A Bounce or a Bull Market?

Most of us would have to say that it was a pretty nasty year, at least from a Christmas Letter point of view. None of our children got into Harvard. No one’s team won the regional soccer championship. Nobody went to New Guinea to help the hill tribes reduce their rate of infant mortality.

And even after the success of our Trade of the Decade, we did not win a Nobel Prize in economics. We didn’t even get a polite note of congratulations. Instead, zilch. Nada. No word. Probably got lost in the mail.

But let’s back up and see where 2009 went bad.

You’ll recall the year got off to a rough start. At least, that’s what we’d call it. Wall Street collapsed. Stock prices were cut in half. And the biggest, most successful firms on Wall Street went broke, got a handout from the feds, or were merged in with other banking groups, sometimes under shotgun wedding conditions. Not one of them – not even Goldman Sachs – was left standing in its original shape. Goldman pretended to be a survivor, but we don’t know what would have happened if the feds – led by former Goldman CEO Hank Paulson – had not bailed out AIG. The insurance giant was one of Goldman’s main counterparties.

World trade fell along with Wall Street. Instead of backing up outside Long Beach container ports, waiting to unload, ships began sitting in harbors idle, waiting for someone to want to send something somewhere. Few people did. Why bother? When it got where it was going there would be no one to buy it.

The US consumer – the world’s buyer of first and last resort – was out of action. He couldn’t spend because he didn’t have any money. He couldn’t earn it and he couldn’t borrow it. He couldn’t earn more money because he lost his job. He couldn’t borrow more because his house was falling in price.

This left the whole world economy in a tight spot. For at least 50 years, the US consumer had been the little engine that could. The US economy grew because he chugged along, buying evermore stuff. The world economy grew because the foreigners were able to export huge quantities of stuff to the US market.

At first, the US consumer bought with real cash. Then, when salaries stopped rising in the ’70s, he switched to credit. By the ’00s, he was depending on credit just to get him through to the end of the month.

But the whole consumer credit bubble finally blew up in ’07-’08…and in ’09 people were in a panic about it. This gave the feds cover. Under the threat of an emergency, they were able to transfer hundreds of billions’ worth of Wall Street’s bad debts onto the taxpayers…and add to his burdens with billions more worth of boondoggle spending projects.

Of course, Dear Readers know that this just makes the situation worse. In order to spend, the feds had to borrow. Not only did this take money out of the real economy – money needed to retool – it also retarded the necessary changes themselves. Instead of permitting brain dead companies to go broke, they were kept alive – with taxpayer subsidies – so new companies couldn’t take their place.

From the bankers’ standpoint, the federal bailout was a big success. They were able to get money from the feds at near-zero cost, offload their bad investments, pay big bonuses all around (you wouldn’t want to lose talent like that!) and go back to doing what they had been doing so fatally before.

Sure enough, with so much hot air from the feds blowing into their sails, the banks made money. They were then able to pay back the government. Investors who bought the banks’ shares also profited.

After the first quarter was over, 2009 was a good year for just about all investors. You could throw dollar bills in any direction; chances were very good that you’d make money. Dollars went down. Everything else went up.

This was almost great for our Daily Reckoning readers. We had warned readers to stay away from dollars. But we also warned readers to stay away from stocks.

Yes, dear reader, we expected the bounce. We even guessed that it would take stocks back to the 10,300 level on the Dow, recovering about half of what they had lost. But we didn’t think the bounce would last this long. And the longer it goes on, the more people come to think that it is not a bounce at all…but a genuine new bull market.

Anything is possible. But we’ll stick with our Bounce Theory a while longer. Even at the March 9 low, stocks never got down to levels typical of a major bear market bottom. By our reading of things, the stock market works in broad patterns of boom and bust. We’ve had the boom, no question about it. What we’ve missed is a real bust. Stocks never became cheap.

But that brings us back to our ‘Trade of the Decade.’ For not only are we arriving at the end of a year. We’re also coming to the end of the ’00s.

Turns out, our ‘Trade of the Decade’ was a big winner. Remember, the trade was simple – sell stocks on rallies; buy gold on dips. Well, over the last 10 years, no major asset class outperformed gold. No major asset class underperformed stocks. Such a big winner was our ‘Trade of the Decade’ that Merryn Somerset Webb wrote about it in The Financial Times:

“It turned out to be a good plan. In 2000, you could buy an ounce of gold for $280 (the average price over the year). Now, it will cost you $1,125. At the time, Bonner saw what most others did not. He saw the US not as an economy carefully and cleverly managed by then Federal Reserve chairman Alan Greenspan and his passion for low interest rates, but as a massive credit bubble waiting to burst.

“He also saw the massive and growing national debt, the trade and budget deficits, and fast growth in the money supply as factors that would naturally debase the dollar over the long term. He also saw the credit bubble as global rather than peculiar to America.

“So it made sense to him to hold the only non-paper currency there is – gold. Bonner had a good decade, making returns of 400 per cent plus.”

We Daily Reckoners were also right about the economy. While Ben Bernanke saw a “Great Moderation,” we saw a Big Bubble. And while Ben Bernanke saw skillful economists maintaining an era of growth and stability, we saw a bunch of clowns cruisin’ for a bruisin’.

So where’s our picture on the cover of TIME? Not there. Instead, there is the hirsute mug of Ben Bernanke. And where’s our Nobel in economics? Instead, that went to Paul Krugman. At least Krugman saw trouble coming. Too bad his solution to it was even worse than Bernanke’s. The Fed chairman increased the nation’s monetary base by $1.2 trillion – more than all the previous Fed chairmen put together. When this didn’t do any good (except for protecting bankers’ bonuses), Krugman suggested that the Fed add $2 trillion more.

The Daily Reckoning