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November 03, 2006

Best Quotes of October 2006
by John Rubino

Richard Daughty, the Mogambo Guru
According to the great analyst Charles Kindleberger, financial crises are associated with changed expectations that lead owners of wealth to try to shift quickly out of one type of asset into another, with resulting falls in prices of the first type of asset, and, frequently, bankruptcy. "Thus, financial crises are a product of sudden alterations of expectations, rooted in reality or imagination. If you are looking for a way to avoid financial disaster, this is the key level of understanding."

I was surprised that he did NOT immediately go into a Patented Mogambo Tirade (PMT) about gold, which I would certainly have done, as in one short sentence he combines "financial disaster" with "a way to avoid"! Fabulous!

I leap to my feet, knocking the plate of nachos I had in my lap to the floor, which unfortunately makes them gritty and hard to chew, and I shout "And what other way IS there, except by buying gold? Financial crises and disasters, created by governments and bankers, ARE what propel all of history!" Unbeknownst to me, the security guards, in undercover mode, were sitting right next to me, and instantly I was being manhandled and hustled out of the room. But they had foolishly forgotten to bring the gag with them, so as I was being dragged out I was yelling "Gold! In all of the crises in history, nothing has ever combined 'financial disaster' with 'a way to avoid' like gold! Gold has always treated its owners very, very well! Usually when everything else (and everybody, like your neighbors and family) treated you badly! Like your nasty little goon squad here!"

The good news is that this "changed expectations" is classic "alternative energy" at its finest, in that the poisonous gaseous vapors of the rotting economy are the high-octane fuel for the coming Great Gold Rally, where the world is divided into two camps. In one camp are desperate, panicky people selling everything in their stock/bond/real estate/debt/government portfolios to buy gold and silver and hard assets. And in the other camp are the people who already own gold and silver, and are watching themselves getting rich, richer, richest as the price climbs, climbers, climbests, week after week, month after month, year after year!

Eric Englund, Financial Sense Online
I disagree with the assertion that all housing bubbles are strictly local. Most assuredly, there are cities in Florida and California where house-price appreciation was surreal. Where this assertion falls apart is that the housing boom was driven by easy credit and not accumulated savings - and easy credit has been available in all 50 states. Even if real estate speculators weren't heading to Butte, MT or Detroit, MI looking to flip houses and condos, mortgage loans were still incredibly easy to come by for even the most unqualified of borrowers. Therefore, a low-wage first-time homeowner in Detroit (with a 0%-down adjustable rate mortgage) can incur a financially ruinous level of mortgage debt just as easily as a high-wage professional in Tampa can do so by going overboard when extravagantly remodeling a home - 100% funded by an adjustable rate home equity line of credit (HELOC).

Both Michigan and Florida, as a matter of fact, are in the top-ten list of states with the highest foreclosure rates in the United States. Interestingly enough, Florida ranked 2nd in the U.S. for house-price appreciation while Michigan ranked 51st.

John Michael Greer, Archdruid Report
All this leaves us in a historically unprecedented situation. Economies based purely on hallucinated wealth existed before the 20th century, but only for brief periods in the midst of speculative frenzies - the Dutch tulip mania, the South Sea bubble, and so on. Today's hallucinated wealth, by contrast, has maintained its place as the mainspring of the global economy for more than half a century. Social critics who point to the housing bubble, the derivatives bubble, or the like, and predict imminent disaster when these bubbles pop, are missing the wider picture: the great majority of the global economy rests on the same foundations of empty air.

Adam Hamilton, Zeal Intelligence
Almost all analysis of the dollar that I have seen in the financial media in the last year has focused on looking at the dollar relative to its late 2004 lows. Indeed from this particular reference point the dollar has been impressive. The US Dollar Index rose 14.6% from its December 2004 lows to its November 2005 highs. And even though the dollar is back down near its latest support line today, it still remains up 7.3% from those bear-to-date lows.

But if you zoom out beyond the last couple years to fully consider the big strategic picture, the dollar is still bleeding badly deep within a powerful secular bear. From its peak in mid-2001 to its trough in late 2004, the US Dollar Index lost a staggering 33.3% of its value in the world currency markets! A dollar spent internationally in late 2004 would only have purchased two-thirds of what the same dollar spent in mid-2001 would have commanded.

Since currencies usually move with all the sound and fury of a glacier, this is a staggeringly large move, especially for the world's reserve currency. In order to function as a reserve, an asset should be stable and maintain its value. Foreign investors and central banks who trusted Washington's endless "strong dollar" propaganda have watched the currency losses on their utterly massive investments in the US fall by a third. If I was them I wouldn't be very happy!

Lest you think a peak-to-trough measurement is a little too aggressive, the results are similar measuring from mid-2001 to today. This week the once mighty US dollar was down 28.5% from its levels of only six summers ago. There is just no escaping the fact that despite the dollar's sideways trading range of the last couple years it remains mired deep within a secular bear market.

Captain Hook, Treasure Chests
According to the Bank for International Settlements (BIS), the combined turnover in the world's derivatives exchanges totaled USD 344 trillion during Q4 2005. No, that's not a typo, that's $344 trillion of notional value, where if one were to annualize a total, it doesn't take long to figure out the world is now trading in excess of a quadrillion worth of this paper every year. Is that a big enough bubble for you? And it goes without saying this has been a boon to the brokerages and banks that deal in these formerly exotic financial instruments, where whether you realize it or not, even if you don't participate in them directly, simply by owning a mutual fund, or a bank account for that matter, indirectly you too are captive to this trend.

In the end then, it's important to realize derivatives and debt are all forms of phony money, designed to artificially pump up an ailing financial system. Moreover, once more people not only begin to realize this, but act on this knowledge, gold, silver, and any of the other real 'hard' currencies you care to mention will come into their own.

Doug Noland, Prudent Bear
The dilemma that emerges from the remediation of one Bubble with another (bigger one) is multifaceted. For one, it fosters an overwhelming profit motive/speculative bias that evolves over time to permeate all asset markets. Second, it accommodates and eventually firmly ingrains a Financial Structure (i.e. the powerful GSEs, Wall Street firms, hedge funds, derivatives, securitization markets, "structured finance," bank real estate lending, etc.) that propagates asset inflation and Bubbles (U.S. bonds 1993, emerging markets 1993-1997, technology, stocks, bonds again, housing, etc. thereafter). Third, an aggressively expanding Financial Sector and attendant securities markets inflation guarantee a self-reinforcing escalation in financial leveraging, instigating Monetary Processes whereby speculative positions over time play an increasingly instrumental (if largely unrecognized) role in system liquidity conditions. Fourth, when a central bank actively induces leveraged speculation as an expedient policy mechanism for system stimulation/inflation - as it clearly did in 2002 - it will not easily divorce itself from obliging a small but powerful cross-section of society. Fifth, as we're now witnessing with housing, policies that incite serial Bubbles ensure inherent fragility that inevitably traps policymakers in an overly accommodative posture.

Michael Nystrom, Bull (not Bull)
As the great trader Jesse Livermore said, "There is only one side of the market - it is not the bull side or the bear side, it is the right side." When it has run its course this rally will most certainly meet the same fate as Nasdaq 2000, and the greatest shorting opportunity of a lifetime will be upon us. But bears, keep your powder dry!

Enrico Orlandini, Dow Theory Analysis
It appears to me that a combination of poor fiscal management, bad foreign policy, and political myopia are all about to combine into some sort of strange brew at precisely the worse time, and it will lead to a financial crisis. This crisis will be worse than the Depression of 1929 owing to the staggering amount of debt in the U.S. In 1929, the US was a creditor nation and had the resources to deal with the problem. That is obviously not the case now. The only "solution" will be to print money, and at first it will work like a drug addict's fix bringing temporary relief, but the end result will be economic death. I also believe that people in the Fed as well as the government know this is going to happen and are making "contingency plans". It won't be pretty and it will lead to social unrest. You can't pull away the punch bowl from three hundred million American's and expect to slide through on you good looks and a few witty remarks. Things will change and it won't be for the better. How long this takes to unfold will be anyone's guess; weeks, months, or even a couple of years. But I believe it will start now and you will be able to identify it if you really want to. Given the predominance of the internet, I believe we are looking at weeks or months rather than years. Throw in trillions of dollars of unregistered over-the-counter derivatives that very few people understand and even fewer can quantify, and a bad situation could turn down right ugly in days. I think that goes a long way toward explaining the record volume seen in the gold pit recently. The smart money is quietly picking up all they can get while the getting is still good. It is better to trade all the fiat paper you can for the only true store of wealth that has stood the test of time. My best advice is to bundle up because it is going to be a long, cold, crude winter.

Jim Puplava, Financial Sense Online
You've got to remember the commodity complex itself - if you take pure commodities, the actual grains, etc. - the commodities markets are so much smaller than the paper markets or the financial markets like stocks bonds and currency. So whenever money flows in - whether it's hedge fund money, it's pension fund money or even investor money, or the momentum traders - you can see these big spikes; and then the market has a very short attention span. And so what happens is "Ok, that was yesterday's story, now give me something new to chase," and that's what markets do.

So what is very important here is you believe and understand your facts and fundamentals, so when these shake out periods come you're sitting there with a shopping list saying: "Boy, I want to buy more uranium companies, or I want to add to my oil position, or I've been looking for an oil service company, or I've been looking at a coal-to-gas liquids company," or any of those companies. So you have your shopping list, and you wait for the market to hand you that perfect pitch, and then you swing. And that's why for example, right now we're looking at some corn and ethanol plays, but they haven't hit our target zone yet. They're coming down to where we think we can pick them up, but you wait patiently. And then more importantly, you hold if you have good quality. You hold onto it.

Kurt Richebächer, Richebächer Letter
In 2001, the Greenspan Fed could cushion the fallout from the bursting equity bubble with the creation of the housing bubble. This time, manifestly, there is no alternative bubble available to be inflated to cushion the fallout from the housing bubble. Rather, there is a high probability that the popping housing bubble will pull the stock market down with it. That is the first ominous difference between 2001 and today. The second ominous difference is that the economy and the financial system have accumulated structural imbalances and debts as never before in history. Vastly excessive borrowing for consumption and speculation has turned the U.S. economy into a colossus of debts with a badly impaired capacity of income creation.

And finally, equity and real estate bubbles are very different animals, of which the latter is manifestly the far more dangerous. In its World Economic Outlook of April 2003, the International Monetary Fund published a historical study, titled When Bubbles Burst, and explained differences in the effects between bursting equity and housing bubbles. It stated, in brief, the following:

First, the price corrections during housing price busts averaged 30%, reflecting the lower volatility of housing prices and the lower liquidity in housing markets. Second, housing price crashes lasted about four years, about 1 1/2 years longer than equity price busts. Third, the association between booms and busts was stronger for housing than for equity prices...Fourth, all major bank crises in industrial countries during the postwar period coincided with housing price busts.

Stephen Roach, Morgan Stanley
Central banks have created a monster -- not just liquidity-driven excesses in financial markets but also major cross-border imbalances in the global economy and mounting political tensions associated with those imbalances. Nor do I believe that the instability of this disequilibrium can be resolved through a mere normalization of monetary policies. Ultimately, a more meaningful shift to policy restraint will probably be required. At the same time, by waiting this long to face up to the excesses of the global liquidity cycle, the systemic risks embedded in world financial markets and the global economy have only gotten worse. A monetary tightening that goes too far risks a collapse in this proverbial house of cards. Yes, the world economy has been very resilient over the past five years -- but at a real cost. Increasingly, the celebrants of global resilience are dancing on the head of a pin.

Steve Saville, Speculative Investor
There's a theory that central banks have tried to suppress the gold price over the past 15 years by lending gold into the market, but regardless of whether this theory is right or wrong it is irrelevant from an investment perspective. We don't know the motivation for the large-scale lending of gold by central banks, but even if we make the assumption that the lending has been done with the aim of keeping a lid on the gold price it is clear that, as was the case with the large-scale gold selling by the official sector during the 1970s, it hasn't altered the long-term trends in the markets.

It will only ever be possible for central banks to lend gold into the market when there are willing borrowers of the gold; and the quantity of willing gold-borrowers in the marketplace will move inversely to the quantity of market participants who think gold is in a bull market (the more people who think gold is in a bull market the smaller will be the pool of potential gold borrowers). This is because a potential gold borrower may well be interested in borrowing gold if he/she expects to be able to repay the loan with cheaper gold in the future, but if he/she believes that gold has a good chance of being more expensive in the future then the idea of borrowing gold will be a lot less appealing.

In other words, the large-scale lending of gold by central banks was a function of the long-term bear market in gold; it was not a cause of it. It undoubtedly exacerbated the downward trend, but the downward trend had to have already been in force in order for the lending/borrowing of gold to become popular.

Peter Schiff, EuroPacific
As if denial of economic weakness wasn't great enough among Wall Street strategists and the Fed's board of governors, nowhere is it more extreme than among realtors. This week the National Association of Realtors heralded the first back-to-back monthly decline in home prices since 1990 as "setting the stage for a stable market" and indicated that "the worst was behind us." My guess is that if the NAR's chief economist David Lereah had been the newscaster covering the arrival of the Hindenburg in New Jersey in 1937 (rather than Herb "Oh the Humanity" Morrison), it too would have been described as a "soft landing."

Ned Schmidt, Value View Gold Report
Paper assets markets are slowly moving into an era of great vulnerability. In the late 1960s the baby boomers began to enter the work force. When they did contributions to retirement plans, including the Social Security system, began to grow. Retirement plans experienced net cash inflows which were subsequently invested in paper assets. Contributions into the plans were greater than the benefits being paid out. That net cash inflow has been the norm for more than forty years. Now, the front edge of the baby boomers is approaching 60. Retirement plans are soon to become net sellers of plan assets to finance the retirement of the paper boomers. Paper assets markets are soon to face a 10-15 year period when retirement plans, around the world, are net sellers of paper assets. That long-term deluge of selling will push paper asset prices to lows none expect.

Many may plan, or hope, to use the equity in their homes for retirement. This past week the report on existing home sales in the U.S. indicates the housing price bubble has burst! Housing prices have started a slide that will likely persist for up to ten years. A far greater concern is to whom the baby boomers will sell their homes. The baby boomers will be selling more houses than buyers will exist to buy them. How many of your neighbors are baby boomers that are likely to want to sell their big houses in the next 5-10 years? The bottom on housing prices as the baby boomers move into retirement will be far below any expectations.

Of the major assets classes, paper assets and housing are over owned by investors around the world. The under owned asset class is precious metals, Gold and Silver. As paper asset markets begin to be pummeled by net selling by retirement plans, Gold and Silver will be the safe havens. As central banks begin to sell their bloated holdings in bonds, bond prices will fall and yields, interest rates, will move dramatically higher. The selling plans of baby boomer home owners will be dashed. The world will then be a net seller of U.S. dollars at the same time. Gold and Silver may be the only investment alternatives with any reasonable hope of being viable.

Mike Shedlock, Mish's Global Economic Trend Analysis
Previously I proposed changing the meaning of GDP from Gross Domestic Product to Grossly Distorted Procedures. If one discounts third quarter motor vehicle output, and subtracts various hedonics and imputations, GDP was easily negative for the third quarter (and perhaps substantially so). If one believes the published price deflators are off, GDP will look even worse.

I questioned GDP on Silicon Investor this past weekend and was astounded to receive the following reply:

If you want to make money you better believe the
GDP
CPI
Unemployment Numbers

Because what you personally think is "real" is irrelevant.

Not only was I stunned to find someone that actually believes all those numbers, I was equally stunned to find a person that actually thinks you have to believe those numbers to make money. It is of course the reaction to the numbers that matters. Whether or not anyone actually believes them is irrelevant.

In the meantime I notice that almost no one is talking about the yield curve, the one set of numbers that someone can and should believe. The Yield curve is what it is, and it is quite inverted, signaling a recession. Forget Goldilocks, the next recession will be an extremely hard affair, led by a falloff in consumer spending, rising unemployment, and a continued slowdown in housing.

Gabor Steingart, Der Spiegel
The only way to fight a weak dollar is to strengthen it. Many people no longer care whether the US currency still justifies the faith people seem to have in it. The new game, which amounts to playing with fire, works exactly the other way around: The dollar deserves the faith it gets because otherwise it loses that faith. Dollars are bought so they don't have to be sold. The dollar is strong because that's the only thing that can prevent it from growing weak. Reality is ignored because only by ignoring it can the dream come true. Or, to put it still more clearly: Behaving irrationally has become rational behavior.

Of course, those playing this game know that, in the long term, currencies can't be stronger than the national economies from which they derive. Consumption without production, imports without exports, growth on credit - these are all things that can't last in this world. Ken Rogoff, the former chief economist of the International Monetary Fund (IMF) and a man who thinks as clearly as he speaks brashly, recently criticized US economic policy even as he seemed to be praising it: Rogoff said the current boom in the United States is "the best economic recovery money can buy."

But if things have become that obvious, why aren't investors recoiling in fear? Why do foreigners, US presidents of all stripes and even Federal Reserve presidents known for their seriousness allow themselves to get involved in such a risky game, when the risk is that of destroying everything? Why aren't those mechanisms of market regulation functioning that are supposed to represent the advantage of the capitalist system over planned economies?

The answer is terrifyingly simple: Everyone knows how dangerous the game is, but continuing to play it strikes them as less dangerous than quitting. After all, what's to be gained from overreacting? Investors allowed themselves to get caught in the dollar trap years ago, and there's no easy way out. If they start taking their dollar bills and government bonds to the market themselves, they would lose money - either gradually or all at once. They would like to avoid both scenarios, at least for a time. A president who does no more than recognize the situation as an important issue may lose his position as public discontent looks for a vent. Though the governors of the Federal Reserve Bank are under the strongest obligation to tell the truth, they have let the right moment for effective intervention slip by.

James Turk, GoldMoney
Three-fourths of the year is now behind us, and what a nine months it has been. Even though both precious metals are down from their multi-decade peaks in May, they have nevertheless generated impressive year-to-date results. During this period, gold has risen 15.8%, while silver has climbed 29.9%. The results for the past twelve months are even more impressive. During this period, gold has risen 27.6%, while silver has climbed 53.5%. These results are meaningful evidence that the commodity bull market is still going strong.

There is a flood of money out of dollars into tangibles like commodities. Why? Because commodities are safe, and dollars are dangerous. The value of commodities is based on their usefulness as a tangible asset, while dollars are based on government promises. Which would you rather rely upon?

Martin Weiss, Safe Money Report
Most investors probably won't learn that GM and Ford are going bankrupt until it's too late to run for cover.

John Rubino
DollarCollapse.com

John Rubino is author of Clean Money: Picking Winners in the Green Tech Boom (Wiley, December 2008), co-author, with GoldMoney's James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, January 2008), and author of How to Profit from the Coming Real Estate Bust (Rodale, 2003). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a currency trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He now writes for CFA Magazine and edits DollarCollapse.com and GreenStockInvesting.com.

Copyright © 2006-2008 John Rubino

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