I overheard a conversation in the gym last night wherein the comment was made, “The Dow is up from a low of 6500 because of administration policies.” The comment was made in reference to the Dow breaking 15,000, in the context of a recovering economy and in support of the administration. I refrained from making any comment of my own and to instead vent here where readers have the same right to discard my opinion and stop reading just as I stopped listening.
I think a quick look at the real facts are in order. Prior to the debt crisis, the Dow reached a high of 14,164.53 on October 11, 2007. As we came to learn, that was an artificial high achieved through the spending of money that never existed. Money that was created out of thin air.
At that time, money needed to fuel the stock market and the economy, was acquired through loose money policies – an artificial supply. Home prices were a prime example. Home values were greatly exaggerated, thus allowing people to borrow against equity that really did not exist. The markets and the economy became dependent on this money supply. So much so that when the supply was exhausted and the economy began to waiver, they had to concoct things like “No-Doc” Loans, “Stated-Income” Loans and “Cash-Out” Financing.
Cash-Out financing was one of my favorites. It allowed people to buy a house (or several) without a down payment and without any documentation of assets and without the need to verify any income. Ironically, the income was to be derived from the purchase of the home, which was based on overstated appraised values.
These windfall profits were then lured into the rising stock market, where stock investing was believed to be a no-brainer. It was magic. Everything was rising in value, fortunes in paper wealth were blossoming. Indeed it was magic and as we all know, magic is nothing more than an illusion with smoke and mirrors thrown in to further deceive. Nobody in their right mind, today, believes the credit crisis was not caused by artificial liquidity – the creation of money out of thin air.
Then for a number of reasons – too many to go into here and now – this supply of money dried up as quickly as a drop of water on a hot tin roof. As the bubble burst, home prices collapsed and by March 2009 the Dow lost nearly 60% of its value. The loss of fake wealth sent unemployment skyward as Wall Street scrambled to maintain profitability in a failing economy. The markets and the economy were in a death spiral.
To prevent the greatest country on Earth, from plunging into third world status, the geniuses pondered the cure. “Ahhhh!” said the Wizard. “I got it. Liquidity. We need liquidity. Where can we find liquidity?” By this time the average American had no borrowing power left. Home Equity – GONE! Market Equity – GONE! Jobs – GONE! There was virtually no one left to sacrifice to the credit gods and if the rich could not make up the difference to cover the lost artificial supply of money, then, “we just need to print it.”
And so we did. On behalf of all citizens with any remaining wealth, government put us all $7 trillion further into debt. The Fed added another $2 -$3 -$5 . . . who knows really how many trillions of dollar to the balance sheet, to keep the illusion alive. Does anybody believe it is not this artificial supply of money that is responsible for another expanding stock bubble? What amazes me is how many people do believe this artificial supply of money will not bring about the same result.
If the vanishing of an artificial supply of money crashed the markets and the economy once, what stretch of logic is it that has people believing it will not crash again? What stretch of logic has people believing the Fed can just print into infinity without consequence? After all, if that is the cure now, why was there ever a crash to begin with?
Enter Gold! While world markets were crashing, the flight to Gold was boarding. On the day the Dow hit its previous artificial high on October 11, 2007, the Gold price was $749 an ounce. Since that day, stocks, said to be recovering with a vengeance, have risen 6%. That’s 6% in five and a half years. And Gold? Gold, even after the recent pullback, is up 96% since that same date!
In the words reminiscent of those voiced in challenge by Achilles in the movie Troy . . .
“Is there any among you who can challenge the claim — an artificial supply of money crashed the markets once and will crash them again!”
“Is there any among you who can challenge the claim — those who were firmly diversified with Gold, were protected against the full force of the crisis then, and will be again.”
“Is there any among you who can challenge the claim — when markets crash this time, the gold price will double again!”