umbrella to slow its fall. The Dow Jones Industrial Average plummeted more than 4% during the past five trading days. The broader S&P 500 index faired even worse. That’s the thing about the laws of physics – they don’t require any faith. They are testable. They care not for wish thinking and make believe, dot.gov statistic padding. Central planners can fluff their partly fraudulent, wholly misleading GDP figures all they like…the truth always comes out in the end.
Unfortunately for investors (and ill-equipped base-jumpers), it’s not the fall that kills; it’s what’s at the bottom.
Readers will observe that one week does not a bear market make. But we are not one week into a bear market. Depending on the metric with which one chooses to define “bear market,” we are anywhere from two to ten years deep, arguably longer. Stocks, for instance, have handed investors negative returns over the past decade…and that’s in nominal terms. Allowing for inflation – which has cost the once-almighty greenback about one-third of its value since the turn of the century – results are far more depressing.
Home prices too have slid into the red during the last ten years, as has total employment when measured as a percentage of the workforce. Your senior correspondent, Eric Fry, provided this helpful chart illustrating as much in his essay Goldman’s Deceptive Profit Growth:
Worse still, the closer one looks at the rotten unemployment situation, the more alarming the situation appears. Addison Wiggin, our publisher here at The Daily Reckoning, drilled a little deeper into the figures…
“Here’s one unemployment number that, near as we can tell, hasn’t been massaged,” Addison mused in Friday’s 5-Minute Forecast. “Otherwise, how could it look this awful?
“One out of every 25 people in the American work force has been out of work for six months or longer. That’s a good 60% worse than the previous record set during the early-’80s ‘double dip’ recession.”
Curiously, most investors still seek shelter from the unfolding crisis in the currency of the world’s largest debtor. Stranger still, they shun gold, the safe haven investment that don’t owe nobody nuthin’. Our favorite yellow metal slid all the way down to the $1,090s per ounce last week as the greenback rallied on “safe haven” buying (though it has rebounded $10 per ounce as we write this morning, suggesting at least some support at these levels).
Short-term trends notwithstanding, unquestioning confidence in the dollar is not like an immovable law of physics. Quite the reverse, in fact. On a long enough time line, entropy wins over all matter. As the greenback hurtles through space, wasting heat along the way, its value continues to erode. Assisted by proposals to raise the national debt ceiling (the latest of which would boost it to $1.9 trillion) and record monthly Treasury auctions to keep the whole show financed, this trend toward eventual currency disintegration ought to increase in both speed and severity.
In the end, a dollar will still buy a dollar…but a dollar’s worth of anything else, including gold, will be more or less microscopic.
Joel Bowman
Joel Bowman is managing editor of The Daily Reckoning. After completing his degree in media communications and journalism in his home country of Australia, Joel moved to Baltimore to join the Agora Financial team. His keen interest in travel and macroeconomics first took him to New York where he regularly reported from Wall Street, and he now writes from and lives all over the world.
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If we cant stop the Federal Reserve ponzi, we wont survive. It’s that simple.