Mike Krieger On Why 2011 Is Not 2008 - Why It Is Much Worse - And On Dow-Gold Parity

From Michael Krieger of KAM LP:

If we are to have another contest in the near future of our national existence, I predict that the dividing line will not be Mason and Dixon's but between patriotism and intelligence on the one side, and superstition, ambition and ignorance on the other.

- Ulysses S. Grant


Mubarak has been an ally of ours in a number of things. And he’s been very responsible on, relative to geopolitical interest in the region, the Middle East peace efforts; the actions Egypt has taken relative to normalizing relationship with – with Israel. … I would not refer to him as a dictator.

- United States Vice President Joe Biden


Stuck in a Time Capsule

I remember as a kid on several occasion putting together a time capsule as part of a school project.  I am sure many of you reading this have done a similar thing at some point.  The concept is simple and elegant.  The group involved in creating the time capsule picks various things from their current society or culture that they feel is representative of the environment at the time and then they bury these items so that future generations can get a glimpse of what life was like for people in a prior time.  The reason humans have a desire to perform acts such as this is because our collective consciousness understands how much things change over time.  Empires rise and fall, major belief systems dominate and then become discredited, broad concepts of what is considered acceptable human behavior with respect to our fellow human beings also change and vary within different cultures over time.  Everyone knows the saying “nothing is certain except death and taxes.”  Actually this is garbage.  Taxes may be certain in the current society we live in but there is nothing eternal about taxes.  It is entirely a human creation.  I would replace taxes with the word change (not Obama change, real change).  From my perspective the one thing in addition to death that is certain in humanity’s existence is change.  Volatile, massive change.  What confuses people is that this change happens very suddenly and seemingly out of nowhere to those only paying attention to the establishment parrots that assure you all is stable and ok because they are the elites and they want things to stay the same.  They want that giant boot stamped firmly on your face forever.

This is exactly where we find ourselves today.  In the middle of the most profound change in the paradigm of the world as we know it that we will ever see in our lifetimes.  Hosni Mubarak had been dictator of Egypt since 1981.  So basically my entire life on this planet this guy had dominated the Egyptian people (with complete and total U.S. government support).  He was an immovable object.  Yet within a couple of weeks this guy was tossed out with relatively little violence.  For someone like me that lives and breathes within the macro zeitgeist of this planet this event was absolutely extraordinary and more importantly just a small piece of the wider puzzle of the world changing all around us.  As anyone that has been reading my pieces for several years knows I have been saying for a very long time that we are in a period of immense economic, geopolitical and social change throughout the world.  This change is of an order of magnitude so great that by the time this period passes (we are still very early in the process) virtually nothing about the way we live our lives and view the world will be the same.  This will be the case everywhere, but nowhere will the impact be as great as in the United States.  The reason is quite simple.  What we are witnessing in the Middle East is the dismantling of the American Empire, the existence of which is actually not even known to the majority of Americans as a result of highly effective media and cultural propaganda.  Most Americans have lived their lives in complete ignorance that it is this American Empire rooted in a counterfeit currency that we force down the world’s throat which has given them their bloated standard of living and will therefore be completely confused about why their standard of living has collapsed once the Empire crumbles.  The entire purpose of these articles is to wake up as many people in the United States as possible to the reality of the situation we are dealing with so they can prepare for what is coming and ride out the storm as best as possible.  So that people can form tighter communities and learn to help their neighbors.  The biggest risk we face is not lower standards of living.  That is written in stone in the near-term.  The biggest risk is that the emotional trauma caused by such an event allows us to be thrown into the arms of a demagogue that promises us security, stability and strength.  This is exactly how it went down in Nazi Germany.  

So back to the time capsule.  On the infrequent occasions that I do turn on the television I am absolutely stunned by the characters the stations wheel out.  I listen to the ways these guys talk and I really feel as if I have found the “Time Capsule 2006 Station.”  We can call it the TCS.  One guy the other day was squawking about how what is happening in the Middle East was “interesting but not significant.”  When it became “significant” he said he would act accordingly.  Seriously, where do they find these clowns? 

The worst part about the crisis in 2008 was the reaction to it.  We promoted and bailed out the “leaders” in all spheres of life, not least of which were money managers.  While I may offend many people on this list with what I am about to say, it needs to be said.  Many of the “investors” managing a significant amount of American capital right now have absolutely no business doing so.  They had no idea what they were doing into 2008 and they have less of an idea what they are doing now.  I am not going to try to call out who knows what they are doing and who doesn’t because we are all about to find out relatively shortly, but by the time this is over the financial industry will be unrecognizable.  In fact, it will probably have to be restarted completely from scratch.  Many massive funds will simply go away in the dust pile that will be their investors assets.  Right now the financials weighting in the S&P500 is 16.5% and the basic materials is 3.5%.  Within five years I expect these weighting to have completely reversed. 
We continue to roll out people on television who are morally repugnant yet the media elevates them to the status of superstars to be emulated.  Warren Buffett is a prime example.  When they rolled out this dinosaur (who wouldn’t even exist without the Fed’s IV into Berkshires vein) on CNBC the other day he basically defended the concept of too big to fail.  Of course he did.  His company is essentially a financial institution and therefore he needs too big too fail to stay around so that he can continue to parade around like some oracle.  Then there was Larry Fink on Bloomberg television the other day.  The first words out of this guy’s mouth (the CEO of Blackrock which manages over $3 trillion) was “market’s like totalitarian governments.”  Link here http://news.hereisthecity.com/news/business_news/12455.cntns.  As I retorted last week: “market’s may like totalitarian governments but humans do not.”  Furthermore let’s make one thing very clear.  He did NOT say “market’s like stability” he said “market’s like totalitarian governments.”  The word totalitarian was right on the tip of this guy’s tongue.  The fact that he blurted that word out says a lot about this man’s character and what sort of dark thoughts percolate in the recesses of his sick mind.
What about that lover of fascism George Soros who markets himself as some victim that cares about the people when he is the biggest elitist control freak I have ever seen.  He could barely contain his enthusiasm for China’s authoritarian political regime the other day.  He was quoted as saying:    “Perfect order and global governance are not realistic expectations. However, it is a sad fact that Western democracies provide less successful leadership than China.”  Of course, Soros and his buddies would rule us and the rules wouldn’t apply to his pals who would be in charge of the “order”.  This is just a continuation of the “markets like totalitarian governments” meme rolled out by that Fink last week.  They are trying to sell tyranny to us!  Link here:  http://www.businessinsider.com/soros-chinese-leadership-is-better-than-western-leadership-and-it-could-become-the-envy-of-the-world-2011-3

This is NOT 2008      

This is not 2008, it is much, much worse and far more dangerous.  This will not simply be the collapse of the banking system (although I fully expect that), rather it will be the collapse of the central banking system.  This will not be the temporary collapse of some phony paper wealth, it will be the permanent destruction of real wealth and the end of how the economy functions today which we can simply call “the system.”  While many people think the stock market will fly up 5,000% as it did in the Zimbabwe hyperinflation I have never held this view and still do not.  I do however believe that the Dow Industrials and the price of gold will trade at a 1:1 ratio.  If I had to take my best guess that level will be around 5,000.  That said, I may change my mind about this depending on what happens going forward but I still think that is the most likely scenario. 

I have not commented on the Dow/Gold ratio for awhile but I think the time has come to do so because I anticipate a MAJOR move here over the remainder of 2011.  Below is a chart of this ratio going back both eighty years years on a monthly chart and five years on a daily chart.    

Dow/Gold Monthly Chart 1925-2011

Dow/Gold Daily Chart 2006-2011

During my days at Bernstein I used to write about this a lot and in meetings I would always call the first chart the most important macro chart in the world.  For you see, during the prior two major secular bear markets for stocks the Dow:Gold ratio hit about 1:1.  It didn’t matter whether it was a deflationary period or an inflationary one.  Given this cycle is as bad as the Depression and way worse the 1970s I fully expect the same to happen again.

The second chart is important because it shows what has happened since the bottom in share prices in March 2009.  At that time the Dow:Gold ratio hit a new low for this cycle of 7:1.  It then rallied to the high that fall of 10:1 and has actually been declining ever since.  So the truth of the matter is that stocks in real terms had a very brief but sharp bounce into the fall of 2009 but have basically been falling ever since, down about 15% to the current ratio of 8.5:1.  The key thing is that new lows have not been hit since March 2009.  The reason I am mentioning this now is because I believe this range trade is about to end and we are about to see a massive plunge in this ratio in the months ahead.  Specifically, I think we are going to be at new lows to around 6:1 within twelve months, which would represent a 30% drop in stocks in real terms.  I actually think the Dow will sell off but more importantly gold will soar. 

No one expects this and even those that do are probably not positioned for it.  Everyone thinks if stocks plunge gold will plunge.  I think they are about to move in opposite directions and in a massive way that virtually no one will be positioned for.  Only time will tell, but I think those calling for a major plunge in everything are wrongly staring at a time capsule from 2008.

Have a great weekend,