The investment community has a cliche atmosphere to it that’s reminiscent of high school. Except, instead of the jocks, nerds, and greasers, you have the bulls, bears, and momentum traders. The cliches tend to all hang out together and parrot each other’s advice. The idea of gold being at $2000 an ounce in a couple of years is not new for those of us in the bear cliche, but what is new is that it was the conclusion of a leaked client memo from Citigroup.
According to the news report:
The bank said the damage caused by the financial excesses of the last quarter century was forcing the world’s authorities to take steps that had never been tried before.
This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.
“They are throwing the kitchen sink at this,” said Tom Fitzpatrick, the bank’s chief technical strategist.
“The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock.
“Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop. We don’t think this is the more likely outcome, but as each week and month passes, there is a growing danger of vicious circle as confidence erodes,” he said.
“This will lead to political instability. We are already seeing countries on the periphery of Europe under severe stress. Some leaders are now at record levels of unpopularity. There is a risk of domestic unrest, starting with strikes because people are feeling disenfranchised.”
“What happens if there is a meltdown in a country like Pakistan, which is a nuclear power. People react when they have their backs to the wall. We’re already seeing doubts emerge about the sovereign debts of developed AAA-rated countries, which is not something you can ignore,” he said.
Wow. I’m not certain if Mr. Fitzpatrick realizes the irony of writing about the damage caused by the financial system while being employed by the one of the largest players in the financial system. Furthermore, Mr. Fitzpatrick seems to have abandoned the Macroeconomic hallmark that is a staple of such firms and instead seems to be writing from the Bear Market playbook. Keynesians would never talk about massive inflation being passed on because of aggressive expansion of the money supply. In fact, Keynesians would be quite happy with all the “money they have pushed into the system” because that would have stimulated lagging demand, according to their ridiculous theory.
This memo is one of the most frank and refreshing pieces of writing I’ve seen come out of a major bank. It paints a bleak and specific picture of our future economic calamity and passed around plenty of blame to both the banks and the politicians. It was as if Mr. Fitzpatrick had just finished reading Henry Hazlitt’s “Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics“and was using it as a guide to deconstruct the lies that the likes of Greenspan, Paulson, and Bernanke have been heaping upon us for years. Not to mention, people typically find jobs at large banks by being bullish on the future, not telling everyone that it’s the end of the world as they know it.
It’s always nice to find like-minded people in unexpected places, so on behalf of the rest of the bear market cliche, I wish to extend a membership invitation to Tom Fitzpatrick: may you make lots of money off of the losses of others.