Second Great Depression

[Anonymous]

Chris S., look at my chart of the ’87 crash, above; gold sallied on just fine while the S&P and gold mining stocks tanked.

If you think that the market is due for a correction (I do); if you understand that gold mining stocks sometimes take a hit in market corrections (yes in ’87, no in 9/11/01); if you see that we are in highly uncertain times — Iran bringing more centrifuges online faster than expected, Saudi Arabia oil production unexpectedly declining; if you understand that gold is the place to be in uncertain times (see the Dec. ’79-Jan. ’80 spike to $875 as a result of the Iranian hostage taking and Soviet invasion of Afghanistan); it makes sense to be in gold (ETF or bullion) until the broad market corrects, then get back into gold mining stocks/mutual funds, which will amplify the nice appreciation that gold will continue to see (until the Fed takes a harsh stand against inflation, which it cannot do given the $12T in mortgage debt outstanding).

[Chris Scoreboard Johnston]

Chris Johnston

Gold was at 790.90 on 10/23/87
Gold was at 684 in 9/88
Gold was at 592.6 on 6/90

These are the front month prices on futures. That October period marked the very top of the market, and the beginning of a multiyear decline that would have been devastating to have been long through. Gold may or may not rise from here, but it will have nothing to do at all with what equities do.

That is “sallied” along just fine? An almost $200/ounce drop. Please people, do your own research and don’t listen to this kind of disinformation.

Unbelievable

[Anonymous]

Chris, I’m moving into gold for a different reason: I want to ‘sit out’ the market drop, which will happen over a day or few weeks, and which may hit gold mining stock mutual funds. Then, I’ll move right back into gold mining stock mutual funds the next day, at a lower price per share = more shares.

Surprising (ha, ha), that we differ on the long-term prospects for gold.

[Anonymous]

What will crush gold, stocks and the housing bubble is high REAL interest rates. What has ignited gold, stocks and the housing bubble is low REAL interest rates. What drives reall interest rates is federal deficit spending. Deficit spending in inflationary, hence the Fed responds by raising real interest rates, which is deflationary. The reason real interest rates have been low for so long is that the federal deficit almost disappeared during the 90’s, and with it, all the inflationary pressures. So the Fed was forced to lower real interest rates.

I believe the future holds much bigger federal deficits, but with inflation held in check by much higher real interest rates. This will lead to a strong dollar and a collapse in gold, commodities, stocks and housing prices.

An alternative scenario is for a balanced federal budget, which will cause very low real interest rates, a weak dollar, and an increase in gold, commodity and stock prices, and stability in housing prices.

Another possibility, much beloved of the doom-and-gloom crowd, is for huge federal deficits, low interest rates, hence hyperinflation, a collapse in the dollar, exploding gold and commodities prices, and who knows what with stocks and housing.

[Anonymous]

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[Anonymous]

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[Anonymous]

I agree that high real interest rates could restore confidence in the dollar and kill gold.

That is my signal to get out of gold, when I see that the Fed will aggressively fight inflation.

Fact check: $4.8T Federal debt as of Q3 ’06; $222B paid on interest paid on Treasury securities in ’06 (~5%); annual Federal spending of $2.8T in ’06.

http://www.whitehouse.gov/omb/budget/fy2008/sheets/27_1.xls

Yeah, let’s see interest rates move to 20%, quadruple interest payments to $900B so that they are 30% of the $2.8B federal budget, in the face of falling tax receipts and increasing demand for government services.

Ain’t gonna happen; the U.S. will print money and ‘retire’ the debt, instead, stiffing savers and foreigners.

That is what is different this time, compared to the ’70s/early ’80s: the huge federal debt.

The feds have no choice but to inflate themselves out of this mess. I wish it was otherwise, so that I could continue to earn a living via productive efforts, instead of speculative efforts.

[Anonymous]

You don’t need 20% interest rates to keep inflation under control. 7% will do quite nicely, given the indebtedness of the American consumer. Also, just because the defict doubles doesn’t mean interest payments double. It takes a while for the debt to build up. If the government ran $2 trillion deficits for 3 years, that would add $6 trillion in new debt, which would then cost an additinal $420 billion/year in interest payments at 7%, or perhaps 3% of GDP. This is quite manageable. What happens if these huge debts continue beyond 3 years is another story. At that point, I might indeed start getting worried.

There is no such thing as “printing” money in today’s economy. Do you mean the Fed will keep interest rates low in the presence of high inflation caused by a huge budget deficit? Possibly, though there is absolutely no past precedent for such a thing.

You make it sound like raising interest rates to accomodate a huge budget deficit will encounter massive resistance. But actually it is the path of least resistance. Congress gets to spend lots of money, which most voters like, while the people who get hurt are the net debtors, and those who have lent to these debtors. The debtors are poor, while the lenders are rich, but Congress will likely be in a mood to make scapegoats out of the rich banks by this time next year. Expect a new law making bankruptcy much easier. That’s the real American way to clean up a debt mess.

[Anonymous]

The Fed had to go to 18% last time around:

http://www.research.stlouisfed.org/fred2/series/FEDFUNDS?&cid=118

It’s going to be very, very interesting. I’ll be all eyes and ears and will be prepared to move quickly. I think that I’ll have to rely on my hoard during the tough times upcoming, and I’m prepared to move quickly to protect it.

I’d prefer to be wrong, and I prefer that all be well.

But, I think that it’s going to be a big, big mess — meltdown and paralysis — once the CDOs/ABSs start unwinding, folks start pointing fingers at each other for ‘insurance,’ and pension funds, insurance companies, and savers realize that their MBSs are near worthless.

[Anonymous]

Aside from gold, how do other investments such as bonds hold up in serious recessions? I can’t find decent info on this.

[Anonymous]

My predictions of higher real interest rates are not born out by the current yields on long-term bonds, which are under 5%. Am I smarter than Wall Street? Unlikely. However, I still think I’m right and Wall Street is wrong. My explanation is that the money keeping long-term interest rates down is not owner money, but rather money managed by non-owners. The managers at hedge funds, pension funds and mutual funds get paid based on short-term performance, and the future be damned. As long as it is possible to goose short-term performance by buying long-term bonds, they’ll continue do so. Then one day, everyone decides to jump ship at the same time and long-term rates shoot up to 7% or so, at which point the hedge funds blow up, the pension funds have a massive hole to fill, and the little guys investing in mutual funds lose their shirt. Not a problem for the managers, since they’ve already been paid their bonuses. In any case, it’s all about relative performance. It doesn’t matter if you lose money, just make sure you don’t lose more than the competition.

There are a lot of distortions in today’s financial world, due to the fact that there are so many intermediaries between the financial wealth-owners and the final investment of this financial wealth, and these intermediaries have little incentive to think long-term. So you are quite right, jg, there is definitely going to be a big, big mess in the near future.

[Author]

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