To All, Interesting thoughts...
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SOCIETY FOR THE INVESTIGATION OF RECURRING EVENTS
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THE DOMINOES ARE FALLING
HOW ALL BULL MARKETS END
Samuel M Robbins Robbins Planning Company
300 Prince Street, West Newton Ma 02165 (617) 527-1301
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INVESTMENT POLICY - MAY, 1998
The dominoes are falling. The death spiral of competitive devaluations has
begun.
How all bull markets end:
All bull markets in history have ended with a combination of monetary,
banking, money, or currency crisis or all of the above. In this particular
case it started last year in Asia. The politicians blamed the speculators
and hedge fund operators, but it was the locals who foresaw that there was a
global glut coming which would not be kind to their currencies. They sold
their local currencies and bought U.S. securities.
It seems that the business cycle has not yet been repealed. It is now
maturing all over the globe. We have been moving into a new kind of world
where profits will be harder to earn and competition will grow fiercer.
That's why the mega-mergers are taking place. This is one of the many signs
that we are in the final stages of this record boom. Accelerating foreign
buying of American stocks also is a traditional part of a stock market top.
As the Asian tigers compete among themselves for global business with their
devalued currencies, they take business from those countries refusing to
devalue, such as China or the U.S. Thi Chinese have been trying to) prove
that they now have a stable currency. After all they started the whole
vicious cycle of devaluations four years ago with a 35% devaluation. Thus it
is only a matter of time before they meet the competition one more time and
again devalue. Hong Kong is now part of China, so the HK dollar will devalue
too. China has recently announced that corporate profits arc off 83% from a
year ago. They must be putting the world on notice that a devaluation has to
be coming, probably after the first anniversary of the Hong-Kong merger.
China has a long-term goal of making their currency a gold-backed,
world-reserve currency. To that effect they buy all gold produced in the
country. So they hate to have a history of devaluation, but they must bow to
reality. How the other Asian Tigers will retaliate is problematic, but
another round of devaluations will probably follow. All this devaluation
makes dollar-valued goods all the more expensive and uncompetitive.
Asian tigers also compete with Brazil and other South American manufacturers
so that competitive devaluations must follow there in due course. Meanwhile
Russia is suffering extreme inflation and will probably devalue the ruble
again to meet the competition. Meanwhile President Yeltsin talks publicly of
a gold-backed ruble to solve the problem. Like the Chinese, The Russians buy
as much gold as they can lay their hands on, all things considered..
Now that Asian currencies have collapsed, (while gold prices have increased
proportionately in local currencies), Asiatic manufacturers are hell-bent on
exporting goods that are cheaper than ever to American consumers. The
trouble is that this does not take place in a vacuum.
For there is Japan. In the late eighties, the U.S. banking system was in a
state of collapse because "non-performing" ( i.e bad) loans represented 5%
of bank assets. We were concerned because that wiped out the banker's
equity. In Japan things are three times as bad as ours wire, and we have a
more robust economy. Japanese non-performing loans now represent 15% of bank
assets. It is clear that the whole Japanese banking system is going to
collapse, not just individual banks. There is already a flight out of yen
and into) the dollar. The end result will be a large devaluation of the Yen,
reducing prices of exported cars. My seasoned informant at the Curubian
embassy in Tokyo observes that the Japanese people are tough, stubborn and
resilient, that they have amassed vast savings with which to meet all
emergencies, come what may. They will not take the competitive wars lying
down and will do whatever is necessary to survive.
The Japanese were not allowed after WWII to own gold. They were told that if
they wanted reserves, they should hold dollars. All foreign holdings of
dollars reached 650 billion a year ago, but that has now declined to about
600 billions. The Japanese government is believed to have been a major
seller all year in order to sustain the cost of government programs there.
Meanwhile on the other side of the globe, the Euro is gradually taking its
place in the international currency markets. Europeans hope to make the Euro
an alternative to the dollar. They plan on backing the Euro with as much
gold as possible to make it trustable, but as little as possible to allow it
be a competitive currency with the USA and others. The Asian tigers are
talking about establishing a monetary bloc and an Asiatic currency of their
own .
The problem is that all foreign governments and all foreigners are swimming
in a sea of dollars. As they start to diversify away from dollars, the
dollar will begin to decline. As they do more business in their own
currencies, they will need less dollars. As the U.S. slows down and imports
less, it will need less dollars. As the dollar declines, interest rates go
up. As rates go up, the stock market goes down.
As the "almighty dollar" goes down, the world will search for alternatives.
At that point they may discover gold, which might represent good value.
After all it has been declining for 18 years. It will not take much selling
of U.S. stocks and treasuries to ignite a roaring bull market in gold. Ah
you say the central banks will sell. It is now turning out that most central
bank sales were purchased by other central banks. Central bankers may
consider gold the enemy of paper money, but they are not so dumb as to sell
it all. The days of central bank sales is coming to an end. They have
finally figured out that since 1968 when gold began trading in a free market
it has returned more than Treasury bills, in both real and nominal terms.
Gold appreciated 7.4% per year since 1968. Treasuries yielded 4.9% per year
since 1968. Subtract 3.5% inflation from both numbers and gold yielded a
real return of 3.9% per year over the last 30 years versus a real return of
1.4% per year for U.S. T-bills over the same period. If it now begins to
appear that there are more U.S. dollars than people all around the world
need. As we are running bigger and bigger trade deficits which put more
dollars in foreigners' hands all the time, then how many dollars does the
world or this country need ?
It is obvious that as the global boom slows down The world will need less
dollars to do business. Perhaps we ourselves need less dollars. "M-3"- the
broad definition of money- has been growing since 1960 at an average annual
rate of growth of 7.8% per year. I use 1960 as a reference point to
eliminate the effects of WWII. Our economy has been growing at a rate of
about 3.5% per year during this same period. Perhaps our money supply should
only grow as fast as the economy needs it.
That 7.8% rate of growth has created an M-3 today of 5.5 trillion dollars.
At a 3.5% growth rate, today's M-3 would have been $1.2 trillion-78% less.
We have printed 4.7 times as much money as we really have needed over the
last 30 years!!!!!!! Little wonder since Nixon closed the gold window in
1971 that the dollar has declined from 350 yen to the dollar to 125 today.
Little wonder that the dollar has declined from 3.5 German marks to the
dollar to 1.75 today. Even though a pending collapse of the yen will take it
down again, the Japanese will fight like a steer to hold the line as much as
possible, probably at 160 to the dollar. I find it hard to believe the
dollar will decline 78%, but I find it easy to believe it will decline alot
more than people expect.
In other words, the rally in the dollar of the last few years has been the
result of the flight out of foreign currencies combined with a desire to
participate in the final fling of our stock markets.(Foreigners buy blue
chips name brand stocks.) But at some point people are going to weary of
seeing their dollars decline in value.
AT SOME POINT THE WORLD IS GOING TO SEE THE RISKS IN PAPER ASSETS. THEY WILL
SEE THAT THE ONLY PLACE WHERE THEIR MONEY WILL BE SAFE IS IN GOLD. Most
people think gold is simply for inflation protection. It is also a
protection against devaluation. The flight out of paper assets means that
the ingredients of a great crash and a great depression are at hand. I have
been saying this for some years now. It is still true, despite the fact that
most investors arc not listening. It is impossible to tell when they will
start listening. It is impossible to time a world-wide cataclysm with
precision. The dominoes have started falling in Asia, and will not stop
until they have taken all currencies down. Most investors are planning on
selling out just one minute before the top. Obviously that treasured spot is
reserved only for the lucky few. The majority of investors will get badly
burned on the way down.
Ah but you argue that the automatic investors who are making monthly
investments out of their paychecks are sufficient to sustain the stock and
bond markets into eternity. First please recognize that these baby-boomers
are desperate. They have finally figured out that they are not going to get
any social security. So they are rushing private plans for their retirement.
Let's take a look at what has really been happening in social security by
listening to "Sam's Fable":
Many years ago, long before social security, a farmer and his wife decided
to save for their old age. They agreed to put aside a certain amount of
money in a cookie jar every week. This proceeded for some years, but as the
four kids became an increasing drain, there were weeks when they could not
make ends meet. The wife then took some money from the cookie jar. Being an
honest woman she put a note in the cookie jar confirming the amount she had
borrowed. This process continued for years. When they retired, all they had
were a pile of promises to pay. Little wonder President Clinton wants the
suckers to put more money into the cookie jar.
This is why the investment rush is proceeding. After each downside
correction, the baby boomers will "buy each dip" as they have been taught to
do. Until the big one. Then all of a sudden they will realize that they are
55 years old, that they arc playing with their future, that they don't want
to lose it all and they will sell out in panic at the bottom.
My best judgment is that the massive, over-valuation that comprises the
present market top will end in a double top. A decline now, followed by
another top in July or August. The ratio of advances to declines has been
slipping for over a year. That is a distant early warning if ever there was
one.
From then on, all the possible good news for years to come is in the
inflated price of most stocks. The crash should proceed for a year or two,
then rally, and then finally reach bottom in another year or two. It will
take that long to unwind all the excess in the marketplace. If history is
any guide, this market has all the earmarks of the 1720 South Sea Bubble in
England.Until then, there had been a slow gradual increase in prosperity.
Everyone thought that there were great riches in South America to be
exploited. All sorts of companies issued stock in the mania. Stock prices in
"Exchange" Alley" in London, generally rose 10 times their issue price, but
in two years fell 90% from their peak valuation.
If you can find a few worthwhile stocks that have already suffered their own
private crash and depression, invest in them to hedge yourself, and build
cash,
Very Truly yours,
Samuel Robbins |
