Friday, January 18, 2008

Pre-Crash Talk and Behaviour?

18 January 2008 (updated 21 & 22 January 2008)

I feel nervous about how our political and financial leaders are presently talking about the economy.

After spending the US into its deepest deficit position in history, US President George Bush is now talking about scraping another $150 billion out of this deepening hole to prevent loss of confidence in the economy. (By the way, the latest downturn has already shaved $2.5 trillion off of the market capitalization of the stock market, so how much difference is $150 billion going to make in any case? Such old-fashioned maxims as "good money after bad" come to mind.)

Wait a minute - isn't it economic health that is supposed to sustain confidence in the economy - not remedial measures?

And how exactly does more deficit spending by the most indebted government in world history promote economic health?

Something doesn't add up here, and I think it is our politicians' logic!

Among other possibly relevant facts, did not the Dow Jones Industrial Average just set an all-time record high in October 2007 at 14198.10? And now, three months later, desperate measures are needed to keep the boat floating? That argument just doesn't hold water!

I'll grant you, the recent action in the Dow has been ugly, and by my reading of the technical indicators, the Dow can't get much lower than it closed on Friday without violating many multi-year technical uptrends, for example, in the RSI and PPO indicators, not to mention the absolute value of the Dow itself. Note too that multi-year MACD support has already broken down, in August 2007.

But what really concerns me is the way our politicians and financial leaders are talking and behaving. President Bush stated, "The economy needs a shot in the arm."

What? This is an economy that has had an injection of $5 trillion in liquidity through increased (doubled) money supply over the past decade. Chris Laird estimates that over the past two years alone, corporate buyouts, corporate stock buybacks, the Yen carry trade and mortgage derivatives markets have added perhaps another $5 trillion in liquidity to the economy. And the answer now is... more of the same? I don't think so.

The US economy has had enough shots in the arm to induce a coma, and to qualify it for admission to a rehab centre!

No, the current situation is not about the requirement for another shot in the arm for the US economy....

Rather, our current predicament is about coming to terms with economic reality. And economic reality is that saving and investment create economic health, not borrowing and spending. I think it is really that simple.

Tonight's coverage of the topic on CBC radio featured a succession of authority figures offering reassurance that the sell-off in the markets is overdone, and that investors are overlooking long-term value by selling at this point.

Nothing worries me more than talk of that kind in a historical context such as our own.

In fact, I beg to differ with the reassuring experts. By my estimation, the US economy is in its deepest trouble in almost a century. By every measure I follow, the US economy has not been in such desperate straits since 1929 - though of course in 1929, almost everyone (besides say, Joseph Kennedy) thought things were going just fine, thank you very much.

Clearly, the Dow has fallen 2000 points since October, and that is very bad news for the hopeful investors who have entrusted their life savings to the present generation of captains of government and industry.

Once again, I'm sorry, but people who talk and behave in such a manner as George Bush, Henry Paulsen and Ben Bernanke are simply not the kind of folks I feel inclined to trust, particularly in matters of money and finance (though I do trust Mr. Bernanke more than his predecessor, Mr. Greenspan, for what that fragile thread of difference is worth).

In short, we are presently enmeshed in the largest-scale multi-bubble debt-financed global economic predicament that has ever faced the world. (I'd be happy to admit to hyperbole here, except that I can find no shred of evidence to indicate that this manner of stating the facts is not simply the closest possible approximation to an objective description of the present truth.)

In short, investable assets (such as real estate, stocks and bonds) are hopelessly inflated in value, given the shaky economic fundamentals which presently underpin world markets. The market value of such assets is presently driven by the greatest bubble in world history as indicated by a series of highly objective measures.

As this "multi-bubble" deflates, our asset-dependent economy will inevitably unwind. Citizens will avoid further losses by converting their behaviour from borrowing (to enable them to spend more than they earn on investable assets), to conserving (spending less than they earn), and therefore saving.... again.... just as it used to be in the "old days."

Further, this dramatic turnaround is likely to happen quickly. In fact, the tipping point may possibly be very near in time, and almost certainly, nearer in time than our reassuring government and financial authorities presently indicate.

What is my response to the present reassuring talk and behaviour of our leaders?

I have never as an investor been so joltingly reminded of what I suspect must have been the eerie political, economic and emotional climate of 1929 prior to the legendary October 24 & 29 crash as I was today, in listening to the evening radio news. The hackneyed and faintly-reassuring-at-best public messages of our leaders offered only backward-looking encouragements that struck me as entirely inappropriate to our present economic emergency.

Based on this kind of last-ditch "more of the same" soothing talk from these so-called experts, I cannot shake the notion that the Dow Jones Industrial Average can certainly fall another 1000 points next week, and possibly... most or all of it as soon as Monday, January 21, 2008....

(January 21, 2008: Well, I think I called this one correctly, with one exception. World markets saw their worst rout in years today, including the precious metals sector, which I predict will recover and outperform the rest given the causative factors underlying present developments. However, the US markets were closed today for Martin Luther King, Jr. Day, leaving the Dow untouched! Otherwise, my sense that our authorities were displaying classic pre-crash behaviour seems to have been dead on the money.... So, let's see how things look in the US for Tuesday, January 22. My guess, not much different! Possibly... worse....)

(January 22, 2008: Ben bailed out the US market with an emergency 0.75% rate cut. Here's the problem. He's expending all of his ammunition in the opening round. Such a dramatic cut will certainly keep the hounds at bay, but in my view, not for long. As we know, the Japanese took rates down to 0% for over a decade, contributing to the fertilization of the ground for the global carry trade which has fuelled so much international speculative behaviour over the same period. In this most radical of all scenarios, Bernanke now has only 3.5% left to bargain with - and we're only three months off the Dow's historic October 2007 all-time high. Whoops! If this is a multi-year recession - or worse - much of the Fed's ammunition will have been spent in the first blink of Mr. Bernanke's eye. What will be left after this first salvo, but to slog through mud for many years to come?)

Also see my later posts: "More Pre-Crash Talk and Behaviour," "Only Yesterday," and, "There's a Tsunami Coming in Gold."


  1. Any opinions on AAUK ?


  2. Good company as far as I know, but I don't follow it. I'm sure it will be a good place to be in an economic downturn of the type we are now experiencing. My favourite precious metals mining stocks right now are Minefinders and Nevsun, as both are on the verge of major new developments with low input costs.

  3. Do you have an opinion of Barrick
    (ABX)? It has a great looking chart.


  4. I have owned Barrick in the past, and wish I did now. The market is rewarding the company for its production growth profile at a time when many of the large producers (South Africans, Newmont, etc.) are facing declining production. Barrick is best known for its history of hedging (selling gold forward at ultra-cheap prices - think $300!), and this unfortunate policy is still dogging the company. I suppose that Barrick is strong due to its ability to produce more gold as prices rise, despite its weighty hedgebook. I am presently in other companies which for the most part the market hasn't recognized, hopefully - YET! I have been most influenced by the Gold Stock Analyst - see link on the right. My best recent performers have been Pan American Silver and Kinross, and I think Nevsun is going to catch fire at some point, as well as Western Goldfields and Golden Queen Mining, for example.

  5. I always forget to mention Minefinders when this topic comes up, my favourite of all gold mining stocks, because I have held such a large position for so long that it has become wallpaper. Minefinders has the advantage of being a low-cost producer with its new mine opening in Mexico, where the peso has moderated labour and service costs. I am similarly enthusiastic for long-dated 2011 Goldcorp Warrants, which are one of my largest positions (G.WT.G), and also for long-dated Kinross Warrants (K.WT.B). Pan American Silver Warrants (PAA.WT) have been a favourite in the past, but they expire this February! Nevsun Warrants are interesting under 50c, due to their volatility, but the shares are so cheap I am holding them at present.