Awaiting a Fix of the Bubble Mistakes
Gold rose $15 yesterday. What to make of it?
Perhaps it was because Ben Bernanke’s extended his “extended period” pledge? He said, in effect, if this economy doesn’t come out of its slump, it won’t be his fault. He’ll keep monetary policy as loose as possible for as long as possible. Not that we had any doubt about it. He has a theory. It’s a bad theory, but it’s all he has. And it tells him that you fight a depression with loose money.
So, what do you expect? Interest rates will remain artificially low as long as Bernanke can get away with it…or until the depression ends…whichever comes sooner. That said, he hardly has to lift a finger. Judging from the last auction of short-term Treasury debt, lenders can’t think of anything better to do with their money than to give it to the government – in return for nothing. The last auction produced a yield of zero on one-month loans.
We went to visit a pair of clever Swiss bankers yesterday. These fellows manage money for clients all over the world. What do they think? They were focused on stocks:
“This year, the people who made the most money were those who were most heavily invested in equities. And if the patterns of the past hold up, 2010 will be a good year for equities too. Whenever the 10-year performance goes close to zero, the next few years tend to be very good for stock market investors. In fact, there has never been an exception, going all the way back to 1881. Last year was one of the worst years in stock market history. This has been one of the best. And next year should be one of the best too.”
He handed us a chart to illustrate his point. It shows the 10-year performance of the stock market. We see that very rarely are stock market returns negative over a 10-year period. In fact, there are only two worth mentioning. One was in the ’30s, when in August ’39 stocks had returned MINUS 4.68% for the previous ten years. The other major losing period came in February of this year, when investors had gotten an average annual return of -3.43% since 1999.
The message seems simple enough. When the market turns down sharply…expect a sharp turn-up to follow. But studying the chart more carefully, we see two things. First, we see sloppiness in the figures. The thirties pattern was not a clean break and then a clean bounce…but a series of breaks and bounces. In fact, investors endured 10 years of losses running up to ’30…and then more 10-year periods of losses in the years ’37, ’38, ’39, and ’40.
The other thing we notice is that an investor could have made a lot of money in the ’30s…if he was lucky. The year 1933 was one of the best years ever. Of course, the investor was well advised to take his gains off the table. Prices slipped in ’34…bounced…and then fell apart. By the end of the ’40s, the poor long-term, buy and hold investor had not made a penny in two decades of investing. This pattern, by the way, is not so different from what the Japanese have suffered during the last 20 years. They’ve seen good times. They’ve seen bad times. But the general trend of the markets has been down for two decades.
We have a feeling that the worst is still ahead for this market too. Few of the mistakes of the bubble period have been corrected. None of the challenges of the new post-bubble economy have been met. Little of the huge mountain of debt trash has been taken away and disposed of properly. The big reckoning is still to come.
Which brings us back to the price of gold. It was over $1,200 just a few days ago. It’s had a little correction. But we doubt that it has had the correction we’ve been waiting for. There is still no sign of consumer price inflation. Nor is there any sign that consumers are returning to their old spendthrift habits. Nor is there any sign that jobs are becoming more plentiful…or that this depression is going to end any time soon. When that becomes clearer, stocks will fall again. Gold should fall too.
People will want safety. But where will they seek it? Ah, that’s another big question. In the first stage of the crisis, they sold gold and bought dollars. Will they do the same the next time? Or will they fear that the dollar may be part of the problem, rather than part of the solution? If so, won’t they flee stocks for gold?
We don’t know.