Short but very important gold lesson

Well, now we know a lot more about gold.  Today, gold was down about $30 to the $890 range.  Then, immediately upon the announcement that the Fed would buy long dated treasuries to "help" the market, gold reverses itself and went up about $20 to close above $930.

If there was ever a better indication that as long as the government continues to try to do things to "help" us, they will fail and gold will win.

You cannot take from those that have and give to those that do not and create wealth.  If you are exceptionally lucky, you won't have any effect.  But, in virtually every situation, this redistribution will hurt the economy and the dollar and help gold.

The next time you hear about a "market bottom" or the end to the recession or that it is time to jump back into real estate or anything like that, take a look at the 5 waves of mortgage problems. Notice that we are just now beginning to deal with the second wave.

We will talk more today about this but I suggest that you sear this into your mind before you make any long range financial plans.

But you should only be worried if you believe that bad mortgages and bad credit actually started this debt crisis. Also, you should not be worried if you think more bad credit can fix the existing bad credit!

I will let you decide...

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OK, now that we have the previous two posts out of the way, Monday (03.16.09) we will discuss how the markets and the US Economy are linked but not dependent upon each other.
Essentially, our economy is based upon the number of domestic jobs, the average $/hour/resident of the US and the general mood and optimism of these residents.
The markets, however, are based upon expected earnings after taxes (both domestic and foreign) and the general mood and optimism of investors.
I hope you noticed the domestic and foreign earnings part. Remember, if you are a CEO of an international company (and virtually all listed stocks are international), you are rewarded based upon your consolidated earnings (foreign and domestic) and, consequently, your stock price. There are no rewards for making the US, or US residents, more prosperous.
Globalization is Kryptonite to national economies IF you are a "have" and not a "have not". Globalization levels the playing field. The game is to increase profits, at the expense of the "haves", without destroying them. It is not quite a zero sum game but the US and its residents will think it is.
Think about the higher value (meaning "wage") jobs that have been lost - maybe for a very long time. Unless we replace these jobs with new and equally high value jobs, this means less disposable income, less consumption, less tax revenue for federal, state and local governments. But the countries that landed these jobs improve their standard of living - though their revenue does not go up as much as our revenue goes down.
And that is the trick. Companies seek to globalize to the point where marginal cost equals marginal revenue. This is the old Economics 101 MC=MR graph. At this point, it takes $1 of cost to generate $1 of revenue or a break even. But, right before this $1 came a $1 of revenue that cost just slightly less than $1 to generate - and that is earnings - and that creates value in the share price.
The same is true for the global production/consumption. You globalize right up to this point. It helps you to reduce the costs for your company (even if you eliminate US jobs) just so that you do not kill consumption in the US.
But, as you reduce jobs in the US, the debt stays the same. And here we are...fewer jobs, less income, same debt, more defaults, falling asset prices. We crammed too much debt down the throats of consumers at the same time we cut their jobs and wages.
Finally, just for reference, all of the stimulus the US can throw at our economy won't work because you cannot take from those that have (through taxes, borrowing and inflation) and give it to those that don't and change a thing. And, if you are going to borrow the money, what ever you spend the stimulus on better make money after you build it. But if you REALLY want to muck things up, just print the money. Now you have fewer jobs, less income AND inflation - exactly the definition of stagflation.
And, for the record, stagflation is the mortal enemy of equity markets - IF you use purchasing power as your measure.
We are so screwed...

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Just for everyone's enjoyment, here are the lyrics to "The Wall Street Shuffle"...written nearly 35 years ago! The group was 10cc. What a song! Not much has changed as far as the "Shuffle" goes - just today, it is played with many more zeros and commas - but it is the same old greed game...

Enjoy and go buy a copy of the song...

Do the Wall Street Shuffle
Hear the money rustle
Watch the greenbacks tumble
Feel the sterling crumble
You need a yen to make a mark
If you wanna make money
You need the luck to make a buck
If you wanna be Getty, Rothschild
You've gotta be cool on Wall Street
You've gotta be cool on Wall Street
When your index is low
Dow Jones ain't got time for the bums
They wind up on skid row with holes in their pockets
They plead with you, buddy can you spare the dime
But you ain't got the time
Doin' the....
Doin the....
Oh, Howard Hughes
Did your money make you better?
Are you waiting for the hour
When you can screw me?
`cos you're big enough
To do the Wall Street Shuffle
Let your money hustle
Bet you'd sell your mother
You can buy another
Doin' the....
Doin' the....
You buy and sell
You wheel and deal
But you're living on instinct
You get a tip
You follow it
And you make a big killing
On Wall Street