(excerpt from Doug's lead article in the International
Speculator of July 2007)
It's been said that if you spend 15 minutes a year trying to figure out the
direction of the economy, you're wasting 13 minutes. First, it's impossible to
predict the future. Second, most successful stock speculators concentrate much
more on individual stocks than on "the market." They look to find the bargains
that are always present regardless of where the overall market is headed.
The general stock market's very long-term trend has always been up, yet there
are setbacks along the trend, ranging from the brief but brutal, such as the
90% drop in stock prices from 1929 to 1932, to centuries-long declines, such as
the Dark Ages. The problem is that you can't count on the long-term trend to
send you a check every month - or even every decade.
It seems to me that, with the exceptions of resource
stocks for speculation and certain foreign real estate for diversification,
gold is really the only place to be at the moment. And it's likely to stay that
way for years. That's because I suspect we could be at the edge of a financial/economic
precipice.
The Greater Depression
People don't seem to grasp that we've had a historically long (since 1982),
broad (every asset class in the world) and steep (e.g., the DJIA from under
1,000 to over 13,000, interest rates from 15+% to 5%) economic and financial
boom. It's gone on so long that everyone pretty much feels that prosperity and
profit are just the way the world works.
But if you credit Austrian School economic theory, which I
certainly do, you're forced to believe that the Business Cycle exists. The
Business Cycle is driven largely by government intervention in the economy, in
the form of taxes, regulation and, most importantly, currency inflation. These
things give false signals to businesses and investors, which cause distortions
and misallocations of capital. When, inevitably, the errors start to be
corrected, the result is an economic downturn. It will be called a "recession"
if the government succeeds in preventing widespread bankruptcies and
unemployment through one more dose of inflation. Or it will be called a
"depression" if things slip out of the government's control.
Am I predicting the Greater Depression may be upon us? Well, I'm not a fortune
teller. But my gut feel is: yes. There's a lot that's likely to go wrong besides
the central problem of the Business Cycle. The problem is that all of these
things are related, so it's likely that when one of them starts running out of
control, they all will.
The Other Things...
War-In recent years, I've done several long articles detailing my views
on this. And things have only gotten worse since then. What is really going on,
under the ridiculous monicker of the War on Terror, is a major conflict between
Islam and the U.S/Israel. I'm no fan of Islam (or Christianity, for that matter),
but I fear the fault lies mostly with us. People don't like foreign troops in
their country, nor do they like foreigners setting up puppet governments to
rule them. My belief is that the only way the war will end is if we do two
things: 1) Sincerely and publicly apologize for our invasions, interventions
and other meddling, and 2) Immediately withdraw U.S. troops, military
contractors and spooks from the over 100 countries where they have a
substantial presence. But there's no way that's going to happen.
The average American believes his government is 100% righteous in its endeavors
to educate/reform/democratize the natives/heathens. And all of the candidates
with the potential to become the next president appear at least as warlike as
Bush (who sold himself as a dove in 2000, lest we forget... no nation-building
adventures for him).
My expectation is that there will be another event comparable to, or worse
than, 9/11. At that point we're looking at something like WW3. It will change
life in many places in the world, but certainly in the U.S., and dramatically for the worse.
Political Controls-For decades, the federal government has cranked out
volumes of new laws and regulations per year. The American public appears to
approve. Sometimes a law is passed to punish a small sub-group but is later
applied to almost anyone; RICO being an example. But since 9/11 the game has
changed. A huge, centralized bureaucracy has been set up as Homeland Security
and, like any bureaucracy, it has a life of its own. When the next serious
"event" occurs, I expect they'll lock the U.S. down like one of their numerous
new federal prisons, in the name of "national security." Guantanamo's shadow
will reach everywhere, and the effect on the economy will be devastating.
Social Unrest-Only an immense amount of borrowing on their credit cards
and against the inflated value of their houses has kept the average American's
standard of living where it is. Meanwhile, the rich really have gotten richer.
Will there be a serious social backlash?
Take the immigrant situation. The Aspen metropolitan area,
where I spent most of my summers, is estimated to be about 50% Latino; this is
the case in hundreds of communities, large and small, in the Southwest and California.
Most Americans appear outraged by new immigrants, at least if listening to Lou
Dobbs' fulminations on CNN is any indication. On the other hand, I can't see
young Latinos, who are a substantial plurality in most southwestern states,
paying 25% of their income in Social Security and Medicare in the
not-too-distant future for the benefit of elderly white ladies in the
northeast. The potential for racially and culturally based conflict exists.
Peak Oil-This theory, developed by M. King Hubbert in the 1950s,
correctly predicted that U.S. conventional oil (light, sweet crude) production
would go into irreversible decline in the early 1970s. Which it did. The theory
also predicts that this will be the case for world production some time between
now and five years from now. Meanwhile, the fact that the world population has
doubled since 1969 - with much of that growth occurring in China, India and the
rest of the Third World where three billion people use a tiny but growing
fraction of what Americans use per capita - means demand is set to continue
growing rapidly.
We're never going to run out of oil. But its price is going much
higher, and
that's going to bring a massive readjustment in the way people produce
and
consume. The adjustment will be the most wrenching in the U.S., simply
because we use by far the most oil per capita, and at the lowest prices.
The Dollar-You've heard this story here many times before. There
are
about six trillion of the things floating outside the U.S., and they're
increasingly treated as hot potatoes. The current $800 billion trade
deficit is
wonderful for Americans' standard of living; generous foreigners ship
us
valuable goods in exchange for fiat dollars. When the trade deficit
eventually
starts turning around, as it must, those dollars will start flooding
back into
the U.S., and real wealth will flow out; the U.S. standard of living
will drop
precipitously. As will the value of the dollar.
Interest Rates-The weaker a currency is, the more the market compensates
with higher interest rates. Bond prices fluctuate in exact proportion to
interest rates. As do, indirectly, stock and real estate prices. At this point
it's hard to see why interest rates shouldn't start heading up in earnest, even
beyond the levels of the early '80s.
And the first hole in the dike portending the end of the current Business
Cycle? For all we know, it may be the bankruptcy of the $6 billion Bear Stearns
hedge fund dealing in low-quality mortgage paper. Six billion dollars is a
reasonable sum, even in today's context, but the real problem is that rates are
just starting to adjust up, housing prices down, and the economy is slow. There
could be hundreds of billions more in losses. And it's impossible to say which
firms that are bankrupted by the default may in turn default on debts to others,
like a string of dominoes. If not contained by the Fed, through the creation of
hundreds of billions of new dollars, the result could be a catastrophic
deflation - similar to what began in 1929.
What will, in fact, happen? Nobody knows, including myself. But I'm quite
afraid we're in for truly stormy weather in the next few years. Most people
aren't adequately, or even at all, aware of this prospect.
I suggest you stay with the approach we advise in the International
Speculator. And that approach has a foundation in gold.
***
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