Monday, March 17, 2008

Good-bye Greenback

Man oh man, I completely dislike alarmism. I hate it. One of the things I dislike the most about my profession is the overweening drama associated with childbirth. Young parents, emotionally charged, bright lights, high-tech machines beeping in annoying cadence-- all are emblematic of the usually unnecessary and counterproductive alarmism of the modern era.

As the years have passed I have grown used to the omnipresence of dread, whether it's in the delivery room or the financial markets. Almost never are the sum of all fears realized. The Black Swans exist, but we cannot live our lives paralyzed by their prospect.

Few things freak me out as much as the gestalt of realization that our financial markets are vulnerable to any manner of perturbation, and the guys at the helm have been so wrong so many times that confidence is gone. Our fiat currency-- the US dollar-- is dying. Since it is no longer pegged to the gold standard, it floats at the whim of the "full faith and credit of the US government." How much faith do you have in who is running the US government?

We have borrowed from the world in order to finance immoral and unpopular wars, ridiculous consumer spending, imported oil and profligate cronyism. Marc Faber and Jimmy Rogers both think the US dollar is going to zero. Zero! Yeah, I know they are the ultimate alarmists and even broken clocks are correct twice a day, but much of the scenario they have painted over the last ten years is coming true.

My mother was an intelligent, curious and analytic person who learned computer programming in the 1980's. She worked as head systems analyst for a Fortune 500 company until retiring in the early 1990's. She died in 1998. When the US dollar gold standard was halted in the 1970's, she and my grandmother (her mother) argued that the US dollar would die a slow awful death. They bought gold-- as much as they could afford at the time. Those coins are long gone now; investments are now in exchange traded funds (GLD and SLV).

Today, we hear of the US dollar being devalued on a daily basis. The nominal price of gold versus the dollar is at all time highs. Our financial markets are in turmoil and brokerage houses are imploding. If ever there was a time for alarmism, this would be it.

I'm too young to have been immediately affected by the savings and loan crisis in the 1980's. I was cloistered away at a university preparing for my future career and remained completely disaffected, or so I thought. My memory of the time was my mother decrying the cravenness of the power structure (Neil Bush ran Silverado S&L into the ground at taxpayers' expense) and predicting the end of the economic world. It never quite happened.

But the S&L crisis did have an impact on our lifestyles, even if none of us may have realized it. When that much capital goes to money heaven something is indeed lost. Less capital is available for schools and hospitals and business expenses and innovation. Workers put in more hours and effort for the same benefit. We all do suffer a thousand deaths in ways that may not be immediately perceptible.

The same is happening today. Bear Stearns goes bankrupt. The Federal Reserve backs JPMorgan in purchasing the shares at a huge discount and covering the outstanding liability. The market futures continue to decline in a not-so-orderly fashion. To what end? Capital is lost, lending power is lost, faith in the financial markets is lost; less is available for schools and hospitals and business expense and innovation. We all lose.

Don't be alarmed, but be prepared. Hold onto your gold. Buy Swiss Francs (FXF) or Japanese Yen (FXY) on any weakness. Stay away from US Treasuries and stocks. If your financial adviser recommends US stocks today, find another adviser. And if you're a doctor or teacher, don't expect to get a raise any time soon.

No comments: