Stocks and Gold Point to a Hellish Outcome

By Bill Bonner

08/19/11 Poitou, France – Wow…another whack.

Wall Street got whacked hard yesterday. It had begun to look as though things were getting back to normal. Then…whammo!

Yesterday, the Dow took a 419 point hit. Gold rose $28 to close decisively above $1,800.

We keep an eye on stocks and gold. Stocks measure the value of America’s businesses. Gold measures the value of America’s – and the world’s – money. What are these measures telling us?

That we’re on the road to Hell!

Of the two measures, gold is harder to figure out.

Stocks are obvious. America’s businesses aren’t worth 20 times earnings. They’re not worth that much because we’re in a Great Correction. And after the action of last week…and yesterday…it is becoming clear that this correction will probably last a long time.

Layoffs are increasing. Home sales are falling. And consumer prices are rising at a 6% annual rate. The New York Times:

The Philadelphia Federal Reserve Bank’s business activity index fell to minus 30.7 in August, the lowest level since March 2009 when the economy was in recession, from 3.2 in July.

That was much worse than economists’ expectations for a reading of plus 3.7. Any reading below zero indicates a contraction in the region’s manufacturing.

A second report showed sales of previously owned homes fell 3.5 percent in July, to an annual rate of 4.67 million units, the lowest in eight months. Economists had expected home resales to rise to a 4.9 million-unit pace.

Separate data from the Labor Department showed initial claims for state unemployment benefits increased 9,000, to 408,000. Another report from the department showed the Consumer Price Index increased 0.5 percent in July, the largest gain since March, after falling 0.2 percent in June.

So don’t expect most businesses to increase sales. And don’t expect profits to go up. Businesses have already done a very good job of squeezing costs in order to survive the downturn. That helps keep up profit margins. But it’s murder on the economy. One business’s costs are another business’s revenues. While profits rise, revenues fall. Not good for the long term.

The biggest single expense for most businesses is the payroll. People are expensive. So, if you’re a good businessman, you try to get rid of as many people as possible – and not hire more of them. Even when you think business is improving, you try to service the new sales with the same staff. A little more over-time…streamlining administration…making the enterprise more efficient.

In that regard, computers and modern communications technology have been helpful. They make it easy to fire people! But they don’t seem to lead to the kind of GDP boosts that you need to create jobs and increase standards of living.

That’s why the 10 million or so jobs that disappeared in this downturn won’t come back. And it’s why the real unemployment rate in the US hasn’t been this high since the Great Depression.

If that weren’t enough, there are other reasons to expect stock prices to go down. The main reason is because that’s what stock prices do. They go up. Then, they go down. Sure, they have a lot of reasons. But people usually only find the ‘reasons’ after the fact. Like commentators and analysts this morning…struggling to find the ‘reasons’ for yesterday’s 419-point drop.

The only thing we really know is that markets go up and down. And yesterday, Mr. Market wanted to go down.

Here at The Daily Reckoning we’ve been expecting lower stock prices for a long time. Wall Street has never completed its ‘rendezvous with disaster’ that began in January 2000. As we see it, stocks began a bear market almost 12 years ago, after an 18-year bull market. But the bear market was never allowed to fully express itself. Instead, the feds came in – like rap stars into a late-night party. They turned up the music. They poured drinks for everyone. They brought drugs and hookers. And pretty soon, the party was going louder and wilder than ever.

But now the party’s over. The feds are still opening bottles. But nobody’s drinking.

The bear market is back. By our reckoning, the Dow should fall below 5,000 before it is over. Most likely, it will not be a short, quick collapse. Instead, it will be a long battle…stretched over many years…with the feds fighting over every inch.

Anyhow, that’s our story. That’s been our story for many years. Seeing no reason to change it, we’ll stick with it.

But what about gold? There…well, we admit to a certain feeling of ‘I told you so.’ But it was one thing to tell Dear Readers to buy gold when it was selling for $300. It’s another thing to suggest it at $1,800. Gold was a steal at $300. At $1,800, it’s probably close to fair value.

That doesn’t mean it won’t go higher. In fact, we think it will go much higher. But it’s a rare bull market that makes it so easy for investors. But gold is harder to figure out.

If the economy is really in a Great Correction…

…and if it will be in a funk for years…a Japan-like slump…

…and if investors are fleeing stocks and buying dollars and dollar-based bonds…

…then, why is gold going up?

Are investors really looking ahead to the feds’ reaction to a double-dip recession? Are they thinking that Bernanke et al will panic…and print more money? Are they worried about higher rates of inflation?

Or maybe investors figure – with interest rates so low – they might as well hold their money in gold. Who knows what could happen? Who knows what the feds will do? Who knows anything?

At least gold is something you know won’t go away.

Possibly. But we don’t think investors are that smart. Or that forward-looking.

Zombie, zombie in the night…

Ah, modern technology comes to the aid of looters. Right in our home state, too. Here’s the report:

(CNN) – A “flash mob” believed to have been organized on the Internet robbed a Maryland convenience store in less than a minute, police said Tuesday, and now authorities are using the same tool to identify participants in the crime.

Surveillance video shows a couple of teens walking into the Germantown 7-Eleven store Saturday at 1:47 a.m. Then, in a matter of seconds, dozens more young people entered and grabbed items from store shelves and coolers. Police said the teens left the store together, without paying for anything.

“At least 28 different individuals” have been confirmed on the video, Capt. Paul Starks told CNN Tuesday.

Although investigators have said they ‘“can’t confirm how this (robbery) was organized,” Starks does believe the Internet was involved.

Regards,

Bill Bonner,