Market Moves from Humbug to Farce

Another week almost gone. This is the second day of our vacation; we’re still reckoning, but even less seriously than usual.

Yesterday, the stock market seemed to hesitate. It didn’t know whether to go up or down…so it did nothing.

On the other hand, gold had made up its mind even before the markets opened; it scooted down more than $20.

What’s the matter with gold? We don’t know. But we’re curious about it and eager to know. Are speculators unloading gold to shore up positions elsewhere? That’s what some commentators think. But of all the things one might sell to raise cash, gold seems like the last one we’d want to get rid of – especially when you look at the state of the markets.

In fact, as stocks, bonds, and particularly, real estate become more volatile and less appealing, you may want to consider taking out a gold “wealth insurance” policy. It gives you exposure to gold’s upside but offers full protection from losing even a single cent. If you’ve ever thought about adding some gold to your portfolio, now is the time.

As we point out in our soon-to-be released book, Mobs, Messiahs, and Markets, every market is a public spectacle. And every public spectacle follows a certain pattern. It begins with lies and humbug – ’emergency’ low lending rates from the Fed…faith-based currency…stocks for the long-run. Then, it progresses into farce – hedge funds…low-doc mortgage loans…and ‘cove-lite’ LBO financing. And finally, it ends in disaster.

We have seen plenty of humbug and farce. The disaster phase is beginning now. Countrywide Financial (NYSE:CFC) – America’s largest mortgage lender – may be facing bankruptcy, according to Merrill Lynch (NYSE:MER). The stock has been cut in half so far.

More importantly, both Home Depot (NYSE:HD) and Wal-Mart (NYSE:WMT) – America’s largest retailers – are warning that earnings ain’t what they used to be. Could this be the long-awaited signal that the consumer is finally cutting back? Maybe.

Excerpts from CNBC-TV18’s exclusive interview with Marc Faber:

Q: How do you read the events as they have unfolded in the past fortnight? How do you think this might shape up?

A: Basically as you know, the U.S. market went up until July 16. The Dow peaked out on July 17 above 14,000 and then it started to slide, mainly driven this time by financial stocks and by what people call a crisis in the subprime lending sector and the CDO and the BS markets. The question obviously is where do we go from here? Is it like ’98, where we dropped first and then recovered strongly towards the end of the year? Or is it something more serious? I think it’s something more serious.

Q: If you had to predict…since your view is bearish, what percentage fall would you expect in emerging market equities, on an average, over the next foreseeable period?

A: Well, I think the S&P has a very good chance to decline by 20-30% and emerging economy stock markets, I think they could drop by 40%. That may not mean that the bull market in emerging market is over for good, because in ’87 we had drops in Taiwan of 50% and then the market went up another four times; so you can have big corrections and still be in a bull market.

But if someone came to me and said, “What is the upside on, say, the S&P?” We had 1,452; the high was 1,555. I would say the upside and the big resistance in the market is, say, between 1,520 and 1,530 – so the upside is limited. But what about the risks?

What I noticed is investors are far more concerned to miss the next leg in the bull market on the upside, than about the risks of losing a lot of money. And I think, gradually this will change, and that will mean lower equity prices…and also prices of other assets such as commodities can go down substantially and obviously home prices around the world.

Dear Daily Reckoning readers should be aware…this is a downturn that COULD be extremely long and severe.

Here’s another DR dictum: The force of a correction is equal and opposite to the deception that proceeded it. Never before in the history of the world have so many people believed so many things that couldn’t be true. Now, they owe more money to more people than ever before. And it could take a long, painful correction…or worse…to straighten things out. That’s why we would hold onto our gold. If we needed cash, we’d sell something else.

But that’s all we’re going to say about it today; we’re on vacation.

Will sent us this note from South America:

“Hey Dad,

“I had an enjoyable and productive three-day trip out to the ranch. The secret to the drive out there is to get a big truck and do it during the day. Those mountains that you go through are stunning; makes the time go by quickly.

“The weather was beautiful, at least until we got out to where the dust storms were. I wrote a blog post about it at www.willbonner.com. When we got into the ranch, the winds were roaring like a small hurricane that pretty much went all night long.

“That afternoon we looked at the progress on the house, which was virtually none. They were getting ready to put the floors down in Jorge and Maria’s house…and still had a good amount of work to do there. They only just started leveling out the earth for the terrace. The excuse for the lack of progress was that most of the workers went back to their families in the mountains in June/July.

“We met with the onsite construction manager and the Salta architect and expressed our displeasure with the progress and formed the game plan to get everything done by the end of October.

“The next morning the winds had let up and it was clear and sunny. I went out with Jorge and surveyed the cattle in the front field, that was four hours worth of riding… The cattle looked good, almost fat.

“I also talked to Francisco about llamas. There’s a special kind that he’d like to buy. His idea is that the people on the farm can learn to weave things with the wool – blankets, ponchos etc. We’d start off small with a handful of animals. After a couple years we could build up a decent sized herd. Each animal should bring in about $300 worth of wool per year. Sounded like a good idea to me.

“I definitely want to go up there more often… It was a good trip. I’m actually getting sort of interested in the farm stuff.”

That’s all for today…

Bill Bonner
The Daily Reckoning
August 17, 2007

…Short Fuse reporting from Baltimore

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Views from the Fuse:

*** After telling us on Wednesday to avoid stocks, bonds and most of all, real estate, in today’s guest essay, Doug Casey suggests that to provide protection from market downturns, you must internationalize yourself.

“I think what you ought to have is your citizenship in one country, your bank account in another country, your investments in a third, and live in a fourth,” writes Doug.

“You’ve got to internationalize yourself. Most people out there are like medieval serfs, psychologically and physically: they’re born some place, they don’t go very far from it and that’s where they die, and they’re going to get exactly what they deserve. Well, you can’t be that way. I think you ought to treat the world as your oyster.”

Where exactly does Doug suggest you go when you head for the hills? Argentina. Are you detecting a theme here?

“Argentina is the place to be. It’s the cheapest country in the world. It has low population, incredibly beautiful, the climate is great. One hundred years ago, it was in competition with the U.S. for being the best place in the world and the richest place. But it went downhill radically, radically.”

*** We reported yesterday that William Poole, who was the only fedhead to comment on the mortgage and credit market crises, said that only some ‘calamity’ would justify an interest rate cut.

“No one has called and said the sky is falling,” he told reporters.

Ring. Ring. Oh, Mr. Poole, it’s for you. It’s Ben. You know, Ben Bernanke. He says he’s going to cut the discount rate.

“Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth,” the FOMC said in a statement released in Washington. “The downside risks have increased appreciably.”

Yup, the Fed’s “inflationary concerns” have shifted…they decided enough was enough and reduced the rate at which the Fed makes direct loans to banks by 0.5 percentage points to 5.75 percent. It’s the first time there has been an “emergency” rate reduction since 2001.

Of course, stocks rose on the rate cut…both the Dow and the S&P climbed the most they have since August eighth. But you know as well as we do…the markets are far from being out of hot water. Let’s not forget that the factors that caused these…well, I guess it’s safe to call them ‘calamities’ now…haven’t been magically cured. So far, we’ve put a Band-Aid on a gaping wound.

Even with a rate cut, or a series of rate cuts, “those who hold toxic waste securities are not going to get out of having to absorb major losses,” Dan Amoss told his Strategic Investment readers. “There’s nothing in the Fed’s charter (yet) that allows it to buy up subprime mortgage-backed securities (MBS) in order to bail out the likes of the now-defunct Bear Stearns hedge funds.”

In other words, the road ahead is a long one. So we won’t have to worry about being bored and just lounging around the pool with nothing to write about this summer…

Until tomorrow,

Short Fuse
The Daily Reckoning

P.S. Still yearning for more on CDOs and mortgage backed securities? We know you are…and Dan Amoss is excellent at breaking down these issues in the credit markets so even your humble editors can understand.