Stewart Dougherty delivers some bitter medicine for retirement investing. But he also recommends an antidote.
Link: The Metastasis of Moral Hazard and its Effect on Gold - by Stewart Dougherty
As average American citizens lose their jobs by the millions, become mired in financial distress and are crushed by the largest debt increase in the history of civilization to pay for government bailouts and fiscal stimulus programs, several Wall Street firms, in actions so arrogant they beggar and defy belief, have announced that they will pay record bonuses in 2009. These bonuses commonly amount to 20 – 200+ times the median American wage, in other words, 20 – 200+ times the earnings of the citizens whose taxes were spent only a few months ago to keep the Wall Street firms from imploding.Nurses, police officers, school teachers, store clerks, truck drivers, gas station attendants, firemen, flight attendants, ambulance drivers and everyday workers of every other description, many of them struggling to provide only a humble, basic lifestyle for themselves and their families, were asked to reach deep into their pockets to help Wall Street survive. Now that Wall Street has taken their money, it will use it to lavish huge bonuses upon itself, in a callous Roman orgy of excess.
The American psychological landscape has been parched by the searing winds of financial desperation, surging inequality and dying hopes. And the tinder of the desiccated American Dream, once the great calling and aspiration of a nation, is now piled so high that a spark igniting it would unleash raging flames reaching up to and scorching an astonished Sun. Yet politicians and the press are so divorced from reality that when the people express at town meetings and other venues their deep, legitimate frustration over the loss of their hopes and nation, they are viewed as whiners, or paid political activists. As noted earlier, denial is very dangerous drug.
Civilized society requires a foundation of morality, decency and justice to survive. The spread of moral hazard, should it happen, will have a disastrous effect on America’s institutions. Few investment classes will be safe in an environment of elevated moral hazard, because both legal and illegal counterparty risk will surge. Legal counterparty risk occurs when, for instance, a corporate executive at a public company is awarded excessive, unwarranted pay at shareholder expense. (Abercrombie and Fitch recently reported that its CEO was paid $70 million this year, as the company’s performance deteriorated and the stock price plunged by 70%. This is an example of legal counterparty risk. It is a disgrace.) Illegal counterparty risk occurs when there is fraud. (Enron and Madoff are just two of many possible examples.)
In the emerging social climate, common stocks will face powerful headwinds from a suffering economy made worse by the corrosive costs of theft, fraud, false executive enrichment, phony insurance claims and frivolous lawsuits. Bank deposits, yielding near-zero percent interest rates, are basically no better than cash in mattresses. Corporate bonds carry serious interest payment and default risks. State, county and municipal bonds will become increasingly stressed as deficits grow and proposed tax increases stoke voter anger, making it difficult to close funding gaps. The real estate sector faces a spike in taxation risk, due to deteriorating local and county government finances. It is also subject to interest rate risk, as surging government debt becomes difficult to sell, resulting in higher coupons. The reputations of hedge and private equity funds have been compromised by large losses, the imposition of redemption restrictions, and high fee structures. Algorithmic, black box trading has been largely discredited. Annuities carry heavy fees and important counterparty exposure, as seen by the industry’s bailout by government. Commodities prices are volatile, and price manipulations by large traders are legion. CFTC oversight is lax to non-existent, so small investors are without protection. While there are many good commodities funds, they carry counterparty risk. Derivatives markets are opaque and out of control, in addition to being nuclear waste sites of counterparty risk, and are certainly no place for individual investors. Art, diamonds, numismatics, collectibles and other highly specialized asset classes have large transaction costs and are best suited to experts. As we can see, investment safety is hard to find even in normal times, which these are not.
In the recent crisis, virtually every investment “truism” has been discredited as a myth. Buy and hold; Stocks for the long term; Efficient market theory; Housing prices only go up; Buy land, they’re not making any more of it; Municipal bonds offer safe, tax advantaged returns; Treasurys are guaranteed by the full faith and credit of the United States; the dollar will remain strong because it is the world’s reserve currency; A diversified portfolio offers protection; Demand for serious art works is unquenchable; and on and on. The current markets have laid waste to every one of those theories, and many others.
Gold is the antithesis of the investment classes described above. Physical gold represents pure wealth of a very finite quantity with absolutely zero counterparty risk. Because of this distinguishing fact, it is immune to the costly effects of moral hazard. Gold does not have expensive skyscrapers named to stroke its ego, nor does it have offices or branches dotting the land. Gold has no CEO who demands a multi-million dollar compensation package just for showing up. It has no employees desiring pay raises, health insurance or vacations. Gold does not take three hour lunches, play golf, drink martinis, do drugs, get sick, or demand a lavish expense account. Gold is not dependent upon protection from regulators who discover frauds only after every innocent investor has been wiped out. Gold is not represented by a Congress that spends it into bankruptcy. Gold is unaffected by the Devil’s songs of greed and graft sung by lobbyists and other self-serving parasites. Gold does not charge an endless procession of monthly or annual fees. Gold cannot be manufactured out of thin air by politicians or Central Bank monetary witch doctors.
As money, gold has not one legitimate competitor, though it is surrounded by fiat fakes. In time, those frauds always die of their chronic, congenital disease: immorality. Gold is the free and honest money of the people, not the controlled, monopoly money of bankers intent upon destroying it for private gain by debasement and inflation. Having been born at the beginning of civilization, it possesses the wisdom of time. It is liberty. When border crossings have been closed by soldiers with machine guns and paper money has been a useless persuader, gold has opened the gates for refugees fleeing tyranny and oppression, providing them safe passage. With beauty commensurate to what it represents, gold makes tangible the wondrous, invisible force of freedom. In Latin, the word for gold is aurum, meaning “shining dawn.” Gold is more than honest money; more, even, than liberty. It represents the endlessly renewing fountain of the future, and the shining dawn of life.
As the existing system destroys itself, the question becomes, “how will wealth and financial freedom be defined in the future?” Today, we say that dollar millionaires and billionaires are wealthy. They used to say that about those who possessed millions or billions of Zimbabwean dollars. But that fiat currency is now dead and its possessors are penniless. History is absolutely categorical: fiat currencies are immoral, and because of that, they fail, without exception. Repeat: without exception, as documented throughout all of time. The new wealth will be measured in something different, most likely gold. There are only 5 billion ounces of it on earth, or roughly 0.75 ounces per capita. The supply grows at less than 2% per year, a fraction of world fiat money growth. Much of it is not and will not be for sale; the amount available to the market is less than 0.25 ounces per person. As gold takes its rightful place of honor as the people’s reserve currency, demand for its limited supply will continue to grow. Tomorrow’s billionaires will be those who prepare today for the coming, inevitable monetary paradigm shift. Those who acquire gold now, while it is still available and inexpensive, will create for themselves a future that is secure, free and rich with opportunity.
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