Friday, September 24, 2010

The Macro Forces Behind the Markets

Today's Wall Street Journal brings us this front-page headline:

"'Macro' Forces in Market Confound Stock Pickers" -- Tom Lauricella and Gregory Zuckerman (9/24/2010)

[Thanks to Wikipedia Commons for Hokusai Kashushika's "Kanagawa", Big Wave]

Well, I have news for you: Macro Forces have been confounding American investors for the last century, in fact ever since Congress created the central bank.

The article states that "macro forces began moving stocks in a big way during the 2008 financial crisis...." I disagree. Macro forces have affected markets since the central bank starting making credit expansion a national and international issue, instead of the much more manageable local-bank issue it was at the turn of the 19th century.

The article states that one modern-day stock picker, John Burbank of Passport Capital LLC, "compares investing in the U.S. to investing in emerging markets, where he started his career. 'What is happening with the country, with the government, and what are their policies? These are the questions as an emerging-market investor that you ask before you do any bottom-up work on stocks,' he says."

Guess what, Mr. Burbank? The U.S. economy has been subject to government whim, just like the emerging economies, since 1913. Where have you been? You're probably too young to remember.


Leading up to the First World War and on into the 1920s, central-bank inspired credit expansion created the first big national boom. A few economists saw the bust coming, e.g., Edward C. Harwood, who wrote in August of 1929:

"[T]he time may not be far distant when the country will realize, in the light of a cold gray 'morning after,' that it has just been on another credit-splurging spree." [The Annalist, A New York Times publication, August 12, 1929.]

That time came two months later. He saw this because he was aware of the macro forces' effect on bank balances.

Another example:

At the end of the Second World War, Harwood saw from his statistics that there was a build-up of real savings capable of spurring on economic growth without help from the central bankers. He also noted that the central bankers were planning to continue their chronic inflating policies anyway. Having become by then an investment advisor as well as an economist, Harwood got his clients into the stock market. They did handsomely for the next ten years.

Then, as Harwood expected, the chronic inflating brought on a balance-of-payments problem, meaning that the gold standard was going to be trashed. He knew that the politicians would never discipline themselves enough to restore the dollar's gold-exchange value. He started getting his clients into gold in 1958. We all know how gold ended up in 1980. His clients did very well, although they got a little SEC harassment along the way.

Another example:

After a few years of sanity in the early 1980s, the central bankers went back to their inflating ways at the first sign of discomfort. The signs were, first, the savings bank crisis; then LTCM and the Latin American crisis; then the crisis; then the 9/11 worries; and now, S.A.S. (Stagnation Anxiety Syndrome). All these caused and continue to cause the central bankers to inflate, inflate, inflate. Where does that lead in fiat times? Bubbles. And not small bubbles; huge bubbles. Bubbles that are so big they have to be bailed out by the taxpayers or the world will come to an end.

I can't help but think that this final crisis isn't over, because no one can predict with certainly the outcome of the current central bankers' particularly egregious macro force known as QE2. If we get price increases, the stock market will do, because the stock market will simply incorporate the new pricing structure into stock prices. Inflation-adjusted TIPS will do, because they will incorporate the CPI. Gold will probably do, because it is a barometer of inflating. But what if we get no CPI price increases? This can happen; look at Japan.

Of the three, I know which I prefer: gold. I am not a short-term speculator and I need security. Gold is the ultimate monitor of macro forces in times like these.

PS: Congress must also be thinking along these lines. Have you seen the headlines lately about their going after gold dealers? Did you note they are enforcing the 1099 regulations relative to gold sales? I presume that's so no one forgets to pay the sales taxes or capital gains taxes; perhaps also because the gold sellers will have to maintain a record of who's buying the stuff. Don't you wonder what legislators are saying behind closed doors?

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Anonymous David Wozney said...

Re: “... chronic inflating ...

If the stated value, of “Federal” Reserve notes, declines enough with respect to copper and nickel, the 1946-2010 U.S. Mint nickels, composed of cupronickel alloy, could become somewhat rare in mass circulation.

The September 20th metal value of these nickels is “$0.0581418” or 116.28% of face value, according to the “United States Circulating Coinage Intrinsic Value Table” at

11:40 AM  

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