I am spurred to write this week on a
confluence of factors, and I do not pretend to know more than the next guy
about the future, only that it is ahead of us.
I do want to dispute my former Morgan
Stanley colleague Barton Biggs (of Traxis Partners) who went on television two
days ago with a prediction that equity markets would soon move up 15-20%, led
by technology. This is in keeping with other optimists who say the US recession
has ended and the US will return to powering the global economy. After all, who
else can?
Okay Barton, maybe, but here is another
view:
The debt crisis in Europe, the
overheated real estate bubble in China, the $5.2 Trillion of debt the US faces
in Freddie Mac and Fannie Mae, the million+ foreclosures with more to come, are
all conspiring to alert the world to the obvious:
TOO MUCH DEBT (and no clear will or way
to pay)!!!
This debt has risen – seemingly central
governments’ only antidote to trouble – while relative earning power in Europe
and the US continues to go down. Cheap labor in China/India/Asia, fueled by
hundreds of millions, is not going away fast enough, soon enough. So how are
these government debts to be paid off? Greece has already shown, and California
(and Michigan, Illinois?) may follow in this, that people who have benefited
from profligate policy will not suddenly submit to austerity. (And even if they
did, the economy would not then grow enough to pay back the debt.)
I watch as the gold price continues to
creep up and I am thankful that I bought it when it was still only $900 an
ounce. I am further encouraged to affirm that gold is not historically as much
an inflation hedge as it is valuable during deflation. To
see how gold shares might act in the upcoming credit crunch, please consider a
chart of Homestake Mining in the 1930's (courtesy of Gold Eagle.)
I like the way this chart calls into
sharp relief a line of reasoning that I have been following: if governments
print too much paper, eventually its value erodes and people look for something
more durable. This is even truer if they want to hoard something of value as
the economy stagnates. Historically, that has meant precious metals, and the
Homestake chart is powerful evidence.
Barton Biggs may be right that another
up-move is due in US equities because Europeans seeking a haven from their
falling currency and lagging markets may choose the US. But that will not pay
off our unprecedentedly high and rising debts nor counter the effects of
diluted currency, a game which the European Central Bank and IMF have now fully
joined with the US Treasury. US equities may seem to appeal for the moment, and
the dollar may be the “least worst” of various currency options, as an analyst
put it recently during a Bloomberg interview.
But it’s bad, and it’s going to get
worse.