Once again, a lazy day on Wall Street. Dow down a little. Gold up a little.
It looks to us that the bond market has topped out. Some sovereign yields are up as much as 45% in the last three months. But we’ll have to wait to see – perhaps years – if the bond market has truly rolled over.
Meanwhile, gold looks more and more as though it has put in a bottom. Gold has been rising for six days in a row. At writing, we’re almost back to $1,300 per ounce.
End of the correction in gold? Again, we’ll have to wait to see.
But we may not have to wait long to find out what’s happening in the gold market. If the economic news turns bad, gold’s outlook could turn good – fast.
And what’s this? The good second quarter, just ended, may turn out to be less salutary than thought.
Certainly, the news was good when it was on the TV. But now the revisions are confined to the back pages of the financial press. Like returned junk after Christmas, they’re showing up and causing dismay. From Real Time Economics:
The first look at second-quarter gross domestic product won’t be released until July 31 – the second day of the Federal Reserve‘s next Federal Open Market Committee meeting. But monthly data available make it clear the spring slump was, indeed, very, very slumpy.
Monday brought disappointing news on retail sales and business inventories. Retail purchases increased just 0.4% in June, not the 0.8% expected, and May’s sales were revised down. The control sales group, which goes into GDP and which excludes vehicles, building materials and gasoline, rose 0.15% in June, half the gain forecasted.
In addition, businesses increased their inventories level by just 0.1% in May, and April’s increase was revised from 0.2% to 0.3%.
The list of economic shops now estimating real GDP grew by less than a 1% annual rate last quarter include Goldman Sachs (0.8% as of Monday), Macroeconomic Advisors (0.6%), Royal Bank of Scotland (0.5%) and Barclays (0.5%). (One caveat to the upcoming GDP data is that the Bureau of Economic Analysis will be releasing benchmark revisions and new methodology at the same time the second-quarter GDP data are released.)
Fed Chairman Ben Bernanke is slated to deliver his semiannual policy testimony on Capitol Hill Wednesday and Thursday. Investors will be listening for the chairman’s economic outlook and how it pertains to future policy decisions.
The Fed’s central-tendency forecast depends on much faster GDP growth in the second half. As the J.P. Morgan economists note, it could be difficult for policymakers to discuss tapering their bond buying program at their September meeting – as many Fed-watchers expect – unless the third-quarter numbers look a heck of a lot stronger than the spring quarter does right now.
But wait… there’s still a housing recovery, isn’t there? From MarketWatch:
The housing recovery is bogus. Here’s why: While it’s true that housing appears to be a great investment, it’s only a good investment for a select few – namely, those with access to ample credit and those who aren’t tied down to expensive housing purchases made in the years before the financial crisis.
Consider a report issued Monday by Lender Processing Services. LPS found that, although delinquent mortgages declined 15% this year, they are still running at 6.08% of all outstanding mortgages – about 1.5 times the rate from 1995-2005…
Moreover, LPS found that existing borrowers are still struggling. Though the number has declined by half since last year, more than 7.3 million mortgage holders have loans that exceed the value of their homes – that’s more than 14% of all existing home loans.
No recovery = no tapering = higher gold price. At least, that’s our guess.
But let’s move on…
Let’s Talk Money
We were talking about money, continuing our annoying exploration…
Money expresses a relationship between people. A man with money has a claim on the time and possessions of other men. He can buy a house from his neighbor. He can buy an hour of his neighbor’s time. In some societies, he could even buy his neighbor’s wife or daughter (then, as now, it paid to live in a good neighborhood)!
A man without money has no claim; he has only a need. He must give up his time… his house… or his daughter… to the satisfaction of other men.
Okay with us. Just as long as we’ve got the money!
But as we explained yesterday, there are two kinds of money. There is credit money – the kind that depends on other people to honor their obligations. And there is real money – the kind that is valuable in itself.
The first, according to David Graeber’s book Debt: The First 5,000 Years, is the kind of money that existed in primitive societies.
People had little of what today we call “information,” but the information they had was of a different sort. It was real. They knew who owed what to whom.
Sometimes these ledgers, kept by community memory, stretched over many generations. Often, they involved transactions of a subtle or ambiguous nature… far too nuanced to be recorded in a dry, modern “due to, due from” tally.
A man borrowed one neighbor’s bow and another’s arrow. He shot a deer. He owed one cut of meat to the one whose arrow he used and a better cut to the one who had lent him the bow. If he was unable to deliver, the debt may be carried forward, perhaps to the next generation, with interest, to be paid in choice intestinal parts.
When trade, agriculture and war brought people together in greater numbers, the credit-based money system broke down.
Who could keep track of so many details? Besides, soldiers had to be paid in something other than contingent credit commitments. They wanted something they could carry.
Women and loot worked for a while. But as armies grew larger… and became more stationary… the Sabine women and the ready supplies of portables were quickly exhausted. The authorities needed another way to keep their soldiers in the field.
So did merchants need other ways of settling accounts. In a small tribe, extended webs of exchange would work. But not in a city. And not when buyers and sellers neither recognized each other, spoke the same languages, nor worshipped the same gods. They, too, needed a different kind of money.
The Shift to Civilization
The shift from tribal society to civilization (life in cities) required a fundamental change.
Justice, for example…
In a small setting, justice was never “blind.” Everyone in the village knew the malefactor and his victim. Judgment was based on custom, but also on a detailed, specific, direct and immediate knowledge of the circumstances. All eyes were on the accused.
In the new civilized community, on the other hand, often the accused, the accuser, the judge and the jury were all strangers. So were they likely to be strangers to the particular codes and customs of the groups of which each other were part.
A new system was needed. And from this emerged, or evolved, the principles of modern jurisprudence – notably that the judgers must be indifferent to the particulars of the accused. Instead, they must put on a blindfold and assume that the man before them is subject to the same law as everybody else.
That was the really big innovation. Suddenly, there were laws that had to be obeyed.
The “law” was supposed to determine the disposition of miscreants. The law, too, was supposed to tell people how to act toward one another – as in “Thou Shalt Not Kill” – and toward their rulers.
But the government (though this took a long time to fully develop and was more often honored in the breach than otherwise) was supposed to be based on laws not of men.
The benefit of this innovation was it allowed people who didn’t know each other to nevertheless live side by side and do business together.
Was this better? We don’t know. But civilized communities were, on the whole, more successful than uncivilized ones. The civilized ones survived… and evolved further. The uncivilized ones were conquered, transformed, exterminated or pushed farther into the bush.
A Different Kind of Money
The parallel innovation in the financial world was the introduction of gold and silver coins.
These made it a lot easier to truck with strangers. You no longer had to worry about whether your counterparty was solvent. Or whether he was honorable. Or whether you could remember his cousin’s name. Or whether his daughter was pretty. You could simply take the coin and be done with it.
This was a different kind of money. It was wealth. Spendable wealth. Universal wealth. Storable wealth.
Of course, no one knows what the value of a gold coin actually is. In terms of what you can buy with it, it changes all the time.
Were humans to suddenly decide they no longer wanted or needed this kind of “money,” its value would surely fall. (Although gold and silver have some ornamental and industrial uses, it is as money – at least for gold – that they are most valuable.)
This new money – like the new system of laws – was a success. It spread throughout the civilized world so that a person in Rome could buy a carpet made by a person in Persia with the same coin as a person in Carthage could use to buy a Gallic slave.
But despite this long history, on August 15, 1971, President Nixon, speaking for the United States of America, announced that henceforth this new money would not be used by the world’s largest economy.
Instead, the US would revert to credit-based money. People were to take the new dollars and count on the full faith and credit of the US government to make sure they were valuable.
What are your dollars worth today? What are your US bonds worth? The Fed will give you “guidance.” Speculators will make their bets. And economists, in the employ of the US government, will tell you that they aim to make your 2013-era dollar worth precisely 98% of your 2014-era dollar. No more, no less.
They tell you the unemployment rate is precisely 7.7%. The CPI? Well, we let them speak for themselves:
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5% in June on a seasonally adjusted basis, the US Bureau of Labor Statistics reported today. Over the last 12 months, the all-items index increased 1.8% before seasonal adjustment.
Is it the aforementioned “less than 1% annual rate” as reported above? Is it more? Less? Does it matter?
Is there any reason to doubt? Any reason for worries? Any reason to stash a gold coin in your safe, just in case this reprise of credit-based money doesn’t pan out?
It took the Soviets 70 years to realize their experiment with primitive communism wouldn’t work. They tried to run a huge, modern nation as though it were a Paleolithic tribe.
It took Zimbabwe nearly 30 years to discover it couldn’t cover its expenses by printing its own credit-based money (though it didn’t begin running the presses at full speed until nearly the end).
And how long did it take the “Thousand-Year Reich” to discover that ignoring the laws of civilized nations would be fatal? Only 12 years!
Tune in tomorrow!
Still a Secular Bear Market?
From the desk of Chris Hunter
You’ve already heard our thoughts on gold. So today let’s turn to the stock market.
Our chart o’ the day comes via The Chart Store…
It shows the secular market phases on the Dow Jones Industrial Average going back to the 1880s.
As you can see, there have been five major secular bear markets on the Dow: one in the 1880s, one in the early 1900s, one in the 1930s and 1940s, one in the 1970s and one that began in the late 1990s.
In each of these phases, the Dow bounced up and down… but went nowhere… until another secular bull phase began.
The big question now is whether we are about to enter a new secular bull phase… or whether we’re still trapped in another range-bound secular bear phase.
Our crystal ball is murky… just like everyone else’s…
But history tells us the bull markets begin with low valuations and end with high valuations.
And right now, the S&P 500 doesn’t look cheap on a 12-month trailing P/E of 19.4. It was on a trailing P/E of 7.7 on Jan. 1, 1982… before the last big secular bull phase.
Nor does it look cheap on a Shiller (cyclically adjusted) P/E of 25. The index was trading on a Shiller P/E of 7.4 on Jan. 1, 1982.
Long-term investors would be wise to wait for cheaper entry points into this market.