Bonds, Stocks and Cash Offer No Margin of Safety

Date 04/09/2008

The Right Side

Bill Bonner

Annapolis, Maryland

Not much action in the markets yesterday...but we don’t have any time to reckon with it anyway.

Gold plunged all the way down to $806. Now analysts are starting to talk about oil below $100 and gold below $750.

Meanwhile, Goldman Sacks predicts that oil will go all the way back to $149 before the end of the year.

Go figure.

We don’t know. The markets can do what they want, as far as we’re concerned.

But what if you have money? You have to do something with it. What do you do?

Avoid US stocks. The US market is in relative decline.

Avoid US bonds and the US dollar too – they’re both too dangerous. Besides there’s no margin of safety. If everything goes right, you won’t earn very much. If it goes wrong, you’ll be wiped out.

Buy gold. We don’t know what direction it is going, but it isn’t going away. And if the world’s monetary system is troubled – either by inflation or deflation – gold will be good protection. Consider it an insurance policy. You pay for fire insurance on your house. If your house doesn’t burn down you still don’t regret having paid for fire insurance. If everything goes right in the world economy, gold will probably go down further. But if anything goes wrong – and our guess is that something will go wrong – you’ll be happy to have some kruggerands in your pocket.

And buy Indian stocks. (More about this tomorrow...now, we’ve got to get back to our conference...)

More thoughts...

*** We’re back in the USA. Impressions? People are still driving big cars. The shopping malls are still open. There’s no obvious sign of decline.

Driving up from Dulles Airport in Northern Virginia, there are the same office buildings – mostly companies that thrive on military contracts – and there are still traffic jams in the late afternoon on the Washington, DC beltway. The lumpenconsumer is still spending money (reports suggest that the English are cutting back on spending faster than Americans)...and he’s still convinced that this is just a temporary setback, not a genuine turnaround. The boom is eternal, he believes.

Our guess is that the eternal boom has come to an end. At least, the credit boom that began in ’82 has come to an end. Credit has tightened. Real rates of interest will be going up. Fear will replace greed as the dominant emotion. And saving will replace spending as the trendy thing to do with your money.

It’s still early in the cycle (these cycles last a generation)...but we will stick to our hypothesis until proven wrong...or until we go broke.

More tomorrow...

Bill Bonner
For The Daily Reckoning

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