Gold bugs are struggling to be contrarian enough...
The TROUBLE WITH BEING a contrarian is that you can never be quite contrarian enough, writes Bill Bonner in his Daily Reckoning.
We began having doubts about the "Feds inflate...Gold soars" hypothesis last year. It was too easy...too obvious. And if it were that easy to inflate a nation's currency, how come the Japanese couldn't get the hang of it in the '90s?
So we moved towards a contrarian position – inflation, yes...but not for a while. And gold? Well, we are in it for the long run. In the short run, anything could happen.
To clarify our view on gold, the Daily Reckoning is not bearish on the metal. It is not bullish on the metal either. It is buggish. We are gold bugs. In the long run, gold will retain its value. Since that's all we ask of it, we are always satisfied. Even if it is down in the short run – and it went through an 18-year downcycle from 1980 to 1998 – it will come back in the long run.
Gold is not a speculation for us; it is a means of saving money. As Richard Russell says, a man should count his wealth neither in Dollars nor in Euros; he should count it in ounces.
Our views on gold are still contrarian. But our views on the gold market have become commonplace. Now...everyone's a contrarian. As we read the opinions and the blogs, it has become common to forecast a dip in the Gold Price...followed by a new, big bull market after inflation has found its footing.
And so what does gold do? It goes up!
So far this September, gold has risen $70 an ounce, taking it above the $1,000 mark. Is gold going up because people fear inflation? Apparently not. If they were afraid of inflation we'd see it in the bond market. But instead of selling off – which is what fixed-income Treasuries should do if there were any hint of inflation – bonds are also going up.
Is gold going up because people are afraid of the Dollar going down? Well, maybe. But that is like saying that the Dollar is going down because people are afraid the price of gold is going up. Where's the chicken? Where's the egg? Which is the cause? Which is the effect?
The Dollar is still going down...as Gold rises. This Wednesday, the US currency closed at worse than $1.48 per Euro. It is now so low that Americans' cost of living – on a parity basis – is among the lowest in the world. The average house sells for just $160,000.
That's only a little over €100,000. Even out in the country...you would have to do some serious searching for a nice house anywhere in Europe that you could buy for €100,000.
And what about the economy? Our contrarian position has remained unchanged. As we put it last week, there are few problems that enlightened central banking can solve; a credit contraction is not one of them. All the bankers can do is to make it worse – by delaying it, disguising it or diverting it in another direction, such as converting deflation into hyperinflation.
As for stocks, however, as far as we can tell, the rally is still on. And now, the news media and the statisticians are in full support.
House prices rose 0.3% in July. Hooray! Of course, the government is giving huge tax credits to new house buyers. Since that program began in January, an estimated 350,000 houses have been bought thanks to the program. Household net worth also is going up for the first time in two years – at least, that's what the papers say. Of course, what do you expect? The feds are pushing up asset prices, giving them the biggest push in the history of man. But remember, the market is also doing its usual post-crash bounce. When the bounce ends...so does the temporary wealth effect...
Is this still a contrarian view? Seems to us that it's becoming more contrarian every day. The longer the rally goes on the more people think it is the real McCoy. But if we are right, the massive effort by the Feds will make things massively worse.
That is the position taken by Arthur Laffer in a recent Wall Street Journal editorial:
"The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity. If there were one warning I'd give to all who will listen, it is that US federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s.
"The Smoot-Hawley tariff of June 1930 was the catalyst that got the whole process going. It was the largest single increase in taxes on trade during peacetime and precipitated massive retaliation by foreign governments on U.S. products...beginning in 1932 the lowest personal income tax rate was raised to 4% from less than one-half of 1% while the highest rate was raised to 63% from 25%. (That's not a misprint!).
"By the end of January 1934 the price of Gold, most of which had been confiscated by the government, was raised to $35 per ounce. In other words, in less than one year the government confiscated as much gold as it could at $20.67 an ounce and then devalued the dollar in terms of gold by almost 60%. That's one helluva tax....
"Inflation can and did occur during a depression, and that inflation was strictly a monetary phenomenon...
"The 1933-34 devaluation of the Dollar caused the money supply to grow by over 60% from April 1933 to March 1937, and over that same period the monetary base grew by over 35% and adjusted reserves grew by about 100%. Monetary policy was about as easy as it could get. The consumer price index from early 1933 through mid-1937 rose by about 15% in spite of double-digit unemployment. And that's the story."
We had no doubt that inflation can occur during a depression; hey, we read the papers. Anyone who has followed the Zimbabwe story knows that you can have a deadly depression...and dizzying levels of inflation at the same time.
But there's always more to the story. Devaluing the dollar in terms of Gold had the immediate effect of increasing the money supply – it was like adding zeros to the currency.
In our wallet is a ten trillion dollar Zimbabwean bill, with a picture of stones on it. Those words – "ten trillion" – did not get printed on that bill by accident. We assume they got printed on their by a printer in the employ of a government that figured that the cost of printing a ten trillion dollar bill was less than the cost of not printing it.
That is, by a desperate government that had so fouled-up the economy that a period of hyperinflation might seem like an improvement. Besides, hyperinflation might have a therapeutic, purgative effect.
But let us not get sidetracked by hyperinflation. It is nowhere in sight. Nor is its more civilized cousin – normal, polite inflation. The money supply in America, as measured by M2, is contracting. The banks get money from the feds, but they don't pass it along. The chain of reflation is broken – or at least temporarily stretched. Currently, it takes a long time for money to get from one end to the other. The cash tends to get waylaid – either by the bankers...or by consumers themselves. It stays in bank vaults...or in bank accounts.
Money is not being multiplied by the speed by which it changes hands. Instead, it is divided by immobility. It sits. It shrinks. It waits for a real boom.