The Pessimist Speaks

by JDH on November 15, 2008

It was yet another bad week on the markets. The Dow lost 5%, the S&P was down 6.2%, and the Nasdaq lost 7.9%. We are now approaching the major support levels on the Dow from September of 1998 (7,795) and September, 2002 (7,528).

For those interested in such matters, the October 27 bottom of around 8,145 on the Dow is the current support level, so the close at 8,497 on Friday leaves us very close to that level. If that support level doesn’t hold, I assume we will get to 7,500 very quickly.

As regular readers will know, I am a pessimist at this point in the market’s cycle. The euphoria surrounding the election of a new President lasted about 24 hours, and that occurred about 1,200 points ago.

GM will likely go bankrupt, which will take down a big segment of the economy. I realize that Congress will attempt a bailout of the automotive industry, but unless Congress can fix what’s truly wrong, I doubt it will make any difference.

(What’s wrong, in case you were wondering, is that the cost structure at the Big Three is way out of whack; automotive workers are not worth $120,000 per year, and building big cars in an age of high gas prices is stupid and short sighted, something which Congress can’t fix. Guess what car is the best selling vehicle in Canada? The Honda Civic (read why here); that tells you something, doesn’t it? Congress will take your money to support bloated and inefficient manufacturers; if they wanted to spread money around, shouldn’t it go to the efficient producers like Honda that produce vehicles people actually want to buy???? But I digress).

I’ve said it before, but I’ll say it again: here’s my guess at the future:

On Monday, the G20 will announce some kind of coordinated effort to save the world and the markets will rally, and gold will fall.

Briefly.

Briefly as in for one day, like happened right after the election.

As I said, I’m a pessimist. The G20 can’t really do anything. The government can’t create wealth. They can’t restructure broken companies. All they can do is print money, and that hasn’t worked. If printing money won’t work, what else can they do? Simple, change the money.

As you know, I am of the view that Franklin D. Roosevelt was perhaps the worst president in U.S. history, and the effects of his horrible decisions are still being felt today. His scariest decision was Executive Order #6102, that went something like this:

All U.S. citizens were given three weeks to deliver all gold coin and bullion in their possession to the Federal Reserve, or face up to ten years in prison. They were paid $20.67 per ounce of gold, which was the then official price. The Fed then set the price of gold, for the purposes of supporting the dollar, at $35 per ounce. That meant that the U.S. dollar, which was exchangeable for a set amount of gold, was immediately devalued by 41%.

Now of course it won’t be just the U.S. pulling a stunt like this; it’s more likely that the entire G20 will be in on the game.

Am I suggesting that on Monday Lame Duck President Bush will sign an Executive Order to seize everyone’s gold? No, I’m not saying that at all. He doesn’t have the stones to pull that off.

However, what’s to stop the world leaders from simply creating a bunch of new currencies, and assigning them whatever value they want? They’ve been doing it in Zimbabwe for years. You take the U.S. dollar, and create something new, say the “U.S. Note”, which is worth ten old U.S. dollars. The Euro could do the same. The amounts would be fixed, and they would stop allowing exchange rates to float. Simple.

Of course if you devalue a currency, the underlying asset values appear to go up, but that’s fine, because you can now repay your debts in less valuable dollars. Beautiful. End of debt crisis.

Of course that then really screws the savers that hold the debts, so the governments would need to throw money at them to keep them happy, so it’s not a perfect solution. But you get the idea.

Am I suggesting that the result of the G20 conference will be a new currency? No, I don’t think that will happen, but it is food for thought.

For the record, I think what will happen is what usually happens: the government will inflate their way out of this mess. If you keep printing money you have more dollars chasing the same number of goods, which causes inflation and deflates the currency. You then take that depreciated currency and use it to repay your debts. Problem solved. (Of course it kills the economy and prevents anyone from wanting to hold your dollars, but you get the idea).

I believe we are entering a pivotal week, and the results of the G20 meeting will tell us a lot about what’s to come.

Me? I’m holding on to all of my gold and gold stocks, and I’m holding on to my short plays on the market. I’m a pessimist. I think we see Dow 5,000 before we see Dow 11,000, but I hope I’m wrong. (I’m not alone in this view; check out this interview with Danielle Park on BNN this week).

In other matters, due to spam, I have put a stop to new registrations on the Forum and on this blog. Since the election is now over, I have also put a stop to overt political discussions. (Yes, yes, I know, I just spent this whole blog posting on an overt political discussion; however, it’s my blog, and the purpose of the discussion was not to bash anyone, but rather to prepare us for what’s to come so we can structure our investments accordingly). Hopefully I can re-open new registrations in the future; I’m working on ways to keep spam to a minimum

Thanks as always for reading; let’s hope my outlook is wrong, for the sake of the economy.

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