Investment banking as an industry runs almost completely contrary to wealth creation since it thrives on fees rather that capital appreciation. Investment banking is about making DEALS (any deals) regardless of whether the deals make sense or benefit both parties (after all, the advisors to the deals, the investment bankers, get paid based on commission and free stock).
Ever since the Financial system started imploding in July 2007, I’ve heard countless folks talk about liquidity, bull markets, bear markets, the dollar, bailouts, etc. But there’s one thing I’ve heard virtually NO ONE talk about. That is:MORALITY or ETHICS.
The first thing that needs to be said is that IF we have another systemic meltdown like that of Autumn 2008, Gold will likely go down along with everything else. There are simply too many big players (hedge funds, investment banks, etc) with heavy exposure to Gold who would be forced to liquidate their positions during a systemic collapse.
I’ve watched with first amusement, then disgust, and ultimately outrage as various pundits proclaimed Bernanke’s efforts “saved the financial system” or helped the US “weather the storm.” Bernanke did NO such thing. You could train a chimpanzee to hit the “print money” button at the Fed every-time the Fed phone rings with a Wall Street number and get the same results.
The REAL Crisis first hit in 2008 though it was almost entirely off the radar of the American public. While all eyes were glued to the carnage in the stock market and brokerage account balances, a far more serious crisis began to unfold rocking 30 countries around the globe. I’m talking about food shortages.
Investors have dozens of reasons for loving Gold. Some love it because it’s a great inflation hedge. Others love it because it can’t be devalued. Others love it because it’s a storehouse of wealth. Personally I like Gold for all of these reasons too. But my favorite reason for liking Gold is because it calls “BS” on this stupid stock market rally.
Here in the US we prefer BS numbers to no numbers at all. The US ALWAYS reports data (unless it’s regarding someone on Wall Street or our Fed Chairman breaking the law). And if the real numbers are too ugly we use seasonal adjustments, birth/death ratios, survivor biases, and other ridiculous adjustments to make the data just palatable for publications.
In 2008, the entire financial system nearly went under due to the Credit Default Swap market which was $50-60 Trillion in size. In contrast, the interest-rate based derivatives market is $196 TRILLION in size: more than THREE times larger than the credit default swap market at its peak.
Emerging Markets, which have lead the S&P 500 for years are flashing MAJOR warnings signals. Remember, the Emerging markets bottomed before the S&P 500 (November 2008 vs. March 2009) during the Crash.
The general public had stocks foisted on them in the 80s with the introduction of stock-based retirement plans (401ks and IRAs). They became further enamored by this asset class with the creation of online discount brokerages, which seduced the DIY spirit. Stocks have become so popular that there are entire peripheral industries have been built surrounding them: investing books, investing seminars, investing TV shows, etc. And yet no one has ever asked whether investing in stocks is actually a good thing.
Social unrest has already unseated several regimes in the Middle East. And the same formula that created those situations (tons of poor, repressed folks no longer able to afford food) exists today in China as well. With that in mind, expect the relationship between the US and China to deteriorate in the coming months. The flirtation underlying trade tensions (steel and tires) we’ve already seen will erupt into full-scale trade wars. We could very well even see an actual physical war the way things are heading.
Remember, Wall Street is nothing more than an exchange: a place where deals of hundreds of varieties are made. In this sense it’s nothing more than a corporate-scale version of Facebook or some other social network platform. That’s it. Wall Street doesn’t generate any real goods. It doesn’t produce drugs that cure illnesses. It doesn’t design cars or vehicles needed to get around. It hasn’t invented ANYTHING of real value in decades (unless you count make believe crap like derivatives and CDOs as goods).
China, as an investment, is important for three reasons. They are:
1) The Chinese economy is believed to be leading the world into recovery
2) The Chinese stock market has lead the S&P 500 for years
3) The Chinese/ US monetary relationship
I’ve covered #’s 1 & 3 several times before and I’ll providing an update of my analysis in tomorrow’s edition of Gains Pains & Capital. So today we’re focusing on #2.
Occasionally I see an article written by some Guru claiming that Gold has no real investment value. They usually use points such as the fact that Gold has no cash flow or you can’t use Gold to buy goods or whatever. All of this stuff is outright moronic. Sure Gold doesn’t have cash flow… but then again Gold also, doesn’t engage in accounting fraud, doesn’t miss quarterly earnings, isn’t affected by Obama’s health care, doesn’t lie about its real balance sheet problems.
Imagine if a grizzly bear got up and tried to attack you after you already brought it down with repeated gunfire. What would you do? You’d blow its head off and then walk up to the body and shoot it until you ran out of bullets to make sure the thing didn’t get up again. Bernanke would do the same thing to deflation today.
