fleck commented on it tonight
Thus far, Greenspan and the Fed have basically been issued a pass after going 0 for 12 on the rate-cut front. Folks still have faith in the Fed, I believe, because the housing bubble has kept the consumer feeling more or less OK, even as people lose their jobs or know someone close to them who has lost his job.
However, I believe that later this year, people will finally be forced to realize that our problems are a result of the mania and are long-lived. That psychological readjustment will come about when the economy and the stock market don't come back (excluding some minor postwar relief bounce).
Along with that realization, folks will start to contemplate what happened in the '30s, even though things are different now, especially in terms of our currency regime. They will contemplate what's gone on in Tokyo for the last 12 years, where now 60% of the stocks on the Tokyo Stock Exchange sell below book value, contrasted to the three-times book value that stocks sell for here.
I think that at some point, the exact moment being unknowable, folks will recognize that the Fed has ruined the financial system, the Fed is powerless to stop the bear market, and the Fed is powerless to fix an economic bust precipitated by the misallocation of capital that occurred in the mania.
That realization, I believe, will cause folks to lose confidence, and that loss of confidence will set off an avalanche in stock prices, forcing them to be valued as the fractional shares of businesses that they are, instead of the conceptual fantasy lottery tickets that they have become. I believe that this loss of confidence, both here and worldwide, will also cause the dollar to be reappraised as the piece of confetti that it has become.
Now, I don't say any of this because I want it to happen. I say this because to me, it was preordained by the policies that precipitated the bubble and the policies that have gone on since the bubble. I don't root for any of this to occur, but I fear it will occur. My choice is to be prepared, and to do the best I can in that environment.
Unfortunately, when it comes to looking at other currencies, the euro and the yen are not a whole lot better than the dollar. I sort of view each of them vs. the dollar as a one-eyed man in the land of the blind. Not too interesting, just slightly better alternatives. However, all of this is very bullish for the only currency that has been in existence for 5,000 years, that cannot be printed, and is no one else's liability -- i.e., gold. I would like to be clear that when I say gold, I also mean silver in the same breath, as I stated at the outset. Just as buying stocks until your hands bled was a state of mind of supreme confidence in the mania, owning precious metals is, to repeat, the expression of the lack of confidence in the monetary authorities, an oxymoron if there ever was one.
I believe that investor demand, the lack of which has been responsible for holding back the metals, will finally manifest itself as this year unfolds and the problems that I have articulated become clearer to people. Greenspan, in particular, has painted himself into a corner, at last, by blaming all of our current problems on "geopolitical uncertainties" surrounding the Iraq war. This is why I feel that we have a potential catalyst to cause people to re-evaluate their thinking. When the alleviation of those geopolitical concerns fails to ignite the economy and the stock market, the game will be up, and the race to protect oneself will be on.
I have no clue as to the precise timing of this scenario, since a lot depends on the length and potency of the relief rally in stocks and the economy. However, the relief rally in the dollar has been especially pitiful. Basically, the euro traded from $1.10 to $1.06 in three days, so we had a mild 5% correction, after a nearly 25% move in the euro. And of course, the euro is now back over $1.10.
This suggests to me that the dollar is on borrowed time, and trouble is coming, sooner rather than later. It also means to me that the price of gold has seen its lows. And, while the tsunami of investment demand that I envision may still be months away, I believe the surprises will now all be on the upside for gold. |
