I’m sure most of my readers will have no idea who Stu Ungar is, but, as the title of the book says, he was the greatest poker player the world has ever seen. He is estimated to have made over $30 million dollars over the course of his poker career, but he’d continually throw the money away on drugs or other gambling addictions. He went from broke to millionaire and back to broke four separate times over the course of his life. He died so penniless that this friends had to take a collection for his funeral.
I send my friend this story because I wanted him to understand that talent and ability are no replacement for a good understanding of yourself. That’s a lesson I hope he’ll come to learn before he gets out.
As I mentioned last week, I expect the market to find a temporary bottom at some point this year and to stage a significant rally. However, I expect that this rally will prove to be a bear trap, as the market will then fall far more to find its true bottom a couple of years from now.
I don’t base this prediction on any sort of economic theory, but rather on history. Prior to the Federal Reserve Act of 1913, economic contractions were short and violent affairs. The Panic of 1907, for instance, was over and done with in a single year. The panic spelled the end of the Knickerbocker Trust Corporation, and many small regional banks failed and wiped out their depositors. This kind of “liquidation” of struggling companies was viewed as a necessary evil back then. No one likes liquidation, but it does its work quickly.
Things are different these days. John Maynard Keynes came along and theorized that all economic downturns were caused by “insufficient demand.” He argued that politicians needed to juice the economy with easy money to get consumers spending again. The fact that Keynes’s theory is nothing more than math piled on top of a foundation that’s part conjecture, and part shaky definitions, did not stop it from becoming popular. Similarly, the fact that Keynes’s prescription of juicing the economy with easy money does not seem to actually prevent recession — but, rather, prolong it, until it becomes far larger and more devastating — has not caused it to since fall from grace. Politicians get elected on promises to give money to their supporters and Keynes’s theory makes it their primary mission to do so.
“Billboard improvement” is a colorful way to describe vandalizing a billboard in order to give the advertisement a totally different meaning. I recently ran across one such billboard improvement that I found rather hilarious.
The thing is, I’ve always thought that when I saw these Wachovia billboards ever since they were sold to Citigroup with the “assistance” of the FDIC. At the time I thought this was the classic case of the FDIC guiding a weak bank on the verge of failing into a merger with a stronger bank, but not less than a month or so later and Citigroup was begging for a bailout less they would fail.
In order to ensure the survival of our banking system, literally trillions of dollars has been injected into the American financial system. The ultimate effect of all this money creation will be to cause inflation, just as Ben Bernanke told us it would back in his speech on how to fight deflation. The other, somewhat temporary, side effect of all this money creation will be to drive down interest rates; anyone who wants to borrow money can get some of the newly created money that was just pumped into the banking system on the cheap. Lower interest rates will also offer people less reason to save, and that’s why I find that Wachovia billboard so hysterical.
In essence, Wachovia was a part of the banking system that reaped profits by engaging in making mortgage loans to people who couldn’t afford them and them repackaging the loans and selling them to Wall Street. We are now having to pay the price for the sins of the banking system and the Fed has decided the form that this price shall take: inflation and low interest rates. Yet they advertise that they will help “your little ones grow.” I have to say that this billboard was indeed improved. Now the billboard plainly says what Wachovia (and the entire banking system) will do to your money… And they say that there’s no truth in advertising.
Of course, these lower interest rates won’t last forever. Eventually people will come to understand how precarious the value of their money really is, and then they’ll start demanding higher interest rates. Not to mention, we’re going to see a much higher value of gold- the canary in the cole mine of the monetary system. Which is just what we’re starting to see. Gold moved from $764 at the start of the week to close the week at $808. Similarly, Barrick Gold has gone from $27.44 to $31.32.
As an investor in Barrick Gold, I had a nice week, and I think we’re going to start seeing some nice moves in the gold sector over the next few months are markets realize that all of these deflationary fears are overblown. Bill Bonner is predicting that the system has one final bubble to blow and that will be government debt; that the price on government securities will go from overblown to in the tank as interest rates have to rise as inflation worries persist. I would have to agree. Going forward, gold is a very exciting place to be. As we goldbugs sit back and watch the financial system collapse, we will get to do as that old song by Everclear goes “Watch the World Die.”