Gold, A Good Bet Against Bernanke & Co

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We’re not really in Dakar. We left there after a couple of hours on the runway. But we thought it would fun to file a Daily Reckoning from such an exotic place.

Now, we’re back in good ol’ Bawlamer, Maryland. No matter where you go in the world, you won’t find anything like Baltimore. It’s probably best that way.

This week, we’ve had our eye on gold…and the dollar. As the dollar rises, gold goes down. This is not the way we thought it would happen. We expected a crack in the stock market first.

But you never know. And we’ll take what we can get. Gold is correcting; that’s what we were waiting for.

Well, we don’t really know what is happening. Stocks rose yesterday – with the Dow up 68 points. So far, no sign of the rout we’re expecting. We’ll leave our tattered Crash Alert Flag flying anyway…just in case.

Gold rose $5 yesterday. Was that all there was to it? Was that the dip you’re supposed to buy?

We wish we could tell you. As far as we call tell, this is the part of the market that is “noise” and not much more. Gold is a very good bet for the long term. Because it is a bet against Bernanke & Co. Look at it this way, where would your rather put your money…on the brains and integrity of America’s central bankers…or on a dumb metal? We’ll take the metal!

Just look at what the Bernanke team does. Listen to what they say. They have no idea what they are doing…yet, they are doing a lot of it. They more than doubled the US monetary base in less than 18 months. They’ve bought hundreds of billions worth of the banks’ dodgy loans. They’ve threatened to drop money from helicopters rather than permit the economy to correct its mistakes.

We’ll take gold, thank you very much…and wait to see what happens next.

Markets are closer to living things than to inanimate objects. They have hearts, souls, and a sense of humor. They don’t merely react to circumstances. They create circumstances. And then they react to them. And then they give a good laugh. That’s why Modern Portfolio Theory and the Efficient Market Hypothesis are such folderol. They expect markets to act like rubber balls or iron filings. They expect them to behave like objects, rather than like human beings.

Anthropogenic Global Warming is probably a hollow conceit. Anthropogenic Market Warming, on the other hand, is a certainty. Put out enough hot money…mix with boundless delusions…and that is what you get.

Anthropogenic Global Warming, or AGW, is what climate scientists call the hypothesis that human behavior is causing the world to heat up. Anthropogenic means ’caused by humans.’ Supposedly, humans release carbon dioxide that creates a greenhouse effect, raising temperatures. That’s what the scientists claim.

The trouble is there aren’t really any climate scientists and nobody really knows what is going on. Real science requires an ability to reproduce results and disprove an assertion. If there’s no way to prove that a hypothesis isn’t so, it’s not really science. It’s just guesswork. Nobody can prove much of anything related to the earth’s climate. You can’t do a controlled experiment. All you have is cogitation and conjecture.

Markets are the same way. Nobody knows for sure why anything happens. But we do know that humans play a central role in market behavior and that what they think matters. That’s why you can’t measure risk by looking back on past behavior. Investors didn’t think the same things then.

In the ’90s, investors began to believe that stocks always outperformed bonds and that the US stock market was the safest, surest bet on the planet. This gave them an almost unlimited faith in Wall Street, in equities and in the future. Stocks soared. Then, what happened? In the next decade, US stocks underperformed bonds and were the world’s worst- performing major equity market.

Now that’s a sense of humor!

And now what do investors believe? They think we are in a recovery. They don’t expect it to be very robust. They may be mad at the authorities for giving so much money to the bankers, but they have confidence that the situation is under control. US bonds are still the world’s best credits, in their eyes. And stocks are still almost as good as money in the bank. Sure, they may take a hit…but they always bounce back.

The bear has his work cut out for him. He must demolish these confident, inherently bullish, attitudes. He gave investors a fright in ’08-’09. As near as we can tell, he succeeded in chasing consumers out of the park. With no source of finance or increased income, consumers have been forced to cut back. They have no choice. Fashion often follows necessity; conspicuous consumption is giving way to frugality.

But investors – particularly speculators – are still believers. The feds couldn’t juice up consumer spending…but they wasted no time putting the asset markets into the blender. Speculators enjoy real short-term lending rates below zero…and the fruit of TARP. And now comes word that the feds are going to extend TARP until October 2010…and use unspent funds in other stimulating ways.

No wonder the markets are so frothy! Just watch. Mr. Bear is going to blow the froth off. That’s his job.

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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Comments

  1. Bill you say, “If there’s no way to prove that a hypothesis isn’t so, it’s not really science. It’s just guesswork. Nobody can prove much of anything related to the earth’s climate. You can’t do a controlled experiment. All you have is cogitation and conjecture.” There actually is a ridiculous amount of research done concerning climate change. There are ice core samples, tree lines ascending mountains, the warming of the arctic & antarctic ice, the satellite and land station data showing warming and along the way it was scrutinized ferociously. The advocates against anthropogenic global warming had their input and were put to the scientific test to prove an alternative hypothesis which is credible. They basically got their ass handed to them. It’s been known for 150 years that CO2 is a greenhouse, gas the debate wavers about the sensitivity of climate and if it has a positive feedback loop effect. The models don’t prove it exists, and you’re right no one can prove anything. The power of science is in its capability to establish the likelihood of something being more reasonable and having the most explanations possible so as to eliminate unworthy ideas.

    From an economic position I agree with you but your analogy is just lost. I can see why you distrust science so much coming from a contrarian perspective and from what I know economics in general is a sequence of mental pitfalls and ambitious snake oil salesman can take advantage of it because it appeals to the masses and their requirement for self deluded grandeur and their own sense of power. Unfortunately it is out of their control when markets move and mostly the haves continue to have while the have nots are robbed. Don’t mistake the prejudice you have for economics/politics for science – science is the safe haven the masses need to realise their desire to know what they and others could not possibly understand.

    Reply
  2. That so funny drew. So what your saying is that in science you dont have to actually prove anything, just have a debate and do so “ass handing”?
    Guess i must be one of the dumb masses you mention at the end. Poor stupid me, just way to dumb to understand anything…i leave it to the scientists.
    Until its proven its opinion and conjecture. Fact!

    Great analogy Bill. Its true that in all facets of life, in the absence of facts, you can argue that black is white and not be wrong. It’s the people who bully you into their way of thinking that really grate.

    Reply
  3. Science means you do the experiment yourself.

    If you rely on ‘experts’ as being the authority on science,
    then that is not science, its just following the masses.

    Reply

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