Great Depression Online Archive Issue:

Mopping Up the Funny Money

Great Depression Online
Long Beach, CA
June 05, 2009

Inside This Issue You Will Discover…

*** Dangerous Catchphrases
*** Could the S&P500 Go to 50,000?
*** Mopping Up the Funny Money
*** And More

Dangerous Catchphrases

Change is constant.  That you can count on.

That’s why perspective is what we’re after.  In particular, perspective different than our own.

We find groupthink, consensus without debate, and conventional wisdom to be hardly wise at all; rather we find it unwise.  And where markets are concerned following the conventional wisdom can be disastrous to your finances.

You know what we’re talking about…

“Just ‘buy and hold’ stocks for the long run…you’ll retire a millionaire.”

“Land…they ain’t making more of it.  You can’t go wrong with real estate…prices always go up.”

“Now is always the best time to buy bonds.”

“What’s good for General Motors is good for America.”

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The problem with such catchphrases – and what makes them so dangerous – is they don’t account for change.  Sure they may not be entirely wrong.  But they’re not entirely right either.  In fact, at times they may have been right…most of the time.  And perhaps they could be right again…sometimes.

Could the S&P500 Go to 50,000?

We’ve contended all along that the stock market’s current rally is nothing more than a bear market rally…a suckers rally that’ll bring good people, good money, and great expectations back to the market before obliterating them all.

To review, since its March 9th low the DOW is up over 35 percent and the S&P500 is up over 41 percent. 

Still we’re not ready to change our minds.  For from September 3, 1929 to November 13, 1929, the DOW lost 47.9 percent.  Then, as rarely noted, it rallied 48.1 percent…bringing good money and optimism back to the market.  But regrettable it was the ultimate suckers rally.  The market subsequently crashed 89.2 percent from its initial peak…a level not seen again for 25-years.

With this mindset, and while on the look out for perspective this week, our ears perked up on Wednesday when we came across the headline…

“Jim Rogers: S&P Could Go to 50,000”

“I was going to say I don’t think S&P500 will see new highs.  But I have to quickly temper that by saying against the dollar because the S&P500 could triple from here if they print enough money and the value of the U.S. dollar collapses, then S&P could go to 50,000, Dow Jones can go to 1,000,000.”

Mopping Up the Funny Money

In the scenario Rogers describes, rising stock prices would not be a good thing.  Moreover, they would be indicative of a currency that’s worth far less than it is today.  In a relative sense, a dollar cup of coffee – not the Starbucks variety – would cost you upward of $50.

Still, if you knew stock prices would go up from here – even if it was from the government’s policy of currency debasement – stocks would be a better place for your money than your savings account…or your mattress.  Of course your guess on where the market goes from here is as good as ours or anyone else’s.  Nonetheless, we believe stocks will fall below their March 9th lows before surpassing their October 2007 highs.  Moreover, we anticipate inflation will show up in food, gas, and consumer prices.

What is certain, however, is that inflation is becoming a real concern.  And why shouldn’t it be.  The Federal Reserve’s lowered the federal funds rate to nearly 0 percent.  And Washington’s running a $1.8 trillion dollar budget deficit this year…more than four times last years all time high.

The only thing that’s keeping inflation in check is banks are still shoring up their balance sheets, consumers are paying down debts and increasing savings, and over a half million people are losing their jobs each month.  But when the economy begins to improve, that’s when things will really get ugly.

In central bank parlance that’ll be the mop up phase of the operation where they mop up the funny money by contracting the money supply.  Yet, if they pause a moment too long inflation could go hyper.  And if they act too soon or too strong, the economy will again depress.

That’s Federal Reserve Chairman Ben Bernanke’s big dilemma.

It’s an interesting conundrum…if only the stakes weren’t so severe.

Sincerely,

M.N. Gordon
Great Depression Online

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