This past week was a scary time for gold bugs. But do not be afraid. I am going to look into the future and tell you what is next in the gold market. Last week we studied the art of speculation and concluded that speculation was a zero-sum game. For every dollar gained, there is a dollar lost. It is like the neighborhood poker game. At the end of the evening, the players as a group have the exact same amount of money they had at the beginning. However, this is not true of each individual player. The smarter players, who can foresee the future, will win. The other players will lose.
Furthermore, virtually all of us in the markets today are speculators, even though a motley assortment of brokers, salesmen and advisors tells us that we are investors. They tell us this thinking that they are flattering us. You see, their real motive is to get our money. No, a speculator is someone who enters the markets intending to profit by buying low and selling high. An investor wants to put his money to work. In the late 19 th and early 20 th centuries (1885-1933) when the United States was a free economy under a gold standard, people would invest in stocks for an average yield of 8%. If they were more conservative, they would invest in the savings bank for 5% (at very low risk). Very few people played the stock and commodity markets because these did not go up, not over the long pull. In 1896, the Dow Jones Industrials were at 40. From 1885 to 1896, there was no Dow Jones Industrials, but Charles Dow kept some railroad indexes starting in 1885, and these railroad indexes show a flat trend for the eleven year period. Moving forward, the Dow Jones Industrials were back to 40 in 1932. That is, for 47 years, stocks in America were flat. So the average person did not buy stocks to make a profit. He did not speculate. He invested. He either bought stocks for the earnings, or he put his money in the bank (or corporate bonds).
But Americans today do not invest for the simple reason that real interest rates have been zero since 1933. The Fed has been creating money for the past 77 years and using that money to keep interest rates below their free market level. The average interest rate over this period minus the rate at which prices have been rising is zero. The result is that savings have dropped almost to zero. Nowadays people try to accumulate money for their retirement by speculating in the stock market or real estate.
They will succeed in accumulating money, but what they do not understand is that our money is continually losing value. So although they have more money at the end of the day, they have fewer goods (or worse quality goods) to buy. Unlike the free American of the late 19 th and early 20 th centuries they cannot save and receive (real) interest. They can only try to make their retirement by speculating, and speculation is a zero sum game.
But as noted, a small number of speculators can take money out of the game by being smarter than the other guy. Today I am going to show you an important principle of intelligent speculation which teaches you how to know what the other fellow is going to do.
The human being is the most successful creature on earth. We stumble many times, but in the end we have the potential to create great things. We have conquered space and time. We have landed on the moon. The reason is that we are the creature who perceives the universe by means of abstractions. Other intelligent animals, such as your dog or cat, go out into the forest. They see the tree. They see the waterfall. They see the other animals. But they see these as specific things. Only man asks, what is the essence of treeness? What are the qualities which all trees have in common and which makes a tree a tree? Animals perceive trees as individual, concrete things. Only man can have the concept of treeness and thus discover facts true about all trees.
But reasoning by abstractions is very difficult. This is why the great majority of human beings are infernally stupid. If we look back in history at the incredibly dumb things that mankind has believed over its history, it is both sad and funny: One can make the crop grow high by leaping high. One can make impossible things happen by employing magic words. For this reason, the great advances of the human species have come from a very few. The great majority shun the effort of thinking on an abstract level, and therefore they get their opinions by following others.
Most people in our society will get their opinions from their local papers. But even the local papers do not originate ideas. This is too much effort for them. So the newspapers and other media sources of the country have agreed upon a system which saves them a great deal of effort. They all follow the New York Times. Then the TV news and the weekly news magazines join the system and follow the New York Times as well. The result is that Mr. Average Joe reads the opinion in his local paper. Then he hears the same opinion on the TV news and does not know that it also comes from the Times. Finally, he reads it in the weekly new magazine and then hears the same opinion from his friend across town at a social gathering.
All around him there is just one opinion. He never hears the contrary view. He does not know that there is a contrary view. Soon the vast majority of the country is of this one opinion.
Now if this opinion were correct, then we could not make money on it. But the Times of today is repeatedly and embarrassingly wrong. The old Times of 1896 was a top newspaper which published the news â€œwithout fear or favor.â€ Adolph Ochs was a gold bug in that year and supported the gold standard and McKinley in the presidential election. His high standard of reporting gave the Times a great reputation. But his descendents took the great paper he made and turned it into trash. Given enough time the reputation will turn into trash as well, but for now it is easy to predict what will happen.
On Wednesday last, the Times published an article â€œPulling Back, Amid Echoes Of the 1930s,â€ by David Leonhardt. This article, even now, is going all over the country in the manner described above. People are reading it and being taken in by it in large numbers. Soon they will apply their opinions in the financial markets. Since we know what they are going to do, it is not difficult to take their money.
The Leonhardt article is a typical Keynesian piece arguing that what makes an economy go up is demand rather than supply. It is a perfect example of our human foibles. Take a false abstraction; logically deduce any conclusion you want from it; and people will believe it, no matter how absurd it is. Demand for the product of one particular business may be good for that one business. But the businessman can only satisfy the demand by shifting supply from someother business to his. If he runs a restaurant and customers like his food, then in order to expand, he must buy more food, hire more waitresses, etc. This means that there is less left for the competing businesses. If people increase their demand for restaurant meals in general, then they are likely to shift from other luxury items, and ski trips, summer beach houses and trips to Europe will have to decline.
In general, the limiting factor in the economy is how much wealth is produced NOT HOW MUCH IS DEMANDED. Look at a baby. It is full of demand. It opens its mouth and howls for food. And yet this does not create the supply to satisfy it. Imagine a village of babies with no parents. They can howl and howl and howl. A Keynesian analyst could come along and tell these babies that they are rich (because they have so much demand). But they would still continue to howl. So it is in Afghanistan, North Korea, Albania and Cuba: much demand, little supply. Mankind has had a word for that since time immemorial. The word is poor.
Actually the Keynesians have another arrow to their quiver. Money is used to demand goods. So the excuse that there is a shortage of demand can be used to rationalize the printing of money. Does this work? Does a country get richer by printing money?
In the African country of Zimbabwe (formerly Rhodesia) prices rose by a factor of 853 followed by 21 zeros over the course of 2007-08. At its worst, prices were doubling every day. Over the past 10 years, average life expectancy dropped from 60 years to 44 years. Pictures of starving people composed of skin and bones circulated on the internet. I would call these people poor, but David Leonhardt would call this economic stimulus (his gobble-de-gook for calling them rich). The most famous case of this in economic history occurred in Germany from 1914 to 1923. Over that period, prices multiplied by a trillion times and, at their worst, doubled every 3.7 days. The entire German middle class was wiped out. There has never been a case of an â€œeconomic stimulusâ€ (meaning large issues of money) making a country wealthy.
On the other hand, we had an exact opposite case here in America from 1866-1896. Over this period, prices declined by over 2/3. (A $3.00 item declined to $1.00, CPI.) During this time, the real wages of the average American increased by 90% (PPI). A host of great inventors emerged who created wonderful new products (the telephone, the radio, the automobile, etc.) which in turn were made available to almost the entire society. And a mass of foreigners immigrated to our shores to get the higher wages for which Americans had become famous. This was the time when the U.S. became the top economy in the world (surpassing Britain). (Note to our southern friends, this is the period when the South caught up with the North economically. The real reason we fought the Civil War was to make you guys as rich as we were.) In more than one sense, our streets were paved with gold.
Our economic establishment tells us that this period (1866-1896) saw a series of depressions. The media of the country repeatedly tell us that they are against the rich and on the side of the poor. This is a repugnant and deliberate lie. 1866-96 was a period of several money and credit contractions, but a money/credit contraction is not a depression. It is a period when wealth is transferred from the rich to the poor. The overwhelming majority of the people benefited in two ways during this period: a) from the general increase in wealth of the time and b) from the money being lost by the rich. The â€œdepressionsâ€ of this period were depressions for the rich, and the media of the country (which is always on the side of the rich) reported them as depressions for the whole society.
This is an extremely important lesson for you to carry through life. The people in our society to whom you look for leadership and truth have betrayed you. Nearly everything you have been taught is a lie, and the people in our society who hold the highest positions of respect and trust are human scum. They have betrayed you, and they have betrayed America.
One simple and convenient piece of data which illustrates this is per capita butter consumption for the U.S. (Historical Statistics of the United States, Colonial Times to 1970, published by the Commerce Department, series G-888, G-889, pp. 329-330). In the money and credit contraction of 1873-79, butter consumption per person rose from about 13 lbs to 16 lbs. In the contraction of 1896, butter consumption per person got up to 22 lbs, the highest in American history. This compares with combined butter plus margarine consumption of about 16 lbs per person in the period after WWII.
In the early 1930s (which the above human scum call the Great Depression) butter consumption increased, and margarine consumption decreased, meat consumption rose (from 129 lbs per person in 1930 to 144 lbs. per person in 1934) and giving to charity rose sharply. By the way, those reports that rich people were jumping out of windows after the stock market crash of 1929 were a complete fabrication (one which demonstrates the media bias in favor of the rich). I have researched suicides both in New York State and in the nation as a whole for the period immediately after the crash, and they are completely normal. All those quasi-socialists who go around saying â€œI am for the poorâ€ are thinking â€œIf I can kiss the hindquarters of the rich, they will throw some money my way.â€
In his book 1984, George Orwell imagined a fictional dictatorship of the future in which the government (Big Brother) lied to the people by falsifying the contents of libraries to conform to the latest twist of the party line. But Orwell, as perceptive as he was, still did not quite get it right. Today the Government lies to us via the newspapers and news magazines while the official statistics, which tell the truth, remain unread in libraries across the nation. As much as he intended to shock us, Orwell was yet too naÃ¯ve.
Although it is not 100% true, I find it most useful to keep in my mind the operating premise everything I have been taught is a lie. This is not true of all history. The Founders of this country were great men, and they accomplished great things. That is why we have such a great country. But almost everything which has been done since the â€œprogressiveâ€ period (circa WWI) has been a disaster. One giant lie builds on another, and we are enmeshed in them like Brer Rabbit was enmeshed in Tar Baby. FDR was a Wall Streeter in the 1920s. He ran a Vulture Fund (so called because it swooped down on dying companies and gobbled them up). The first thing that he did after taking office as President (March 9, 1933) was to ram through legislation taking the country off the gold standard and giving the power to counterfeit money to the commercial banks. He was not a traitor to his class. He did not rob the rich to give to the poor. Rather, it was the working people who voted for him who were traitors to their class. When you read about this period, keep firmly in mind: everything I have been taught is a lie.
Now these are general remarks, and they apply to many areas of life. So let us return to the Leonhardt article. Since it appeared on page 1 of the Times, it will go all over the country. The editor of some small town in the west, whose citizens do not even know that the Times exists, will pick up its ideas and tell his readers that, just like the 1930s, a giant wave of depression is threatening to engulf the country. Since they will also hear this from the news magazines, from their neighbors and from a great many sources of information and will never be exposed to the ideas of this article, they will believe. After all, they are not intellectuals. They are busy people, and they have to get the work of the world done. And so it will go across the country.
So when these people have to make decisions about what to do with their money, they will have clearly in front of their minds â€“ as though it were a real thing â€“ the â€œdepressionâ€ of the 1930s as the model. They believe that every so often, out of nowhere, a giant wave of depression sweeps the country, lowers prices and makes everyone poorer. So they will rush to protect themselves from this depression, most likely by buying Treasury bills or bonds and going long the dollar. (A study of the money and credit contractions of American history shows that not a single one of them came out of nowhere. They were all caused by a contraction of the money supply on the part of the government, which led to a contraction of credit by the commercial banks.) But when all these people go into the markets and try to protect themselves from this mysterious â€œdeflation,â€ they will find that it is nowhere to be found. Exactly the opposite. They will find a massive rise in prices because this time the government has been increasing the money supply (approximately double since mid-2008). They will be poorer because their paychecks will not cover the increase in their cost of living ($5 gas, $1 daily paper, $1500 monthly rent). The answer to this problem is not hard to find. Buy gold.
Exactly what to do? That is my job. Although it is not possible for everyone to win by speculating on the markets, it is possible for a small number who see reality as it is to come out ahead. (The only way that the majority can avoid being cheated is by voting out the existing paper money system and restoring the gold standard. The reason they are losers is that they are trying to get something for nothing.) We now know that the great majority of the people are going to make the wrong play in the coming financial period. They are expecting prices to go down, but prices are going to go up. To give you financial advice so that you can come out ahead over this period is the job of my newsletter, the One-handed Economist, a fortnightly commentary on the economy and the financial markets ($300 per year).
In economics, as in life, you must see reality as it is if you are to make the right decisions. Many people have suffered disastrous losses because they have made the wrong decisions. And yet in this age â€“ as evil as it is â€“ there are incredible opportunities for profit. Sound principles of speculation, although they cannot give us 100% success, do significantly increase our chances of winning. The good people, who are against something for nothing, will get rich, and the evil people, who seek something for nothing, will get poor.
Specific actions in accord with this philosophy are laid out in the One-handed Economist. You may subscribe by visiting my web site, www.thegoldspeculator.com and pressing the Pay Pal button ($300/yr), or if you do not like Pay Pal, you may subscribe via the U.S. mail by writing to The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055 and taking advantage of a $10 cash discount ($290/yr). The One-handed Economist is written every other Friday and posted on my web site (password protected) on Saturday/Sunday with special bulletins when the market does something unusual. (Last issue was June 25.)
Thank you for your interest.
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