Posts Tagged ‘Depression’

Welcome the Seventies!

No, you won’t get back your Intel 4004, you won’t need to grow back that Afro, nor will you easily get a hold of some new records from the Beegees. But what you are most likely to see a heck of a lot more inflating prices of goods (your favorite dinner) and deflating financial values (your favorite stocks).

The reason why some things just don’t change, is because people don’t. After the roaring 50s and 60s, we had evolved from savers to spenders, from investors to speculators. As the markets began to deflate, the Federal Reserve, along with the help of the U.S. Government Mint, began injecting even more liquidity into the marketplace in attempt to cushion the fall of falling asset prices, such as stocks and bond ratings.

In doing so they created a giant ball of cash that was rolling nowhere since due to its gigantic size was being rejected by the average consumer in favor for safer assets, such as commodities and real estate, and eventually gold.

It’s happened before in the 1970s and before that in the 1930s. Before that at the beginning of the last century. As a matter of fact, it’s been recurring about every 30 years or so, in almost identical cycles: Years of solid growth, followed by years of higher company profits trailed closely by stock prices, and then a euphoric blow-off of speculation and ill-appreciated prosperity. Then came the bust, the “credit crunch” when debts come due, loans are recalled, intrinsic values revisited. All speculative action dies along with the spirits of those who were riding it.

The primary differentiation between the “inflationary” depression of the 1970s and the “deflationary” depression of the 1930s was a simple one: Liquidity. In 1929 after stocks crashed and banks were failing by the day, there was nothing to fall back on. Man’s trust was in gold and its supply was limited. The Treasury was by no means interested in sponsoring such an event with goods of limited supply and unlimited value to those in need.

Today the story has a twist. One that has been in motion since its inception in 1944 with the Bretton Woods Agreement when the U.S. Dollar, became the unilateral global currency, “always” to be redeemable in gold. This was scrapped in 1971 with the closing of the “gold window” when these dollars became backed, not by resource of limited nature rather by the faith and credit of the people, assumed its role as the world’s global currency. This enabled the powers that be with the ability to constantly replenish the world’s liquidity in times of necessity. Unfortunately, this resulted in the same failures seen in the 30s. The rich got richer because they owned things and the poor got poorer because they owed things. Furthermore, how much you had became significantly inferior to what you had.

This being the predicament it has become quite clear in my mind that the scenario to unfold will indeed be that of an “inflationary” depression. the European Central Bank announced that it would make “unlimited” funds available to the banking sector. The Fed will, predictably, react in the same way, running the printing presses overtime.

The only way for the Fed to limit the deflationary affect of illiquidity, would be to increase real value – earnings, commodities and gold. Unfortunately, and contrary to the belief in the Federal Reserve, that’s impossible.

Billions won’t be enough to mop up this mess, but trillions. Even then chances are good that amid the panic, much of that liquidity will get misallocated to places whom those injecting it don’t desire. There is no question in my mind that the damage has been done and one way or another values must realign.

Consumer costs will rise, while stock valuations (as measured between earnings and cost per share) will fall. Debt related issues will suffer, albeit not do to deflationary pressure, rather due to inflation and interest rates.

Tomorrow marks a significant day for hedgers as the deadline for withdrawal at the end of the quarter (45 days). This was obviously discounted as the Dow fell another 200 points.

Mark my words: These days will go down in history.


It Doesn’t Matter

It’s the mantra that our generation has come to proclaim. We have it well and why shouldn’t we. We were born in the greatest country in the world, into the wealthiest economy of nations, living on soil on which no war has been fought upon in over 150 years. Bred into an era awash with liquidity, credit and good fortune that has infused not only our own but that of the entire world. A planet free of international conflict, depression and social pandemic for over 3 decades.

So when we hear of such things, when our children read of depressions in their text books, we come to ask why. Why do we learn of such devastating events that has no affiliation whatsoever with our day and age? Why do we continue to teach industry instead of finance? “It doesn’t matter” we tell them.

However, history would beg to differ. We learn of the ancient cities of Rome and Tyre to remind us that those times were also ruled by men. Men who are invincible and who could not fail. Men who believe they are wiser than nature and the course of events. They told themselves “This time is different” while they scoffed at the failure of the empires. “Veni, vidi, vici” Caesar said. Today, people tell themselves the same.

Here are three examples, brought to us by Bill Bonner, of the sentimental shift that has occurred over the past few decades

Crashes Don’t Matter
First, there was the Crash of ’87. Stocks fell hard. But then, they got right back up again, as though nothing ever happened. Then, people began to think that crashes were no trouble. Even if stocks fell, they’d soon be on an upswing again. Books began to appear such as “Stocks for the Long Run.” People began to believe you couldn’t go wrong in stocks, no matter how much you paid for them.

Terrorists Don’t Matter
Second, in 1989, the Berlin Wall was dismantled. Suddenly, we no longer had any enemy worthy of the name. We weren’t going to be exterminated in a nuclear war after all. From here on, it would be clear sailing.

Deficits Don’t Matter
Third, Ronald Reagan and the neo-cons transformed the Republican Party. “Deficits don’t matter,” said Dick Cheney. They don’t matter to the Democrats. And now they no longer matter to Republicans either. After the ’80s there was no longer any organized political party in favor of fiscal and monetary conservativism.

Oh, the system won’t collapse tomorrow, or the next day. On the contrary it may seem to become stronger. It may rise to new heights, we may find additional ways to turn a dollar into many.

But let us not “discount nirvana” as Greenspan warned. (He may of been wrong too many times but it doesn’t make his statements any less true).

Quotes of the Day

“They’ll be eligible for Medicare just three years later and when those boomers start retiring en masse, then that will be a tsunami of spending that could swamp our ship of state if we don’t get serious”.
– U.S. Comptroller General, David Walker.

The article is a must read for every American.

“Those who cannot remember the past are condemned to repeat it”.
– Late 20th Century author, George Santayana


Seven-fold increase in gold needed to avert debt depression

Just in from GATA…

While it is almost a year old, a study of the enduring importance of gold in the world economic system by R. Peter W. Millar, founder of Valu-Trac Investment Research Ltd. in Scotland (, seems ever more compelling, and Millar graciously has agreed to let it be shared with you.

Millar stresses the periodic upward revaluation of gold as the mechanism for defeating a deflationary debt depression at the end of an economic cycle. Millar writes:

“The first cycle unfolded as follows:

“– Phase 1: stability under a Gold standard until 1914.

“– Phase 2: Inflation until 1921, which resulted in a buildup of debt.

“– Phase 3: Disinflation, which brought stability and allowed asset inflation until 1929, but encouraged a further buildup of debt.

“– Phase 4: Instability after 1929 caused by deflation of assets from overpriced levels and exacerbated by excessive debt levels, leading to depression of economic activity.

“– Phase 5: Monetary reform enabled by a revaluation of gold to overcome deflationary debt depression.

“In the second half of the 20th century we saw a repeat of the first three phases of the same cycle:

“– Phase 1: Stability from 1944 to 1968 under a gold standard.

“– Phase 2: Inflation from 1968 to 1981, which caused and justified another buildup of debt.

“– Phase 3: Disinflation from 1981 until the end of the 20th century, and maybe to the present.

“However, it appears that Phase 4 (instability and ultimately deflation due to excessive debt) may have started. If so, Phase 5 (revaluation of the gold price to raise the monetary value of the world monetary base and hence reduce the burden of debt) becomes likely or inevitable.

The extent of that revaluation would need to be major according to our calculations, probably by a factor of at least seven times, possibly up to 20 times the current price of gold.” (emphasis added)

The price of gold when Millar wrote his study, in May 2006, was about where it is tonight.

Millar’s study is titled “The Relevance and Importance of Gold in the World Monetary System” and you can find it at GATA’s Internet site.

Based on Miller’s study this would bring the price Gold to anywhere from $4725 to $13,500 an ounce. Similarly, and more importantly would be, IMO, the future price for Silver.

Based on Today’s ratio of 1:48 this would put silver into the $89-$281 price range. If we are to return to historical averages, when the ratio was closer to 1:16, we are looking at $267 to… (ready for this)… $843 an ounce. And what if Silver becomes more scarce than Gold? Well, let’s not go there.

Now a real economist would snub his nose, insulted that the Dow would only be able to buy one ounce of gold and say, “Well you didn’t really make anything, That’s the price of money”. And I would counter back ever so politely, with a smile across my face and say, “Yes, and I’m buying it now for only $675!”.

Seven-fold increase in gold needed to avert debt depression
February 21, 2007

Why Warren Buffett’s not a “Macro” guy

I was recently watching a clip of Warren Buffett. I can’t explain how every time I listen to the man I attain a greater knowledge not only in investing but in the philosophy of life. I could find a quote of his to fit any occasion, (and I usually find myself doing just that). He’s a brilliant man with a simple philosophy on just about everything.

But what I found most amusing is how he knows exactly who he is. He claims he knew he would be wealthy from a very young age, (he made his first investment at 11 I believe). He said he would be a millionaire by 30. 31 was close enough. He doesn’t need a lavish lifestyle to define him, he stays with his simply priced home he bought decades ago and his $100,000 a-year salary (even with inflation!). I even believe he doesn’t want to be the richest man in the world. His image is his non-image. And yes, I’m getting carried away.

In the Q & A session after his speech to the students at University of Florida he says “I know this is going to sound disgusting, but I have been very lucky”. Of course all Billionaires say that but he blames his exuberant wealth on the fact that he happened to be born in a perfect time, in the best country in the world and with a very close tie to people who were very knowledgeable in his ultimate area of expertise. (His father was a stock broker and he learnt by Ben Graham in his younger years).

When asked about Interest Rates, the Japanese economy and the future of the stock markets he responds by saying he’s not a “Macro” guy.

Why? The answer is simple. He never had to be. He started investing somewhere around 1950. Yes, the market has seen many ups and downs since that period. But in general the market has been up, especially considering the recent bull market we’ve had for the last 25 years. By simply buying at value you couldn’t go wrong.

But how many World Wars, Depressions or empire collapses has he lived through? He has even managed to stay out of, what many believe to have been, the worst Stock Market Bubble/Crash in history. These macroeconomic trends haven’t ruined him in the past why should they now?

But I don’t believe we have all been as fortunate and will be. We don’t live in a crisis. We live in something worse. A “perfect” world. Read any article in the media. It will contain one of two things: How great life is or how it may, according to some sentiment out there, may possibly but not probably, get a bit worse.

We live in a great and dynamic time. But as the saying goes “This too shall pass”. We know not how long it will last, we know only that the answer is not forever.

For a more “devastating-but-not-pessimistic” view click here.

Many speculate as to what was the true cause of the Great Depression. They say it was the Stock Market but I found found this:

“In the 1920s, in the U.S. the widespread use of the home mortgage and credit purchases of automobiles and furniture boosted spending but created consumer debt. People who were deeply in debt when a price deflation occurred were in serious trouble—even if they kept their jobs—and risked default. They drastically cut current spending to keep up time payments, thus lowering demand for new products.

“Furthermore the debts grew, because prices and incomes fell 20–50%, but the debts remained at the same dollar amount. With future profits looking poor, capital investment slowed or completely ceased. In the face of bad loans and worsening future prospects, banks became more conservative in lending. They built up their capital reserves, which intensified the deflationary pressures. The vicious cycle developed and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 depression.”

Timing with Sentiment

If you want to know if we’re at a bottom, look around for people yelling there’s no hope (“Great Depression”). If you want to destinate a top, look for many men selling stupid books with unreal names (“Dow 36,000”). If your looking for a healthy market, look for two economists arguing – valid claims for an up or a down.

I see nothing of the above. Today, there seems to be two types of people. Those who care (Get Out!), and those who don’t (“Housing woes seem to be are over”).

I heard a Financial Manager saying that although most currencies are falling, and gold (no doubt a currency) is actually up for the year has not, he will nevertheless stick to the US Dollar. Why? Just because.

Point made.