Fraud and corruption are being exposed at the highest levels of
our financial markets. The integrity of our so called "free"
markets has been badly damaged and rightly so. The cover up, fraud and deceit
have reached biblical proportions.
When the government decides to intervene on behalf of certain
market participants and ignores its own role in the previous bubble and its
subsequent collapse, a dangerous precedent is set that destroys trust. When
trust breaks down, paper assets become worth less in the eyes of those with
money to invest and people turn to reliable asset classes like Gold instead.
So far, nothing has been different this time around - history is repeating
right in front of our eyes. The old shiny "barbarous relic" is the
best performing asset class of the past decade with no end to the Gold bull
market in sight. Gold has outperformed Buffett and Gates combined over the
past decade by more than a country mile and will continue to do so.
Fannie Mae and Freddie Mac and their willful support of a
housing bubble that kept housing unaffordable for most citizens, the Madoff
scandal (keep in mind this guy was the chairman of the NASDAQ stock exchange
and the SEC willfully ignored obvious evidence of blatant ongoing fraud),
bailing out auto companies while trampling on the right of creditors and
ignoring our bankruptcy laws and procedures, Hanky Paulson and his looting of
the U.S. Treasury, Geithner not paying taxes he knew he owed (he ain't that
stupid even though he seems like it sometimes), AIG executives partying in
expensive hotels with taxpayer bailout money, the FDIC ignoring obviously
insolvent banks and thus increasing taxpayer expense when they finally take
over a bank, the SEC banning short selling in its favorite firms while
ignoring the fact that its favored firms have illegally used naked shorting
for years as a tactic to destroy small firms, etc., etc.
There will always be fraud in financial markets and government.
But it has reached a feverish pitch at this time precisely because the
secular credit contraction has begun and is now revealing who has been
swimming naked. Unfortunately, the government is rushing to put a towel
around the biggest and worst offenders, including itself. These are secular
sign posts that indicate a long-term change is now well-entrenched: a lack of
trust in "the powers that be."
What the government is trying to do is to delay and prolong the
pain so that it can be taken over a decade or two instead of letting the
chips fall where they may. The common concern is that if free markets were
allowed to do their job, then the system would implode and collapse. This, of
course, is ridiculous and is why the last U.S. economic depression lasted 15
years instead of 5.
But our government has gotten so large and all-encompassing that
it demands to control everything. If prices go up, ban investment and
chastise the speculators. If prices go down, ban and chastise the short
sellers. If spending doesn't fix things, spend more then act shocked when the
deficit comes in at levels higher than expected and raise taxes. If
foreclosures get excessive, ban foreclosures. If industries fail, take them
over and pretend you are going to make them stronger. If some firms are
succeeding despite all the obstacles presented by our regulatory and taxation
system, over-regulate them and increase their taxes to help out the firms
that are struggling. And if none of this works, label the groups that annoy
you or get in your way as "suspicious" or "unpatriotic" -
maybe even throw around the "terror" word a little.
Government is a parasite on the economy. Parasites cannot succeed if they kill the host. And yet, the
government is killing its economic host, the U.S. economy. The same thing
happened in the 1930s in the U.S. and in Japan in the 1990s. It's not the end
of the world and it's not doom and gloom, but it does create hard economic
times for those not suckling on the government teat.
Stocks and corporate bonds do not thrive in such an environment.
Stocks are dead for the next decade as a buy and hold investment and should
be avoided unless one is a trader ready and able to play the swings. Because
real estate is in a popped bubble, it is a lousy investment for at least the
next 5-10 years. Commodities do poorly during a weak economy, which we
undoubtedly have, unless one's thesis about rapid currency debasement is
correct (i.e. the inflation vs. deflation debate).
When trust breaks down there are few places to hide. Gold and
Gold stocks thrive during such times. This is not a 2-3 year general stock
bear market and then we return to "the good old days" of a secular
bull market for the ages (i.e. 1982-2000). This secular stock market bear has
legs and needs ample time to complete. An historic 18 year stock secular bull
market requires at least 12-15 years to correct. The "peek-a-boo"
plunge below the 2002-3 lows in the major U.S. stock market indices was not a
one time event, it was a preview of things to come.
The Dow to Gold ratio is a
way to measure these "big picture" swings in the stock market from
secular bull through secular bear. The Dow to Gold ratio will reach 2 and may
well drop below one during this secular bear market. This is how much damage
is required before people will put their trust back in paper promises made by
financial markets and the government. In other words, such asset classes
backed by paper will need to become this cheap before a new bull cycle in
paper assets can occur. The government will fight tooth and nail to prevent
this paper decline (because those backing the paper filled campaign coffers
with contributions the last election cycle), which will only prolong the
agony and not change the ultimate outcome.
We are now entering the hard phase of a Kondratieff Winter, a
cyclical phenomenon that is alive and well. The debt must be defaulted on or
paid down. The fraud must be purged. Gold must be restored to the center
stage. A debt-free asset that requires no trust or economic activity, Gold is
not increasing in value and never really does. It is the value of other
things that fluctuate relative to Gold. Right now, paper promises and asset prices
are collapsing all around Gold because those who stand behind the paper
promises have lost the trust of the marketplace.
Once trust is lost, it takes a long time to restore. The only
real question for those who understand such long-term cycles and don't want
to trade the shorter time frames is what form of cash to hold to help weather
the storm. This is the only importance of the deflation versus
inflation/hyperinflation debate. Cash is king in this environment as it will
outperform stocks, real estate and corporate bonds. I choose Gold as my cash
because it is reliable and I live in the United States. Typically, the
greatest debtor nations are at greatest risk of currency debasement/capital
flight when paper promises crumble during a Kondratieff Winter. Though I
could be wrong, I believe this leaves the U.S. Dollar and British Pound
suspect over the longer term (I remain intermediate-term bullish and
long-term bearish on the U.S. Dollar).
But in reality, the bigger overarching theme that makes this
longer-term cycle just a little different than some of those in the past in
the presence of an anchorless global fiat monetary system created by the U.S.
when we defaulted on our Gold promise and quasi-Gold standard in 1971. I
believe Gold will outperform all global currencies for the foreseeable future
until this glaring monetary deficiency is corrected.
Gold will survive this mess (and the next) because it has served
as money on and off for thousands of years. It will increase in value
relative to stocks, corporate bonds, real estate and commodities at least
until the Dow to Gold ratio reaches 2 (and quite possibly less than 1). Those
betting against this long-term trend fail to understand history and why this
cycle will inevitably recur. And as long as there is fiat money backed by
nothing but the foul breath of costumed apparatchiks and a private,
non-federal, for-profit federal reserve bank corporation, the swings in this
Dow to Gold ratio will continue to get wilder and wilder.
This is why major central banks and governments around the world
know to hold some Gold and keep it listed on their balance sheets as money.
And this is why I recommend people invest at least some of their money in
Gold stocks, as the firms that dig money out of the ground when cash is hard
to come by will be handsomely rewarded. When there's no one left to trust
with your money, turn to Gold.
Adam Brochert
GoldVersusPaper
|