Monday, September 25, 2006

Market Thoughts

The cover story in this week's Economist magazine is "The Dark Side of Debt." A paragraph from the article, "The world is once again in the grip of a spree of lending, but this time to companies rather than countries. What is striking is that much of this lending is occurring not through public share and bond markets. The issuance of syndicated loans vaulted to $3.5 trillion last year from $ 2.3 trillion in 2000."

The net result of the removal of gold behind paper money has been a virtual explosion in credit creation and liquidity. The sheer amount of liquidity that is floating around the globe is incalculable. Fifty trillion, one hundred trillion? Nobody knows. The only thing we do know is that the total amount of unbacked paper is utterly enormous. The result is that it's floated up the price of everything from stocks to bonds to real estate to commodities.

In the face of this enormous inflation of paper money and credit, the Fed pretends that it's holding back inflation. The Fed does it with phony inflation statistics. The current reasonably accurate inflation number is 7 percent. The current estimation of the M-3 money supply is 9 percent. The only thing holding back massive price inflation today is the massive over-supply of goods.

So today we have the almost unprecedented situation of too much money confronting too many goods. The result is a highly unstable market with accompanying massive speculation and leverage.

And people still ask me why I own gold. Gold offers solid protection against that time when the entire "house of fiat paper" comes crashing down. At which time panicked investors will be wondering whether there is anything left in the system that is real. And, of course, the answer will be gold. It all starts with honest, intrinsic money, and it all ends when honest money is superseded by garbage money. The framers of the Constitution of the United States knew that well, which is why they specified that only "specie" (gold and silver) are real money. But a small group of bankers, with the help of an ignorant Congress, foisted the Federal Reserve onto this nation, and the results are what we have today.

The system is an inflationary fraud, and as night follows day it will collapse. The only mystery is the timing, but in investing the great unknown is always timing. Which is why John Magee insisted, "Don't tell me what to buy, tell me when to buy it." Even Warren Buffett, who lost almost a billion dollars betting against the dollar, knows the meaning of that aphorism.

Stock Market -- Housing is sinking, car sales are sinking, everybody knows that. In the face of this "news," rates are declining and the Fed must be pumping up the money supply. What about the stock market? So far, the stock market is acting as if declining interest rates and plenty of liquidity is going to produce a "soft landing" in the economy -- and I emphasize the phrase "so far." Because the stock market can change its mind overnight.


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Blogger seamus said...

Help me out with this. What are you going to DO with the gold when the "house of paper money comes down"? Use it to buy food? Convert it into worthless paper money? Melt it down into your own currency?

What makes gold more valuable and real than, say, greenbacks or beads? Just its age as a form of currency?

11:52 AM  

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