STAFF NEWS & ANALYSIS
Depression Leaves Investors Feeling 'Like a Dog Without a Bone'
By Staff News & Analysis - September 28, 2011

Don't Let Volatile Markets Get You Off Your Game … With the 4-day slump in stocks momentarily taking a breather, investors are tentatively coming out of their bunkers to assess the damage. The 7% storm that battered the markets this week destroyed more than $1 trillion of wealth held in the New York Stock Exchange Composite Index (NYA), according to Factset data. – Yahoo Finance

Dominant Social Theme: Look. Depressions happen. But what would you do in 1932. You'd stick it out! By, say, 1960, you'd be back where you were! No problem …

Free-Market Analysis: This is a big dominant social theme for the masses of confused people who have heeded the prescription to put their hard-earned dollars into stock and bond markets. (See article excerpt above.) Just wait. The sun will come out tomorrow.

Of course, many people missed the big gold and silver runup of the past decade (because what can you do with gold, after all?) and they've been watching their savings erode because of inflation. Now they are waiting for the bull market to begin. They are waiting and waiting, like Godot.

Bull markets in stocks usually happen after recession, people have been told. And the recession ended in 2009, didn't it? Didn't it? So when's the market going to snap back? Soon. Soon. It's been delayed a bit, that's all. Maybe next year won't be so good. But it will come. It will come.

See, you can't time the market. You can only stick it out, crouching down and trying to avoid the gale force financial winds that are buffeting your nest egg and making your retirement look less and less secure. Every day of your life you're pummeled, it seems, with more bad news. Your egg is close to cracking. What media mavens call a "recession" feels more and more like a depression to you …

Every day of your life you look anxiously in the newspapers to find out what "they" are saying about inflation, about Europe, about the budget crisis and whether taxes are going up. You have a job, but you're worried you're going to be made "redundant." Or maybe your company is going to go out business. Or your skills simply aren't going to be needed anymore.

It's your fault, too. Plenty of people are "making it" in the modern world and if you're not it's because you haven't planned properly. You haven't taken the right degrees, focused on the right industry, created the image for yourself. Your fault anyway …

And so you worry. You live with worry. You worry all the time. When you're driving to work you worry. If you stop for a cappuccino at Starbucks, you wonder what it would be like not to have the money to buy one in the future.

When you stop by the gas station, you're praying the price of a gallon of gas hasn't gone up AGAIN. You're responsible for your family, but sometimes it seems as if you can't even be responsible for yourself. There are so many outside factors weighing down on you. So much you can't control …

It's like you're being hit over the head – over and over. And there's nothing you can do about it. You can't fight back because you don't know who's hitting you. You can't see the blows. You can only feel them. All you can do is duck and cover.

You visit your financial planner, or your investment advisor, or broker-consultant. You try to make sense of what you've got and where you're going. You have questions, but they seem to have answers. They seem confident. (You watch closely for signs of worry.) They wear watches you can't afford, and expensive suits, and they talk on the phone in hushed voices while you're sitting there, like they're in important consultations.

They hang up and ask you how you're doing. You better sit tight, they tell you. No worries. Next quarter we'll review your allocation and readjust as necessary. You may have strayed from the baseline but not by a lot. Anyway, it costs money to reallocate. You want to stick with what you've got. You've just got to ride out the storm, yeah, ride it out …

Riders on the storm

Riders on the storm

Into this house we're born

Into this world we're thrown

Like a dog without a bone

An actor out alone

Riders on the storm

Jim Morrison! You used to listen to him a lot when you were younger. You've still got his albums stashed away in your attic somewhere. He certainly had a way with words, and those were happier days, way back in high school and college when you didn't have so many cares, so many responsibilities.

Back then, you could sit around, smoke a joint and listen to Morrison or the Grateful Dead. Life seemed a lot simpler. How'd it get so complicated? Nothing quite makes sense anymore. It's like all the things you've been taught to believe in aren't quite meshing. Like the gears have begun to grind.

You're always worried, always frightened. Recession, depression … global warming, overpopulation … European defaults. Bank failures. Everywhere you look, you're threatened. You voted for Obama but the hope-change thing hasn't worked out the way you expected. Things are worse now, if that's possible. Maybe you should have voted for Hillary …

But your guy has told you to sit tight! Take the long perspective. Don't sell out of the market. That's the worst mistake you can make. At home, you have a big file full of asset allocation charts – in color. Or maybe you have a notebook filled up with a financial plan with assumptions that made a lot of sense in 2006. They seem so … official. Could all those numbers be wrong? They're in color …

You listen to him, you really do. You desperately want to think that your life makes sense within the bigger picture, that the people you trust aren't lying, that existence isn't arbitrary and capricious, that things can't be put into order in a way that anticipates trouble and avoids confusion.

Certainly, you don't want to act like a "dog without a bone" in Mr. Morrison's eloquent formulation. You don't even want to think of that possibility. You want to be logical, approach your money-problems in a modern, scientific and civilized manner. You're in control, or you want to be.

So you drive back to work, trying to convince yourself that things are going to get better. They always have before, haven't they? Except maybe … this time they won't. This is the nagging fear that you're starting to have. The longer the "recession" continues, the more frightened you get. The economy isn't acting the way it should.

And there's a reason for this! It's not something most people are prepared to contemplate, or not yet. But it's starting to dawn on them, like a sour sunrise.

Things really are different this time, or at least they seem to be.

Here at DB, we think so. We've been pointing out consistently that the dollar reserve system actually DIED in 2008 when central banks around the world pumped something like US$20-$50 TRILLION (no one really knows) into the markets worldwide to avoid a "liquidity crisis."

Nobody talks about that event these days. But you can't have an economy that needs a US$50 trillion fix. If the economy needs a bailout of that proportion, it isn't working. And it's not. It's dead. All the big banks and securities firms, all the big corporations and world-spanning multinationals – they all would be out of business now if central banks hadn't provided trillions and trillions. They'd be finished. Kaput. Actually, in a lot of ways they are. The pricing mechanism establishing their value has been short circuited by all the money central banks have poured into the market.

So it's not business as usual, even if planners, investment advisors, bankers and economists say that it is. The recovery is on track, they say, just delayed. There are problems that have to be solved, like this sovereign debt crisis in Europe. But big minds are working on it. They'll get it right, sooner or later …

"The main thing to do is if you have a well thought out plan, you stick to it, through the ups and through the downs," advises Charles Reinhard, deputy chief investment officer at Morgan Stanley Smith Barney. There may be strong temptation to make changes in your portfolio, but Reinhard's advice, as it has been since April 2009, is to stick with stocks and view this as a normal correction within a multi-year, post-recession bull market.

By his calculations, Yahoo informs us, "the market is baking in a recession and a 15% decline in profits next year." Reinhard, we learn, wants us to avoid cash and most other traditional safe havens. He sees value in "high quality corporate bonds."

The article does provide us with the opportunity to take action. If you simply can't help it, if you are itching to do something, you can rebalance. "After nearly two straight months of market gyrations, [some] strategists say it is important and timely to get things back in line with your original plan."

The trouble with such rebalancing, of course, is that for most people their investments do not include much in the way of precious metals. This means they've already missed out on ten years of gold and silver appreciation. Instead, most people were invested in paper assets during the 2000s and had to weather the horrendous performance of markets in 2008 and 2009.

It's 2011 now, and planners and advisors are still singing the same song. Many expected an equity rebound in 2011. Now, the common wisdom is that something will happen by 2013! The financial industry makes asset allocation and "rebalancing" seem like some sort of long-term panacea. But what if markets don't rebound this time? What if it's different this time? It seems to be.

Industry allocation practices STILL don't include much in the way of precious metals. As precious metals prices were on the way up, many securities professionals believed they were headed back down. And now that they are much higher, there's talk about a precious metals "bubble" and how it's not a good idea to "buy at the top."

Asset allocation as it is practiced in the securities industry today is something of a fraud. For one thing, it's hardly scientific, though it's made to sound that way. In fact, it doesn't take into account the full spectrum of the business cycle, only one side of it – the bull market of central banking hyper-stimulation. But what happens during the years when the market is not responding to fiat money-printing?

Since 1960, there have been approximately 30 years when the market responded to the inflationary goad of paper money and 20 years when it did not. The securities industry paradigm only works during money printing. It doesn't provide people with any real alternatives for about 40 percent of the market environment, therefore.

The best someone like Reinhard can come up with is to advise people to buy high quality corporate paper! He makes this recommendation even as many are predicting a "double dip recession." And others (ourselves included) never believed the recession really ended. Some would make the argument it's deepening into an inflationary depression.

Anyway, that's what happens when you overstimulate with too much paper assets delinked from an underlying asset. Austrian economics explains how this sort of stimulation inevitably creates a business cycle that pumps up gold and silver.

But that's not what we hear from the securities industry. The fantasy is that during such times as these (never mind that there haven't BEEN such times as these) the big money is headed toward safe havens like the US dollar and US treasuries. Say, wasn't the US just downgraded? Just askin'.

By our calculations there's still another four or five years to go before this cycle finally reverses itself. But with gold and silver down sharply, the securities industry is once again in full cry about how untrustworthy precious metals are, and why they're in a bubble.

It really is a kind of professional malfeasance that the securities industry is allowed to get away with misinforming investors about how the "real" economy works. There are tens of thousands of securities regulators and hundreds of thousands of regulations, including a host of "prudent man" regs.

Yet, still the industry doesn't tell the truth about a simple thing like the business cycle. And "asset allocation" and "buy-and-hold" techniques are therefore of dubious value, to say the least. As a result, people are growing more and more frightened and angry. They're not being told the truth. But gradually, we figure, they'll start to understand it for themselves.

After Thoughts

Ultimately, this is the real danger faced by the powers-that-be. The Internet Reformation will proceed apace, undermining the lies and misinformation that were spread so effectively in the 20th Century. Those lies were murderous, crushing hopes and dreams and diminishing the life savings of entire families and communities, but in the 21st Century they needn't be …

There's a killer on the road

His brain is squirmin' like a toad

Take a long holiday

Let your children play

If ya give this man a ride

Sweet family will die

Killer on the road, yeah

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