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August 14, 2009

Perma-Bears and Gold Bugs
by Daniel Aaronson and Lee Markowitz

Despite accurate predictions and sound fundamental reasoning by the Perma-Bears and Gold Bugs, these two terms continue to be used negatively by the media and investors because people remain overwhelmingly optimistic about investing in the US stock market.

Perma-Bears

One of the biggest reasons that Perma-Bear carries a negative connotation is that bullish investors and the media assert that the Perma-Bears have been bearish for years. As a result, the Perma-Bears were just "lucky" for foreseeing the collapse in equity markets. The criticism that the Perma-Bears were so early that their predictions are not credible is without merit because timing any bubble's bursting is impossible, let alone one that was as great as the American financial bubble. The charts below, which plot Total Credit Market Debt as a % of GDP and US Consumer Spending as a % of GDP, are perfect examples of why being a Perma-Bear was correct yet also shows that it was impossible to know how big the US bubble would become before bursting. (Note that total credit as a % of GDP surpassed that of the 1920s prior to 2000.)

Total Credit Market Debt as a % of GDP

Source: Ned Davis Research

Consumer Spending as a % of GDP

Source: Commerce Department

Nonetheless, it is perhaps possible to excuse even long-time investors for remaining bullish while the Federal Reserve continuously extended easy credit because markets took it in stride for over 25 years. However, had the Federal Reserve in 2007-2009 not a) cut interest rates to 0% to transfer wealth from risk averse people (who kept their savings in a bank to earn interest rather than to speculate in the stock market) to banks who now make nominal interest payments to depositors, 2) created TARP which provided very cheap capital to the banks to avoid bondholders and shareholders from suffering well-deserved losses and 3) extended trillions of credit to private companies and the bond market, the whole system would have melted down. The events that led to the market meltdown occurred not out of the blue, but because of reckless monetary policies that were visible for years. However, the Perma-Bear is still viewed negatively.

Gold Bugs

Gold Bug is another term that investors do not want to be labeled. However, if you are not a Perma-Bear you better be a Gold Bug. The Federal Reserve's goal is to create so much inflation that even housing prices will rise. If the Federal Reserve succeeds, it will destroy the purchasing power of the Dollar, which will make gold soar.

Although there is not a lot that Alan Greenspan has done to deserve praise, he has presented both sides of the Dollar Standard versus the Gold Bug debate during his lifetime. Greenspan's actions to defend the Dollar Standard argument are well known. Whenever the economy faced pressure, Greenspan cut interest rates to keep credit flowing leading to our current problems. He was able to execute his policies because the US was not on a Gold Standard. What is lesser known is that in 1967 Greenspan wrote an essay titled "Gold and Economic Freedom", which shows that he was a Gold Bug at the time. The following is from the essay.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

Greenspan's days as a Gold Bug were far better for society than the policies he pursued as the Chairman of the Federal Reserve.

Summary

Despite the near meltdown of the entire financial system, Perma-Bear and Gold Bug are still two of the most negative terms that people use to describe investors. Perhaps it is possible that these terms are misunderstood and instead used to describe people who are set in their ways and closed-minded about their views. Yet from a fundamental standpoint, the only reasonable view that one should take following a 25 year credit bubble is that of a Perma-Bear. Furthermore, with debt levels so extraordinary and the Government now using its balance sheet to replace the private sector's balance sheet, people should be Gold Bugs. From a contrarian standpoint, the fact that being labeled a Perma-Bear or a Gold Bug still causes one to be defensive shows how much misplaced optimism on the US economy and US Dollar still exists. At the true bear market bottom, Perma-Bear and Gold Bug will be in vogue, which will be the time to change one's views.

Daniel Aaronson
Lee Markowitz CFA
Continental Capital Advisors, LLC

Continental Capital Advisors, LLC was formed to offset the destruction of wealth caused by the global devaluation of currencies by central banks. The name Continental Capital symbolizes the 1775 US Currency, "the Continental", which was backed by nothing and quickly became devalued.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Certain statements included herein may constitute "forward-looking statements" with the meaning of certain securities legislative measures. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the above mentioned companies, and / or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Any action taken as a result of reading this is solely the responsibility of the reader.

Copright 2009 © Continental Capital Advisors, LLC

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