The fight goes on!

Bill Bonner - Mon 11 Jan, 2010

Employers are reluctant to create new jobs

The fight goes on!

We mean the fight between greed and fear, boom and bust, expansion and contraction.

This is a fight that goes on all the time. But it is usually kind of a ‘cold war.’ Years go by without much activity. Stocks meander. A few companies go bust. A few boom. Interest rates... the dollar... and commodities are fairly steady.

Then, there are periods when all Hell seems to break loose.

We’ve been in a shooting war for many years – since the bubble blew up in the tech sector at the beginning of the ‘00s. After 20 years of boom... suddenly we were in a bust. But the fear didn’t last. Out came the feds with their big guns... both monetary and fiscal... and pretty soon it was boom again... and then bubble.

You know what happened next. The housing/finance bubble blew up with sub-prime. Then, the stock market gave way. And then the economy was in the worst contraction since the ‘30s.

Of course, the feds fought the correction with everything they had. In 18 months the Fed doubled the nation’s monetary base. Federal spending went to the moon too – with budget deficits over $1 trillion... and no end in sight.

All this firepower had an effect. The banks were able to pay their bonuses. And big players were able to borrow at nearly zero interest and gamble against the dollar. So, the financial world could slide back into party mode.

But it was a wild and desperate kind of partying... like Berlin in 1945, as the Soviet Army approached the city. Because, outside the financial markets, fear has never gone away. And on Friday, it should have been obvious even to economists that there’s not much to celebrate.

“Jobs gloom hits West’s recovery hopes,” says a headline.

After much anticipation of a stable jobs picture – or even rising employment – the figures came in showing the US economy is still losing jobs.

About 7.5 million jobs have disappeared since the contraction began. All told, since the fighting began in Jan. 2000, the US economy has not created a single new job... despite steady population growth.

As for the stock market, it too is no higher today than it was 10 years ago.

The battle between inflation and deflation – boom and bust – has been hot for a decade. Why? Because the feds try so hard to prevent nature from taking her course. Normal markets are never entirely stable. They boom and bust. But the busts happen naturally... and usually, quickly. People who make mistakes are punished. They take their lumps. The economy recovers.

But since the mini-recession of 2001, the feds have fought a pitched battle to keep the markets from doing what comes naturally. Ben Bernanke denies it, but their intervention caused the huge bubble in housing/finance of the 2002-2007 period. They put in so much new money and credit that it looked like they had won the war. Stocks hit record highs... and houses too.

But something that has to happen is going to happen, one way or another. Corrections have to happen. And now, the US economy is correcting – like it or not. That’s the meaning of Friday’s unemployment numbers. The jobs of the bubble époque are going away. Employers are reluctant to create new ones. They want to see a real recovery before they obligate themselves to more fixed expenses.

So stay tuned. The war isn’t over...

More news… and a new way to gain exposure to gold’s ‘upside surprise’:

Gold took a big hit in the run up to the Christmas break, falling from the lofty heights of $1,220 per ounce... all the way to $1,085.

That’s an 11% fall – enough to call it a significant correction.

But now gold is bouncing back in a most impressive way. As I write, the yellow metal is at $1,158, up 7% in little over a week.

The naysayers are insisting that we’re coming to the end of gold’s bull run, notes Joss Smith, investment director of The Zurich Club.

“I do not think it is,” he says. “This is just the start.”

“Gold really gains when investors’ faith in the future of paper money wobbles. Witness the gold surge of the late 1970s when confidence in money’s value dropped as inflation soared. Today, central banks in the US and the UK are printing money to buy their own governments’ bonds – quantitative easing. What this equates to is future inflation and, I think, sustained bullishness on gold.”

Joss explains that the evidence for this “loss of faith” is not just the rising gold price. It’s in the enormous growth in gold bullion ETF holdings. These rose by 24 tonnes in November to a record 1,762 tonnes.

“It can also be seen from central bank purchases. Governments and their agencies have been selling gold for two decades. Now they are turning into net buyers. India just bought 200 tonnes from the IMF and the Chinese announced that they had built their reserves to over 1,000 tonnes.

“In the context of this bullish outlook, the current pullback is a necessary period of consolidation after the explosive gains of the past nine months. But there’s still plenty of profit to be made. The secret is finding the right kind of exposure to the gold market, and attacking aggressively NOW.”

Editor’s note: Joss Smith is the investment director of The Zurich Club.

In the latest issue of his monthly publication, Joss encloses a more aggressive and potentially more profitable way to gain exposure to gold’s ‘upside surprise’. This fund has only just become available, having been launched in mid-November but it could produce fantastic returns.

You can access this very exciting leveraged play on gold within minutes when you take a no-obligation trial membership of The Zurich Club. To find out more about this group AND details of a cunning investment strategy perfectly suited to today’s markets, click here.

Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. 0207 633 3600.

And more thoughts:

*** The news this morning tells us that markets are rising. Investors are bullish because China’s exports are recovering, says the new analysis.

Meanwhile, celebrated short seller Jim Chanos says China is going to blow up. It’s going to be “ Dubai times 1,000,” he says.

Our old friend Jim Rogers disagrees. He thinks Chanos hasn’t looked long enough or deeply enough into the China story. He thinks China is a buy.

And what do we think?

We don’t think. We listen:

“Something like 50% of Chinese economic growth – if you can believe the numbers – is based on capital investment, ” said a dinner companion last week. “You can’t invest that kind of money without making some pretty major mistakes.”

If we were forced to bet on it... we’d bet that Chanos is right. We don’t know anything about China or the Chinese economy. But you don’t go from third-world communist hellhole to the world’s second major economy without some serious bust-ups... especially when the communists are still in control.

*** Barely had we touched down in the USA than we were invited to a dinner party in Georgetown. In keeping with the Chatham House Rule, we won’t mention any names, but we were in distinguished company. These were America’s elite of movers and shakers, ambassadors, lawyers, policymakers, people who reflect and shape the opinions – and actions – of the US empire.
We were invited to answer questions; instead, we asked them.

We began by mentioning the failure of the economics profession. Never had an unarmed group done more damage to the wealth of a society, we suggested. Economists helped create a huge bubble, ignored it until it blew up, and then gave the wrong advice about how to fix it. Bailouts and boondoggles were all they had to offer.

But wait a minute, said a fellow diner: ‘I’m an economist... we couldn’t let the whole banking system collapse.’

“Why not,” we asked.

‘Because unemployment would go up to 14% or more...’

“How do you know what the proper rate of employment should be,” we wanted to know.

‘But you can’t just ignore people when they are out of work... and you can’t ignore an economy when it goes into a depression, can you?’

“Why not,” we repeated our first question.

What we notice in our brush with America’s intellectual and political elite is that they are very smart, very well informed, but too busy to stop and think.

They are thinkers. They are always thinking about what to do. But they cannot afford to think radically... about why they should do anything at all. If they did, they would be as marginalized as we are... How much more fun it must be to be at the centre of power... pulling the levers... turning the knobs... making the world a better place!

The presumption of all elites is that they can do a better job of running things than people who are less well educated, less informed, or less intelligent. In a sense, this is obviously true. In the administration of commonly held assets, for example – such as municipal sewage-treatment plant... or an art collection – a person with taste, culture and education is likely to do a better job than a numbskull. (We admit that even this is a dubious assertion... but we will presume it is true for the sake of this argument...)

But the elites go a major step further... they claim to be able to do a better job of administering privately held assets too... things that belong to other people.

Take the Cash for Clunker program. Auto sales went down. But so what? How many cars SHOULD be bought and sold? Nobody knows. And it’s really not for anyone to say... other than the buyers and sellers themselves. But the elite think they know better.

The fellow with an old pick-up truck may have judged his truck good for another 6 months of service. But with the lure of a federal bribe before him, he junked the truck six months early. Any sensible person can see that this is a waste. A valuable asset has been lost – six months of truck service.

But the elite economist thinks he has saved the auto industry. Because the “demand for trucks has been stimulated.” Jobs have been saved. Detroit has been given a boost.

What kind of nonsense is this? Not only have useful resources been sent to the scrap heap prematurely, but the auto industry has been given a bum steer too. Resources from all over the economy – steel, oil, labour, electronics – have been diverted to the auto industry, on the basis of ‘demand’ that only exists because of federal money. The laid-off auto worker is a victim too. He might have been considering turning to another trade... instead, called back to work by the Cash for Clunkers program, he shelves his plans for retraining and relocation. He thinks Detroit is making a comeback. How disappointed he will be when the phony demand disappears!

And where did the federal money come from? It had to come from somewhere. In the event, it was borrowed from lenders who would otherwise have lent it to someone else. We don’t know what the other borrower would have done with it, but no matter what it was, it could be expected to produce a net benefit, one way or another, to the economy.

Until tomorrow,

Bill Bonner
For The Daily Reckoning

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