The World Is Not Ending: But Jim Rogers may be right
By Tony Allison, October 13, 2008
After one of the most tumultuous weeks in stock market history, it may be best for most of us to take a breather and gain some perspective. The best advice is to get outside and away from the ubiquitous computer screens. Take a walk along a lake, play with your children, savor the changing leaves of fall. Life continues. The world at large is not imploding, although the hedge fund industry may be.
It is certainly understandable that the majority of Americans are frustrated and worried. For decades the purchasing power of the middle class has been shrinking as the dollar continually loses value. In the last decade the costs of life’s essentials have taken off (food, energy, insurance, transportation, medical care, etc.). Now Americans must deal with imploding 401-k’s to go along with imploding housing values. The great era of easy money is ending. The transition back to more traditional ways will be difficult, but not catastrophic. America is resilient and flexible, and most citizens will be willing to make sacrifices if they are equally shared and there is a plan to move forward.
The issue of shared sacrifice is certainly one that will continue to rage on beyond the next election. Many average citizens feel that Wall Street caused the current crisis and is now first in line to get bailed out. It is laughable when an insider like Jim Cramer suggests to his viewers that they sell enough to cover purchases for 5 years. Most Americans couldn’t liquidate enough to cover the next 5 months! And why would they sell everything after the S&P 500 is already down 40% for the year?
The “experts” are feeling confident about inflation as well. Former Federal Reserve Governor Wayne Angell opined that inflation will not be a problem in 2009 on CNBC last Friday, and was optimistic about a much stronger dollar ahead. Of course inflation is never a problem for the wealthy Wall Street elite who don’t have to raid their IRA’s and 401k’s to make ends meet. The dramatic rise in the cost of living means very little to them.
Let them eat cake
It smacks of the usual “let them eat cake” attitude from Wall Street. The credit crisis will eventually work itself out, but at a cost. That cost will fall on the struggling middle class as its purchasing power is hit yet again. Strong dollar? Not for the middle class. All the government bailouts, and those in the future must come from borrowed or printed money. The US is the world’s largest debtor nation. “Who cares?” screams Wall Street. “Just get it done!” As is true throughout history, the burden will be borne by the innocent rabble that will see retirement dreams and quality of life head south. The decades-long era of easy money is coming unwound.
Easy money - a warning to future generations (unheeded)
One of the few economists to question the Federal Reserve’s actions during the 1920’s was Benjamin Anderson, Senior Economist for Chase National Bank. Immediately following the crash of October, 1929 Anderson summed up the situation and left an explicit warning for future generations. “Basically, our present troubles grow out of the excessively cheap money and unlimited bank credit available for capital uses and speculation from early 1922 until 1928. There is no intoxicant more dangerous than cheap money and excessive credit.” (emphasis added)
Wall Street “outsider” Jim Rogers is much less sanguine about future prospects for inflation than the mainstream crowd. Rogers created headlines last week in a CNBC interview when he stated, “We’re setting the stage for when we come out of this for a massive inflation holocaust.” Rogers argued that markets do not trust governments’ plans to keep struggling banks alive and markets will only calm down when the companies with bad assets are allowed to go bankrupt. Rogers warned that the current plans, which will force governments to issue more debt, print money and flood the markets with liquidity will flare up inflation after the crisis is over and create worse problems.
“What about all the people in countries that minded their manners, saved their money, didn’t get overextended and now all of a sudden they’re being asked to bail out a bunch of guys on Wall Street who were incompetent at best and some of them crooks? I thought it outrageous that anybody has to step in and bail out a bunch of 29 year olds driving Maseratis.”
“We had the worst excesses in credit markets in world history. We’re going to have to take some pain,” said Rogers.
Gold has been known throughout history as a safe haven during troubled times. Sure enough, there is now unprecedented demand world-wide for physical gold and silver. There are shortages and high premiums from the US to Europe, from the Middle East to Asia. In some areas, delivery times are running into the two month range or longer. Other dealers are simply not selling, as they are unsure of obtaining any supply.
At the same time the paper gold price, set on the Globex world-wide trading system (dominated by the NY Comex) has gyrated wildly. It moved sharply lower during last Friday’s chaos on Wall Street, causing analysts to dismiss gold’s value in a crisis atmosphere. It is logical that the world’s central banks would want a lower gold price to calm the jittery markets. Paper gold traded on the Comex appears to be dancing like a puppet to a tune emanating from Washington. That tune may continue until the crisis has calmed. But sooner or later the global rush to physical gold and silver will reconnect precious metals prices to the reality of supply and demand.
William Fleckenstein of Fleckenstein Capital had some interesting thoughts on this “disconnect” recently.
“What I haven’t talked about is gold lease rates have gone through the roof. That appears to be because central banks are becoming credit-adverse and not lending out their gold as they once did. I’ve also heard rumblings about some large holders of gold futures deciding to take delivery, since they’re having trouble buying physical gold in sufficient size. If that’s the case, it could cause a mad scramble at the Comex, because there’s not enough gold to meet the open interest. It looks like physical gold, as compared to paper gold, is rapidly becoming the flavor of the day; meaning that a huge price move may lie just in front of us.”
Inflate or Die
As fall turns to winter and the credit crisis continues to roil the global markets, it may be wise to take a break from all the fear and loathing. Take a longer perspective and turn your focus elsewhere. The Federal Reserve and the other major central banks will not let the global financial system fail without a fight. They will flood the earth with liquidity first, printing money until the presses explode rather than see iconic firms continue to fail. Even now the Fed has already ramped up its balance sheet in historic fashion and it’s far from finished.
Eventually, the situation will stabilize and banks will begin to function again. But the massive injections of capital will ultimately have severe consequences. Monetary inflation will eventually gain strength and become a significant global issue. The precious metals and metals stocks will likely anticipate this wall of inflation well before the traditional statistical indicators.
Over the next few months, the de-leveraging of the financial system will continue apace, as the weak-hand hedge funds finish exiting from the commodity sector, setting up the next dramatic advance driven by stronger hands. The hedge fund sector collapse will continue to be painful to valuations short-term however, as excellent companies are dumped overboard in a wave of forced selling and redemptions.
China will keep spending
As to oil and other commodities, the story is far from over. The great industrial revolutions in China and India are just getting underway. Their young and growing populations (40% of world population) are rapidly moving up the protein and energy chains, demanding (and able to afford) more of each. Rapid infrastructure development will also continue in China, as the government races to pull hundreds of millions into middle class status ahead of rising expectations and political unrest. And sitting on trillions of dollars of trade reserves, China can afford to keep spending.
The global slowdown may put a pause in the prices of commodities, but massive and growing demand from the developing world still lies ahead. The quality natural resource companies with access to energy, metals and food in stable geographic areas should do exceedingly well in future years. Energy stocks are trading at P/E ratios suggesting oil will drop to $30 a barrel or less. The fundamentals looking beyond this crisis scream much higher prices.
The world is most definitely not ending, unless you are a hedge fund leveraged 50-1. The end of their world may be in sight. For investors, just sit tight and enjoy the fading light of fall. For the patient, better days lie ahead.
U.S. stocks sprang higher on Monday as widespread buying fueled the Dow Jones Industrial Average's greatest intraday point gain on record after a frantic weekend of international government actions bolstered confidence in the banking sector and credit markets. All the major indexes rose more than 11 percent.
The Dow Jones Industrial Average soared 936.42 ending at 9,387.61. The S&P 500 Index launched 104.13 to close at 1,003.35. The Nasdaq also was up over 11%, gaining 194.74 to close at 1,844.25.
Crude-oil futures rallied nearly 5% Monday, spurred higher by world equity markets as efforts by European and U.S. governments to prop up their ailing banking sectors revived prospects for oil demand.
Gold for December delivery fell $16.50, or 1.9%, to end at $842.50 an ounce on the Comex division of the New York Mercantile Exchange, the lowest since Oct. 3.
Wishing you a good evening,
© 2008 Tony Allsion