09/04/09 Baltimore, Maryland
What was the SEC was doing…?
But first, what the stock market and the economy are doing…
In the past two days, the price of gold has shot up more than $40. It’s now near $1,000 an ounce.
Why? We don’t know. Rumors, talk, noise…there’s plenty of that. But as for why investors are suddenly putting so much money into gold, we’ll have to wait to find out.
But should you buy gold now? The answer is simple: yes and no.
The Trade of the Decade is still buy gold/sell stocks. And the decade isn’t over. If you have US stocks, this is a good time to sell. The Dow went up 63 points yesterday – a weak bounce after several days of losses.
This is no time to hold stocks – for the reasons we outlined yesterday.
But gold? Should you buy gold and hope to get rich when gold shoots up to $3,000 an ounce? A bad idea, in our opinion. You should buy gold to protect your assets. The risk is in the paper money…because they can create as much of it as they please. And they’re under pressure now to create a lot. You buy gold as insurance against inflation, a dollar bust, a bear market in stocks and bonds, or a financial crisis. Gold is nature’s money. It is better than manmade money. Because, with gold, what you have it what you’ve got. They can’t artificially depreciate it or easily increase the quantity of it. That’s why the feds don’t like it. It won’t support their cause du jour – whether it is a war, a bailout, stimulus, health care, or whatever. Gold doesn’t cooperate with the financial engineers. That’s why it’s a good thing to hold when you think the financial engineers are making a mistake.
But our view at The Daily Reckoning headquarters is that while the engineers are making a mistake, they not very good at it even when they’re making a mistake they’re good at. Typically, they’re pretty good at causing inflation. But now the credit bubble is deflating, not inflating. It will take them a few years before they become reckless enough to move prices up again. And then, they’ll probably overshoot their objectives considerably.
In the meantime, there’s no inflation to speak of…no dollar crisis…no bond bust. So we wouldn’t expect the price of gold to soar…not just yet. That’s the big surprise – that this period of deflation will last longer than expected. Then, when it begins to seem permanent, inflation will suddenly come roaring back.
By then, most investors will have given up on gold…especially those who were speculating on it going to $3,000. It will go to $3,000, but only after speculators have dropped their positions.
So far, everything is happening just as we expected. After more than half a century of boom, we are now in a bust. People need to downsize…cut back…and live a little less large than they had in the boom years. That means…well…just what you’d expect.
Wasn’t it just yesterday that we reported that Florida was losing population? People just aren’t retiring like used to. Here’s comes the evidence:
From The New York Times comes this headline: “Older US Workers Put Retirement on Hold.”
The Times tells us that older people are continuing to work because they don’t have a choice. They can’t afford to retire. So they hold onto jobs, which is another reason it’s so hard for the unemployed to find a job. Those who have them aren’t giving them up. A Bloomberg report today, for example, tells us that more people are applying for job benefits than expected. Another tells us that millions of people are running out of benefits before they find a job.
Just what you’d expect, in other words. Here are some of the other things we expected:
1. Unemployment is still rising.
“Investors discouraged by US jobs report,” says a headline at the International Herald Tribune. To make a long story short, August was a disappointment. More jobs were lost than expected.
We don’t know how many jobs we should expect to lose. But we’re in the downhill part of the credit cycle; we’re bound to lose a lot of them.
2. Sales are falling.
That’s another thing we would expect. People have to cut back. So…they do cut back. Sales go down. That means fewer sales and fewer jobs. No point in making things, shipping them and retailing them if no one is buying them, right?
3. What else would you expect? Lower house prices? Check. Higher savings rates? Check. More bankruptcies? Check. Falling prices? Check.
Isn’t it nice when things work out “as they should?’ Check.
Now, back to the regulators. Here is Britain’s main man, Adair Turner of the Financial Services Authority, in The Wall Street Journal:
“Cash is for buffers, not for wallets,” says the headline. Mr. Turner is making the point we have made many times. The US system of capitalism has become a system where the capitalists have no capital. The big banks have too little in savings…not enough ‘buffers’ to protect them from unexpected crises. They made a fortune during the boom years – loading consumers up with debt. But instead of holding onto the money to protect themselves against emergencies, they paid it out in bonuses and salaries. Then, when the crisis came – one they caused – they were without sufficient funds.
What do you do when you’re a major bank and you are insolvent? Hey, you already know the answer. You turn to the government! Which is why Mr. Turner’s comment is both very smart and very dumb at the same time. He’s right; the banks should hold more capital. But the reason they don’t is obvious: they know the government will bail them out. They figure they don’t need much capital; the feds have plenty.
This is the problem economists call “moral hazard.” If you protect people from their own excesses they will become even more excessive. On the other hand, if they have to pay for their errors, they’ll be quicker to correct them.
Okay…well…maybe the banks still wouldn’t save enough. But that would take care of itself. If the feds didn’t intervene, the insolvent banks would go under; those left would – by definition or accident – be better run.
But let us turn to America’s equivalent of the FSA – the SEC.
Front page in The Washington Post: “The Madoff Files…A Chronicle of SEC Failure…”
According to the Post, Madoff was “astonished” that the SEC didn’t bother to verify whether he was actually doing the billions of dollars worth of trades he claimed to be doing.
In response, the SEC says it “doesn’t have the resources” necessary to keep an eye on “the exploding number of financial firms.”
And according to today’s International Herald Tribune, Senator Schumer has suggested a way for the SEC to increase its budget by 75%. The idea is to turn it into a kind of tax farmer…with the right to earn money directly from the industry it is supposed to regulate. There’s an idea for you – a very bad one. It would give the SEC more money to waste…allowing it to hire more people to meddle in the marketplace…giving investors more illusions that they are playing ‘on a level playing field’…and ultimately corrupting the financial sector even more than it already is.
Which brings us back to our original question: what was the SEC doing?
The Madoff group was very suspiciously doing billions in trades with remarkable profitability and consistency. Every trader in New York knew something was up. What was so intriguing to SEC eyes…when they weren’t keeping their eyes on Madoff?
We can tell you. Us! Your editor and his colleagues. No kidding. We’ll give you the full story on Monday. Promise.
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Well my local newspaper has a story today (Friday 9/4), claiming that “Dow climbs nearly 100 on jobs report.” The report that told me that the unemployment rate has increased once again to a level not seen since 1983. Have a great holiday weekend.
@Jason: Yes the rate increased but the job losses are less than anticipated now. It won’t be long before we see some job growth, yes, growth. The market ran as it should have today – I thought maybe even a bit more.
For months, day after day, week after week, it’s the same doomsday scenario from the same sources. It’s tiring, especially in the face of improving economic numbers and a rising market. I tire of the “ones who called it right in the first place” acting as if they can get it right this time. Doesn’t work that way. As they say, even a broken clock is right twice a day.
Where’s Harry? We need Harry to “say it ain’t so”. He probably made another fortune today.
Oh wait… Harry was here seconds before! Amazing… there he was with so much GOOD NEWS!
I think I’ll share that news with all of the unemployed I know. It’s sure to warm their hearts this winter in the homes they can no longer afford. But wait, they’ll have jobs this winter because GROWTH is coming!
Hooray for Harry! I hear they’re hiring at CNBC. They need more cheerleaders.
Thanx 2 people like BB who keep us on top of watts really going on,and at the same time were’re also prospering cuz of him,keep up the fine work ur doing 4 all of us.Let the hecklers,heckle! Cuz were’re not hide’in in a corner waiting 4 the end. And were,re also not braging how bout how good we r. “Socortes has some very profound things 2 say bout pertending 2 b something!”Were in the corner waiting 4 the trap door in the market 2 open then will switch over 2 the Short side of the street,were the real cheese cake is. Ask JR he’s a retired pro from the Short Side of the street. How sweet it is! Hey BB Hanabal Smith, from the A-Team had a saying,that went like this.”I just love when a plan comes 2gether!Don’t u? W0o…” Happy Holidays,and may we all live long an prosper! Double W0o 2 that!!!
I want some of what Harry’s having, please. C’mon, I said please!
Harry, what is there to be positive about in the job numbers?
Do you mean to tell me that because the number of new jobless for august was a lower rate of decline, i.e. 216,000 for August rather than 276,00 in July, that we are close to Job’s growth in the US? What your suggesting will require a swing of almost half million jobs just to bring employment back to where it was at the start of August, I for one will believe that the recession is over when new jobs outnumber job losses.
Just out of interest when do you expect unemployment to peak and begin to turn positive, which month year?
Hey Harry, if you go to a casino hoping not to lose more than $276 and you only lose $216 is that still a good day?
Hey Harry, if your house catches fire and it only burns 3/4 of the way down is it still a good day?
Hey Harry, if you go to work thinking you are going to get laid off and instead they only cut your hours or salary by 75% is that still a good day?
Housing bottom (check out Bloomberg for info/charts for all of this), Layoffs slowing quickly, Manufacturing up, Retail Sales bottoming, etc., etc. I trade on hours of research. Sometimes I wonder how many people here actually read reports rather than these end of the world blogs, which they are so quick to quote without question.
Bill Bonner,
You have been damning the Fed & its chairman for devaluing the dollar and risking its position as the reserve currency of the world. When the governments of the world seem to be in a race to reduce the value of their currencies, to improve their exports and make imports more expensive, why do you object? What benefit accrues to having the Reserve currency of the world when foreign individuals and governments run to it for safety and run up the vallue of the currency while we are trying to reduce the value of the currency in a competitive market?
WGF
This shake-up has been huge and has effected millions.
I personaly have lost hundreds of thousands of dollars, income property, and almost my own home.
The loses will continue.
The ONLY bright side that I see this that a shake-up like this makes all of us that have been shook-up, take a serious look at HOW we are going to go forward.
I LOVE the Stock Market and even though I have lost VERY HEAVY I have LEARNED from my mistakes and I have already begun to profit AGAIN from the Market.
As it is said in that old
Mission Impossible TV Show,
“THIS TAPE WILL SELF-DESTRUCT IN 5 SECONDS,
Good Luck JIM.
Sir Blasphemy writes: “I LOVE the Stock Market and even though I have lost VERY HEAVY I have LEARNED from my mistakes and I have already begun to profit AGAIN from the Market.”
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Hey that’s great. You’re a pip. You stick with it now, ya heah. Luck’s done smiled your way. Read, research, study, telephone, talk to key employees. Really, load up while you can.
Strains of “O! Deys A New Day Comin’” waft through the cyber space, curling to land on your lap.
The capitialist have no capital and the consumers have no more credit. I want to be optimistic like our friend Harry, but as the old girl in the commercials use to say….Where’s The Beef?
Suppose today is a part of entire future.
Today’s movement could have fraction of future movement.
I saw something analyze like this on a book.
What is this?
Brother – can you spare a dime?