03/07/11 Baltimore, Maryland – Rope a dope.
Want a winning investment strategy? Find out what the dopes are doing with their money. Do the opposite.
Some investment advisors are smart. Some aren’t. Some are mavericks with original, interesting ideas. Some just read the paper and do what everyone else is doing.
Last week, we got an advisory letter from one of the latter…one of the dopes. We read it carefully; if he were pointing investors in the same direction we are going, we’d have to change course.
But no! He urges investors to buy major US stocks and to sell gold. Gold is “overpriced” he says.
What a relief. He still has no idea what is going on; he thinks things are getting back to “normal.”
And wait. Here’s James K. Glassman, writing in The Washington Post. His piece is entitled, “The Modern Investor.”
What’s the modern investor supposed to do? Put half your money in stocks. The other half in bonds.
Wait a minute… Is this the same man who came out with “Dow 36,000” in 2000 – the year the stock market peaked out? It is? Well, great! That does it for us.
We don’t want to be a modern investor. We don’t want stocks or bonds. We’ll stick with being an old fashioned investor and stick with our program: Sell stocks on rallies; buy gold on dips.
Headline in The Financial Times on Friday:
“ECB hint on rate rise jolts markets.”
The European Fed said it might raise its key lending rate in April. The euro rose sharply…the Dow fell 88 points. Gold rose $12.
The case we’ve been making is that the ECB can’t “normalize” interest rates. Neither can the Fed. In Ireland, most people have floating rate mortgages. If rates floated up to market levels, the Irish would sink. They can’t afford higher interest payments.
The situation is the same for the Irish government. At market rates – 9% or more – it will go broke immediately. So, it looks to the ECB, the IMF, and the World Bank…and every other possible source of below-market financing…to meet its budget needs.
And the US? Ditto!
Historically, which is to say for the last two decades, the average rate of interest on US 10-year Treasury notes is about 5.7%. You’ll notice that that’s a bit more than the 3.5% the Treasury is paying now.
And then you can do the math. Nah, we’ll do it for you. Imagine that the whole of the federal debt was financed at 5.7%. The total bill would be about $800 billion per year – or more than a third of total tax receipts. Of course, much of the debt is fairly long-term…so it won’t have to be rolled over tomorrow. And much of it is held by the government itself…
But you can imagine what would happen to the bond market.
And imagine what would happen to the stock market if interest rates went back to 5.7%?
If interest rates returned to “normal” stockholders and bondholders would lose trillions of dollars.
What’s more, there’s no law that says interest rates can’t go higher than the recent average. Suppose they went to 18% – as they did at the end of the ’70s? Suppose the whole of the federal government’s debt were financed at 18%? Then, guess what, the total interest charge would be approximately equal to 100% of tax revenues.
Well, you can imagine how long that would last. Not a single minute. The whole system would fall apart long before it came to that.
But you see what we mean? Normal is out of the question. Grotesque. Weird. Strange. Extraordinary. Perverted. That’s the financial system we have. And that’s the financial situation we’ll have for a while longer…until it finally blows up.
At least, that’s our theory.
No recovery. No “back to normal.” No exit.
If the feds try to exit from their twilight zone policies they’re going to hit a bridge abutment. Markets will crash. The economy will go to pieces. Unemployment will go up. People will point fingers and accuse them of exiting “too soon.”
We saw, too, editorial opinions already stating that the ECB was “trigger happy”…and urging the Fed to avoid following its lead.
No worries on that score. Here at The Daily Reckoning we put the odds of an exit at zero.
The economy now depends on cheap money. It can’t survive without it.
Bill Bonner
for The Daily Reckoning
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 The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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Smart money is shorting silver. That is all I need to know.
I see that gas prices are still spiking here in the USA, even though Libya sends us little (or none) of their oil. I expect at any time now to see adverts in the newspapers offering to put people into long positions on gas. When you see the adverts, you know the speculators driving this up are setting the morons up for a sharp fall.
Double-dose of terrific articles today, Bill. Thanks very much.