A Pile-Up on the World's Financial Highway

I will wear my pant-legs rolled
And walk along the beach…
Then, I will drown myself in the pool

The terrible pile-up on the world’s financial highway has left us all in shock. We check to see if our fingers move. We look in the rear-view mirror to see if there is blood on our face. And then we crawl out of the car. Thank God, we can still walk! No broken bones.

What’s our name? Count back from 10…. Okay, no brain damage.

But oh…look at our ride! The car is totaled. There’s only about $100 trillion worth of wealth in the world. At least, that’s the figure we read recently. We’ve also read that the total loss of wealth from the global financial crisis could be as much as $50 trillion. That was Rupert Murdoch’s estimate. And he’s probably not far off. Half the world’s stock market value. Twenty percent of property values. Trillions in derivatives, SIVs, CDOs and IOUs. It adds up fast.

But wait…what luck!…we’re still in one piece. And there, on the side of the road, there’s still a gas station…a pizza shop…a mall. Life goes on. Most of the wealth that was lost was only imaginary wealth – confections spun out of sugary dreams. Put a little water on them and the melt away… But the real wealth is still there…more or less.

So cheer up. It’s not so bad!

Those who feared the ‘end of the world’ can relax. A financial crack-up doesn’t mean that real assets disappear. Houses are still right where they were before the crack-up began. Factories are there too – with their assembly lines and heavy machinery. Every backhoe and tractor-trailer is still just as ready-for-service as it was before the crisis began.

So what’s the problem?

Who said there was a problem? We don’t have a problem…do you have a problem?

It’s just that the world economy is going through a major re-examination of its life. It was shaken up by the accident. Not just physically… emotionally too. It stared death in the face – or so it explained to friends, a bit too often and too dramatically, after the crash. So, it’s decided to take a long vacation… After many years of working day in and day out…buying, selling, investing, speculating, leveraging, borrowing…whew!…it is ready for a rest. So, it’s taking some time off. Thinking about things…re-evaluating things.

‘What am I really doing with my life?’ it wants to know.

‘Is this the right way to go?’ ‘Does this take me where I want to be? Maybe I should have gone to law school like my mom wanted.’

‘And my marriage…what the heck is going on there? Evelyn was so nice and sweet when I married her. Now, all she thinks about is redecorating the house…and hanging out with her friends. And look what she did to her face! She’s got those cardboard lips that never crack a smile… And now, she’s mad at me because I lost money in the worldwide financial meltdown. But who didn’t?’

While all this deep reflection is going on, the world’s income is falling rapidly. Businesses are closing their doors. Working stiffs are working a lot less. Machines are slowing down. The capitalists are just trying to hold on to what they’ve got – forget about making more.

On Friday, the Dow fell another 100 points. It’s headed down to the 3,000-5,000 level. Could there be a big rally first? Could it fall like a stone…even lower than 3,000? You bet.

And look at what’s going on with gold – up $25 on Friday to close over $1,000! The Dow is on it way to 3,000…and so is gold. Remember our ‘Trade of the Decade?’ Never mind…of course you do. Buy gold on dips…sell stocks on rallies. So far, so good…and only 10 1/2 months left to go.

(More on gold, below…)

Gradually, a stark and uncomfortable realization is setting in. It’s like a middle-aged man who suddenly realizes he’s wasted the best years of his life…

The world’s enterprises are set up for an economy that no longer exists! Factories were built…along with a whole chain of production, delivery, and sales…to provide too many things to too many people who can’t pay for them.

And now, in these moments of soul searching…of walking along the beach and hearing the seagulls speaking each to each…comes another realization: almost nothing is worth as much as it used to be. Take IOUs from people who can’t pay their debts, for example. Houses lived in by people who don’t have jobs. Shares in companies that sell stuff to people who can’t afford to buy it. The ‘wealth’ that these things represented was mostly imaginary. And now that imaginary wealth is disappearing – poof!

Dear reader, we are in a period of discovery – ‘price discovery,’ as economists call it. It’s a time of growing self-awareness…of dawning reality. At moments…it is terrifying. For all of a sudden, it occurs to us that we have been dunderheads. We have paid too much…saved too little…

We have misspent our time…mislaid our fortune…and misunderstood everything…

…and now, terrible truth strikes us like a Mac truck. We have been rear-ended, so to speak. Our life is a wreck…a wasted opportunity…a dead end.

Is it too late to start a new one? A new career…maybe as a bankruptcy lawyer. And a new love in our life – maybe with one of these young surfer bunnies from California. Or perhaps a local girl…?

*** Our intrepid correspondent, Byron King, with his thoughts on the recent gold rally:

“I’m bullish on gold. Actually, I think that gold could go to $3,000 per ounce in the next 30 months. Really bullish.

“There’s no fever like gold fever. Right now, we are on the cusp of a great run-up in gold. I believe that there’s still time to get into some excellent stocks. The gold miners have room to grow. They should benefit from rising gold prices. And we might see higher dividends down the road.

“Is there a caution? Always. Could gold prices tumble? Well, yes. That would hurt us. But for gold prices to tumble would take a lot of investor dishoarding. That is, people would have to hit the ‘sell’ button en masse. And that would require some tectonic shifts in worldwide tax, fiscal and monetary policies by a host of socialist-leaning governments. For the moment, I think we’re safe from any counterrevolutionary antics like that. As Charles de Gaulle once noted, ‘People get the history that they deserve.’”

*** Colleague Manraag Singh brings us up to date on what’s going in the monetary experiment known as Zimbabwe:

“The Cato Institute estimates Zimbabwe’s inflation rate at 89.7 sextillion percent. That is 89.7 million million million, or twenty-one zeroes behind the number.

“Putting that into perspective, the official count of stars in the universe is about 70 sextillion, apparently…

“On the plus side, Zimbabwe’s share index is expected to double this year now that are re-opening it with trading in US dollars…

“Gideon Gono had shut it down about three months ago after accusing some traders of using fraudulent cheques worth ‘60 hexillion’ Zimbabwe dollars to buy shares. I haven’t been able to find out how much a hexillion is…”

The Daily Reckoning