Is 'long-term' thinking a trap?

Oct 1, 2010

Baltimore, Maryland

Dow...3 ounces!

Our old friend Ronan McMahon has been keeping us up to date.Ireland is going broke, he says.

---------------------- User Speak! ----------------------
"Loved the mobile version of equitymaster. Great to be able to access it on my blackberry." - Atul Kumar, an Equitymaster Subscriber
"I liked very much equitymaster website on mobile. I can keep myself updated while I am travelling. Thank you very much." - Prakash Gudnavar, an Equitymaster Subscriber
What's your say? Check our new mobile website now!

The Irish foolishly borrowed too much money during the boom years. The banks foolishly lent too much money.And then the government foolishly said it would bail them out...even though the total exposure was 4 times Irish GDP.Yesterday, they foolishly took over Ireland's biggest bank, Anglo Irish. And now they're going broke. The losses are probably more than they can handle.

But it's been worth it. What a ride the Irish have had! They were the poorest people in Western Europe...then, they became the richest people in Western Europe. And now they're back to being the poorest...

It would have been better if they had had a better sense of architecture during the fat years... They wouldn't have blemished the island with so many ugly buildings. Alas, the Irish will have to live with the stain of their prosperous years for generations...

Of course, the same could be said for the USA. All those wretched suburbs and condos...All those shopping malls. All those parking lots...

Not to mention all that debt!

Yes, we will live with the bubble rubbish and residue for many years.

But Ronan said something interesting. We were discussing Irish property. There's a lot of it for sale. Buyers can practically name their own prices. But the choice properties are still in the hands of the insiders. When they see something go down to where it is a bargain price...they snap it up.

This signals to us that the whole process of debt destruction still has a long way to go. The assets still have appeal. Investors still think they can make money by buying low and selling high. In other words, they still think there is a bias towards the upside.

They haven't given up. They're still eager to buy - at the right price.

But just wait. When the end comes...they won't be interested at any price. Some of the finest properties will go 'no bid.' Then, the players...the insiders...the smart money will all be convinced that property is a losing proposition...and that you will never make money by buying real estate - because it always goes down. Then, when the insiders have given up. Then, and only then, can you expect to make any real money.

It's no different in the stock market. What investors want now are bargains. They think that they can make money, by buying at the right price. Then, as the 'recovery' comes their stocks will go up. They think the bias of the stock market is still upwards.

Certain well-known investors - for whom we have an enormous lack of respect - claim that stock prices always go up "in the long run." These super bulls are forever predicting "Dow 36,000" or "Dow 100,000." And they'll probably be right. Someday, the Dow will probably hit 100,000. And you'll be able to read about it in your $50 newspaper while you're drinking your $100 cup of coffee.

This week, Jeffrey Hirsch predicted a Dow over 38,000 by 2025 - a gain of about 5% per annum, without dividends. Maybe he'll be right too.

But stocks don't really always go up. Au contraire, every stock you buy will eventually go to zero. Your only hope is that you expire worthless before it does.

As for the lot of them, remember that most of their profits and share price growth is an illusion. Let's say you "buy the market." You just get an ETF representing the index...or simply buy the Dow stocks. The companies make money. Their share prices go up.

But wait. Where do their revenues come from? Where do their profits come from? Aren't they just taking money from each other...and from other businesses and consumers (who are also their employees...that is, a cost center)? How can they ALL go up? They can't really. They can only grow as fast as the economy itself. Competition keeps profit margins with a fairly narrow band. So, their share of the economy is limited. And since the economy is quoted in money...they can't really go up more than money itself.

In other words, if there were just $100 in a town, and the businesses in the town were worth half that amount, they would be worth $50. Total. No matter how much progress the town made, as long as the amount of money stayed constant, they would still only be worth $50 (though that money could be worth much, much more in terms of what it would buy).

Gold is stable money. It's the closest thing we have to a fixed monetary unit. The supply increases, but only about as fast as the rest of the economy increases. So, over thousands of years its "price" - in terms of how much you could exchange in for - has been more or less constant.

If stocks were really becoming more valuable you'd expect that they would become more valuable against a fixed quantity of real money -- gold. But look at what has happened. At the beginning of the 20th century, the Dow was 66 and an ounce of gold was about $20. "A $20 gold piece" was a unit of exchange. So it took a bit more than 3 ounces of gold to buy the Dow. Then, at the bottom of the bear market in stocks in the '30s, again it took about 3 ounces of gold to buy the Dow. And again, at the bottom of the bear market in '82 you could buy the Dow for less than 3 ounces. At once point, a single ounce would do it.

Currently, it takes a bit more than 8 ounces to buy the Dow. Hmm... You could get the Dow for about 8 ounces of gold in the '10s...again in the '20s...the '30s...the '40s...the '50s...'70s...'80s...and now finally, once again, in 2010.

And that number is probably going down. The bear market in stocks still hasn't reached its bottom. When it does, you'll almost certainly be able to buy the Dow for 3 ounces of gold.

Stocks for the long run? Ha ha....

*** We're on zombie watch...

They're everywhere...but especially here in the Washington metropolitan area.
Zombies get their money from the government - directly or indirectly. Or some other perk...some edge...some benefit.

Just open the Washington Post. Skip the international news, which is nothing but humbug and claptrap...usually having to do with Iraq, Afghanistan or Israel.

Go to the local news.

Let's about this: a little item. Martena Clinton made the news after her car was towed by the Secret Service and then lost. She had parked in a handicapped section. But wait...what's this? Ms. Clinton isn't handicapped. She's not a half-wit. She's not lame. In fact, in the photo, she looks pretty good.

So what's she doing in the gimpy parking section? Well, her husband is said to be mobility challenged.

Special parking spaces seemed like a nice gesture when they were originally introduced. But the zombies quickly took advantage of them. Now, they're used by friends and families of an invalid...often passed down from one generation to the next after the cripple dies.

That's how zombies do it. They take advantage of an easily-corruptible system. Government salaries and benefits, for example, are typically about 30% better than those in the private sector.

You can see the difference here in Bethesda. The houses are all tarted up. The cars are all new and expensive. The streets and restaurants are full. Everything is modern, rich....

The editor of US News & World Report talks of a "great divide" in the US...those who have government salaries...and the rest of us. People who work for government - or otherwise are supported by the government - have made steady income gains over the last 30 years. Others have not. Government employee labor unions have grown while others have declined.

Being a zombie pays. And it's likely to pay even better in the future. Because now zombies control the White House (it was the zombie states...those that owed the most money...and those that get most money from the government) that elected Barack Obama. They control the Congress too. Zombies have the time (what else do they have to do?) and the resources (often, direct contact with the government itself) to get involved in elections. They have a motive too - they can pass legislation putting more money in zombie hands. Military contractors, tax lawyers, 'educators' and the handicapped - all have a keen interest in elections. The rest of us have our work, business, families, careers to attend to. Not that every tax lawyer is a chiseler, every military contractor is a cheat, and every person who can't walk is a malingerer - far from it. But they have to doubly honest and independent to avoid the corrupting gravity of Planet Zombie.


Fragging Your Own Money

"Monetary warfare!" says the Financial Times. In North America, the US is pointing its heavy guns at China... the US Congress has proposed a bill naming China as a 'currency manipulator.' How, exactly, is China manipulating the renminbi? It is holding steadfast to the dollar! This, says US Speaker of the House, Nancy Pelosi, "translates into a significant subsidy, artificially making U.S. products more expensive, and jeopardizing efforts to create and preserve manufacturing jobs in America,"

In South America, Brazil fires salvoes at Japan, South Korea and Taiwan. "We're in the midst of an international currency war," said Guido Mantega, Brazil's finance minister, on Monday. What makes the Asian countries a target of Brazil's artillery? They intervened in the currency markets directly, selling their own currencies and buying, among other things, Brazil's real.

The remarkable thing about these battles is that admirals scuttle their own ships. Generals spike their own cannon. All the combatants send out their currencies like footsoldiers - and then shoot them in the back. They are all trying to "manage their currencies down," the FT explains.

Meanwhile in Europe, Ireland cannot assassinate its own homegrown currency. It doesn't have one. It signed on to the euro. For the moment at least, the euro managers hesitate; Ireland will have to cheat its people and its creditors flagrantly rather than surreptitiously. On Thursday, it put another 5 billion euros into Anglo-Irish Bank.

These strange facts incite the following reflection on the whole scammy system. The trouble with today's capitalism is that there little honest capital left in it. It has been drained away by quackery, debt and fraud. Real capitalism requires solid capital - money you can trust. But real money disappeared nearly 40 years ago. That was when the last traces of gold were removed. Since then, all currencies have been 'managed.' No longer fixed measures of real wealth, they have become tools...supposedly used by the authorities to promote full employment and growth...but in fact little more than monetary felonies.

From the end of the Napoleonic wars until the beginning of World Wars of the 20th century, the world's money system was backed by gold. You couldn't 'manage' it. You couldn't devalue it. You couldn't talk it up or talk it down. You couldn't beggar thy neighbor by cheapening it or enrich him by making it more dear. It was what it was. The new experimental money system began in the Year of Richard Nixon, 1971. Thereafter, the supply of money could increase much faster than the supply of goods and services. US money supply (M2) rose 1,314% between 1970 and 2008, from $624 billion to $8.2 trillion. What did all this ersatz new money do? First it flattered...then it corrupted...and finally, it robbed.

America's working stiffs were the first to get whacked. Inflation made them feel like they were earning more; but they haven't had a real, hourly raise since the system was put in place 4 decades ago. And now, America is struggling to make sure they get none in the future either. Lowering the dollar against the renminbi increases the cost of probably 90% of the goods in Walmart and Costco - where the working classes shop.

But this has been going on ever since the managers began taking liberties with the dollar. In the 1960s, the working man - 90% of the population - got 60% of the income gains of the period. By the end of the bubble years - 2001- 2007 - he got just 11%. This has resulted in a "record income gap," says this week's news. Half the nation's income goes to the top 20% of the population, nearly twice as much, compared to the bottom 20%, as in 1967; it's the biggest gap since they began keeping track.

Consumer prices rose 5 times over the last 40 years. The stock market went up 15 times - from 800 in January 1970 to over 12,000 in 2008 -- roughly in line with the increase in the money supply. But the phony money betrayed the rich too. Investors were misled. Capitalists erred. Trillions of dollars went down rat-holes. Consumers were spent out, but the capitalists kept building shopping malls. Now, stock market prices have gone nowhere for more than a decade. And household net worth - most of it in the hands of the wealthy - has declined $12.3 trillion from the peak. When the mistakes are finally flushed out, they could be down another $12 trillion.

The horns have sounded and bells have been rung. It is 1939 in the currency war - just the beginning. When it is over, every managed currency in the world will be dead or wounded. But we will be wiser, too. When the new managed dollar was introduced in the 'Nixon Shock' of August, 1971, nobody knew what it was worth. When the end comes, everyone will know.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

A New Infrastructure Boom March 26, 2019
Selva Freigedo talks about the potential in 5G network and how it could transform the way we communicate.
A 40 Somethings Guide to YouTube Hits March 20, 2019
Vivek dwells into a new YouTube phenomenon.
As the Economy Slows Down, Maruti and Two-Wheeler Companies Cut Production March 19, 2019
The country's largest car maker has cut production by more than a fourth.
In Supporting Demonetisation, RBI Behaved Like an Old Uncle Not Willing to Take a Stand March 13, 2019
The minutes of the meeting of the RBI Board which happened before demonetisation have been released.

Equitymaster requests your view! Post a comment on "Is 'long-term' thinking a trap?". Click here!

3 Responses to "Is 'long-term' thinking a trap?"


Oct 3, 2010

..i cant figure out what the author is attempting to do..


K.G. Rao

Oct 1, 2010

You folks at EQM simply must let me hear on this. Is it correct, as Bill Bonner says, "...Government salaries and benefits, for example, are typically about 30% better than those in the private sector." Goes against everything one has read, not just in India, but even in god's Own Country the USA. So what are the facts? Is Bill Bonner talking tripe?



Oct 1, 2010

Hello DOOM'S DAY PROPHET! You are so pessimistic in each of your newsletters that I wonder why.
It is true that ultimately all of us will die, everything that is built falls down one day, business grows up and dies down and new business takes its place. Change is the essence of life. Wealth is an illusion - enjoy while you can - if you chose to be sad and morose - it is your choice.

Equitymaster requests your view! Post a comment on "Is 'long-term' thinking a trap?". Click here!