They have called it wrong at every step of the way…
– Donald J. Trump on the Federal Reserve
POITOU, FRANCE – Spiritus Mundi! Holy moly… and hubba… hubba… hubba!
A great revelation is at hand. The earth wobbles… the stars go dark: A great empire fades.
Cleaning the Cellar
But before we turn to the extraordinary, let us linger on the mundane. Our weekend project was one we put off for 20 years – cleaning out the wine cellar.
Back in the old days, people drank a lot more wine than they do today. It was a stable food, a source of calories and nourishment that didn’t require refrigeration.
The wine here was never very good and was produced only for local consumption. But what it never achieved in quality it exceeded in volume; they made a lot of it.
In this part of France, for example, a working man in the 15th century drank four bottles of wine a day. And there is proof… the wooden barrels, still in our wine cellar.
This weekend, we vowed to clean it out. And we began by taking the doors off their hinges. The old wood was badly chewed and rotted around the edges. But it still held together, so we washed it, sanded it, put on an antifungal, anti-worm product, coated it with linseed oil, and finally painted it red to match the other farmyard woodwork.
Bill repairs the old doors of the wine cellar
It was relaxing work. And it gave us time to think about the insights of the last few weeks…
Markets, economies, and even empires move in great, long-term swings.
Sometimes they are forward-looking and expansive. Sometimes they retreat… just wanting to hold on to what they’ve got. Sometimes they grow and take chances; sometimes they correct mistakes, lick their wounds, and recuperate.
Stocks reflect an optimism about the future… a belief that you can participate in the march of progress, and that by trusting your savings to a group of people you don’t even know you will become wealthier.
Gold, on the other hand, is what you stick with when you’re afraid… when you fear that things are going in the wrong direction, or have gotten ahead of themselves. As Warren Buffett said of gold: “Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time.”
The ratio of the Dow stock prices to the gold price – the Greed/Fear index – gives us a good way to tell where we stand.
And priced in gold… the great bull market of 2009-2019 doesn’t look so great. Instead, it looks for all the world like a normal bear market bounce.
Typically, bear markets don’t take prices down in one fell swoop. Usually, there is a bounce or two… in which prices recover about 50% of their losses. Old-timers call it a “suckers’ rally,” because it lures unwary investors back into the market.
They buy the dip, and get buried when the bear market resumes.
The Dow traded at an all-time high of 40 ounces of gold in 1999. The Soviet Union had thrown in the towel. The internet promised faster growth with less capital requirement. The Clinton government had even produced budget surpluses (putting aside Social Security obligations).
And everywhere, American businesses, stocks, technologies, movies, culture – all were on top of the world.
It was also the tail end of the longest economic expansion on record and the greatest stock market boom ever.
Even then, it seemed like the peak of something. But what? Was it the end of the great boom that began after WWII? Was it the “end of history”?
Did it also mark Peak America… the beginning of the end of America’s great triumph?
In January 2000, stocks began to fall. And they fell hard. Eleven years later, you could buy the Dow for only seven ounces of gold – an 80% loss in gold terms.
Then… the market bounced. At least, that is what it looks like. The Dow recovered to 22 ounces of gold in 2018 – about half what it had lost in the 2000-2011 downswing. And now, it appears to be headed down again.
If so… we can see the whole move in stocks from 2009-2019 as simply a standard, run-of-the-mill bear market suckers’ rally and not a new bull market at all.
Like the smell of a freshly baked madeleine to Proust, this insight triggered a waft of remembrances of things past; the aroma of it was so strong, so pure… so clear and true… all of a sudden, the sour contradictions and smelly confusions that have dogged us for the last 20 years floated away.
A booming stock market, for example, suggests that the economy is healthy… and that people are getting richer.
But that never squared with so many other things:
Why would people be going further and further into debt if they were actually getting wealthier?
Why would the U.S. government, too, be forced to borrow as if there were a national emergency… and why would the Fed cut rates if, as the president claims, this is the greatest economy ever?
And why would the manufacturing sector – the backbone of the economy – have lost 5.5 million jobs since 2000, when the Dow industrials doubled?
Why would the average man have lost nearly 30% of his real income since 1975?
And why would Americans elect Donald Trump, whose campaign slogan in 2016 claimed that the nation had declined? (Make America Great AGAIN.)
And what sense did it make… that in such a great boom… the flower of American enterprise, the U.S. stock market generally, and the Dow specifically, should be completely overshadowed by that barbarous relic… the thing that Warren Buffett despises because it has “no utility” and “just sits there and looks at you” – gold?
Yes, Dear Reader, maybe holding gold was not so fuddy-duddy foolish after all.
If you had held the Dow stocks from 1999 to 2008, you gained about 20% in the run-up to the crash. Then, you lost nearly half your pile in the ’08-’09 crisis.
What followed, of course, was the most remarkable episode in U.S. financial history, in which the Fed pumped in $3.6 trillion in new money… and dropped its key interest rate below zero and left it there for nearly the entire decade. That fake-out caused the Dow to more than triple from the ’09 low…
Investors celebrated… and the Fed, desperate to keep the party going, cut rates even before another crisis came to light.
But what has all the hullabaloo wrought? Over 20 years – 1999 to 2019 – and despite more stimulus than the world had ever seen, the Dow rose only 143%.
If you held gold, on the other hand, you multiplied your money more than five times. It was not U.S. industry that triumphed in the 21st century. It was gold… old, dumb, immobile gold.
This is telling us something. Something important. Stay tuned…