Bill Bonner

Nothing much in yesterday’s market news…so we turn to a remarkable article that appeared in MONEY magazine, proving that MONEY doesn’t know anything about money.

(MONEY Magazine) – Can you tell when a boom has turned into a bubble? One clue: When pop culture starts paying attention. The housing bubble, for example, brought both the TV show Flip This House and a rival on another network, Flip That House.

So if you own a lot of gold, you might regard a recent episode of Saturday Night Live as your first warning. In the opening skit, Bill Hader as China’s President Hu Jintao declares that Glenn Beck was right and that “my government should have bought gold. Unfortunately, all our assets were tied up in US Treasury bills.”

Back in the real world, gold is trading at about $1,400 an ounce, up from less than $500 five years ago. That’s a 23% annualized return, far outstripping the gains on stocks (1.1%) or bonds (6.1%). Fear is driving a lot of the rise.

MONEY has a point. But not a good one. When pop culture gets excited about an asset class – tech stocks in ’99 or housing and finance in ’06 – you know it’s late in a roaring party. It’s just a matter of time before the neighbors get mad and call the cops.

But the MONEY writer missed the point. Pop culture has to take the bubble asset seriously. Not as a joke.

The author admits that the magazine tried to persuade readers to dump gold last year at this time. That was a costly mistake. Gold went up nearly 30%. But it just shows how hard it is to get to the top of a bubble market.

Yeah, but gold is not in a bubble market. It’s in a bear market. It will turn into a bubble market later. So far, almost no one is at the party. Ask your friends, dear readers. Ask your relatives. How many of them own gold? Ask the cab drivers, the insurance salesmen, the auto dealers and the psychiatrists. Ask the readers of MONEY magazine. Do they old gold? Nope. It may have just completed its 11th year of a bull market, but people have still not caught on. They think there’s something weird about gold…something almost unpatriotic. It is as if you didn’t trust Ben Bernanke or something.

MONEY goes on to tell readers why they shouldn’t buy gold now.

Reason #1: “Bad economic news may not make you very much money. Good news could crush you.”

Of course, it depends on what kind of bad news. And how bad. Historically, gold is a refuge against bad news. And we can’t think of anything we’d rather have in bad news…unless the news were so darned bad that we’d rather have a farm far out in the country with a cow, a pig, a flock of chickens and an arsenal of weapons.

But how about the good news? Yes, gold would go down in a good news environment. The author talks about the ’80s and ’90s…as if a re-run of those good news years were possible. Oh boy! This fellow must have read Peter Lynch’s advice about not paying any attention to macroeconomics; he must have taken it seriously! Poor lump! You can ignore the macro weather forecast, but only when the weather is good. When the hurricanes and tornadoes start to blow, you need to know what’s going on so you can nail up the plywood and head for shelter.

What is the likelihood of a repeat of the ’80s and ’90s fair weather? Well, we’d need to begin with the high interest rates of the early Reagan years (they’re extremely low now). Then, we’d need low stock prices (they’re 1,100% higher now). We’d need relatively high inflation (CPI touched 13% in the early ’80s) rather than the 1.1% core CPI we have now. We’d need a monetary base of about $600 billion (rather than the $2.5 trillion Bernanke is building). We need total debt at about 120% of GDP, instead of 400%. And we’d need a Fed that was determined to stop inflation rather than one that was dead set on causing it!

And we’d all have to be 30 years younger, too.

All things considered, we’d gladly go back to the ’80s – if we could do it. But who could possibly believe we could? Only a writer for MONEY magazine.

Yes, if things do go back in time to the ’80s and ’90s, gold will be crushed. That’s a chance we will gladly take.

His reason # 2 is no better. “Sure, the dollar has problems. But just look at the other guys.”

We’re not sure what that is supposed to mean. The whole planet’s monetary system is based on paper currencies, with the dollar at the center of it. Yesterday, the dollar turned down against foreign currencies. But so what? We can’t tell you which of these paper currencies will shrivel up and blow away first…but they’re all going to do so. How do we know that? Well, in all modesty, we admit that we don’t know for sure. We don’t know nothin’ for sure. But every paper currency ever tried – apart from present company – has always disappeared. And none has ever survived a complete credit cycle. They’re okay on the upside. They fall apart on the downside.

We’re on the downside of the credit cycle now. Or not far from it. The dollar won’t survive. And when it begins to limp and cough badly, some investors may go to Chinese yuan or Swiss francs. Most will want to go to real money…the kind you can trust…the kind that never goes away…

…the “last man standing” in a monetary crisis – gold.

MONEY has other reasons for telling readers to stay out of gold. They are no better. And at the end of the article, as if the author were not convinced that he had made his case, he tells readers that if they must get into the yellow metal, they should do so with only 1% of their portfolio. And put the money into an option, not into the real stuff. Then, if the bet pays off, the MONEY reader would get a big payday.

Wait a minute. Picture the MONEY reader. He’s got a $200,000 portfolio. On MONEY’s advice, he keeps it fully invested in a balanced portfolio of equities. Then, he takes $2,000 and buys an option on gold. If gold goes up dramatically, his $2,000 option turns into, say, $20,000. But what has happened to the rest of his portfolio? We don’t know, but there is a good chance that either his option expires worthless – in which case, he loses his $2,000. Or, if it pays off…and gold is soaring…the rest of his portfolio could register far bigger losses than he recovers from his gold play.

Again, MONEY is missing the point. Ordinary people have no business speculating on gold. They should buy the metal as a safety device – to protect themselves from all the dumb policies and speculations of the banks and the Fed itself. The Fed is no longer doing its job. Its reserves are trash – bonds to be paid off by the federal government (which is insolvent) or by underwater homeowners. Since the Fed is derelict, people need to have their own reserves of real money. Gold, in other words.

Meanwhile, California is in the same situation as Portugal, Ireland and Spain. It can’t print its own money. So, it has to take the austerity route. Here’s the latest from Bloomberg:

California’s Brown Unveils $12.5 Billion in Spending Reductions

California Governor Jerry Brown’s budget will cut spending by $12.5 billion, including as much as a 10 percent pay reduction for most state employees, aides said.

The plan, which Brown is to unveil today, will also raise $12 billion by retaining tax increases due to expire and making other modifications. Some of the revenue will go to cities and counties as part of Brown’s plan to transfer spending authority from the state to local governments.

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 ReckoningDice 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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