A speculator is a trader who approaches the financial markets with the
intention to make a profit by buying low and selling high (or higher), not
necessarily in that order. The speculator is distinguished from the investor,
who approaches the financial markets with the intention of making a return on
his capital. and does not try to predict the ups and downs of the market. In
simple terms, the speculator is interested in price action. The investor is
interested in dividends.
The problem with many people trading in today's markets
is that they are speculators but do not like to admit that fact and persist
in calling themselves investors. The idea here is that speculation is evil
while investment is somewhat respectable. Not wanting to think about issues
of good and evil they simply accept society's opinion and let it dominate
their life.
This is a disaster because, not admitting to
themselves that they are speculators, they give no thought to the issue of
how to be good speculators. This was evident from the people who attended the
gold conferences of the late 1970s. I often tried to warn those people,
"Gold is approaching $800. It is no longer undervalued, as it was in
1970. Indeed, it gives every indication of being overvalued at the present
time. This is a time to be careful."
I might as well have been talking to a wall. These
people had come to the conference because they wanted to speculate. That is,
they wanted to buy gold and sell it at a higher price. But they did not want
to do the hard thinking that would tell them whether gold was going up or
down. Gold had gone up in the past. Therefore, their emotions told them that
it would go up in the future. Despite my good record they did not want to
hear my dissenting voice. They gave no thought to how one predicts price movements.
The best way to predict price movements in stocks
was taught by Ludwig von Mises, the head of the Austrian school of economics.
Von Mises taught that whenever the central bank interferes with the credit
market and moves the free market rate of interest below its true value, this
causes a rise in the capital markets (i.e., the stock market). Let us take a
simple example. When the U.S. central bank was created in 1914, it lowered
the rate of interest from 6% to 3%. Since stock (earnings) yields are
competitive with real bond yields, stock yields had to fall from 8% to 4%.
But the only way for this to happen was for stock prices to double. Sure
enough, from late 1914 to late 1916 the DJI went from 53 to 110.
I first applied this theory in 1969. The Fed
tightened after the election of 1968. I saw rates move up and bonds decline.
So I turned bearish on stocks, just in time for the bear market of 1969-70. I
have been calling bull and bear trends in the stock market for the past 40
years. This does not work all of the time because a few major term market
moves have other causes. But it works for about 90% of the major term moves.
I have been doing this successfully for the past 40
years. This includes some brilliant calls, such as the late 1974 bottom, the
1982 bottom, the October 1987 crash, the 1988 bull market, the bull trend of
the 1990s. I turned bearish on stocks in early 2000, turned bullish again in
Oct. 2002 and then switched over to gold. I am not shy about my methods and
have written a book on money and credit. Somewhere over this long time period
one would think that somebody in the establishment would have listened.
But, you see, they don't have to think any new
thoughts. THEY ALL HAVE TITLES. The title "proves" that they know
economics - even though they don't know economics. And large numbers of
people are so impressed by these titles that they believe establishment
economists whatever they say and no matter how many times they are wrong.
I have done a study as to who gives establishment
economists their titles. Well, the first answer is, THEY GIVE THEM TO EACH
OTHER. You see, Adam Smith never had a title in economics. He was a professor
of philosophy. But of course the Wright Brothers never had a title in
airplane design. Indeed, they never even finished high school. That was the
old America where a man was judged by what he accomplished, not by his
title.
Consider mutual funds. If you buy a mutual find,
then you pay a fee, which includes the salary of the fund manager. But fund
managers, by and large, can't do their jobs. Over time, the average mutual
fund manager underperforms the market. For example, if you put $100,000 into
the average American mutual fund on Jan. 1, 2000, than on Jan. 1, 2009,
according to the Lipper figures, that has shrunk below $78,000. The figure is
only reported every 3 months, but estimating by what the market has done
since that time, today your speculation has shrunk to $60,000. And all these
people can say is, "Buy and hold good sound stocks for the long
pull." (The One-handed Economist's Model Conservative Portfolio
is up from $100,000 to $155,000 over the same period.) If the fund managers
are not doing the job, why should they get paid? If you brought your car to
an auto mechanic and it came out worse than it went in, would you bring it
back next time? Of course not. But that is because you are not in awe of the
auto mechanic's title as you are of the fund manager's title. For this
reason, most auto mechanics know how to do their jobs.
The second answer about titles in economics is that
a half century ago they were bought out by the bankers. Specifically the
Manhattan Bank (later merged into Chase-Manhattan and then into J.P. Morgan)
established a chair of economics at Harvard University for John Kenneth
Galbraith. Galbraith was one of a group of crackpots who said that, if the
bankers are given the privilege to legally counterfeit money, this is the
road to plenty for the society. Harvard was not going to hire Galbraith on
its own. But when the Manhattan Bank waved around its money, they grabbed it.
Using the prestige of Harvard (which they had just bought and paid for) these
bankers took over the economics departments of first the most prestigious and
later all the schools of economics in the country. Today there is hardly a
teacher of economics in the country who knows any economics. This is why
their students - who become the fund managers - cannot do their jobs.
So the first thing that you, as an up-and-coming
speculator, need to know is, who are the experts who really can do their jobs
and who are the phonies who try to impress you with their titles? This is the
American way. You start off with whatever level of knowledge you have. You
explore, you listen, and you test what you hear against the facts. If a
theory works, that is supporting evidence that it is true. If it doesn't
work, then it isn't true.
For example, John Maynard Keynes stole his economic
theory from two Americans, William Trufant Foster and Waddill Catchings who,
in 1928, wrote a book called The Road to Plenty. The road to plenty
for a society, Foster and Catchings said, was to abandon the gold standard
and base the economy on paper money. Foster and Catchings never caught on
because they were too conservative. Keynes was smart enough to disguise their
theory as liberal and progressive. In this form, he taught it to John Kenneth
Galbraith and the other crackpots of the day. Well abandoning the gold
standard was not the road to plenty for our society. We broke the last tie to
gold in 1971, and real wages in America peaked in 1972. Now the country is
getting poorer. When America was based on a gold standard (1788-1933), it had
the greatest economy of any country in the world at any time of history.
So the theory adopted in 1971 did not work. And the
economists who promote this theory do not know economics. Abandoning the gold
standard was certainly the road to plenty for the bankers and for Wall
Street., but it was not the road to plenty for America. While the stock
market went up, the real wages of the average working man went down.
Let us consider retirement. Today a lot of Americans
look to the stock market for their retirement. This was not true prior to
1933. Retirement as an institution was created in America by Noah Webster
(who gave us the American dictionary). In 1785-86, he toured the 13 new
states and convinced key legislators to legalize the paying of interest (at
least in the North). People than started saving and taking their money to the
savings bank, where it earned them a steady 5% (real) interest. If you earn
5% interest over a 49 year working lifetime (16-65), your savings are
multiplied by four times. And this multiple of four means that it is possible
for the average person to save enough for retirement. Retirement became an
institution in America (and Britain) starting in the early 19th century.
But the stupid "economists" of today do
not even know what retirement is. Retirement is a period, usually near the
end of one's life, when one stops working and lives off of one's savings.
Retired folks consume wealth, but they do not produce wealth. Now let me ask,
how it is possible to have large numbers of people in the society consuming
when they do not produce?
Noah Webster's answer was that during all the time
these people had been saving money, their savings were used by businessmen
(taking loans from the banks) to buy/build machines (or other forms of
capital) which increased the per capita productivity of the average worker.
Some of these machines were very powerful and increased productivity by
50-100 times. So the saver had contributed his share to a 50-100 factor
increase in the wealth of the world. Paying him fourfold was a very modest
price. Thus the consumption of the retired class was produced by the new,
younger workers, who were enabled to produce so much because of the better
machines, which in turn were made possible by the savings of the retiree.
That is the way that the system used to work. But in
1933, FDR switched from a gold standard to a paper money system, and from
that day to this real interest rates on riskless investments in the U.S. have
been 0%. (Today nominal rates are 0%, and real rates are negative.) As a
result, Americans have pretty much given up savings.
Okay, if you can't get 5% real interest on your
savings, what do you do to retire? The answer, for too many people, is the
stock market. But quite frankly, the stock market is a long way from being
riskless. In the 19th century, no one thought of getting his retirement out
of the stock market. In the days of Charles Dow, the DJI went back and forth
between 50 and 100. There was no long term trend. In our own day, the rise in
stocks from DJI 800 in 1982 to DJI 14,000 in 2007 was caused by three
factors: 1) Wealth was transferred from the worker to his employer as wages
lagged the rise in prices. 2) Wealth was transferred from the saver and
retired person to the debtor (again the large corporation) by continually
declining interest rates. 3) Capital goods (stocks) were given a higher
valuation in relation to consumer goods, again because of declining interest
rates. But the essential factor was missing. There was no saving and
creation of better machines. A society cannot get richer by the technique
of one part stealing from the other part. It can only get richer by the
creation of wealth. The auto industry is a good example. What made the
auto industry great was that Henry Ford figured out how to make good cars
inexpensively. Every car that rolled off his assembly line represented a gain
in wealth for the society. A car that had cost $2000 now cost $400. What do
auto executives do today? Do they figure out better ways to create wealth?
No, they go to the Government and say, "Steal from the poor and give to
us." And the President says, "I am the friend of the poor. Here's
the money."
So taking your retirement out of the stock market is
a foolish plan. The stock market is a group of people speculating against
each other. It has much the aspect of a neighborhood poker game. Some may
win, but some will lose. And at the end of the night, the average player has
broken even. You can't retire by breaking even.
The error of those who say that over the long pull
stocks always go up (or who said this in 2007) is that they take too short a
time frame as reference. The correct proposition is that stocks always go up
as long as the quantity of paper money is increased. But whether the paper
money will be increased or decreased is a political decision (made by the
Fed).
And the important factor influencing the Fed's
calculations is the fact that we are now in the (second upswing of the)
commodity pendulum. Commodities got horrifically undervalued (in real terms)
in 1999-2001. They are now recovering from that undervaluation but are still
low in real terms. If you want to know what is going to happen to the U.S.
economy, then you have to study the history of the 1970s (not the 1930s). Do
you remember when Paul Volcker increased the money supply by 17% in 1986? Do
you remember when Alan Greenspan increased the money supply by 15% in 1993?
We did not get corresponding increases in the Consumer Price Index from those
increases in money.
The reason was that commodities were then on a
downswing, and the commodity declines undercut the consumer price increases.
That is also what happened in the 1960s. But now commodity prices are on the
rise (the decline of '08 being a small blip on the long term chart). As commodities
recover their highs (as gold has already done) and then go higher yet, the
Consumer Price Index will rise explosively. Of course Bernanke has not helped
this situation by recently doubling the monetary base. When the rise in
consumer prices becomes intolerable, the public will demand someone to come
in and stop what they call inflation (actually depreciation of the currency).
Then the Fed will be forced to come in and tighten. A tightening Fed may seem
far away today, but it will eventually come. And then we will see a stock
market decline which will make the past 1½ years seem like child's
play.
At the One-handed Economist, I try to
practice rational principles of speculation. I am a gold bug now but am not
committed to always being a gold bug. (I was a gold bug through the 1970s and
said good-bye to gold in 1980. I played it in and out through the '80s and
'90s and then turned long term bullish again in 2002.) Right now I am very
impressed with the technical strength shown by gold. It has led all other
commodities on the rebound from their late 2008 lows and has already
recovered back to its all-time high. Other commodities will follow. Further,
many gold bugs have commented on the lagging of the gold juniors. What they
do not realize is that the market is conservative in the early stages of a
bull move, and the fact that gold traders are sticking to the blue chips is a
sign that this gold bull has a long way to go. The juniors will have their
day, but that is quite some time down the road.
What you get from me is my best opinion at all
times. I am not like those gold bugs of the 1970s who just hung on and on
through the dismal '80s and '90s. When I turn bearish on gold (which I do not
expect to do for quite a while) you will be the first to know (if you are a
subscriber). You may also visit my web site, www.thegoldbug.net, (no charge) where I blog on social issues of the
day from an economist's point of view. In the One-handed Economist,
you get those hard-nosed predictions about where the various financial
markets are going and what is the best move to make at this time.
Howard Katz
The Gold
Speculator
Howard S. Katz
was one of the early gold bugs of the late ‘60s and ‘70s, turning
bullish on gold in 1965. His favorite gold stock, Lake Shore Mines, went from
$3/share in 1970 to $39/share in 1980 (sold at $31).
He turned
increasingly skeptical about gold as it mounted its final rise in 1979, and
he called the top after the close on Jan. 21, 1980 (with gold at
$825.50/oz.). Katz traded gold in and out during the ‘80s and
‘90s and once again turned long term bullish in Dec. 2002.
His thoughts on
commodities, stocks, bonds and real estate are available in The One-handed
Economist that is published every two weeks giving specific advice on trades
in stocks and futures. He went to Harvard, but rather than turn left, he
refused to take courses from the Harvard Economics Department and studied
economics on his own, concentrating on the classical economists and the
Austrian school.
He has published
several letters, to include The Speculator (1964- 1972), The Gold Bug
(1973-1986) and The One- handed Economist (1996-present). He is the author of
3 (published) books on money: The Paper Aristocracy (1976), The Warmongers
(1979) and Honest Money – Now! (1979).
He was the head
of the Committee to Establish the Gold Standard and worked with Congressman
Ron Paul for the passage of the American eagle gold coin bill of 1986. He is
at present an advisor for Kenneth J Gerbino & Company, a Beverly
Hills money manager.
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