Contrarian or Victim

Here at The DR, it’s no secret that we consider ourselves contrarians…not ‘gloom and doomers’ mind you, but perhaps just not as closely aligned with the ideas of the government and the mainstream media as Joe Average American.

It’s not an easy stance to take…and in today’s guest essay, Rick Rule explains why being a contrarian is hard work.

“In natural resource investment markets, one can be a contrarian or one can be a victim, and the choice is one’s own,” he writes.

“Having once been a victim, I chose the other path. Natural resource industries are cyclical, volatile, emotional, over-regulated and capital-intensive. That’s the good news. If you accept markets for what they are, while other speculators operate in ignorance, you have an advantage in the market. Being a contrarian is hard. That’s the other good news. Most speculators cannot act in contrarian fashion, for reasons we discuss later.”

Rick Rule
September 5, 2007

Keep reading today’s guest essay here:

Contrarian or Victim

And now some news from Short Fuse in California…

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Views from the Fuse:

*** The Dow, the S&P and the NASDAQ all suffered their first losses in three days at market open this morning.

The drop was caused by not-so-good employment and housing data, and on the news that short-term interest rates in Europe rose to the highest since January 2001.

Although the big employment news will come from the Labor Department on Friday, a closely-monitored employment reading showed that the private sectors added the fewest workers in August than they have in four years.

Bloomberg reports: “The 38,000 increase [in jobs] last month was less than half the 80,000 gain predicted in a Bloomberg survey of economists. The figure follows a revised figure of 41,000 for July that was smaller than previously estimated.”

This data is just a teaser of what’s to come from what Chuck Butler likes to call “The Jobs Jamboree” on Friday. While the Labor Department report is always breathlessly awaited by those who breathlessly await these kinds of things, this month there is even more of a sense of anticipation. The Fed’s decision to cut or not to cut will factor in the jobs reading…if the report is stronger than expected, it could dash the hopes for a rate cut.

Also dragging down Wall Street is the news that pending home resales fell 12.2% in July to 89.9, according to the National Association of REALTORS. “Economists in a Bloomberg survey projected a 2.2 percent drop.” Whoops…

Obviously, the big question in the markets is, “What’s next?”

“What’s next is easy,” write Mish and Brian from their perch at The Survival Report.

“The Fed is going to try to contain the damage by cutting rates. Those rate cuts are not likely to happen at the September FOMC meeting, but they are going to happen, most likely by the end of the year or the first quarter of next year. We will have more on the odds of rate cuts later in this report. But first we need to see a bias change at the Fed. We look for that bias change toward easing at one of the next two FOMC meetings.

“But how will you profit from that change? The answer here is simple too…”

Our old friend Dr. Kurt Richebächer died last week, in Cannes, France. He was 88 years old, and his writings were a staple among many people’s required reading list. As Chuck Butler puts it in today’s issue of The Daily Pfennig, “Yes, I used to kid about how when you read one of his letters you need to put away all the sharp objects… But he told it like no one else…

“He didn’t pull punches, and he was always ahead of all other economists with his thoughts. I will miss his writings… And the world has lost an economist that didn’t cower to Washington…”

Dr. Richebächer, R.I.P. (More on the Good Doctor to come…)

Everything is always the same. And everything is always changing. People come and go. So do bubbles.

Humans apparently came to be what they are by millions of years of evolutionary selection. We were shaped by circumstances just as giraffes or warthogs were created by their environments…and chance.

Here at The Daily Reckoning we observe humans the way botanists look at flowers. We watch them bloom and whither…and trace the seasons of their lives. Sometimes they are bullish and colorful. Other times, they fear the chilly winds and close up upon themselves.

Circumstances change all the time. But humans evolve too slowly to keep up. Today’s people are the same, more or less, as those who stormed the Bastille…built the Pyramids…and crossed the Bering Straits wearing skins. They always hope to get something for nothing…and are deeply disappointed when they don’t. Thus do they create their own cyclical patterns of temptation, error and regret…repeated over and over again…from the dawn of creation to the crack of doom.

What is new and different is that never before have we seen economic and financial patterns played out on such magnificent scale. Never before has so much money chased so many goods and services. Never before have central banks had so much power to distort markets. Never before has any nation been able to get away with such grand larceny as the United States. Never before have any people been permitted to go so deeply into debt as Americans. Never before have capitalists been able to buy so much rope with which to hang themselves – on credit, no less. And never before have so many institutions come to the rescue, and never more quickly, than when the capitalists recently slung the rope over the rafters and got ready to step up on a chair.

We were just settling down to watch the body jerk and shake…and listen to the gurgling sounds…when the central bankers cut the cord…slicing the discount rate so as to given unworthy banks even more credit. Then, along came George W. Bush with encouraging words for the nation’s debt-laden homeowners. They may have bought houses they couldn’t really afford, with money they didn’t really have, but now…they can count on the president to help them hold onto them.

In other words, we suspect that the basic program for this cycle will be the same as it always is. When money is too easy to get, people tend to use it unwisely. Mistakes are made. Gradually, the mistakes build up until a correction becomes inevitable. Naturally, people who hoped to get something for nothing…and seemed actually to get something for nothing when the going was good…expect ‘relief’ and ‘rescue’ when the something seems to be getting away from them.

And then when the rescue squad shows up, they tend to breathe a sigh of relief…there is a doctor on the case!

The U.S. stock market hit a high on July 19th. It may have been THE HIGH for the entire worldwide credit bubble; we don’t know. What we know is that scarcely had prices fallen – less than 10% from all-time highs – when every financial official deemed it essential that he act swiftly and resolutely to forestall even greater losses. A month later, the Dow hit a low and has been recovering since. Yesterday, the index rose 91 points.

“ALL IS WELL,” everyone said in unison.

But all is not well at all. The basic problem is that the financial world is not really suffering from a syndrome that modern financial medicine can cure. If the ailment were merely a temporary lack of liquidity, central bankers could clear it up tomorrow. But the problem is not illiquidity, it’s insolvency – caused by too much credit, not too little. People, businesses, nations – debtors owe more than they can repay. Borrowing more may postpone the crisis…maybe even disguise it; it cannot solve it.

Gold is coming back. It advanced more than $9 yesterday…to $691 an ounce.

One of the best long-term bets you can make is to bet against the dollar…and holding gold is the safest (and most profitable) way to do it.

The dollar is perhaps the greatest source of ‘easy money’ the world has ever seen. The U.S. Treasury can create almost as much of this ‘money’ as it wants – at negligible cost. Ben Bernanke said so!

The feds no longer give out the news, but private analysts continue to track M3 – the broadest measure of U.S. money supply. According to the latest figures, M3 is increasing at about 13% per year – or about four times as fast as GDP.

Nothing destroys an economy more thoroughly than easy money. It multiplies the mistakes people make and magnifies the damage. Yesterday’s paper tells us that Venezuela is beginning to suffer the effects of easy money. In Venezuela’s case, the money came from the oil boom. Venezuela is an oil exporter. As the money came in, it permitted President Hugo Chavez (who claims to be an admirer of Trotsky and Guevara) to indulge his fantasies. Now, consumer prices are rising at 16% per year, with certain staples becoming hard to find at any price. The bolivar is falling at nearly 30% per year…and on the black market a U.S. dollar fetches 4,750 bolivars.

From the air, London must have looked like an ant colony this morning. Millions of little black figures (everyone wears black in London) filing along the streets, the riverbanks, and over the bridges. The London Tube workers have been on strike. People had no choice; they walked to work.

Strikes are often good for people. A doctors’ strike in Scandinavia coincided with a drop in death rates; embarrassed, the doctors decided never to go on strike again. This strike in London is probably good for people too…

“You didn’t do a very good job of describing our trip to Scotland,” Elizabeth complained. “It was much more fun than you made it appear.”

She adds this note:

“The West Coast of Scotland is beautiful…majestic hills, bare of trees, sweeping down into valleys of pastured sheep. Purple heather. The landscape is inviting in the sunshine, and most forbidding under storm clouds. The first day we saw much of the latter; then the sky cleared and on our return to Edinburgh we had a glorious drive through the region around Loch Lomond and the Trossach hills.

“We were there for a wedding at Kinlochmoidart on a peninsula looking into the Irish Sea. We stayed in a shabby little hotel overlooking a loch, very much like the lakes in Nova Scotia, with little islands on granite rocks rising out of the water, and surrounded by flickering birch and dark fir trees.

“The wedding was very pretty, in a small granite church at the end of a dirt lane. Lovely stained glass. The bride was ushered in to the music of bagpipes, and the service was the fine old 17th-century Church of Scotland (Episcopal) one with its emphasis on the sacred union of body and soul in the married state. The service is like good poetry: rich in imagery and concise in expression.

“The groom and most of the men in the small gathering wore kilts, and so did the priest, under his chasuble! He looked and sounded like a cheerful, robust London cab driver. In fact, he comes from London, and entered into the priesthood late in life…just a year or two ago. He gave a brisk and heartfelt homily, we sang some lovely old hymns, and then the couple were man and wife and off we all went to a gloriously gloomy Scottish hunting lodge for a reception and dinner.

“The dinner, in a tent, was followed by Scottish reels, and there was some reeling! The wine flowed freely and so did the rain, which leaked into the tent and got the dance floor very wet. But we slipped and spun with the best of them to ‘Strip the Willow’ and the ‘Auld 51st’ until the patterns got so complicated that we gave up and did some docy-doing to the general tempo.”

Until tomorrow,

Bill Bonner
The Daily Reckoning