Jeremy Grantham, Grantham Mayo Van Otterloo
Everything is in bubble territory. Everything. From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it's bubble time! The bursting of this bubble will be across all countries and all assets.
Bernard Ber, CIBC
Let us return to the sequence of events that led to the stock market crash of 1929 and the Great Depression in the 1930s. Back in 1966, the most esteemed Alan Greenspan himself wrote the following in an essay entitled "Gold and Economic Freedom":
When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates.
The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.
Do we see any parallels here?
The two major players in the world financial system at that time were the United States and Great Britain. The United States was the emerging industrial power, whereas Great Britain was the mature and stagnating industrial power. The central bank of the emerging industrial power (the US) printed money in an effort to prop up the economy of the mature industrial power (Great Britain). The inflation of the money supply resulted in the overheating of the economy and the stock market of the emerging industrial power. It was the crash in the stock market of the emerging industrial power (the US) that brought about the crash in all the world's stock markets and the Great Depression followed later.
Now fast forward to today, and what you see is China as the emerging industrial power and the United States as the mature and stagnating industrial power. China is printing money in an effort to prop up the economy of the mature industrial power (the US). The inflation of the money supply is resulting in the overheating of the Chinese economy and stock market. Very interestingly, on February 27, 2007, it was the sharp 9% one-day drop in the Chinese stock market that led to the sharp drop in stock markets worldwide, including the US.
People may be conditioned to think that economic events in developing countries pale in significance to economic events in the US, and may fail to see how what happens "way over there" in China would have any significant impact on their economic well-being. But how different the truth really is. I think most people even now after the February 27th turn of events, fail to grasp why the US stock market sold off so sharply after the Chinese stock market sell off occurred first. The idea that a foreign stock market could dictate what happens in the US stock market almost offends the American sense of national pride (so the event is casually dismissed as "market irrationality"). A word of advice: you better get used to it, as there is much more of that to come. The crash is coming.
Richard Daughty, The Mogambo Guru
I'll say it again, as if I haven't said it enough already: The dollar is going down because we acted like idiots, and so load up on gold, silver and the shares of oil companies to save yourself. This Mindless Mogambo Strategy (MMS) has worked like a charm for quite awhile now, and so it IS "the trend." And as everyone knows, "the trend is your friend!"
Bill Fleckenstein, Fleckenstein Capital
Wall Street continues to view stocks as one-way bets, with positive outcomes. Every day, I am more and more astounded by the bravado/denial that I see. If you told this crowd that the world was going to end on Friday, they'd be buying stocks in anticipation of the rebound they would expect to occur after its demise. How anyone can be sanguine about how this movie ends is beyond me.
On a side note, operators in the LBO world seem keen to IPO themselves because they can see that valuations are so stupid. Thus, they're in the process of trying to have it both ways: getting paid huge fees to take companies private, while preparing to take themselves public based on their huge fee income.
Mark Kiesel, PIMCO
One question my friends and colleagues have asked me repeatedly over the past six months is: Are you still renting? Yes! I sold my house over a year ago and continue to rent. Based on the current outlook for housing, I will likely be renting for one to two more years.
Housing is today's leading indicator of economic growth and risk appetite. An extended downturn in housing will likely lead to slower job creation, softer corporate profit growth, tighter lending standards and weaker consumer and business confidence. The Fed should lower the Fed Funds rate as soon as we have confirmation that the employment situation is deteriorating. By that time, credit spreads will have already anticipated the fact that risk appetite is set to turn for the worse.
Paul Lamont, Lamont Trading Advisors
When the effects of inflation have been extracted, the DJIA is much more cyclical than Wall Street promoters would care to admit. After optimistic peaks of 1834, 1906, 1929, and 1966 the DJIA subsequently moved to the bottom of the long term trend channel. These bear markets were either inflationary, such as the 1966-1982 bear market or deflationary such as in 1929-1932. We have also noticed that inflationary/deflationary crashes tend to alternate. We suppose this is because Mr. Market likes to fool even the bears. Today we are again at the top of the trend channel. How will we fall? Most bears remember and fear the stagflation of the 1970s. However with debt levels currently high, inflation cannot be maintained for an extended length of time. Debtors would merely file for bankruptcy or foreclosure (as they have begun recently). Instead a deflationary spiral similar to 1929-1933 or 1834-1842 is likely. It appears the rule of alternation will continue.
John Mauldin, Millennium Wave Advisors
Rising prices create their own kind of self-fulfilling momentum. As more and more people throw caution to the wind and jump into the market, hoping to capture some of the profits they see their friends making so effortlessly, you finally get down to the last bear standing. Mr. Market will do whatever it takes to prove the most people wrong. And one of his favorite things to do is to create momentum markets which defy the logic of the underlying fundamentals. It then ends in tears.
Hyman Minsky, as quoted by Prudent Bear's Doug Noland
An understanding of the American economy requires an understanding of how the financial structure is affected by and affects the behavior of the economy over time.
It should be noted that the stabilizing effect of big government has destabilizing implications in that once borrowers and lenders recognize that the downside instability of profits has decreased there will be an increase in the willingness and ability of business and bankers to debt-finance. If the cash flows to validate debt are virtually guaranteed by the profit implications of big government then debt-financing of positions in capital assets is encouraged. An inflationary consequence follows from the way the downside variability of aggregate profits is constrained by deficits.
Mike Maloney, GoldSilver.com
Why does everyone think the Dow is going up, when it is actually going down in value?
According to the Minneapolis Federal Reserve, total inflation from 2000 to 2007, using the Consumer Price Index, is just about 20%. This means the Dow would have to be at 14,100 just to break even. And that's if the CPI wasn't a made-up, hocus-pocus, voodoo fabrication (which it is). Here's why.
In calculating inflation, the Bureau of Labor Statistics (BLS) takes a basket of goods and services and tracks their prices throughout the years. This worked just fine when they would track the actual price of the same items year after year. The problem is they no longer use the actual price, and they no longer track the same items year to year. If the price of an item has gone up so much that it might make whichever administration that is in power look bad, they simply drop that item from the basket of goods (deletion), switch to another item (substitution), or make up their own price (hedonic adjustment). Yes, the BLS has become just another division of the governments "Ministry of Propaganda". Its job is to manipulate the numbers, so as to paint smiley faces all over the economy.
...[This kind of] "invisible crash" is a product of a fiat currency system and/or rampant credit creation. It requires a rapidly expanding money supply to obscure the fact that an overvalued asset class is correcting and reverting back to fair value or less. It cannot happen on a gold standard with conservative fractional reserve banking practices. Therefore, it didn't happen in the United States until the 1970s and today. But it has happened numerous times throughout history once a country leaves an asset backed currency standard. The stock of the Mississippi Company of John Law's France, and the German stock market during the Weimar hyperinflation come to mind.
Doug Noland, PrudentBear
The "2006 Vintage" of residential mortgage loans is now recognized as being in a class by itself (recalling the 1999/2000 Vintage of telecom debt). This predicament supports a central tenet of Macro Credit Theory: Credit losses (and maladjustment) expand in an exponential manner in the late stages of a Credit boom. Invariably, the benefits of prolonging frenetic "Ponzi" financial schemes will appear much more appealing than the alternative. The fundamental backdrop in 2005 (and earlier) beckoned for a major tightening in mortgage lending standards, one that rampant marketplace liquidity ensured was delayed for a number of perilous quarters. The upshot was a year of absolutely atrocious lending that is now coming home to roost, along with ongoing excesses ensuring that the roosting process has years to run.
Michael Nystrom, BullNotBull
When I was about 9 years old, my father took my elder sister and me to see a performance by a famous magician called Blackstone. What I remember most about the show is when Blackstone, with a flourish of his cape, made an elephant appear onstage out of thin air. It was an astonishing feat, and the crowd - including me - went wild with applause. I had no idea how he did it. After the show however, as we were exiting the theater, my elder sister said, "I didn't see what was so great about that elephant. It just walked onto the stage and everyone started clapping."
My sister's revelation was just as amazing as the trick itself, which suddenly made perfect sense. Blackstone had used some kind of sleight of hand, distracting the audience over here while he got the elephant to walk on stage over there. With this simple, well-known magician's tactic, he managed to fool just about everyone.
Yesterday, as the Dow "smashed its all time high," closing above 13,000 for the first time in history, I was strangely reminded of Blackstone's performance that day some thirty years ago. The Dow's current levitating act is the result of another well-known sleight of hand trick used by central bankers. It's called inflation. Even so, most everyone is mesmerized by the performance. Everyone seems transfixed, clapping in amazement at this spectacular feat.
Enrico Orlandini, Dow Theory Analysis
So what else bothers me? Bush along with US domestic and foreign policy just scare the hell out of me. Did you ever know an accident was about to occur before it did? That's the way I view US policy. My fear is aggravated by the extremely high level of complacency that exists in absolutely every fiber of American society. How do you measure complacency? The market has its barometer and it's called the VIX which is short for Volatility Index. I've been in the investment business for a while now and I don't recall such a prolonged period of high P/Es, low dividend yields, and low VIX readings. Either everyone has ice water running through their veins or everyone is piled over on the wrong side of the boat. Any bets on how that will end?
Rob Peebles, PrudentBear
After four years of rising stock prices a person might wonder how private equity investors can keep finding companies cheap enough to deliver decent returns on their investment. According to Thomson Financial, private equity firms bought 654 U.S. companies last year. But were they bargains? Were they bought cheap enough to produce a decent return on their $375 billion cumulative price tag?
Here's the answer: It doesn't matter.
That's the great thing about being a private equity investor. It doesn't have to be about the Return on Investment or the ROI. There's always the RFP, or Return From Pillage. So far, RFP has come in the form of "management" fees and "dividends" paid by recently-privatized companies to the privateers who privatized them.
Wall Street Journal reporters Greg Ip and Henny Sender described these innovative forms of compensation in a July 25, 2006 article using Burger King as an example. Here's how private equity investors got it their way with Burger King: First, Burger King paid the private equity folks $22.4 million in "professional fees," apparently for shepherding the company from the public wilderness into the loving arms of private equity owners. Then, after three years of restructuring and other voodoo, and three months before releasing Burger King back to the public, Burger King paid the investors a $367 million dividend.
After reviewing such a transaction, a person might exclaim, "Zowie, what a turn around to be able to afford to pay yourself almost a gazillion dollars!" But that person would be exclaiming in the wrong direction. That person should be exclaiming, "Zowie, you loaned money to Burger King to pay almost a gazillion dollars to their own owners!" That's because Burger King borrowed the money for the dividend, the sort of thing that apparently is possible at the late stage of a credit bubble.
Ron Paul, Texas Congressman
The fiscal year 2008 budget, passed in the House of Representatives last week, is a monument to irresponsibility and profligacy. It shows that Congress remains oblivious to the economic troubles facing the nation, and that political expediency trumps all common sense in Washington. To the extent that proponents and supporters of these unsustainable budget increases continue to win reelection, it also shows that many Americans unfortunately continue to believe government can provide them with a free lunch.
Peter Schiff, EuroPacific Capital
As the Dow burst through the 13,000 milestone this week, few understood the hollowness of the achievement. Measured against the rising dollar-denominated prices of just about everything else on the planet, the Dow has actually lost value over the past seven years. Measured against the truest benchmark, the price of gold, the record high for the Dow was set back in January of 2000 when its price equaled approximately 43 ounces of gold. Today it is only worth about 19 ounces.
To better appreciate just how much of stock gains can be attributed to inflation, consider that the record high for the Dow in 1929 of approximately 380 also equated to 19 ounces of gold. So despite all of the hoopla and a thirty-fold increase in stock prices, the Dow has actually gained no real value during the past eighty years. The entire rise from 360 to 13,000 has been an illusion made possible by the magic of inflation. So much for the concept of stocks being a "can't lose" long term investment -- unless you feel that eighty years is not quite a long enough time horizon!
Jay Taylor, J Taylor's Energy & Energy Tech Stocks
We Americans have come to think it our natural-born right to be able to drive huge SUVs while most of the world lives in relative poverty. But our materialistic view of the world is on a collision course with a new reality that will be forced on us and will reduce our standard of living. The new reality I speak of is derived from a combination of declining production of oil, especially cheap oil, and rising competition from huge numbers of middle-class people from places like China and India as well as other lesser-developed countries. We are going to continue to pay much more for oil, as various geopolitical interests compete for dwindling supplies of oil, and as central bankers print more and more money in a self-deceptive move to try to pretend to society that we can afford expensive oil.
Steve Saville, Speculative Investor
Now, it is certainly possible that the knock-on effects of weakness in the US residential property market will postpone the start of a major decline in the bond market until the first half of next year, but there's little chance of it being postponed any longer than that. This is because central banks and governments can be relied upon to respond to every economic problem by promoting more inflation as long as they have the freedom to do so. And they will have the freedom to do so until bonds break below major support and begin to accelerate downward. In other words, if things get bad enough on the economic front to underpin the bond market during the second half of this year then the monetary authorities will undoubtedly take actions that set the stage for an even bigger inflation problem thereafter.
Jim Willie, Hat Trick Letter
A powerful gold and crude oil rally is soon to be unleashed. The gold push will be unwanted, but demanded by a weak USDollar. The oil push will be secretly ordered.
Three sources have supported the gargantuan US credit appetite in the last several years. The Asian trade surplus recycle has essentially disappeared, without publicity or fanfare. The Persian Gulf petro surplus recycle is going in full bore, under the shroud of accounting diversions, with little attention paid. The USGovt printing press has been turned loose in unprecedented fashion, without the harsh light of tracked M3 Money Supply statistics. Look for a higher crude oil price, like one to hit $80 per barrel, and a higher gold price, like one to hit $750 per ounce, in the coming months. Look for mindboggling creation of new money to come also, under the cover of darkness, to paper over the mortgage bond black hole, to avert associated credit derivative accidents underway. We are in the Weimar Age of modern money. Good prefers light; evil embraces darkness. In full light, the gold rally would be afforded greater tailwind. Even in darkness, gold will thrive since confidence erodes in darkness. Darkness is the constant theme to both the current financial system which manages the USDollar, and to a lot more of the national drumbeats.
Naomi Wolf, The Guardian
Last autumn, there was a military coup in Thailand. The leaders of the coup took a number of steps, rather systematically, as if they had a shopping list. In a sense, they did. Within a matter of days, democracy had been closed down: the coup leaders declared martial law, sent armed soldiers into residential areas, took over radio and TV stations, issued restrictions on the press, tightened some limits on travel, and took certain activists into custody.
They were not figuring these things out as they went along. If you look at history, you can see that there is essentially a blueprint for turning an open society into a dictatorship. That blueprint has been used again and again in more and less bloody, more and less terrifying ways. But it is always effective. It is very difficult and arduous to create and sustain a democracy - but history shows that closing one down is much simpler. You simply have to be willing to take the 10 steps.
As difficult as this is to contemplate, it is clear, if you are willing to look, that each of these 10 steps has already been initiated today in the United States by the Bush administration.
Because Americans like me were born in freedom, we have a hard time even considering that it is possible for us to become as unfree - domestically - as many other nations. Because we no longer learn much about our rights or our system of government - the task of being aware of the constitution has been outsourced from citizens' ownership to being the domain of professionals such as lawyers and professors - we scarcely recognize the checks and balances that the founders put in place, even as they are being systematically dismantled. Because we don't learn much about European history, the setting up of a department of "homeland" security - remember who else was keen on the word "homeland" - didn't raise the alarm bells it might have.
It is my argument that, beneath our very noses, George Bush and his administration are using time-tested tactics to close down an open society. It is time for us to be willing to think the unthinkable - as the author and political journalist Joe Conason, has put it, that it can happen here. And that we are further along than we realize.
Martin Weiss, Safe Money Report
Forgive me if my message to you is both brief and blunt:
The U.S. dollar is sinking into the toilet.
No one is able or willing to come to its rescue.
Investors who fail to take protective action could get hurt badly.
And those that act promptly stand to make some of the greatest fortunes in recent memory.
