海角大神

The depression is alive and well!

Unemployment claims just came in higher than expected.

And new house sales in January were at their lowest ever. Pundits were quick to blame the snow. But sales were off even in areas that had better-than-usual weather.

Household income has gone nowhere in 10 years. Stocks have suffered a lost decade too. And now Ben Bernanke says we鈥檇 better be careful鈥�because the recovery ain鈥檛 no sure thing.

The Fed chief has no idea. But average people know what鈥檚 going on. They know how hard it is to find a job. If you鈥檙e in the building trades鈥�or you have only a year or two of college鈥�you鈥檙e pretty much out of luck. You may have to retire before you ever start work again.

That鈥檚 why there was such a big drop in consumer confidence.

But look on the bright side. Building more houses for people who couldn鈥檛 afford to live in them was not exactly the greatest business strategy. And all those people who were appraising, mortgaging and selling houses can now find more useful work. Real jobs. Doing something more useful. What are those real jobs going to be? We don鈥檛 know yet. But it could take a long time to find out. And in the meantime, we have a depression on our hands鈥�

So, let鈥檚 enjoy it鈥�

How do you enjoy a depression? Well, the first thing is to make sure you鈥檙e not in its way鈥�

Dear readers may not know this, but in addition to writing The Daily Reckoning your editor also has a serious job鈥�

Yes, in the morning he is a moral philosopher鈥�gratuitously insulting public officials, whole professions, and entire nationalities. He is grateful to them all鈥�they make life so entertaining! Imagine what kind of world we would have if people minded their own business and got on with their lives鈥� People would be richer and happier, we don鈥檛 doubt it鈥�but at whom could we point a finger and laugh?

No, dear reader, the world needs its bumblers, fools, politicians (are we repeating ourselves?), grifters (sorry鈥�we did it again!), and megalomaniacs. It needs someone to challenge the gods from time to time. Otherwise, the gods wouldn鈥檛 have the fun of whacking them. And we wouldn鈥檛 have the fun of watching.

But getting back to the point鈥�what was the point? Oh yes, the point is we have a serious job to do too. In addition to writing about the world of money, we actually have to live in it.

You see, we have a Family Office鈥�a little group of researchers and analysts that actually has to make decisions鈥� In the afternoon, we have to decide. What to do? Long or short? Buy or sell?

One thing we need to be on guard against is allowing our emotions to take over. For all our deep thinking and cynical detachment, we鈥檙e human too. We get emotionally attached to our own ideas. Then, we鈥檙e very reluctant to give up on them鈥�no matter how bad they turn out to be.

We remember鈥�sadly鈥�our own feet dragging after the bull market in gold of the late 鈥�70s. We didn鈥檛 want to sell. So we delayed鈥�we hesitated鈥� By the time we realized how wrong we were we didn鈥檛 have to sell. The bear market in the yellow metal was over! Gold had hit bottom. Gold was down 70% from the top. Much more in real terms.

But there鈥檚 nothing like a 20-year bear market in your favorite asset class to sharpen your wits. We realized that we needed a better way鈥�

When you鈥檙e investing real money, you need some discipline鈥�and some rules. At the Family Office, we鈥檝e developed a methodical approach that let鈥檚 us choose investment themes very carefully 鈥� after much thought, consultation and deliberation. And then it prevents us from making any changes鈥�again, except with much reflection and discussion. We also have our own timing index, which would practically take an act of congress to override. If the timing index says to get out鈥�we get out.

Why are we telling you this? Because you need to follow some rules too 鈥� or you鈥檙e going to suffer in this depression along with everyone else.

What鈥檚 the number one rule in a depression? Conserve cash. In a depression, cash goes up. Everything else goes down.

Almost everyone loses in a depression. All assets go down. Against what? Against money鈥�cash. So, the thing to do is obvious. Get rid of your investments. Cut your expenses. Sit tight. Do nothing. When you鈥檙e given an investment opportunity, just say no. Wait until the depression has run its course.

If Japan is any indication, this could go on for another 10 to 20 years 鈥� with generally sinking prices for just about everything, but particularly for stocks and real estate.

It鈥檚 going to be hard to sit out a downturn that long. You鈥檙e going to be tempted to speculate鈥�to get back in鈥� You鈥檙e not going to want to be left behind.

And yet, in a real depression, getting left behind is the best you can hope for鈥�

A year or two ago, we would have thought that you couldn鈥檛 increase the monetary base so dramatically without grave inflationary consequences. Inflation 鈥� with a lag of about 18 months 鈥� was a dead certainty. Now that we鈥檙e closer to the situation, we see that inflation may be hard to avoid鈥�but it鈥檚 hard to summon up too. Japan couldn鈥檛 do it. And now the Bernanke Fed can鈥檛 seem to do it either.

Central bankers are talking about increasing their inflation targets from 2% to 4% in order to give themselves more flexibility to deal with situations such as the crisis of the last 2 years. But they are dreaming. They can鈥檛 really control inflation that perfectly. Maybe they can鈥檛 really control it at all, except in the grossest, clumsiest way. They have tripled the world鈥檚 monetary reserves in the last 7 years. Prices for gold and oil have responded more or less in line with the monetary base. But most consumer prices are heavily dependent on capital investment in China鈥�housing prices in the US鈥�and a million other things that the economists at the Fed can鈥檛 begin to control.

Of course, in extremis, as Ben Bernanke once told the world, a central bank can always create un-controlled inflation. They 鈥渉ave a technology known as the printing press,鈥� he said. Crank up the presses鈥�and let people know that you are cranking up the presses鈥�and you鈥檒l have price inflation lickety split.

But the financial and economic costs of cranking up the presses are so great that very rarely is any central bank鈥�and certainly not any major central bank of a civilized nation鈥�reckless or bold enough to do it. It鈥檚 the nuclear option of the monetary world. You have to be very desperate to take the nuclear option. We don鈥檛 think Bernanke and crew will get there鈥�not for a long time.

That said, there are also conventional weapons鈥�such as those being used now. One in particular鈥�quantitative easing鈥�packs a lot of firepower. It鈥檚 not nuclear. But it can still make one helluva mess. Stay tuned.

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