Still Going Strong

08/09/11 Poitou, France –

Morning’s at seven;
The hill-side’s dew-pearled;
The lark’s on the wing;
The snail’s on the thorn;
God’s in his Heaven—
All’s right with the world!

Robert Browning

God is in his heaven.  Gold is on its throne.  And all’s right with the world.

But wait…all is wrong with the world.  We get up in the morning.  We go to our portable computer.  We look at what is going on.

Normally, there would be no question about it.  We would read Thomas L. Friedman in the New York Times and get such a stitch in our side, it threatened to rupture our insides.  Or, we could listen to a speech by Joe Biden; what a hoot!  And, for more serious laughs, we could turn to Paul Krugman or Ben Bernanke.

Yesterday’s news brought a smile too…but it was a wry, almost worried, smile.

The stock market buckled Monday under the weight of a crisis in Europe and danger of recession at home. Reeling from a downgrade of American debt, the Dow Jones industrials plunged 634 points.

It was the worst day for the market since the financial crisis in the fall of 2008 and extended Wall Street’s sudden, sharp decline. Stocks have lost 15 percent of their value in just two and a half weeks.

Too many things are going wrong…all at once.   Leaders are getting desperate.  Staying up late.  Organizing conference calls.  Watch out.

But we Dear Readers should be happy.   We bought gold 11 years ago.  And for the last decade our investment approach has been simple – buy gold on dips, sell stocks on rallies.  The stock market has been rallying since March ’09, so we’ve had plenty of chance to sell stocks.  And gold hasn’t missed a step.  Up every year.  No matter when we bought, it went up.  Nothing has done better.

Stocks have been losers.  Real estate has gone down.  The economy sucks.  Even Warren Buffett has lost money; he bought $3.6 billion worth of stock in the last quarter…his biggest bet since ’08.

But gold is, well, amazing.   JP Morgan strategists say it’s going to $2,500 by the end of the year.  That will be almost 10 times what we paid for it in 1999.

The price of gold rose an unbelievable $61 yesterday to a new record of $1,715.    The Dow fell 634 points.   Oil is barely over $80.

But get this…US 10-year Treasury debt has gone up too.  Investors are taking money out of the stock market to flee what they consider riskier investments.  As debt prices rise, yields fall.  And now the US 10-year note yields all of 2.34%.

So, there’s something to laugh about.  And we can laugh at ourselves too.  We thought it was absurd and appalling when lenders were willing to give their money to the US – the world’s biggest debtor – for 10 years, in expectation of a yield of only 3%.  After all, inflation is at least that much.  Probably twice as much.  Why would an investor willingly set himself up for losses?

But if the 10-year note was a bad deal at 3%, it is an even worse deal at 2.34%…and the people who bought it are richer for ignoring our advice.

Still, we’ll stick with gold.  Gold has gone up too.  But for completely different reasons.  You buy US Treasuries when you have faith in the system and the people running it.  You buy gold when you don’t.

T-notes have gone up because the lumpeninvestoriat seeks to protect itself  from natural market forces.  It looks for safety in the world’s ersatz reserve currency – the dollar.  As Alan Greenspan said, the US won’t default.  It can always print more dollars!

Gold has gone up because smart people know that there is only one money they can really trust.  There is only one currency that won’t disappear.  And there is only one financial reserve that will hold up to a real crisis.

That is gold.  Gold is back on its throne – as the world’s One True Money.  Wise governments, wise investors, and wise families are buying it to protect themselves from the jackasses who run the world’s money system.

A few days ago, Ben Bernanke was asked about gold.  Ron Paul asked him if he considered it money. ‘No,’ he said.  Gold was just a commodity.  Like bauxite or guano.

But now commodities are tumbling.  If gold were just a commodity, it should be going down with copper and lead.  Instead it is soaring.

Why is that, Ben?

Ha, ha, ha…so you see…the financial world is fun again.  Yes, England is smoking from riots.  Europe is on the edge of a complete financial meltdown.  And America is sinking into depression.  But we can still laugh at the morons who rule us.  We can guffaw and snicker at the people who are supposed to know what they are doing.  We can curl up in spasms of mirth at the knuckleheads who run the world’s financial institutions…

Yes, the G-7 is on the case.  The International Herald Tribune says they are “Groping for ways to calm seething markets…”  Too bad Dominique Strauss Kahn isn’t there.  He’s a good groper.

And more thoughts…

All eyes are on the Fed.  It is the guardian of the dollar…and keeper of the world’s largest economy.  Now, with the markets crashing, people turn to Ben Bernanke as they would to the captain of a sinking ship.

“Save us!  Do something!  Help!”

Alas, Cap’n Ben was on deck of the QEII when it hit rough seas.  It was he who lifted anchor and ordered $600 billion of more sail…rather than battening down the hatches until the storm blew over.   It was he who ordered zero interest rates.   And it was he who filled the Fed’s decks with debt.

What will he do now?  Netscape News reports:

“I don’t think the Fed can stand by,” said Mark Zandi, chief economist at Moody’s Analytics. “This is a crisis of confidence and the Fed needs to shore up confidence.”

On June 30, the Fed ended a $600 billion bond buying program, its second such effort, but it pledged to keep its holdings of those bonds constant until the economy started to improve.

Many investors would like to see the Fed launch a third round of bond buying. But the program has triggered a sharp debate inside the Fed about whether further bond purchases could set the stage for inflation down the road.

You bet they would.  Because depression-like conditions threaten the US.  Here’s the New York Times on the subject:

Second Recession in US Could be Worse Then First

If the economy falls back into recession, as many economists are now warning, the bloodletting could be a lot more painful than the last time around.

Given the tumult of the Great Recession, this may be hard to believe. But the economy is much weaker than it was at the outset of the last recession in December 2007, with most major measures of economic health — including jobs, incomes, output and industrial production — worse today than they were back then. And growth has been so weak that almost no ground has been recouped, even though a recovery technically started in June 2009.

“It would be disastrous if we entered into a recession at this stage, given that we haven’t yet made up for the last recession,” said Conrad DeQuadros, senior economist at RDQ Economics.

Regards,

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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