Gold chart confusion

Here's a chart of gold against inflation as measured by CPI, from Captain Hook, and it suggests that high as it is now, the price of gold is still below its 1973 - 1997 average:

... and here's another reproduced on the Contrarian Investor's Journal (possibly from TedBits, which I'll come to in a moment), which seems to show the opposite:

... and here's another from Ty Andros's TedBits, comparing gold to gobal financial liquidity:

Which line of reasoning would you support at this time?

Why equities should go down

I'm breaking radio silence because of a brilliantly lucid article (from the subscription-only Barron's site) found for us by Michael Panzner.

Vitaliy Katsenelson explains that the current average price-earnings ratio may seem cheap, but that's because recent profit margins have been well above the 8.5% trend. Even allowing for a shift since 1980 away from industry towards the higher-margin service sector, the present 11.9% profit margin should be seen against a longer-term background figure of around 8.9 - 9.2%, which if current p/e ratios continue would imply a downward stock price correction of 22 -25%.

This chimes with Robert McHugh's "Dow 9,000" prediction from last July. And in many fields it's usual for overshoot to occur in the process of regression to a mean, so if it holds true in this case we could see even deeper temporary lows.

Day traders, be warned: this piste is a Black Run.

Au revoir

It looks as though the bear market has begun, though of course, events are liable to make fools of all of us. A recent peak was in October last year and if we take a recession as lasting typically 30 months, we should be grounding by around April 2010.

I've done my best to add my voice to the growing chorus of somethingmustbedonners, and tried to warn investors as I did in the late Nineties - not that I'm wise, but I seek out the wise. This won't put off the day traders, who rush in where angels fear to tread and will try to make fortunes on the rattlesnake-fast turns of bear market rallies; some will get it right, and fair play to you, as they say.

For the rest of us, I don't think I can better the common sense, brevity and clarity of this in the comments section from Jim in San Marcos, answering an investor's query as to what to do:

The basic premise is to pay off your debts and have some spare cash in the bank. There will be layoffs.

Buying a big item right now could tie you to a commitment that could be more than you anticipated. I know of one person already that was surprised by a layoff. They didn't see it coming.

If it gets worse, a lot of people will be selling big ticket items to raise cash. There should be some pretty good deals out there.

Money isn't everything, and there are bigger issues facing us: the growing military as well as economic power of Russia and China; our failure to nurture and educate our young, which points up the selfishness of our adults; the threat to democracy that is big government combined with big business, and the growing divide between an increasingly internationalist managerial class and a resentful, paralysed underclass whose numbers grow while our economies shrink and twist. And perhaps it is not entirely paranoid to suggest that there are many (often well-meaning, by their lights) proto-revolutionaries hacking away at the cultural and social ties that bind us, still dreaming that Bakunin was right when he said that the urge to destroy is also the urge to create.

I now have to take some time out to set my own affairs in order - too many commitments, personal and professional. Good luck to you all, and thanks for reading and commenting.

We have tracked the beast to his lair

Many an honourable man is underrated. Richard Daughty (aka The Mogambo Guru) takes this opportunity to show that the banks created the problems that some of them are now called upon to solve. It's like that film (Blowback) where the arsonist villain turns out to be a firefighter. Doubtless no-one will suffer condign punishment for using inflation to steal from gullible savers.

Meow boing splat

Both Karl Denninger and Michael Panzner interpret yesterday's rise on the Dow as a bear market rally. There are already references to "dead cat bounce", but we haven't anywhere nearly touched the bottom, I think.

People speak of the crash of 1929, but it took much longer for the crisis to work through and there were lots of opportunities for investors to step off with smaller losses. There were also plenty of traps for those who thought it was time to buy back in.

Here's a chart (source) of the process:

As they say, history doesn't repeat itself, but it rhymes. Today's central banks are acutely aware of this past history and do not wish to be remembered for making the same mistake, i.e. worsening the situation by deliberately contracting the money supply.

However, Denninger and others think we can't stop this contraction anyway, once the credit bubble has been pricked, and attempts to reflate will merely devalue the currency while failing to stimulate the real economy.

Dow 9,000 prediction fulfilled

As at the time of writing, the Dow is 11,820.24 and gold $875.90/oz. The Dow/gold ratio is therefore below 13.51 and has (perhaps fleetingly) fulfilled Robert McHugh's prediction.

Whether the Dow falls below 9,000 nominal in the course of a severe recession is something we shall have to see.

Funny line

Traders described the losses on the FTSE 100 Index as "incredible", with the Footsie at one stage plummeting by as much as 330.7 points.

(Press Association release today.)

Less than 6%. Maybe they should raise the minimum age to be a trader.

Oh, and the PA uses the hack line "More than £x billion was wiped off the value of ... shares". Enough experience for cliche, not enough to remember history.

"See what I mean? Kids!"