-----------------------------------------
Joel Bowman,
reporting from Mumbai, India...
Today kicks off our 2008
Best in Rude Series. Over the past fifty or so Mondays, we've brought
you some insights from Bill Bonner, the founder of Agora Publishing and
editor of the Daily Reckoning. Many of Bill's columns wound up in the
ballot box for this year's best column, including today's, first
published back on January 7.
At that time oil had just
breached the triple-digit price barrier, on its way to an all-time
record, and the Dow was looking healthy at 12,827 points. History has
filled in the details for most of the year but, just for kicks, let's
take a look back at Bill's look forward to see how the forecast panned
out...
— Agora
Financial Reserve Is Open Again —
Claim Your "One-Time
Dividend" From Agora Financial Headquarters
Tell Me Where to
Mail Your $1,500 Check*
Open to all new members who
respond before midnight, Jan. 1 - you can claim your $1,500 dividend
check in two simple steps. Get The Details
Right Here
*$1,500 Check Offer
Available to Selected Applicants Only. Offer Expires Middnight, Jan. 1.
Details Here
-----------------------------------------
Predictions,
Guesses and Complete Fantasies for 2008
By Bill Bonner
Don't tell me when I will
die, says Woody Allen. Just tell me where...I'll avoid the place.
In the year of our Lord
2008, there will be many places investors' money will die. Of course, if
we really knew where the deaths would take place we wouldn't be writing
this column. It is not given to man to know his fate. Nor even the fate
of his money. But this is the time of year when a financial columnist
lets his well-deserved humility give way to brazen immodesty. He sticks
his neck out...and offers dear readers a peek at the upcoming year's
financial obituaries.
But let us add an
extenuating circumstance: the importance of an event is not merely the
likelihood of it...but the likelihood times the consequences. For
example, it is not a good idea to drink heavily and then drive down U.S.
I-95 to Miami. Most likely, you'll get there in any case...but the
consequences of being wrong make it a bad choice. Likewise, we may have
another year of rising equity prices, a strong currency, a new boom in
house prices...and a healthy, growing economy. But there are times –
such as after imbibing too deeply for too long from the cup of liquidity
– when betting on rising asset prices and prosperity is a bad wager; the
risk of a crack-up is just too great to ignore.
So let us turn to our
guesses. The alert reader will see that they follow a pattern. We
believe that the financial world stands between two more or less equal
and opposite forces. On the one hand is the irresistible force of
inflation. On the other is the immoveable object of deflation. Central
bankers are busily trying to keep prices rising on one side; on the
other, Mr. Market has plans of his own. The party is over, says the
market. No, here's some more punch, say the central banks.
Just to complicate things,
between the thesis of inflation and the antithesis of recession is the
synthesis of stagflation. Not that we know what will happen, but with
all this 'flation' around, something is bound to blow up. The
predictions that follow are just our way of taking cover.
Getting down to specifics,
our guess is that this will be a better time to sell shares than to buy
them. The U.S. economy depends on two big industries – and both of them
are menaced by 'flation.'
The travails and hardships
of the financial industry are well known. No need to say more about
them. But asset prices depend on finance. Wall Street takes money from
the people who earn it, all over the world, and funnels it into asset
prices. When credit contracts, asset prices fall.
Another major contributor
to a share-price funk is the housing industry. Houses are not going up;
they're going down. And in America, falling house prices squeeze house
owners...and reduce consumer spending. When consumers don't spend,
businesses don't earn as much money. Falling earnings produce, ceteris
paribus, falling share prices and an economic slump.
We have already let the cat
out of the bag as far as house prices go. There are two things you can
count on: both house prices and business earnings revert to the mean.
Housing prices always go back to levels where people can afford them.
And outstanding corporate earnings always get worn down by competition.
The dollar, too, is
threatened by both inflation and deflation. Not that we have any direct
or new information, but if we were writing a life insurance policy on
the buck, we'd want a thorough physical. Inflation hurts the value of
the greenback directly. Things cost more, in dollar terms. But deflation
hurts it too. Lowering asset prices and cutting consumer spending,
deflation hits below the belt. The economy crumples over...and the
dollar falls.
Why? Because the dollar's
handlers want to see it lose this fight anyway. As deflation threatens,
they lower interest rates...making the buck even less attractive to
foreign (and domestic, for that matter) holders. The Fed, along with the
Bank of England and the European Central Bank are all working the pumps
– trying to keep the inflationary boom going by reducing the values of
their own currencies. We have little faith in the healing power of
central banking; but when it comes to killing a patient, even a quack
can do the job.
But if the dollar is to go
down, what will it go down against? Ah, that is a good question. Against
commodities? Maybe. Against housing and stocks...as we have said,
probably not. Against the pound or the euro? We can't say; they are all
in jeopardy. Against gold?
Back in January 2001, we
announced our Trade of the Decade – sell shares/buy gold. At the time,
the ratio of share prices to gold was just coming off an all time high
of 44 ounces to one Dow index. Gold had scarcely ever been lower and
shares had scarcely ever been higher. Twenty years previously, the ratio
had been as low as 1 to 1.
Since January 2001, the
ratio of shares to gold has fallen in half. Not because shares have come
down, but because gold has gone up. The trade has been a good one. Will
it be good in the year ahead? Again, we can't say. But since we're
guessing, our guess is that there is more juice in this trade. Gold is
clearly in a bull market. If the force of inflation prevails, it is
impossible that the bull market will come to an end with the price
barely higher than the peak set 27 years ago. And, if gold does not go
up, it will be because the force of deflation has the upper hand, which
will almost certainly mean lower stock prices. One way or another, the
Trade of the Decade still looks like a good one.
Like a good marriage or a bad movie, we'll stick with it to see how it
turns out.
[Joel's Note:
Bill Bonner is the man responsible for the group of editors that
contribute to your Rude Awakening mailings. He is the founder and owner
of Agora Publishing and every piece of investment commentary, market
observation or general economic scribbling that stems from Agora is, in
a large part, due to his efforts in starting this company. All of the
editors, although they all have their own specialties, are drawn
together under the Agora tree because they believe in financial freedom.
If you would like to read
more of Bill's unique brand of economic philosophy, we'd suggest picking
up a copy of his latest book:
Mobs, Messiahs and Markets – Surviving the Public Spectacle in Finance
and Politics . It's brimming with "best-of-Bonner" quotes and quips
and will undoubtedly prove an invaluable tool in your own quest to
financial freedom. Enjoy.
-----------------------------------------
[Rude Endnote:
We'll be back tomorrow with the next installment of the 2008 Best in
Rude series. In the meantime, the time draws nigh when we close the
doors on the Agora Financial Reserve. In addition to the usual benefits
of a lifetime membership to all of our best research, this round of
seats also includes a $1,500 one-time dividend check. For all the
details,
read on here .
Until next time...
