08/19/11 Poitou, France – Wow…another whack.
Wall Street got whacked hard yesterday. It had begun to look as though things were getting back to normal. Then…whammo!
Yesterday, the Dow took a 419 point hit. Gold rose $28 to close decisively above $1,800.
We keep an eye on stocks and gold. Stocks measure the value of America’s businesses. Gold measures the value of America’s – and the world’s – money. What are these measures telling us?
That we’re on the road to Hell!
Of the two measures, gold is harder to figure out.
Stocks are obvious. America’s businesses aren’t worth 20 times earnings. They’re not worth that much because we’re in a Great Correction. And after the action of last week…and yesterday…it is becoming clear that this correction will probably last a long time.
Layoffs are increasing. Home sales are falling. And consumer prices are rising at a 6% annual rate. The New York Times:
The Philadelphia Federal Reserve Bank’s business activity index fell to minus 30.7 in August, the lowest level since March 2009 when the economy was in recession, from 3.2 in July.
That was much worse than economists’ expectations for a reading of plus 3.7. Any reading below zero indicates a contraction in the region’s manufacturing.
A second report showed sales of previously owned homes fell 3.5 percent in July, to an annual rate of 4.67 million units, the lowest in eight months. Economists had expected home resales to rise to a 4.9 million-unit pace.
Separate data from the Labor Department showed initial claims for state unemployment benefits increased 9,000, to 408,000. Another report from the department showed the Consumer Price Index increased 0.5 percent in July, the largest gain since March, after falling 0.2 percent in June.
So don’t expect most businesses to increase sales. And don’t expect profits to go up. Businesses have already done a very good job of squeezing costs in order to survive the downturn. That helps keep up profit margins. But it’s murder on the economy. One business’s costs are another business’s revenues. While profits rise, revenues fall. Not good for the long term.
The biggest single expense for most businesses is the payroll. People are expensive. So, if you’re a good businessman, you try to get rid of as many people as possible – and not hire more of them. Even when you think business is improving, you try to service the new sales with the same staff. A little more over-time…streamlining administration…making the enterprise more efficient.
In that regard, computers and modern communications technology have been helpful. They make it easy to fire people! But they don’t seem to lead to the kind of GDP boosts that you need to create jobs and increase standards of living.
That’s why the 10 million or so jobs that disappeared in this downturn won’t come back. And it’s why the real unemployment rate in the US hasn’t been this high since the Great Depression.
If that weren’t enough, there are other reasons to expect stock prices to go down. The main reason is because that’s what stock prices do. They go up. Then, they go down. Sure, they have a lot of reasons. But people usually only find the ‘reasons’ after the fact. Like commentators and analysts this morning…struggling to find the ‘reasons’ for yesterday’s 419-point drop.
The only thing we really know is that markets go up and down. And yesterday, Mr. Market wanted to go down.
Here at The Daily Reckoning we’ve been expecting lower stock prices for a long time. Wall Street has never completed its ‘rendezvous with disaster’ that began in January 2000. As we see it, stocks began a bear market almost 12 years ago, after an 18-year bull market. But the bear market was never allowed to fully express itself. Instead, the feds came in – like rap stars into a late-night party. They turned up the music. They poured drinks for everyone. They brought drugs and hookers. And pretty soon, the party was going louder and wilder than ever.
But now the party’s over. The feds are still opening bottles. But nobody’s drinking.
The bear market is back. By our reckoning, the Dow should fall below 5,000 before it is over. Most likely, it will not be a short, quick collapse. Instead, it will be a long battle…stretched over many years…with the feds fighting over every inch.
Anyhow, that’s our story. That’s been our story for many years. Seeing no reason to change it, we’ll stick with it.
But what about gold? There…well, we admit to a certain feeling of ‘I told you so.’ But it was one thing to tell Dear Readers to buy gold when it was selling for $300. It’s another thing to suggest it at $1,800. Gold was a steal at $300. At $1,800, it’s probably close to fair value.
That doesn’t mean it won’t go higher. In fact, we think it will go much higher. But it’s a rare bull market that makes it so easy for investors. But gold is harder to figure out.
If the economy is really in a Great Correction…
…and if it will be in a funk for years…a Japan-like slump…
…and if investors are fleeing stocks and buying dollars and dollar-based bonds…
…then, why is gold going up?
Are investors really looking ahead to the feds’ reaction to a double-dip recession? Are they thinking that Bernanke et al will panic…and print more money? Are they worried about higher rates of inflation?
Or maybe investors figure – with interest rates so low – they might as well hold their money in gold. Who knows what could happen? Who knows what the feds will do? Who knows anything?
At least gold is something you know won’t go away.
Possibly. But we don’t think investors are that smart. Or that forward-looking.
Zombie, zombie in the night…
Ah, modern technology comes to the aid of looters. Right in our home state, too. Here’s the report:
(CNN) – A “flash mob” believed to have been organized on the Internet robbed a Maryland convenience store in less than a minute, police said Tuesday, and now authorities are using the same tool to identify participants in the crime.
Surveillance video shows a couple of teens walking into the Germantown 7-Eleven store Saturday at 1:47 a.m. Then, in a matter of seconds, dozens more young people entered and grabbed items from store shelves and coolers. Police said the teens left the store together, without paying for anything.
“At least 28 different individuals” have been confirmed on the video, Capt. Paul Starks told CNN Tuesday.
Although investigators have said they ‘“can’t confirm how this (robbery) was organized,” Starks does believe the Internet was involved.
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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Looks like today’s commentary was out of date quicker than the electrons could make their way through the internet. $1800 is no longer about what gold is worth, make that $1852.60(!)
I suspect we’ll get to $2,300 before the end of the year, followed by some sort of correction. But the real story today was silver, having kept its uptrend intact in spite of the big sell-off in early May, it now looks poised to blow through $50 to unimaginable levels in the days ahead.
i surely do love silver
i surely do love gold
they’ll be as they are trusted now
and since the days of old
http://thepeakoilpoet.blogspot.com/2011/08/i-surely-do-love-silver.html
What if the crash of 2000 “that wasn’t”, isn’t the real baseline of when the correction should have begun? What if the real beginning of the correction was October 1987 and we’re still just beating around the bush waiting for that correction to run its course? If you look at a 40 year graph of the S&P 500 the notion becomes much more plausible than you might think.
Bill,
Owning gold is protection against a “mad max” scenario. Owning “cash” or “Treasuries” is protection against deflation.
That is why it is so confusing.
If I had $10 million dollars as a rich person. It would be perfectly rational for me to put $5 million in owning “physical” gold (not paper gold) and $5 million in treasuries even if I expect deflation (that means even the gold price will go down).
The problem with deflation and ultimate hyper-deflation is that the “state” and the “banking system” may not survive if a “mad max scenario” ensues due to hyper-deflation.
The “mad max scenario” is total chaos or the hyper-deflation turns to hyperinflation (if the debtors win the game!) and a new currency is issued.
Mansoor
Gold valuation in dollars will reach 250 dollars an ounce within the next 40 weeks as deflation becomes obvious with the 22 and 23 August 2011 Wilshire and global equity nonlinear crash.
Gold is following a 9/24/13 year fractal that started in 1968. The third fractal’s 13 years are composed of two subfractals: 21/52/42 month fractals and 7/16/14 month fractals with Aug 2011 the third fractal’s 14th month.
Asset valuations are the summation of the global money supply, a function of money and debt. The money supply, notably debt is undergoing nonlinear decay.
Remarkably, the macroeconomic asset valuation growth and decay patterns, the product of the growing or decay money supply of the system, have consistent and predictable characteristics, elevating the debt-money-asset system of macroeconomics to the level of a science equivalent to physics, chemistry, and biology.
Three reasons why gold and silver is held by me.First,the coming collapse of the dollar,second,the inevitable violence and Civil disobedience on the horizon,and third,the 800 pound gorilla that no one wants to mention,a terrorist nuclear attack on a major city. The US is a Nation that lives in the delusion that it is invulnerable.One attack,and this Nation will be turned into Dante’s inferno.
i have to congratulate you americans
hillay clinton have just appointed maud olofsson from sweden the former ( very soon) partyleader of centerpartiet as an adviser hahahaahah
Bill. A better question would be: “Why did Capitalism Fail?”
Capitalism failed because of deregulation.
Without rules and regulations the lowest common denominator always prevails. The criminal willing to stoop the lowest wins at every game with no rules. That’s exactly what has happened repeatedly to varying degrees for the past two hundred years. Without enforced regulations, ‘capitalism’ is just another word for organized crime.
Deregulation of big business combined with non-enforcement, and under-funding, of white-collar criminal investigation has created a type of reverse evolution in America. Instead of survival of the fittest we have inadvertently created a system that elevates the scum from the bottom of the soles of society to the very peaks of the ruling class.
I know that many reflexively puke when a sports metaphor is used, but it is highly instructive in the fall of capitalism. Imagine a football game (American or English) where only one team is forced to abide by the rules, while the owner of the other team also owns the refs, the stadium, and the media. Imagine the team that plays by the rules have players ALL of the caliber of Pele, Beckham, or (the greatest quarterback of all-time) John Elway. Now imagine the other team fouling the hell out of our all-star team, cheating like crazy, eye gouging, well placed blows to the crotch, etc., and therefore ultimately defeating the all-time greats who were penalized heavily any time they retaliated. You have just witnessed in two hours a model of 200 years of de-regulated capitalism.
The would-be “Lords of the Earth” like to think that instead of being born on the third base of privilege and trotting to Home base under the supervision and protection of bought and sold umpires, they hit a triple and ran to home. They desperately want to believe that in spite of warping (or discarding) the rules their “victory” was actually a victory.
Capitalism failed because it became a lawless capital crime.
Woop Woop!
Good thing I’m long gold and short on the market.
They government will certainly seize all of your gold – you do know this, right?
MAYBE if it’s overseas and only maybe then, might the government not be able to seize it but I wouldn’t count on it.
Just sayin’.
My advice: Do what Soros is doing. he closed his hedhe fund up because he knows now is the time. But he’s doing SOMETHING with his knot. This villain is BEHIND much of what’s going on.
Gold is probably close to fair value…
Probably true: so why buy something that is close to fair market value? Why not buy something you can use: like cans of soup, power tools, electric wire, etc. These barterable/readily usable goods will be much cheaper to own today, store today, and use tomorrow for your own needs or to trade for goods you don’t have.
Reasons I won’t buy gold:
1) Right now, it’s overpriced and there is no guarantee it will continue to go up.
2) Potential federal confiscation.
3) Onerous taxation on “profits” (28% last I checked).
4) Can’t eat it.
5) Can’t drink it.
6) Not easy to transport.
7) Not easy to convert to a form of money that everyone can agree on at a certain value. I.E. you’re going to buy groceries with gold…the guy at Wal-Mart can’t usually count change correctly with a cash register. Think he’s really going to do a good job authenticating the purity, weight, and current exchange value of your gold???
9) Can’t wear it as clothing (jewelry doesn’t count, and also makes # 8 much more likely)
I can’t think of # 10 right now, but do we really need a # 10 after those first 9 are truly brought into consideration?
Better investments:
1) Land with high agricultural potential.
2) Fresh water sources. Wells, springs, rivers, etc.
3) Generators. People are always going to need / want electricity.
4) Hunting / fishing equipment (no, not a bass boat, something that actually makes it easy to catch local food).
5) A green house in your backyard to grow food year round.
6) A few small animals to provide meat / milk.
The city slickers might not like some of those ideas, but if you really think your gold is going to save you when all Heck breaks loose in the city…oh, man. Good luck with that.
Hi Bill, great article on the zombies the other day. Finally they are coming out to play! Have you seen that film Dawn of the Dead by the way? Best film ever.
I too have been cogitating on what I call the gold and bond market paradox. Why are these two contrary markets simultaneously rising whilst everything else (stocks and commodities) are falling? I think I may have explained it in a recent blog entry if you are interested:
http://sicsemperliberalis.wordpress.com/2011/08/09/the-gold-and-bond-market-paradox/