Yesterday, we drank coffee and waited…
To pass the time, you’ll recall, we muddled through an Edinburgh University study of former Fed chair Alan Greenspan’s confidence level and whether it could be used to forecast movements in the gold price.
Now we know the answer to a slightly different question. The lack of confidence others have in current Fed chair Ben Bernanke’s statements can certainly move the gold price… and the price of everything else, too.
“Pick your poison,” chimed in The Rude Awakening’s Greg Guenthner this morning. “Bonds. Stocks. Emerging markets. Commodities. Wherever you decide to turn this morning, you’ll see red on your screen.”
Crimson Shades of ’08
Ouch. Where does all that money go?
“Money heaven…” Dave Gonigam, our compatriot at The 5 Min. Forecast, suggests. What comes “out of thin air”… returns from whence it came.
“American investors have taken out more margin loans than ever before,” observes Floyd Norris in The New York Times. When the stock market hits consecutive highs, as it has for the past 6 months, individual investors pile in… and are willing to borrow money to speculate.
“Speculative investing has grown among retail investors,” Norris continues, “reaching levels that in the past indicated the market was getting to unsustainable levels and might be in for a fall.”
Floyd offers U.S. margin debt as a percentage of U.S. GDP as a guide:
“The first time in recent decades that total margin debt exceeded 2.25% of GDP came at the end of 1999, amid the technology stock bubble. Margin debt fell after that bubble burst, but began to rise again during the housing boom — when anecdotal evidence said some investors were using their investments to secure loans that went for down payments on homes.
“That boom in margin loans also ended badly.”
Will this time end badly? We don’t know… but we’re willing to hazard a guess.
“The rising level of debt is seen as a measure of investor confidence,” says Alexandra Scaggs in today’s Wall Street Journal, “as investors are more willing to take out debt against investments when shares are rising and they have more value in their portfolios to borrow against.
“The latest rise has been fueled by low interest rates and a 16% year-to-date stock market rally.”
Summary: The Fed pumps hot money into the banking system. Excess reserves beget margin loans. Margin loans, by definition, fuel speculation.
“In my opinion,” writes one contemplative reader following our investment thesis with some skepticism, “trying to use gold, tulips or any substance to control bankers and politicians is a cop-out. It’s like using burqas in Islam to prevent men from getting bothered by attractive women… [these speculative rallies] are part of our nature.”
Indeed, the easy money works great… until it doesn’t work anymore.
“I am sure politicians,” the reader goes on, “if really interested in devaluing the dollar with gold as a backup could figure a way to manipulate the price of gold for their own use. Isn’t this what politicians do best?”
Perhaps they ought to try it. Just a little…
Addison Wigginfor The Daily Reckoning
P.S. We followed up this piece in the Daily Reckoning email edition with an essay by Jim Rogers on the coming currency wars of the global economy. It was just one example of how we strive to give our readers both a day-to-day rundown and effective analysis of the markets at-large. If you’re not yet receiving the Daily Reckoning email edition, you’re only getting half the story. Click here to sign up, for free, right here.
In 2006, Dr. Kurt Richebächer penned an undeniably prescient article on the state of the US economy. Specifically he addressed the dangers of perpetually low interest rates and the convoluted thinking that increasing one's indebtedness could somehow lead to prosperity. Today, his warnings are as important as they were nearly eight years ago. Read on...
Addison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. He's the creator and editorial director of Agora Financial's daily 5 Min. Forecast and editorial director of The Daily Reckoning. Wiggin is the founder of Agora Entertainment, executive producer and co-writer of I.O.U.S.A., which was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival, the 2009 Critics Choice Award for Best Documentary Feature, and was also shortlisted for a 2009 Academy Award. He is the author of the companion book of the film I.O.U.S.A.and his second edition of The Demise of the Dollar, and Why it's Even Better for Your Investments was just fully revised and updated. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times Magazine, The Economist, Worth, The New York Times, The Washington Post as well as major network news programs. He also co-authored international bestsellers Financial Reckoning Day and Empire of Debt with Bill Bonner.
The US Social Security program is complete mess. The funds needed to pay these benefits are quickly drying up, and agreeable solutions are in short supply. But all is not lost... There actually IS a viable way to "save" Social Security. But as Dave Gonigam explains, you're probably not going to like it. Read on...
This summer, the worst Ebola outbreak ever recorded hit sub-Saharan Africa. But the greatest danger, as Stephen Petranek explains, is that the virus will have a chance to mutate into a form that spreads more easily. And if that happens, there will be far reaching consequences - from both a health and an investment side. Read on...
Everyone in the world has a unique talent or skill that someone else might find useful. Whether it's editing video, speaking Spanish or even eating paper, chances are there is someone out there willing to pay for what you have to offer. Today, Chris Campbell shows you one way to find those consumers and how to make your skill work for you...
For the last few years, gun enthusiasts have been concerned that the Feds would find a way to block their access to firearms. Now those fears appear to be subsiding... and so do gun sales. Greg Guenthner explains how to navigate this market in the coming months and years. Read on...
The gold mining sector is one of the most difficult areas of the market to navigate successfully. But there is money to be made here. Henry Bonner sits down with one of the giants of this industry and picks his brain about how to find winners in this market and the four things every great investment has in common. Read on...