|
What’s happening
now is panic, says Joseph McAlinden, who thinks
that the financial system will survive it and that a year from now the Dow
will be dramatically higher. Chairman and CEO of Catalpa Capital LLC, and former
managing director and global chief investment officer for Morgan Stanley
Investment Management, McAlinden believes gold
continues to be an asset class of choice, despite the decline during the late
summer sell-off.
The Gold Report: What does it mean when major investment banks are
disappearing and the federal government steps in to bail out Fannie Mae,
Freddie Mac, AIG and others? Where will this money come from and what will it
mean for gold?
Joe McAlinden: The events of recent weeks have radically changed the
progress of what had been a pretty unpleasant business cycle experience in
the past year, in particular the credit crisis. It’s unclear whether
the events of the last week are a climactic "breaking of the levee after
the hurricane has gone through” type of thing or if it’s just the
beginning of the hurricane hitting. So, it’s a very, very challenging
time.
I do think that the financial system will survive
it and that a year from now the Dow will be dramatically higher, and that we
will manage to avoid disastrous economic consequences, as has really been the
case so far. We’ve had a pretty ugly credit environment already, yet
the GDP through the second quarter was continuing to expand in the United States.
But things have deteriorated rapidly and severely
since then, with the federal government having to step in, acquiring the GSEs (government-sponsored enterprises), bailing out AIG,
and expanding the Fed's lending facility yet again, among other new things.
All of this has to have consequences. Now, some
have argued that the consequences are going to be deflation because of the
implosion of credit. You could also argue that it’s going to be very
inflationary because the Federal Reserve Bank is essentially going to have to
print more money to pay for all this stuff.
I fall into the latter camp. I think that gold
continues to be an asset class of choice despite the decline that we have had
over this late summer sell-off. And I think that the price band of $800 to
$1000, which I thought would prevail (although that was penetrated on the
downside), is still what your target expectations ought to be. If anything, I
think it could be penetrated on the upside with the events that occurred last
week.
TGR:
How do you see the market recovering?
JM:
What’s happening now is panic. Lehman Brothers got into trouble, and
people began speculating about what would come next. Merrill Lynch
disappeared; Lehman went bankrupt and there are only two left—Goldman
Sachs and Morgan Stanley.
And so speculators began selling and shorting
those stocks heavily and wild rumors started
circulating. The companies tried to reassure people. So, it was a very ugly
period. From my own experience, when things get this hysterical, it’s
usually is the sign of a bottom. Hopefully the turning point will prove to be
the announcement of the Paulson new rescue plan.
TGR:
How did it play out in ‘29?
JM:
1929 was different. You had all sorts of fiscal and monetary policy mistakes
that were made in the wake of the stock market crash. The economy was not
experiencing anything like a depression.
When the stock market broke, the government went
to anti-trade restrictive policies with tariffs and protectionism. Hoover actually raised
taxes. And most importantly, the Federal Reserve followed a bad policy and
wound up contracting the money supply when they should have been expanding
it.
Now, I can’t guarantee that the same
mistakes won’t be made again, but at least this Fed has the benefit of
history, and has a Fed chairman who has studied what happened in the '30s
very extensively and is very informed on it. So, I would bet that
that’s not going to happen, which is why, rather than betting on
deflation, which would lead you to shorting gold, I
think the outcome of this is going to be inflation.
TGR:
So, similar to what we had in the '70s?
JM:
Yes.
TGR:
And you think this is going to be the bottom on the Dow or the S&P?
JM:
To be honest, I thought we had hit a bottom in March and then again in mid-
July, but things on the credit side have worsened. Interestingly, as this has
been happening, there has been evidence that home prices, which triggered
this whole chain of events, are actually stabilizing. It’s very
debatable, but we’re seeing things that would suggest, not that home
prices are recovering, but that they’ve stopped falling, and to the
extent that they’ve stopped falling, it has major positive implications
for the financial community.
To use the hurricane metaphor again, if home
prices are stabilizing, then what that suggests is that the brunt of the
hurricane is actually past. But the follow-on rain and the accumulated water
is so bad that the levees are cracking and now certain neighborhoods
and people will experience the worst of the consequences, which is the
slamming of Wall Street.
So, it’s tough, and so certainly people
should hold on to some cash if they’ve got any left, and I definitely
think that precious metals have a place in portfolios.
We know that historically September and October
is a period when major bottoms are made in big bear markets. When you go back
through these cycles, the fourth quarter is a period when bottoms are formed,
and we certainly aren’t forming a top, that’s for sure.
The Gold Report
www.theaureport.com
Visit The GOLD Report - www.theaureport.com – a unique, free site featuring summaries of
articles from major publications, specific recommendations from top worldwide
analysts and portfolio managers covering gold stocks, and a directory, with
samples, of precious metals newsletters. To subscribe, please complete our
online form, or send an email with the word 'Subscribe' in the subject field
to subscriptions@theaureport.com.
The GOLD Report is Copyright © 2005 by
Streetwise Inc. All rights are reserved. Streetwise Inc. hereby grants an
unrestricted license to use or disseminate this copyrighted material
only in whole (and always including this disclaimer), but never in part. The
GOLD Report does not render investment advice and does not endorse or
recommend the business, products, services or securities of any company
mentioned in this report. From
time to time, Streetwise Inc. directors, officers, employees or members of
their families may have a long or short position in securities mentioned and
may make purchases and/or sales of those securities in the open market or
otherwise. Streetwise Inc. does
not guarantee the accuracy or thoroughness of the information reported.
|
|