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Mix-Ansicht- Exerpt Gary North: GOLD AND MENTAL PARALYSIS - CRASH_GURU, 28.12.2005, 05:14
Exerpt Gary North: GOLD AND MENTAL PARALYSIS
-->CONFIRMATION BY POLICY, NOT THE CROWD
Do not wait for confirmation by the crowd. Do not
wait for confirmation by a guru. Wait for confirmation by
economic policy.
The FED Chairman elect, Ben Bernanke, has made clear
the following propositions: (1) he will follow Greenspan's
legacy; (2) he will not allow price deflation.
The second policy is in fact the main implication of
the first. Greenspan has left only one abiding legacy:
inflating the currency so as to avoid price deflation,
which might in turn create cascading cross defaults and
thereby shut down the bank payments system.
Because the FED is raising short-term interest rates
by its policy of tightening money, Bernanke is about to
inherit one of two things: (1) an inverted yield curve, or
(2) a falling bond market (rising long-term rates). He may
even get both, one right after another.
Let me explain. First, look at the charts for money.
The adjusted monetary base, year to year, has grown 3%.
But in recent weeks, it is growing at 0.5% annual rate --
one half of one percent. This is almost zero inflation.
The other monetary statistics reveal increases of
under 5%. See this for yourself.
http://snipurl.com/fedcharts
I know, I know: you don't really want to see
these charts. You want me to give my two cents'
worth, and then move on. This is unwise. You
must seek confirmation on your own, not merely on
the basis of what I say. All I can do is suggest
a scenario and provide a few bits and pieces of
evidence.
The FED is clearly pursuing a tight-money policy.
This is why the federal funds rate is rising. This tight
monetary policy confirms the FED's stated goal: to raise
the fed funds rate.
The FED is therefore creating a nightmare for the
carry trade industry, which borrows short-term money at low
rates and buys long-term bonds at high rates. When
commercial short-term rates hovered at 1.75%, that was
profitable. It no longer is. See for yourself: the U.S.
Interest Rates chart, posted here:
http://snipurl.com/fedcharts
Look at the chart for"Short-Term Interest Rates." If
you had borrowed a billion dollars in mid-2004 at 1.6% or
so, and you are now paying over 4%, your profit margin has
shrunk dramatically. You now own lots of bonds or
mortgages that are paying a little under 6%. If short-term
rates go back to where they were in early 2001 -- above 6%
-- you will owe more money in interest than your bonds are
paying. You enter the world of red ink.
What would you do? Obviously, sell the bonds and pay
off the loan. But what happens when lots of people start
selling bonds? The price will go down: competitive
bidding. In bonds, this means that the interest rate will
go up.
This means mortgage rates will go up.
Can you say the words,"shiny needle for the housing
bubble"?
At that point the old bugaboo of central bankers will
raise its ugly head: how to get long rates down for the
sake of avoiding a crash in the bond market, meaning the
U.S. Treasury's bond market. The best way, economically
speaking, is to let the housing bubble burst. But that
would cause a major recession. Residential real estate has
driven the recovery since 2001.
Incumbent Presidents get surly when there is a
recession. So does Congress.
A RECESSION IS COMING
I see a recession coming if the present tight monetary
policy continues. I think it will continue.
This means that the experts who advise mutual fund
managers regarding FED policy are wrong. They watch
shifting adjectives in FED announcements to draw
conclusions.
The conclusion that stock fund managers want to hear
is this:"No more short-term interest rate hikes."
The conclusion that bond fund managers want to hear is
this:"No more long-term interest rate hikes."
But what has Bernanke actually said? He will follow
Greenspan's policy. What is this policy today? Tightening
money and thereby raising short-term rates. Because of the
squeeze on the carry trade, this will also raise long-term
rates. The two rates went down together after 2000. They
will go up together.
Normally, long rates fall when short rates rise. The
inflation premium component of long-term interest rates
falls. It is falling today. Mortgage rates have risen,
but not as fast as short rates. However, the squeeze on
the carry trade will take long rates up if the fed funds
rate goes back to 6%, where it was in late 2000. That's
what I think the FED is going to do.
Why don't the experts pay closer attention -- ANY
attention -- to what Bernanke says? Because recessions
mean falling stock prices. Because rising short-term rates
mean a crisis for the carry trade industry. Nobody on Wall
Street wants to believe the FED will do this.
They refuse to acknowledge the reality of what the FED
has already done: created a bonanza for the carry trade
industry by forcing down short-term rates. That policy is
being reversed by fed funds rate hikes of 0.25 percentage
point every time the FOMC meets.
The FED giveth, and the FED taketh away. Cursed be
the name of the FED.
RECESSION AND GOLD
This is where guesswork comes in. If gold were a
major asset class, then a recession would force down the
price. People need liquidity in a recession. They sell
liquid assets. Gold is a liquid asset.
The question is this: To what extent are holders of
gold at risk of reduced liquidity? That is, to what extent
do they rely on their gold holdings as assets to be sold to
maintain their solvency? My answer is simple: not very.
But there are no statistics on this.
I know that central banks are the main holders of gold
-- or at least their official books say they are. Central
banks, unlike you and me, do not sell assets in order to
increase their liquidity. On the contrary, they buy assets
in order to increase their liquidity.
So, are the major investment funds heavily invested in
gold? No. How about pension funds? No. Then who is?
Gold bugs, mainly.
Indians and other Asians hold gold. They might be
forced to sell if America's recession tanks the Asian
economies. But because Asian central banks are the driving
force behind the Asian boom -- not Americans, who are
merely the indebted intermediaries -- the recession may not
hit Asia very hard.
Remember, Asian central banks are cranking out the
money that is used by the Asian central banks to buy
dollars. This holds up the value of the dollar. This in
turn helps Asian exporters to sell to Americans. But Asian
central banks can buy any other asset, such as the debt of
Asian governments or the debt of Asian companies. It
doesn't matter whether Americans buy Asian goods or Asians
do, just so long as the goods get sold by Asian
manufacturers.
Asia doesn't need Americans to borrow and spend.
Europeans will do it, too. So will Asian companies that
find buyers for their bonds, namely, Asian central banks.
Gold is not immune to a recession. As an asset class,
it can go down, along with stocks and bonds.
Here is the problem: most people will not buy gold at
the bottom. They won't buy gold at all.
So, for those of you who are thinking about buying,
remember this: if you did not buy when gold fell $25, why
do you think you will buy it the next time it falls $25?
Or, step by step, $50?
CONCLUSION
This report isn't only about gold. It's about you.
Gold could go down. It could also go up.
How should you make a rational decision? By answering
two questions.
1. How much confidence do you have in the
Federal Reserve Board?
2. Do you think that the Board will hold
to the present policy of essentially
zero money creation? It has not done
so since 1932. Why now?
Recessions are always followed by fiat-money-induced
booms. This is why gold will move up. The question is:
Will it move up from here, or will it fall back during the
recession (2007 at the latest), and then move up? A
logical case can be made either way.
I think the upside risk of missing the move up is
larger than the downside risk of getting in too early. For
most people, I think this is the case. They must act
rationally and without emotion in order to overcome their
own emotional constraints. They are fearful:"Will gold
fall?" They are greedy:"I'll wait until gold falls."
Both emotions will produce paralysis unless accompanied by
a fixed buying plan:"I will buy at either of these prices,
one lower, the other higher."
We have been down that road once this month. What
have you learned -- not about gold, but about you?
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