When Disasters Collide

[FRED]

When Disasters Collide (registration)
November 13, 2006 (Susan Witty - Barron's)

(Discounted Barron's/WSJ subscription here: wallstreetjournaloffer)

How to Make Money in a "Bubblequake"

WORRIED ABOUT THE HOUSING BUBBLE? You should be, but don't let it monopolize your agita. There are four other bubbles also deserving of attention, according to americasbubbleeconomy: a stock-market bubble, a foreigner-supported-dollar bubble, a consumer-debt bubble and a U.S.-debt bubble. When the five collide in a "bubblequake," the book's authors predict, the air will rush out of the pumped-up U.S. economy, deflating the average American's assets and standard of living.

But not to panic. America's Bubble Economy has a subtitle: Profit When It Pops. Eric Janszen, one of its four authors, suggests keeping 10%-15% of your assets in gold, which he sees rising "to a peak price of $2,500 to $3,000'' an ounce. Janszen et al. also recommend eurobonds and euro-denominated exchange-traded funds, because most of Europe isn't as indebted as the U.S. and its main currency should outperform the dollar.

A former venture capitalist and founder of the financial Website iTulip, Janszen says the U.S. is repeating errors of the Nixon era, including massive government deficits, under-funded entitlements and an unpopular war the government can't fund with higher taxes or special bonds. Throw in today's growing global demand for commodities, and "... all roads still lead to inflation, whether due to energy costs, unfunded deficits or dollar-currency risks," he says.

Janszen, who was rightly skeptical of the Internet craze early-on, tells Barron's that the current stock-market bubble is "a reflection of monetary inflation" rather than future earnings. A more normal trendline, he says, would put the Dow at about half its present level, or 6,000. Now, that's something to worry about.

AntiSpin: None required, but comments are welcome.

[hoodoo]

Hi,

I don't remember that you predicted a peak price for gold in the book. In fact, the narrative actually tried to steer away from naming a number and I suspect that you and your co-authors agreed to that approach. Just curious how/why the prediction appeared here rather than in your book.

The book is good and I read it the day that I got it. However, the web links are all dead - a huge disappointment.

Cory

[FRED]

Hi,

I don't remember that you predicted a peak price for gold in the book. In fact, the narrative actually tried to steer away from naming a number and I suspect that you and your co-authors agreed to that approach. Just curious how/why the prediction appeared here rather than in your book.

The book is good and I read it the day that I got it. However, the web links are all dead - a huge disappointment.

Cory

Try the book links now. They all work, but at the moment don't lead to meaningful content. This will soon be corrected.

[EJ]

Hi,

I don't remember that you predicted a peak price for gold in the book. In fact, the narrative actually tried to steer away from naming a number and I suspect that you and your co-authors agreed to that approach. Just curious how/why the prediction appeared here rather than in your book.

The book is good and I read it the day that I got it. However, the web links are all dead - a huge disappointment.

Cory

Hi, Cory. We're working on the links. As for the price prediction, well, no guts, no glory.

Previous predictions–one each, not a stopped clock repeating the same prediction until true:

- Nov 1998: Tech stocks a bubble that will go on for years
- Aug 1999: Y2K will be a non-event
- Mar 2000: Tech stock bubble pop imminent
- Apr 2000: Secular bear market has started
- Jan 2001: Recession imminent, inflationary policies coming
- Sep 2001: Gold price has bottomed
- Aug 2002: Housing a bubble that will go on for years
- Dec 2004: How the housing bubble end will begin (collapse in
transactions not prices)
- Jan 2005: Housing bubble collapse dynamics and timing (10 to 15 year
correction process)
- Jun 2005: Housing bubble has peaked
- Mar 2006: Housing bubble collapse geographic dynamics (from rural
areas back into metro areas, reverse of bubble process)

The gold chapter in the book is based on my Sep 2001 gold prediction here on itulip.com...

http://www.itulip.com/gold.htm

Five years later, given that events are tracking more or less in line with the prediction, I'm more comfortable now calling a more specific target. And I'll take a stab at when: around 2010, give or take a year.

[lewman]

Eric,
Agreed with your assessment on where gold will go in terms of price and reasons behind it ... eventually.

Do you think what happened in '75 will happen again, i.e. gold was rising nicely til '75 and then dropped by 50% from $200 to $100 before shooting to $850.

Gold has strong correlation with inflation and since you call for Ka (disinflation) before Poom (high inflation), I wonder if disinflation will push gold prices down as significantly as it did in '75 before it takes off for the moon.

Thanks.
Lew

[EJ]

Eric,
Agreed with your assessment on where gold will go in terms of price and reasons behind it ... eventually.

Do you think what happened in '75 will happen again, i.e. gold was rising nicely til '75 and then dropped by 50% from $200 to $100 before shooting to $850.

Gold has strong correlation with inflation and since you call for Ka (disinflation) before Poom (high inflation), I wonder if disinflation will push gold prices down as significantly as it did in '75 before it takes off for the moon.

Thanks.
Lew

Short term (about a year or less) fluctuations in the price of gold reflect market participants' perception of financial market risk, long term (about a year or more) changes a measure of inflation.

Average annual gold prices and CPI inflation. Gold went up from $35 to $161 in 1975, a first year after becoming de-monetized. Then gold didn't do much until 1979 when CPI inflation averaged 7.5% and peaked in 1980 when inflation averaged 18%. The gold bubble was short lived, lasting about two years.

In the current instance of inflation, the rise in the gold price has been relatively steady.

No one knows for sure, of course, but my best guess is that if the financial system goes haywire in a disorderly transition off the dollar standard, gold may spike to $2,500 to $3,000 during the event. If the process is more gradual and orderly, the rise will be more along the lines that we have seen over the past five years, and gold may peak at somewhere between $1,500 and $2,000.

The two periods, though, are entirely different. The 1980s gold bubble was the result of floating exchange rate teething pains combined with exceptionally–as distinguished from normally–corrupt US monetary policy. Since then, cooperation among global central banks has been strong, but will weaken in the next crisis.

Quoting again from "Money: Whence it came, where it went" by John Kenneth Galbraith (1975), Chapter 20: Where it Went, Applying policy to where it is needed (Page 313):

"Not much in the history of money supports a linear view of history, one in which the knowledge and experience from one epoch provide the intelligence for improved management in the next. Of those who give guidance on these matters history says even less. Out of the 2500 years of experience and 200 years of ardent study have come monetary systems that are as unsatisfactory as any in the peacetime past. In recent times conservatives have reacted adversely to inflation, though not with great enthusiasm to the measures for preventing it. Liberals have thought unemployment the greater affliction. In fact no economy can be successful which has either. Inflation causes discomfort and frustration for many. Unemployment causes acute suffering for a lesser number. There is no certain way of knowing which causes the most in the aggregate of pain. It was the prime lesson of the thirties that defaltion and depression destroyed international order, caused each nation to try for its own salvation, indifferent to the damage that its efforts caused to neighbours. It has equally been the lesson of the late sixties and early seventies that inflation too destroys international order. Those who express or imply a preference between inflation and depression are making a fool's choice. Policy must always be against whichever one has."

The new US Congress is a vote by the majority that aggregate pain is high, and for relief. The pain is in the poor distribution of wealth and income gains, and redistibution is the implicit mandate. Only in office a week and you can already hear the Lou Dobbsian drum beat of protectionism, the anti-China "too much savings" and "yuan too strong" pedanticism.

Ka-Poom is mostly a political bet that the lessons of monetary history have once again been collectively forgotten by US politicians, that "...the prime lesson of the thirties that defaltion and depression destroyed international order, caused each nation to try for its own salvation, indifferent to the damage that its efforts caused to neighbours" and the lesson that "inflation too destroys international order" need to be re-learned. As a net debtor, the US can no longer act unilaterally in monetary affairs, but for its own internal political reasons–to blunt the pain of unemployment–will try nonetheless.