海角大神

Nothing much in yesterday鈥檚 market news鈥�so we turn to a remarkable article that appeared in MONEY magazine, proving that MONEY doesn鈥檛 know anything about money.

(MONEY Magazine) 鈥� Can you tell when a boom has turned into a bubble? One clue: When pop culture starts paying attention. The housing bubble, for example, brought both the TV show Flip This House and a rival on another network, Flip That House.

So if you own a lot of gold, you might regard a recent episode of Saturday Night Live as your first warning. In the opening skit, Bill Hader as China鈥檚 President Hu Jintao declares that Glenn Beck was right and that 鈥渕y government should have bought gold. Unfortunately, all our assets were tied up in US Treasury 产颈濒濒蝉.鈥�

Back in the real world, gold is trading at about $1,400 an ounce, up from less than $500 five years ago. That鈥檚 a 23% annualized return, far outstripping the gains on stocks (1.1%) or bonds (6.1%). Fear is driving a lot of the rise.

MONEY has a point. But not a good one. When pop culture gets excited about an asset class 鈥� tech stocks in 鈥�99 or housing and finance in 鈥�06 鈥� you know it鈥檚 late in a roaring party. It鈥檚 just a matter of time before the neighbors get mad and call the cops.

But the MONEY writer missed the point. Pop culture has to take the bubble asset seriously. Not as a joke.

The author admits that the magazine tried to persuade readers to dump gold last year at this time. That was a costly mistake. Gold went up nearly 30%. But it just shows how hard it is to get to the top of a bubble market.

Yeah, but gold is not in a bubble market. It鈥檚 in a bear market. It will turn into a bubble market later. So far, almost no one is at the party. Ask your friends, dear readers. Ask your relatives. How many of them own gold? Ask the cab drivers, the insurance salesmen, the auto dealers and the psychiatrists. Ask the readers of MONEY magazine. Do they old gold? Nope. It may have just completed its 11th year of a bull market, but people have still not caught on. They think there鈥檚 something weird about gold鈥�something almost unpatriotic. It is as if you didn鈥檛 trust Ben Bernanke or something.

MONEY goes on to tell readers why they shouldn鈥檛 buy gold now.

Reason #1: 鈥淏ad economic news may not make you very much money. Good news could crush you.鈥�

Of course, it depends on what kind of bad news. And how bad. Historically, gold is a refuge against bad news. And we can鈥檛 think of anything we鈥檇 rather have in bad news鈥�unless the news were so darned bad that we鈥檇 rather have a farm far out in the country with a cow, a pig, a flock of chickens and an arsenal of weapons.

But how about the good news? Yes, gold would go down in a good news environment. The author talks about the 鈥�80s and 鈥�90s鈥�as if a re-run of those good news years were possible. Oh boy! This fellow must have read Peter Lynch鈥檚 advice about not paying any attention to macroeconomics; he must have taken it seriously! Poor lump! You can ignore the macro weather forecast, but only when the weather is good. When the hurricanes and tornadoes start to blow, you need to know what鈥檚 going on so you can nail up the plywood and head for shelter.

What is the likelihood of a repeat of the 鈥�80s and 鈥�90s fair weather? Well, we鈥檇 need to begin with the high interest rates of the early Reagan years (they鈥檙e extremely low now). Then, we鈥檇 need low stock prices (they鈥檙e 1,100% higher now). We鈥檇 need relatively high inflation (CPI touched 13% in the early 鈥�80s) rather than the 1.1% core CPI we have now. We鈥檇 need a monetary base of about $600 billion (rather than the $2.5 trillion Bernanke is building). We need total debt at about 120% of GDP, instead of 400%. And we鈥檇 need a Fed that was determined to stop inflation rather than one that was dead set on causing it!

And we鈥檇 all have to be 30 years younger, too.

All things considered, we鈥檇 gladly go back to the 鈥�80s 鈥� if we could do it. But who could possibly believe we could? Only a writer for MONEY magazine.

Yes, if things do go back in time to the 鈥�80s and 鈥�90s, gold will be crushed. That鈥檚 a chance we will gladly take.

His reason # 2 is no better. 鈥淪ure, the dollar has problems. But just look at the other guys.鈥�

We鈥檙e not sure what that is supposed to mean. The whole planet鈥檚 monetary system is based on paper currencies, with the dollar at the center of it. Yesterday, the dollar turned down against foreign currencies. But so what? We can鈥檛 tell you which of these paper currencies will shrivel up and blow away first鈥�but they鈥檙e all going to do so. How do we know that? Well, in all modesty, we admit that we don鈥檛 know for sure. We don鈥檛 know nothin鈥� for sure. But every paper currency ever tried 鈥� apart from present company 鈥� has always disappeared. And none has ever survived a complete credit cycle. They鈥檙e okay on the upside. They fall apart on the downside.

We鈥檙e on the downside of the credit cycle now. Or not far from it. The dollar won鈥檛 survive. And when it begins to limp and cough badly, some investors may go to Chinese yuan or Swiss francs. Most will want to go to real money鈥�the kind you can trust鈥�the kind that never goes away鈥�

鈥�the 鈥渓ast man standing鈥� in a monetary crisis 鈥� gold.

MONEY has other reasons for telling readers to stay out of gold. They are no better. And at the end of the article, as if the author were not convinced that he had made his case, he tells readers that if they must get into the yellow metal, they should do so with only 1% of their portfolio. And put the money into an option, not into the real stuff. Then, if the bet pays off, the MONEY reader would get a big payday.

Wait a minute. Picture the MONEY reader. He鈥檚 got a $200,000 portfolio. On MONEY鈥檚 advice, he keeps it fully invested in a balanced portfolio of equities. Then, he takes $2,000 and buys an option on gold. If gold goes up dramatically, his $2,000 option turns into, say, $20,000. But what has happened to the rest of his portfolio? We don鈥檛 know, but there is a good chance that either his option expires worthless 鈥� in which case, he loses his $2,000. Or, if it pays off鈥�and gold is soaring鈥�the rest of his portfolio could register far bigger losses than he recovers from his gold play.

Again, MONEY is missing the point. Ordinary people have no business speculating on gold. They should buy the metal as a safety device 鈥� to protect themselves from all the dumb policies and speculations of the banks and the Fed itself. The Fed is no longer doing its job. Its reserves are trash 鈥� bonds to be paid off by the federal government (which is insolvent) or by underwater homeowners. Since the Fed is derelict, people need to have their own reserves of real money. Gold, in other words.

Meanwhile, California is in the same situation as Portugal, Ireland and Spain. It can鈥檛 print its own money. So, it has to take the austerity route. Here鈥檚 the latest from Bloomberg:

California鈥檚 Brown Unveils $12.5 Billion in Spending Reductions

California Governor Jerry Brown鈥檚 budget will cut spending by $12.5 billion, including as much as a 10 percent pay reduction for most state employees, aides said.

The plan, which Brown is to unveil today, will also raise $12 billion by retaining tax increases due to expire and making other modifications. Some of the revenue will go to cities and counties as part of Brown鈥檚 plan to transfer spending authority from the state to local governments.

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