The stock market has a long memory
This is my final submission of providing my views of the resource and financial world for this great Canadian Mining Journal. My corporate merchant banking activities for the resource industry has been eating up a lot of my free time. My relationship with the Journal’s editorial staff has been very professional and enjoyable but unfortunately, I will only now have time to read the entire magazine as written by others, and I will.
But for today, let me go back to June 1960 when with my entire family we were at the McGill University Annual Convocation event where I received, after four years of hard work, a Bachelor of Science degree with a Geology Major. My mother, father and family were there to celebrate the event, and my mother, who at that time was about 52 years old, and with my father, had supported me through school, asked me what work I was going to do now that I was a University graduate. I told her that I intended to get married, go back to school, and study business and investment management. My mother responded with shock, not about getting married, or remaining in school, but about the investment management choice. Her words to me were—“Do you know what happened in 1929? Why don’t you become a doctor?” And that is when I first learned that the stock market has a very long memory.
In 1929, my mother was a 21-year-old high school graduate who owned and ran a very small lending library as her only source of income. But what did happen in those years after 1929 is what was called the “Great Depression.”
The “Great Depression” transformed Canada and the United States, as well as a good part of the rest of the world, about the way that people thought of themselves and their employment and of their government and especially of investments. Yes, no two people had the same understanding of the Great Depression, but like my mother at age 21, they knew that there was a serious financial problem and that they could no longer think about trying to get rich.
By 1932, three years into the first days of the so-called “Crash,” there were 30 million Americans and countless Canadians and others in the world without a job, many of them the breadwinners of a family that had to live on their own savings because there were no jobs.
The “Great Depression” of the 1930s changed the way that the U.S. government had to react. It meant that they had to be concerned and do something about many people’s daily lives. People in general had to generate a new and different household style as well as life practice, while watching unnatural events such as the actual complete closure of banks where they had deposited their savings, as well as learning that chequing accounts were no longer acceptable, cash was required not cheques.
The world of family relationships got closer even though the conditions of work, when available, even with massive unemployment, as well as the long line ups of people waiting to get some soup in place of a meal. It was not a good time, and my mother’s remembrance was correct in asking the question.
By the time I finished graduating from two Universities with a BSc., an MBA and a CFA, I did know too well what happened in 1929 and hopefully those terrible depths of the lack of security and money is not totally likely today.
We are, however, unfortunately looking ahead towards some serious economic negativity from a deflationary and as a result, even inflationary days, all of which could be blamed on the global currency wars that are very likely to soon take place and perhaps my mother’s Great Depression memory will happen again.
But today, unlike my mother, we can protect ourselves by owning gold, real estate, agricultural land and other hard assets which must be fully paid for. And just to make my day while writing these final words for the Canadian Mining Journal, I learned that the Swiss, bless them, are going to force their Central Bank to begin to accumulate massive amounts of gold, just like the Chinese and the Russians have been recently doing on a regular basis.
The Swiss call their major change—“Save our Swiss Gold Referendum” and with a little study, I have made out that the Swiss central bank today has about 30 million ounces of gold and it intends that over the next five years to increase that to 130 million ounces of gold and as such, it will have to buy at least 100 million ounces of gold over the next five years.
The Swiss referendum is expected to pass, but from the son of a now deceased mother who asked about 1929 and who wanted a doctor, I can tell you my study of investments and my knowledge of the gold market means that we all should have some gold bullion, which I am buying today for the only gold fund that I currently oversee – The Goodman Gold Trust. And thanks to Concordia University which I never attended as a student, I am now a Doctor of Laws, and my mother would be proud and she would also own some gold.
My mother died at 97 years of age in 2005, just days and months away from the start of the most recent U.S. Great Depression of 2007 and 2008, and which is still upsetting the economy of the United States. Mom must have remembered what happened in 1929 just before she left us, only this time she did not warn me about what happened in 1929 and I wish she had, because there may be another Great Depression waiting for us.
Gold, too, has a memory and the gold bull market is not over. Notwithstanding, it has been out of favour for the last several years, but the bull market for gold is not yet over.
But the United States has many economic problems. The U.S. faces an inept trade policy that no longer holds a dominant position in the global economy as it did at the end of the Great Depression and World War II and the Obama administration is facing unprecedented constraints in the creation of a good future. while the personal economic struggles facing many American citizens along with the ISIS problem is forcing a severe surge of insecurity and skepticism about the U.S. global economic prowess. The U.S. may be facing a new version of the Great Depression of 1929 to 1944.
As interest rates in the U.S. interest and the Federal Reserve agrees that they will, the net interest rate payments, or the current size of the US debt will triple in the next 10 years and as such, inflation is the only way the U.S. can get out of the mess that it currently finds itself in.
Easy money from the Federal Reserve has kept gold out of favour and other than U.S. Central banks has caused investors of countries outside of the U.S. to look towards the stock market rather than the historic safety of precious metals, notwithstanding the global printing of currencies.
In the next 10 years, the United States will have had a deficit for almost every year for the last 50 years. There is only so much the government can spend before the public says no more, and it is coming soon.
Yes, gold is out of favour today, but almost nothing else has changed in terms of how well the U.S. is going to perform over the next 10 years. The U.S. has no way out of its problem of too-much debt but to create inflation as a cure for the likely deflation that lies ahead.
Debasing the currency creates inflation and is a possible cure for the possible deflationary environment the populace will have to accept. And if a central bank wishes to debase its currency, it can always find a way to do so, even at the end of all attempts they have to monetize the existing federal debt of the 20 plus trillion dollars.
The most recent Economist Magazine of October 2014 said in an article entitled “The Pendulum Swings to the Pit” that the politicians and central bankers are not producing the inflation it needs; some economies face damaging deflation instead. And then the article goes on with “It is a pernicious threat, all the more so because at its onset it seems benign.” And as inflation drops, slipping into deflation becomes even easier. It is in that dangerous position that the world now stands—the low inflation of being consistently below an already-low target is back in itself; the deflation it could lead to is even worse.
To continue with the unnamed Economist writer (it may be my mother) “Debt aggravates the cycle as prices and incomes fall, the real value of debts rise, forcing borrowers to cut spending to pay down their debts which ends up making matters worse.” “This pathology did great harm during America’s Great Depression which was when economist Irving Fisher (also now deceased) disguised it under the name of debt deflation.” Read the Economist article on page 25 and remember what my mother told me about what happened in 1929.
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