Where Was Your Money in 2008?

2008 was a tough year for every investor and every sector. Well, almost every sector. Casey Research’s Doug Hornig takes a look back at the year behind us, below…

2008 is now in the rear-view mirror, with virtually every investor shouting “Good riddance!” and praying for a better year to come. Forget about making money, just keeping your head above water was an accomplishment over the past twelve months.

Consider the statistics (12/31/07 vs. 12/31/08):

Housing – down 18% nationally, by the Case Shiller index, and 30% or more in most major metropolitan areas.

Domestic stocks? Nope. The Dow Jones Industrial Average – down 33%; Dow Utilities – down 30%; Dow Transports – down 21%. S&P 500 – down 38%. NASDAQ – down 40%. And if you were unfortunate enough to have invested in a financial-sector ETF, you lost at least 55%.

Foreign stocks? The Vanguard Emerging Markets Fund, a typical example, came in at minus 55%.

Bonds didn’t fare well, either, with the yield on 10-year Treasuries dropping 42%, and 30-year T-Bonds off 38%.

Energy. Uh-oh. Crude oil – down 59%. Natural gas – down 37%.

Industrial metals took a whacking, with copper down 55%, nickel 56%, and aluminum 37%.

Food did a little better than most, which isn’t saying a whole lot. Corn – down 17%; wheat – down 24%; live cattle – down 15%.

Enough. You get the idea. Every asset was mired firmly in the red in 2008, right?

Actually, no. The single exception was gold, which was up 5.6%. A modest gain in most times, but a phenomenal performance for a year where everything else tanked.

And if you managed to invest something other than U.S. dollars in the metal, you did even better. Gold rose 12% in euros, 32% in Canadian or Australian dollars, and a whopping 44% in British pounds.

Nor is this an isolated phenomenon. In 2008, gold posted its eighth straight yearly advance. Since the beginning of 2001, it has averaged a better than 16% annual gain vs. the U.S. dollar, 11% vs. the euro, and 17% vs. sterling.

Your financial advisor likely tells you to invest in the stock market and be patient, because over the long haul stocks will yield an average yearly return of 9-10%. Well, maybe so. But it sure depends on how generous your time frame is.

Over the past eight years, gold has added 215% (in U.S. dollars). During the same period, the S&P 500 lost 22%. The DJIA? Down 11%. In order to show a profit with a simple buy-and-hold strategy (ignoring all rallies and dips), you’d have to go back to early 1999 for the Dow, and 1997 for the S&P!

Where was your money in 2008? Or ’07? Or…?

If you’re a BIG GOLD subscriber, a significant portion of your portfolio was in physical gold and paper proxies tied to the gold price.

Yes, the gold-producing companies that we follow in BIG GOLD did poorly in 2008, as the frenzied stock sell-off spared neither market nor sector, across the globe. But we held on through the storm, and the miners have rebounded sharply in the past month. We expect that they will be stellar performers in 2009, as the coming inflation that’s baked into the American economic cake begins to break out.

And despite the turmoil of ’08, our readers always had something to cushion the blow. Gold. We advised buying it and taking it into their physical possession. When a severe shortage of coins and small bullion bars developed in the second half of the year and premiums skyrocketed, we showed subscribers where to buy at the lowest possible markup. For those with sufficient means, we provided detailed instructions for purchasing 100-oz. gold bars on the New York Comex.

2008 was a rough year, for everyone. But it’s gone, and if you held gold and its proxies, you did better than most.


Doug Hornig
for The Daily Reckoning

January 13, 2009

Put Bernie Madoff on the public payroll!

Today, we’re going to give the feds some advice. Many will find our advice repulsive. Others will find it shocking. Still others will think we are joking.

True, the feds haven’t asked our advice. And true, people will ice skate in Hell before they take it. But at least we will feel that we have done our duty. Besides, to them that give much is given. Something like that. It’s in the Bible.

Follow the trail of our advice to others…and we will get something for ourselves. What we will find is a fuller understanding of the economic big picture…and perhaps a better sense of how to protect ourselves.

We begin, however, with the latest reports from Wall Street.

The Dow fell again yesterday. It’s down to 8,474. Oil and gold are still going down too. Yesterday, oil slid to $37 and gold lost $34.

Meanwhile, unemployment in the highest it’s been in 16 years – and rising. At 7.2% in December, it is probably already 8% now. USA Today reports that men are losing jobs more than women. This is probably because the damage in autos, finance and construction, industries dominated by men, has been so great.

But you think you’ve got trouble? What unemployed Americans don’t buy unemployed Chinese don’t make. A report at Bloomberg tells us that 10 million migrant workers in China lost their jobs in the first 11 months of 2008. By now, the figure is surely much higher.

“Poverty does cause violence,” says a professor at Columbia who studied the issue. The Chinese government has warned that it may be faced with “mass incidents” in which it has to use force to keep the mob under control. Next door, Russia has already called out troops to put down a tax revolt in Siberia.

“I’m getting a license to carry a handgun,” said an American friend, surprising us over dinner last week. “I don’t know…but I see people getting desperate.”

Elsewhere in the news is a report that shoplifting in the United States is rising. More than 80% of stores surveyed said it was becoming a bigger problem.

And in Spain, people are so desperate for work they’re joining the army. When the market declines, politics – especially armed politics – increases. Like Ireland, Spain profited in a big way from the boom in credit. But now that the boom is over, it is suffering in a big way too. House prices are slumping and jobs are disappearing. Our team in Buenos Aires – which keeps an eye on the Spanish-speaking world – tells us that only 47,000 young men signed up for military service in 2007. In 2008, the total rose to 80,000. According to some experts, by 2010, one out of every five Spaniards in the work force will be out of a job.

The IMF says it may need another $150 billion to fight the worldwide slowdown. Chickenfeed, really. This thing has gotten so big, $150 billion won’t even be noticed.

The World Bank says global trade is shrinking – for the first time in 25 years. And here, is where we pick up the trail. With so many clues…so much data – so much noise! – it’s easy to get lost. But here we have a lead we can work with. Let us begin here.

World trade is shrinking. Across borders, at least, people are buying and selling less. Why would they do that?

We were afraid you would ask that. Because the answer requires more time than we have this morning. So we will simplify. Economies naturally expand and naturally contract. In an expansion, world trade increases. In a contraction, it diminishes. Typically, the big increases in global trade correspond with the rise of imperial powers – armed forces large enough to protect trade routes…guarantee the safety of merchants…and enforce a uniform, reliable commercial code. Trade expanded greatly during the Roman Empire…then contracted sharply when it fell. The Mongol Empire too created a huge free trade area in Eurasia. Then, the British and other European powers expanded their sphere trade along the shipping lanes…throughout most of the world…until they were rolled back from much of Eurasia by the advance of other hostile empires – the Soviet Union and China.

The last major boom in world trade came with the Reagan Administration. The free-marketers in the ’80s – both in England and America – lowered taxes and reduced barriers to commerce. Then, a remarkable thing happened – the Soviet Union collapsed, leaving its member states and client countries free to enter into trade with the West. China also realized that its rice bowl would be fuller if it too began selling to the West, rather than threatening it.

That Golden Age of ebullient world trade is now over. It could, of course, be nothing more than a temporary setback to system of imperial finance that is otherwise in good shape – a mere runny nose and sore throat…nothing to worry about. But the noise we hear sounds more like a death rattle than a head cold.

But the quacks are at work, busily making the situation worse.

Looking at the essentials of the economic situation, we see it in 3D:

A natural Deflation of asset prices in the financial world…

…leading to a natural Depression in the economic world….

…with an army of public officials Determined to turn things around.

Their approach is the old ‘hair of the dog that bit him’ technique. The world has had too much credit; they propose to give it even more. With $10 trillion in “stimulus” efforts all over the planet, they’re not giving only a hair of the dog; they’re throwing in the whole damned kennel.

These efforts are not going to work. Why not? Because you can’t help an obese man by giving him another helping of dessert. And you can’t cure an alcoholic by offering him free drinks.

If the feds were paying attention, they should listen up here:

The cure for a slump is a slump.

A real correction corrects. Cold turkey. Rehab. Debts are paid off, worked off, or written off. Prices fall to the point where they make sense again. Consumer items become affordable; an ordinary person can buy a house. An ordinary investor can buy a stock…or an apartment building…and get a decent return on his money. An ordinary businessman can make a profit from operations; he doesn’t have to count on stock options and rising share prices in order to make a living.

The way to cure a correction, we repeat, is to let it do its work. But that’s not going to happen. We’ll explain why it won’t happen tomorrow. Today, let’s continue to look at what will happen – more quack cures!

Our colleagues in London tell us that the English are proposing to “tax savings to force people to spend or invest, rather than just sit on their money.” That’s right, they want to stimulate world trade by forcing consumers to buy more tennis shoes from India. If they don’t, they’ll have to pay a tax!

Another wonder drug was proposed by two former Bank of England economists. They want the government to buy houses that go into foreclosure and then rent them back to the people who couldn’t pay their mortgages.

One thing you can count on, dear reader: you’ll hear about plenty more schemes to correct the correction. Many of them will get the backing of the government.

And all of them will cost money – big money.

Once a bubble in one sector has burst, you can’t re-inflate it. All you can do is to inflate other bubbles. After the bubble in the tech sector popped in 2000, for example, the feds manned the pumps. But they couldn’t get the tech stocks re-inflated. The NASDAQ never recovered. Instead, they pumped up a huge bubble in private debt – with gassy bulges in housing, finance, commodities, emerging markets and many other sectors. Now, that bubble has burst and the feds are, once again, pumping harder than ever. This time, they’re blowing up the biggest bubble in PUBLIC debt the world has ever seen.

Even Le Monde has noticed:

“The governments of the entire world are beginning to create mountains of debts in order to finance their bailout plans, their stimulus programs and their budget deficits caused by the recession. Even so, the rate at which the US and European countries borrow on the financial markets is near the lowest in history. It is only barely above 2% for 10-year loans to America and slipped under 3% for the German equivalent at the end of 2008… Some economists ask themselves if a bubble in government debt isn’t in the process of forming…and they ask themselves what will happen when it eventually explodes…”

We think we know what happens. The whole system of imperial finance gets flattened.

But at least if they’re going to do the wrong thing, you might as well do it well. It is a documented fact that neither the present U.S. Secretary of the Treasury – Hank Paulson – nor the incoming man – Tim Geithner – had a clue about what was happening last year. They didn’t seem to understand how America’s system of imperial finance – the system that undergirded expanding world trade – actually worked. They seemed completely surprised when it began to crash. Clearly, neither is competent to manage such a system.

So we have a suggestion. Why not turn to a man who does know? In all the world, there is one man who has proven that he knows better than anyone, not only how it works…but how to work.

That man is Bernie Madoff. Instead of putting him in jail, put him at the Treasury.

That is our advice for today. For it, we expect neither compensation nor thanks. But in the spirit of public service, we will explain – tomorrow – why Mr. Madoff is the man for the job.

Until then,

Bill Bonner
The Daily Reckoning
January 13, 2008

The Daily Reckoning