Friday, 3 February 2023 — Albert Park

By Brian Chu Editor, The Daily Reckoning Australia

[8 min read]

Dear Reader,

We just heard from the US Federal Reserve Open Market Committee yesterday morning, the first for 2023.

The result? A 0.25% rate rise, taking the Federal Funds Rate to 4.5–4.75%. In less than a year, rates have risen by 4.5%, which is a rapid rise by any standard.

The language from the Federal Reserve press release tries to appear balanced — stating that the official economic statistics point to a recovering economy and that inflation continues to remain a threat coming off the Russia-Ukraine conflict. Though, it sounds more hawkish than dovish to me.

Ah…Fedspeak. These 289 words are possibly the most impactful verbiage in today’s economy. So much reliance by the market on the Fed’s outlook that the two are almost joined at the hip.

As much as the markets strive to provide some semblance that participants are able to trade freely, the truth is, it’s merely an illusion. Most have chosen to use their freedom to hug the shores of the Fed safety island.

You, me, and many who are aware of this fraudulent system might try and trade against the tide. However, the sheer volume of cash coming from financial institutions and managed funds that closely follow Fedspeak, means we’re contrarians trying our luck against the ocean of groupthinkers.

So, what’s our winning game plan and how do the odds measure up?

Trade with or against the markets?

There’s a famous saying, ‘don’t fight the Fed’, given you’d be taking positions against a colossal amount of cash.

However, those with the mental fortitude and sufficient expendable capital might outlive the herd mentality and book some significant profits.

Think the likes of legendary contrarian investors Peter Schiff, John Paulson, and Marc Faber, who made their name by realising massive profits going against the market.

Back when the system was more stable, these exceptional profits came only once in a blue moon. The system was behaving ‘just right’ for a longer time and therefore contrarians were on the ‘wrong’ side of history. And that’s why these contrarian investors command such a polarising view of their investment credentials. Mainstream pundits want to paint these legends as pariahs and outcasts who may be as good as a ‘stopped clock that gets the time right twice a day’.

Investors who follow these contrarians in the market know full well that success comes with patience and prudence. Many have battle scars, including eye-watering losses on several trades before managing to profit once the market cycle moved in their favour.

A fragile system cranks up the spin cycle

Those who swim with the tide may feel cocky and comfortable because of how long their system has beaten the naysayers who perpetually call for their collapse.

However, there are increasing signs that efforts to try and keep this system from falling apart are looking more desperate, and its impact is dwindling.

If I can draw a parallel, it’d be like the talking heads on mainstream media that report your news. For eons, they’ve been able to dominate public discourse. So confident are they of their dominance that at the height of the Wuhan pandemic, they arrogantly claimed that they’re the only trusted source on science.

This was peak arrogance. And while they talked about the Dunning-Kruger effect to deter people from thinking for themselves, we’ve seen since last year that it’s now coming back to hit them between the eyes.

With Elon Musk taking over Twitter, torrents of bombshells in the form of ‘The Twitter Files’ revealed a massive amount of scandal and coverup implicating governments, public institutions, corporations, academia and the media, as they acted against the interest of the public. The damage they’ve sustained has hit hard, with many organisations facing serious financial and reputational losses.

I have a feeling this is about to hit the Fed, global central banks, and the financial markets.

Why so?

The Fed and other central banks downplayed inflation for much of 2021, even as prices were rising in goods and services, especially necessities. Many were suffering from rising living costs as their livelihoods were threatened by health mandates. Yet it was only late in 2021 when the Fed decided to accept that inflation would linger and began to move to combat it.

The rate rises last year caused the financial markets to tumble heavily, hitting businesses and households hard, especially in the second half of 2022. Though headline inflation figures peaked last September, that’s more political than a reflection of reality. After all, those who shop for food, pay their utility bills and essentials, see their costs skyrocket. Even in Australia, electricity bills rose 20% or so by mid-2022. And we’re about to brace for gas prices to rise some 50% or more in March.

How about those who found themselves without a job in the last two years? Given many small businesses were hit hard by the lockdowns and large corporations saw their bottom line shrink last year, many lack the capacity to hire more staff.

So any talk from central bank economists and government bureaus about a recovering economy is Orwellian speak. They can back it with fancy numbers, but most know it doesn’t match the reality.

Markets shake off Federal Reserve…again

Prior to the Fed announcing the outcome of its most recent meeting, leading market commentators and fund managers were divided over whether the Fed’s decision would prove bullish or bearish.

It was like tipping on who’d win the footy grand final. All forms of media outlets were pitting bulls and bears against each other.

You saw the outcome, the Fed appeared to try talking tough…and the markets laughed it off.

The Dow Jones Index was down as much as 500 points or 1.5% just after the press release statement before wiping out all the day’s losses in half an hour. Similarly, the NASDAQ Index was moderately down prior to the release but staged a mighty rally of almost 3% to close 2.3% higher.

So, it appears that the bears (me included) got it wrong, correct? For now, it seems like it.

Am I about to throw off my fur and put on my horns to join the bulls? Probably not.

Fact is, this is a fantasy economy conjured up by spin doctors using ‘official’ statistics. It’s largely detached from our reality. They’re only able to get away with it because it’s a political alibi they can use while they have a shred of cover from mainstream media.

Take away that cover (which is as sheer as a stripper’s bikini) and they’re exposed.

Knowing them for their uncanny ability to try to get ahead of the narrative, their rhetoric will turn soon. They’ll talk doom and gloom, and the markets could experience pretty dark days.

Maybe I’ll be wrong…and you can bookmark this article and have a good laugh at me for being a Cassandra.

But do you want to be riding with the herd on this one?

Really?

God bless,

Brian Chu,
Editor, The Daily Reckoning Australia

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

We’re leaving France, on our way back to Ireland. This time, the weather is supposed to be less violent. So we’re taking our chances on the high seas. That is, we’re driving up to Cherbourg and taking the ferry around England and across the Irish Sea to Dublin.

The trip is a delight in the summertime. But not when the sea is rough.

Meanwhile…

Here, we measure our wealth in gold. It’s not a perfect measure. Speculators often drive the price, either up or down. But it always comes back to a reasonable level.

Some investors expect to make money by catching gold in an upswing. We do not. Gold produces nothing. It makes no profit. It adds not a penny to the world’s wealth. Gold is a speculation, not an investment.

Or…it is a store of value, which is how we use it.

The midas multiplier

From 3 November 2022, until today, gold has risen US$300 — an 18% increase. This has gotten speculators excited. And it has piqued our interest too. It looks as though the yellow metal is poised to hit US$2,000 for the first time ever.

‘There’s no fever like gold fever’, said our old friend Richard Russell.

But if you measure your wealth in gold itself, a rise — or a drop — in the price is (almost) meaningless. Your wealth is unchanged. Because your ounces of gold only multiply if you sell them.;

Here’s what we mean…

Getting comes from giving. Real wealth comes from providing real wealth — goods and services — to others. All honest people do it that way, whether selling their time or lending their property. An investor has an asset (money) that other people can use. He lends it out for interest, or he participates in the profits. Those profits are the difference between the time and resources that go into providing a good or a service and what it is worth on the open market once it’s ready for sale. That profit is the measure by which the business owners get richer…and also the measure by which the society itself is enriched.

Gold is merely a form of ‘money’, the best form. But even the best money is worthless, in itself. It’s only valuable inasmuch as it can be either turned into goods and services and consumed…or used to produce more wealth. Warren Buffett is right; holding gold itself is a barren exercise. Gold yields nothing.

Long, broad patterns

But there’s a time for everything…even for barren exercises. There’s a time to sow and a time to reap. And a time to do nothing. Wouldn’t the world have been a better place if Adolf Hitler had decided to write a novel — even a bad novel — rather than attacking France? Las Vegas may be barren, but in 1942 it was a much nicer place to be than Stalingrad.

And as we’ve seen, markets move in long, broad patterns. Stocks are not always going up. Sometimes they go down for long periods of time. After 1929, it was 25 years before stocks recovered. After 1966, (inflation-adjusted) prices took 30 years to bounce back. And now, as of January 2022, the primary trend is down again.

The numbers are misleading; the patterns are confusing. Prices go up and down in nominal terms. But the only way to know if you’re gaining wealth, or losing it, is to look at prices in terms of gold. Then, you can see more clearly (but not perfectly) what is going on.

In 1966, the Dow hit a major high. It took 25 ounces of gold to buy all the 30 Dow stocks. Then, the Dow/Gold ratio turned down. An investor knew perfectly well that companies still produced profits. He knew too that if he wanted to add real wealth, he would stick with the businesses that produced real wealth, that is, the businesses that made profits. And he knew that gold was as inert and lifeless as a joint session of Congress…smooth, glittery…but ultimately unproductive. An ‘investment’ in gold would be barren.

At that point, Dow stocks were expensive. In gold (real money) terms, they would fall in value for the next 16 years (until 1982) and would not fully recover until 1996. So, putting aside dividends, there was no point in holding stocks (and certainly not stocks that paid no dividends) during that whole period.

Wealth you can touch

But if you had cashed out of the Dow in 1966, you would’ve gotten as many as 27 ounces of gold. And if you’d merely held your gold, you’d still have 27 ounces of gold. But knowing that the real money is made by providing real goods and services, you should have kept an eye on the Dow. And when the Dow/Gold ratio fell to an all-time low in 1980, you would have had the chance of a lifetime.

(In the interest of full disclosure, our target — for buying back into the stock market — is a Dow/Gold ratio below five.)

So, if you’d taken the opportunity to trade your gold coins at five ounces-to-the-Dow in 1978, you could have then enjoyed the great bull market that followed…taking you all the way to 1999, when you might have traded out of Dow stocks at 40 ounces/Dow. (Again, our model hedges our risk a bit by getting out earlier.)

And here we see the bumptious power of 1) a bull market in stocks…2) companies that add to our wealth…and 3) the primary trend. Our real wealth, measured in ounces of gold, would’ve increased by as much as 20 times from 1966–99 (or by eight times if you had followed our safer Dow/Gold trading rule).

So let us try to condense this ramble into several key points:

1. Gold is real money. Measuring your wealth in gold ounces is more reliable than doing so in dollars.
2. But gold is barren; holding gold forever gets you nowhere…your wealth doesn’t grow.
3. Stocks — representing ownership in profit-making companies — are the way to make money.
4. But holding stocks alone won’t increase your wealth either. Measured in gold, they go up and they go down; today, they’re no more valuable than they were 98 years ago.
5. Over time, all you earn from stocks, broadly, is what you get from dividends.
6. You can do better, at least theoretically, if you buy stocks when they are historically cheap (using the Dow/Gold ratio as a metric) and sell them when they are expensive. Stick to gold during periods when the primary trend for stocks is down.

Stay tuned…

Regards,

Bill Bonner,
For The Daily Reckoning Australia