We have been discussing how we could be wrong. Today, we reach into the archives for evidence. You will see how we were right… and wrong… in 2008.
We were right: In the crisis of ’08-’09, asset prices did continue to fall, millions of people did lose their homes, millions lost their jobs, businesses went broke, and it was the worst downturn since the Great Depression.
We were wrong, too: We are still waiting for the post-1971 monetary system to collapse. And we wouldn’t be surprised if we were still waiting… three, four, five years from now. The system is more resilient than we thought.
We were right: The Fed did come to the rescue with more “money printing.”
But we were wrong: It wasn’t the kind of money printing we imagined. It put a big bid under asset prices; it didn’t budge the needle on consumer prices. Now, seven years later, we expected 20% inflation. Instead, we got 2%… or less.
As you will see, we gave readers some good advice. But it wasn’t good forever.
With this spotty record in mind, we offer some advice for 2016 and beyond: Sell U.S. stocks. Hold cash. If you’re feeling adventurous, buy stocks in beaten-down, neglected, and underdog sectors – oil, commodities, Russia, or Greece.
Better yet… Pet a dog. Give a hug to a homely girl and a $5 bill to a bum. Laugh at a presidential debate. And be happy.
Originally Published on January 2, 2009
Well… it’s over.
“I’ll be glad to put this year behind us,” said a fellow we met at a New Year’s Eve party last night.
“What a disaster. I’ve never seen anything like it.”
The fog was thick when we set out. We had been invited to a party about an hour away… but it was an hour of twisty roads we’d never been on before… in some of the thickest fog we’ve seen in years.
“Just stay on the little road… you’ll see the old castle in ruins on your left. Turn there… and take the bridge over the river…” we had been told.
It sounded easy enough. When we got to the village, there was the castle… a huge thing on a hill in the middle of town… but where was the bridge? We couldn’t find it. So, we drove around in the fog for another half an hour until finally getting our bearings. Then, walking to the house, we nearly fell into a moat.
“You didn’t tell us you had a moat around your house,” we told our hosts.
“Well, we didn’t think we needed to. You can see it. You’re supposed to stay on the path to the house.”
In the fog, we couldn’t see much of anything outside. But the house was warm and inviting, with a huge fireplace that must have dated from the medieval era.
“This part of the house is from the 14th century,” we were told.
In the fireplace was a huge crackling fire. We stood in front of it, with our backs to the fire, to warm up. Then, we commenced explaining.
“What is going on in the financial markets?” people wanted to know. They had heard we were an economist. They thought we might know something. We didn’t want to disappoint them.
“Yes… it’s a rare, but typical, meltdown. Like America in ’29, but without the flappers. Like Japan in ’89, but without the sushi. Nothing to worry about really. Just the end of the world as we have known it. Asset prices will fall – erasing trillions of dollars’ worth of ‘wealth.’ Millions of people will lose their homes. Millions will lose their jobs… their pensions and retirement savings… their self-respect. Hundreds of thousands of businesses will go broke. And the monetary system we’ve had since 1971 will collapse. Nothing special. And, oh yes, there will probably be a revolution in China.”
“No, actually, that’s the good news. The bad news is that government meddlers all over the world are making the situation much worse. They don’t have any choice. They have to react. And the only things they can do are the usual claptrap remedies.
“More government spending. More giveaways. More bailouts.
“All they are doing is trying to avoid the ‘creative destruction’ that a real economy needs… and postponing the inevitable adjustments and corrections that must be made.
“But it gets worse. The world’s main debtor – the USA – is also the custodian of the currency that most of the world’s debts are denominated in. And Ben Bernanke is hell-bent on making sure that the U.S. does not follow the Japanese example… or the example from the U.S. in the ’30s.
“He won’t stand for deflation. He’ll want to fight it in the worst possible way because he wants to go down in history as the first and only central banker to beat it.
“What’s the worst possible way to fight deflation? Print money.
“We call this policy ‘Gonoism,’ after Zimbabwe’s top man at its central bank – Gideon Gono. Gono did what neither the U.S. in the ’30s nor Japan in the ’90s was able to do. He made prices go up – 230 million percent in a single year.
“Of course, he destroyed the economy completely… So Bernanke won’t be the first. And we may not get to 230 million percent. Maybe 20%. But even at that level the destruction will be massive.”
With introductions and explanations out of the way, we sat down for dinner… said goodbye to 2008 with champagne, kisses for the ladies, and handshakes for the menfolk… and then made our way home by 3 a.m.
The year 2008 was a tough one for everyone… everyone, except for those who held gold and stuck to gold. Over the course of the year only two asset classes rose. U.S. Treasury bonds and gold. One of these things, we believe, is in a durable, reliable bull market. The other is a fake-out. Which is which?
First, let’s look at what happened to most investors last year.
Those who had their money in U.S. stocks lost about 40%. Those who invested in Europe were down a bit more – about 45% to 50%.
Investors in Japanese stocks lost 42%.
And investors in Chinese stocks lost 70% of their money.
We interrupt to come to our first resolution for the New Year: We will stick to the basics.
Yes, Daily Reckoning readers got good advice last year. Stick to the basics; stick to the “Trade of the Decade.” Sell stocks on rallies; buy gold on dips. Now, we see the results for the year. The S&P is down 40%. Gold – bless its heart – is up 5%.
Unfortunately, good advice is easier to give than to take. Besides, we don’t trust any market forecaster – including ourselves. With the family money, we took the long view… and decided to diversify. “In twenty years, what is most likely to have made the most money,” we asked ourselves.
Gold? No. Over long periods, gold makes no gains at all. It is only valuable when other gains are fraudulent… when there is a crash… or inflation. That is why it is so valuable now. We face all of those things.
But over the long run, gold does nothing and goes nowhere. That makes it a bad investment usually and a good investment occasionally.
The most obvious and most tradable long-term trend is probably the regression to the mean in the world labor market. Broadly, a working stiff in Shanghai ought to make about as much as his counterpart in San Francisco. That will probably mean a huge rise in consumption in the Orient… with fast-growing economies and asset prices.
Taking the long view, we invested in India and Vietnam – believing that they would be relatively safe from the worldwide financial meltdown we saw coming. We also invested in Japan, believing that after an 18-year slump, it was unlikely to slump more.
We were wrong about both those things. In the long run, we still have faith in India… we’re not so sure about Vietnam. And we still believe that Japan offers good value. But in the short run, we have lost money. Hence, our New Year’s resolution: Stick with the basics.
Sell stocks on rallies; buy gold on dips.
P.S. Buying gold and selling stocks was great advice… for almost another three years. From the start of the century until September 2011, stocks (as measured by the S&P 500) were down 20% and gold was up 565%. Since then stocks rose 83% while gold fell 44%.