The following is part of Pivotal Events that was published for our subscribers Thursday, March 26, 2009.
SIGNS OF THE TIMES:
"Bear Stearns could be the watershed event that purges everything."
- Wall Street Journal, March 28, 2008
That opinion was another example of the ancient theory that things only go wrong one at a time. This is the naive view that financial history is episodic when, as proven yet again, financial history is periodic. In so many words, during a financial mania all, repeat all, of the big banks get overextended at the same time.
In polite circles this is described as "The markets never accommodate the desires of the crowd." Decades ago, on the old and notorious Vancouver Stock Exchange, this came out as "The mooches are not allowed to make money." At the time, this might have referred to retail buyers that are essential to any promotion.
Now, courtesy of runaway ambition in Washington, big banks are mooching for big money from the small taxpayer, which is coercively becoming vulnerable to the biggest promotion in history. Throwing someone else's credit at a credit contraction won't make it go away.
"Yield of Canadian bank stocks, relative to the 10-year bond yield is seven standard deviations away from the mean - superior relative value."
- Financial Post, March 29, 2008
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"Credit-crunched Russian billionaire asks for the £39 million deposit he put down on the world's most expensive house."
- Mail Online, February 19, 2009
The story included that full price on the French Riviera estate, "Villa Leopolda", was £500 million. It requires the attention of 50 full-time gardeners.
"This is nothing like the Great Depression, where we had 25% unemployment."
- Financial Post, March 3, 2009
From an interview with Donald Coxe. There have been a few of these examples of taking a current unemployment number and comparing it to the worst numbers from the 1930s. Unsound research is not the way to prove a specious conclusion.
For the record, the number was 8.1% for all of 1930, and 8.7% on the report for this February. It should be noted that there is probably a significant difference in assembly and treatment of the data.
It seems likely that the use of such absurd comparisons is an indicator of just how much the establishment has been shocked by a 1929, or 1873 crash overwhelming orthodox remedies.
The problem with interventionist policymaking is that they don't know that what they are doing won't work. If they knew any history, then they would know that what they are doing won't work and would not be trying it.
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It's good to see some robust action into the appropriate time-window. There has been some turmoil beyond the usual economic and financial problems of a post-bubble world. The Democrat Whitehouse and Congress is using the crisis as an opportunity to push through policies that can be described as somewhere between socialism and fascism.
Early in the year some of our readers were offended by our approach to the turn in American politics. Our point has been that while activist measures may engage an anxiety-ridden media, over any measure of time the results will make a natural disaster worse.
Within a contraction, free capital is cautious and will go into hibernation at the prospect of confiscation by taxation or the dread of depreciation.
One of the more successful bankers in the 1840s, Lord Overstone, observed "No warning can save a people determined to grow suddenly rich."
It is worth adding that there no stopping a desperate post-bubble government from turning on scapegoats, intervening in markets and invoking protectionism. Over the centuries it has been bad enough as done by a "middle-of-the-road" government, but within the rule of this determined and ambitious mob the long-term outlook is very bleak.
In the meantime, the overall market has been acting well, and while a good part of the expected move is in, targets for important highs in April-May seem realizable.
Gold Sector: It was a year ago in early March when we got the big "sell" on this sector. This was based upon out unique work on the silver/gold ratio, which gave us the signal a week before the top. Then through the summer we were calling for a "1929", or "1873" type of crash. In 1929 gold's real price and gold stocks declined with the crash into November. In 1873 there was a price for gold relative to greenbacks and it fell with the crash into that fateful November.
Needless to say, but the pattern worked this time around as well. On the surge in February our silver/gold indicator got somewhat overbought but not up to the critical signal. Consolidations in the indicator and the sector have been constructive, so the outlook remains lustrous.
This is for the whole sector including small caps. As the saying goes - everything we needed to know about the financial markets was learned on the old and notorious Vancouver Stock Exchange. In a particularly bad market it was time to start buying the fifteen-cent stocks and one guy's research was simple. He phoned the company and if someone answered he hung up and bought the stock.
Well, all that was needed was to determine if the company was still alive, and that is the case now. There is no need for us to provide recommendations on gold exploration stocks. There are a number of services that will be able to advise on individual stocks in a roaring bull market.
Senior golds have been very good with the HUI advancing from 150 in late October to 327 in mid February. The correction was to 255 on March 9 and today it's at 340. Clearly, the latest rally is tied to the weakening DX, but the earlier double was due to the strong rally in gold's real price.
As we frequently note, our Gold/Commodities Index set its cyclical low at 143 in May 2007 and turned up as credit markets turned down. This is the way this portion of financial history really works, and the Index increased to 519 with the worst of the problems in early February. This represents a material increase in operating margins as well as valuations of gold deposits. Just the increase so far provides the base for an outstanding bull market for the whole sector. This will likely run for two to three years after the crash. Then with cyclical swings, the bull market for golds can run for around twenty years.
More recently, commodities had been expected to outperform gold into late spring and our Index has declined from 529 to 420. After mid-year the uptrend in gold's real price could resume.
Link to March 27, 2009 'Bob and Phil Show' on Howestreet.com: http://www.howestreet.com/index.php?pl=/goldradio/index.php/mediaplayer/1157