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Friday October 9, 2009 - 14:48:34 GMT
Black Swan Capital - www.blackswantrading.com

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Gold soaring, paper plunging, and that dog won’t hunt!

Key News
Federal Reserve Chairman Ben S. Bernanke said the central bank will be prepared to tighten monetary policy when the outlook for the economy “has improved sufficiently.” (Bloomberg)
China will carry on with its fiscal stimulus and loose monetary policy as the country's economic recovery is not yet on a solid footing, Chinese Vice President Xi Jinping said on Friday. (Reuters)
German exports unexpectedly fell for the first time in four months in August. (Bloomberg)

Quotable
“How many millions of jobs? In the George W. Bush years, we lost 5.3 million manufacturing jobs, one-fourth to one-third of all we had in 2001.
 
“And our dependence on China is growing. Where Beijing was responsible for 60 percent of the U.S. trade deficit in manufactured goods in 2008, in the first six months of 2009, China accounted for 79 percent of our trade deficit in manufactured goods.
 
“How can we end this dependency and begin building factories and creating jobs here, rather than deepening our dependency on a China that seeks to take our place in the sun? The same way Alexander Hamilton did, when we Americans produced almost nothing and were even more dependent on Great Britain than we are on China today. Let us do unto our trading partners as they have done unto us. As they rebate value- added taxes on exports to us and impose a value-added tax on our exports to them, let us reciprocate. Impose a border tax equal to a VAT on all their goods entering the U.S. and cut corporate taxes on all manufacturing done here in the United States.
 
“Where they have tilted the playing field against us, let us tilt it back again.”
              Pat Buchanan, American Conservative magazine
 
FX Trading – Gold soaring, paper plunging, and that dog won’t hunt! 
 
A lot of people believe the stock market peaked around October 2007.  In the proverbial nominal terms, that is true. But if we consider the two major classes of assets: real stuff (which is real tangible value best depicted by gold) and paper (which is real intangible promissory notes) the real value of the stock market peaked way back in the year 2000. From 2000 onward, it marked era of real stuff dominating paper—reflecting a decline in real wealth as so measured.  
 
The valuation of paper peaked with E-mania (the reason paper was valued was because real wealth supporting those promises was created, to a degree), you remember those years toward the end of the Nasdaq boom. That’s when E-Whatever was soon going to obsolete real brick and mortar stores such as Home Depot and Walmart. The model was burn through cash as fast as you can, give away stuff for free, and your stock price will soar.  But to be fair, the E-mania craze was near the end, pushing valuations into silly season.  
 
The boom in technology/telecom sector in the US during the 90’s drew in lots of capital investment and created real wealth (and boosted the dollar). Incidentally, the US dollar was in a major bull market during the 90’s in case you are a believer that stocks can only based on the canard of a weak dollar. 
 
The Nasdaq bubble went pop in 2000. That is when our illustrious central banks put the pedal to the metal and started creating free credit to save us from ourselves. Of course the run up in stocks after the bust to their 2007 peak was proof that our central banks succeeded. But as you can see in the chart below, measured in real stuff there was no such success. Proof positive again that real wealth is not created by artificially lowering the rate of interest (a lesson the Keynesian crowd for some unknown reason keep forgetting).  
 
So, to say the price of gold has gone up is the same as saying the value of paper has gone down; or tangible value is more highly sought than paper promises.  
 
This circles back to the debate today. To continue to issue paper promises in an effort to create wealth is proven a dismal failure. More paper supply and promises means lower prices on said paper (not just US paper, the biggest supplier, but all paper). It just so happens that the biggest supplier of paper is the one taking an inordinate amount of hits, as it should.  
 
Take a look at the chart below. [Chart not available in text format.] Notice the nice looking symmetry. The left side looks a lot like the right side.  If the time period is similar, it means we have another 10- years of paper falling in value relative to stuff (into 2020), though the majority of the move has passed, assuming we only sink to 1980 level valuations. Problem is there is no reason to suggest we can’t go much lower than 1980 levels. [The symmetry argument may not hold as we know valuations fall faster than they rise, but we shall see.]

I think the average person realizes his wealth had eroded despite being told how rosy everything was, even before the credit crunch. Financial types did well thanks to paper, and many are doing well again, thanks to taxes siphoned from the average person and of course, more paper.   
 
Maybe this post credit crunch period will succeed in intensifying what the market might have been telling us since late 2000—there is a secular change in attitudes toward paper promises. It would help explain why the stimulus isn’t simulating. And it may help explain why consumer installment credit outstanding is tumbling fast for the first time in forever despite the fact we continue to be told recovery is here, please start dancing in the streets. 

The average guy, not having a chance to view the S&P 500/Gold chart was told by all the “free trade” mantra chanting types (which includes almost everyone in the media and economics at any level) that he was really adding wealth during the boom—pre crisis propaganda—and that the intensity of “free trade” and all those goods flowing in freely from China were really “enhancing” his purchasing power. It was no matter Mr. Average was finding his ability to obtain a high value-added manufacturing job shrinking by the day, as so-called platform companies made the only choice good for shareholders profits, transfer lock-stock-and barrel US manufacturing to our “friends” in China.  
 
Friends indeed they are for the same power elite that have continued to position real asset investments in China—the Kissingers’, Bushes’, Gates, Feinsteins’, and Buffets’ of the world, and almost every major US multinational worth its salt. The point being a political and economic class all singing from the same sheet of music despite being on different spectrums of the political isle—supposedly. But they are all on the same side of the isle when they worship at the Church of Free Trade—the money isle. Who can blame them….Dog eat dog…Social Darwinism and all that… 
 
All this wealth being created supposedly as the dollar becomes the sacrificial lamb of “free trade.” Because a lower dollar means more US trade, and wealth, despite the fact that it’s not true.  
 
What is interesting, is that if we compare the Asset Accumulation chart of China from 2000 onward (below), it matches up pretty well with decline if US real wealth beginning in 2000 per the S&P/Gold chart above and the massive ramp up in all types of US dollar-based credit.  

Maybe that is some evidence of a wholesale transfer of wealth from the US to China, sacrificed at the altar of “free trade”? Nah…it couldn’t be. Well, something just doesn’t wash. I do remember my old accounting professor saying to me once summing up proper accounting practice: “Don’t worry; sooner or later it all comes out in the wash.”
 
And that something, I think, is a realization by the average guy, no matter which side of the political isle he is seated, that things just aren’t right.  
 
Of course the Adam Smith and David Ricardo (free traders that likely wouldn’t recommend national suicide in place of free trade) enthusiasts i.e. all Wall Street and think tank economists on the right or left will throw out the argument that the global economy is not a zero-sum game, producing a bevy of statistics to prove China’s gain is a US gain too. There are good arguments on that side of the fence—real free trade is not zero-sum when it crates wealth for both trading partners.  
 
But when real wealth in the guise of “free trade” is siphoned off one country and almost literally deposited wholesale in another because of the interest of those “connected,” it becomes almost a zero-sum game. Thus, it is the real stuff wealth transfer that has created the massive global imbalances we are now trying to alleviate. The “free traders” will tell you it is all something completely different than a transfer of wealth that created the problem, despite that fact one can point to deep loss of manufacturing jobs and skills and decline in real wealth for most of the populace.  
 
All of this stuff is complicated.  But angst is felt in the belly of the average person even though he or she may not be able to verbalize the economics. Deep down, I think this is why there is so much concern about the US dollar and the potential for crisis. The disastrous wealth crushing policies of the US government, through many administrations consecutively is likely why gold is crushing their promises in a big way.  
 
Being from, and living most of my life in the South (but born in the all-knowing all-seeing Northeast corridor), I have many wise friends that would never make it on Wall Street. They don’t know that stuff or care that much about it. They’d rather go huntin' or fishin' or watch a game and drink some beer; and be left alone to just do it. This doesn’t make them any less smart though about the ways of the world. They do clearly understand that something isn’t right—they don’t need a degree in economics to know what that something is—no good jobs.
 
Maybe the dollar catches a bounce. And maybe the dollar starts to look good against other paper that starts to look relatively worse, and does rally for a while.
 
But until there is a clear policy change in terms of papering over the world to create wealth, economists can talk all they want about recovery. My friends would say this, “That dog won’t hunt.” 
 
Have a great weekend.
 
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com 
 

 

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