The Post-Crash Party Continues by Bill Bonner London, England
Gold took off yesterday...closing at $1020. Here at The Daily Reckoning, we're impressed. But we're not that impressed. Gold, of course, is half of our Trade of the Decade, which we announced almost 10 years ago. We're bullish on the metal...have been for a very long time. But recent comments in this space have made readers wonder what the Hell is going on...so we will spend a few minutes clarifying.
First, we hope you bought gold many years ago. That would make it simpler. Then, we could say: hold! Gold is an antidote to paper. There is so much paper...and so much more apparently on the way...that the gold play seems like a winner. It's a bet that the money system that has been around since August '71 is going to fall apart.
We still think that is a good bet. Our Trade of the Decade remains. Buy gold on dips; sell stocks on rallies. We've done well with this trade; we'll stick with it a bit longer.
But what if you don't own gold? The yellow stuff is now over $1,000. In fact, it looks like $1,000 could be a new support level for the metal - with most of the support coming from the Chinese. China has relatively little gold in its central bank. It must see what we see - the weakness of the dollar and of the dollar-reserve monetary system. It must worry about the value of the $2 trillion or so it has in dollars. It must also wonder how it is going to run its economy if the dollar falls apart. American buyers were its consumers of first and last resort. To whom will China sell if its most important customers' money becomes worthless?
Recent comments by a group of Chinese officials make it clear that they are thinking of these things...and that they have decided to add more gold to their reserves. In fact, all the central banks have become net buyers. No more selling off gold reserves. That is seen as a mug's game - which it is. Replacing gold with paper? C'mon, what were they thinking?
So China is a buyer. Trouble is, it has to be a discreet buyer. It has too much money. It could cause the price to skyrocket overnight. Then, it would be paying too much. So, perhaps it does what we do - China buys on dips! For example, the order may have gone out: buy gold whenever the price goes below $1,000.
We don't know what their buying strategy is...but the Chinese are probably going to be big buyers over the next few years.
Should you buy along with the Chinese? Should you compete with the Chinese for each ounce of gold that comes on the market?
Good question. Unfortunately, we don't have a good answer. So let's try a different question: Is gold going up or down?
The answer to that is simpler: gold is going up...then down...then up again. It is going up because the feds - including the feds in China - are encouraging speculation. Then, it is going down when the next phase of the bear market reasserts itself and the speculators run for cover. Then, it is going back up...much farther and faster...when the Fed becomes desperate and finally throw caution - and dollars - to the wind. We're confident this last stage will arrive. Our hesitation is that it will take much longer than we expect. Gold may rise in a deflation...but it soars in a period of inflation. That period could be a long way off.
The feds can't revive the consumer economy. Despite all you read...the consumer economy is probably going to limp along for many years. No boom in consumer spending = no inflation.
"US retail sales surge as economy strengthens," announces a Reuters' headline. Don't believe it. Between the seasonal adjustments and the feds' giveaways the retail sales numbers are meaningless. The real story is that there is little - or no - real organic improvement in the economy. The largest banks that get federal bailout money, for example, have actually reduced their lending for 6 months in a row.
But the feds can stimulate speculation. The dollar has become the 'carry trade' currency. The big players borrow in dollars...and use the money to speculate - against the dollar! They buy gold. They buy Brazilian bonds. They buy aluminum futures. They buy stocks.
The Dow rose 108 points yesterday. Oil rose over $72. Almost all commodities are up - except natural gas.
[Now's the time to get in on natural resources...Alan Knuckman, over at Resource Trader Alert, says that you could have made $17,820 in pure profit...in just 9 days from 5 wheat contracts. And that's just the tip of the iceberg. See what kind of profits you could be making with commodities by clicking here.]
More below...after the news:
"We'll start today with another trend of the 'new normal': The working poor," writes Ian Mathias in today's issue of The 5 Min. Forecast.
"30% of Americans making $100,000 or more each year are living paycheck to paycheck, reports a CareerBuilder.com study this week. That's up from 21% last year - a number that still seems awfully high.
"61% of all American's say they are in a similar bind...making just enough to finance their lifestyle every month. Just a year ago, 49% were living paycheck to paycheck.
"The number one way to make ends meet on a tough month? Cut savings. Check out these quick stats:
21% of correspondents have reduced or eliminated 401k contributions in the last six months
36% don't put any money towards retirement
33% don't save at all
30% that do put some away, save less than $100 a month
"Puts an interesting twist on the much belabored rising savings rate, doesn't it? The personal savings rate as reported by the government has nearly doubled from this time last year - from roughly 2.5% to 5%. But to what end? Sounds like we're just saving money today to help pay for next month's heating bill."
Wanna make sure you get The 5 - in its entirety - sent to your inbox, every Monday through Friday? You can...by becoming a subscriber to one of Agora Financial's paid publications, such as Breakthrough Technology Alert. Their latest report details an epic piece of news that could make life better for the entire human race - and could give you your shot at incredible wealth. But you must act before Wednesday, September 23.Get all the details here.
And back to our question:
The post-crash party seems to be going well. It may continue. But the underlying problems of the real economy have not been corrected. They will rise up like zombies in a bad horror movie and bring the party to a close. Absent support from the Chinese, the price of gold will probably go down along with everything else. Which brings us back to the question we dodged.
"Dad, I made $2,000 just in the last couple of days...on that gold play I got in. But I'm nervous...should I sell it?"
Jules has graduated from college. He's investing his meager savings, trying to put together a big enough stake so he can take a year off from work and concentrate on his career as a composer and performer.
"Jules...I don't know," began the answer. "But you're a young guy. You can afford to speculate. If it goes your way, you make money. If it goes against you, you learn something...and you have plenty of time to recover.
"It looks to us as though this party is going to continue for a while. If I were you...I'd stick with it a while longer."
Our advice to a man of 21 is not the same as our advice to a man of 60. The older man would get older advice:
"Gamble not thy whole wealth on the gold market," we would say.
The older man needs gold. But he needs it as insurance...as a reserve against catastrophe...as a form of savings. The Fed has been negligent and derelict. It is not protecting America's money and Americans' wealth. The average fellow has to do it himself. He has to have reserves of his own...reserves of real money - gold.
He should buy. He should hold. He should buy the dips. But he should not speculate on higher prices...nor risk his wealth gambling in the gold market. Most likely, after this speculative boomlet, the price of gold will go down. How much? How far? For how long? Of course, we don't know the answer to those questions.
We're not buying now. But we already have our position in gold. We will add more - on the next big dip.
[You could wait for the next dip...or you could buy gold now - for just a penny per ounce. Put your pocket change to good use...see how here.]
"Why capitalism fails" is the intriguing and misleading headline of an article in The Boston Globe. It is a reminder of the theories of Hyman Minsky, who pointed out the obvious: capitalism is inherently unstable...it proceeds in booms and busts...not steady, incremental growth. Of course, that is just the way it works - like nature herself. And that's why people don't like capitalism...they can't control it. So, whenever a bust comes, they imagine that it has 'failed' or 'broken down.' Then, they propose ways to fix it.
"Since the global financial system started unraveling in dramatic fashion two years ago, distinguished economists have suffered a crisis of their own," starts the article. "Ivy League professors who had trumpeted the dawn of a new era of stability have scrambled to explain how, exactly, the worst financial crisis since the Great Depression had ambushed their entire profession.
"Amid the hand-wringing and the self-flagellation, a few more cerebral commentators started to speak about the arrival of a 'Minsky moment,' and a growing number of insiders began to warn of a coming 'Minsky meltdown.'
"'Minsky' was shorthand for Hyman Minsky, a hitherto obscure macroeconomist who died over a decade ago. Many economists had never heard of him when the crisis struck, and he remains a shadowy figure in the profession. But lately he has begun emerging as perhaps the most prescient big-picture thinker about what, exactly, we are going through.
"A contrarian amid the conformity of postwar America, an expert in the then-unfashionable subfields of finance and crisis, Minsky was one economist who saw what was coming. He predicted, decades ago, almost exactly the kind of meltdown that recently hammered the global economy."
Economists went off their heads in the last few decades. They thought capitalism would make us all rich. And they thought capitalism automatically tended toward beneficent equilibrium.
Here at The Daily Reckoning, intuitively, we guessed the contrary. The system produces a kind of orderly chaos...in which the rich are frequently impoverished, the proud are humbled...and the goofballs who think capitalism fails inevitably make things worse.
Bill Bonner The Daily Reckoning
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The Daily Reckoning PRESENTS: Today, we take a break from the world of macroeconomics to look at biotechnology stocks. Of course, since we aren't qualified to talk about this, we turn to someone who is: Breakthrough Technology Alert's Patrick Cox. In the essay, below, he tells us about an emerging field that merges information technologies with cell biology. This radical new approach to biology treats cellular functions very much like computers and software. Read on...
When Computers Meet Cell Biology by Patrick Cox Marco Island, Florida
The sequencing of the human genome has resulted in the emergence of an enormously important new branch in the biotechnological sciences. The most common terms for this field are bioinformatics or computational biology.
You may have read about the discovery, recently, of a new and radically more effective mosquito repellant. Based on molecules found in black pepper, it was not discovered using traditional laboratory methods. Instead, it came about through computer simulations based on knowledge of mosquito cell biology. This is just the tip of the bioinformatics iceberg.
Until recently, cell biology has been something of a "black box." We could observe how cells functioned, but had little insight into the actual mechanisms. Now, though, scientists are learning how cells work on the molecular level.
Using mathematical models and new technologies for detecting molecular processes, researchers are extracting raw data from DNA and modeling the ways genes work and interact. To understand this field, you should view your own genome as a giant software program for manufacturing proteins.
The process of unraveling and decoding the DNA software involves massive amounts of data collection. Then, once collected, correlation and other forms of computer analysis are performed on those data to figure out cause and effect. How big is this challenge?
Consider this: Each human cell contains about 3 gigabytes (3 billion bytes) of pure data and instructions. If this information were written in book form, it would require 5,000 volumes, each 300 pages long. That's 120 times larger than the kernel of the Windows operating system, which is about 25 megabytes of code. This data resides, of course, in each cell's pinpoint-sized nucleus. The human body, in turn, has approximately 100 trillion of these 3-gig cells.
Add to this complexity about 5,000 different proteins expressed by each cell. Different cells, however, express different proteins. These proteins, the proteome, behave as computer commands and serve to communicate between cells.
The decoding of all these systems is, obviously, a huge computational challenge. It has only just begun and it would not be possible, in fact, without recent advances in computer technologies. As more powerful computing comes online, the pace of bioinformatics discovery will accelerate. Quantum computing, because it is particularly suited to sorting out cell biology, will enable a "quantum" leap in understanding.
"Until recently, cell biology has been something of a 'black box.' We could observe how cells functioned, but had little insight into the actual mechanisms. Now, though, scientists are learning how cells work on the molecular level."
Today, there are three main areas of research in computational biology. These are genome analysis, protein structure prediction and drug design.
Genomic analysis is, as you would expect, the statistical analysis of genes. As more and more DNA is analyzed in conjunction with individual medical information, more is known. Among other reasons for performing this analysis, scientists are looking for the genes that cause or contribute to diseases.
Protein structure predictions are based on computer models that integrate information about the function of these proteins. This is an immense task, as there are tens of thousands of proteins. Ultimately, understanding the proteome will enable truly personalized medicine, with minimal side effects for patients.
With the knowledge gained from understanding the genome and proteome, computer models of target proteins can be created. Using these virtual proteins, drugs can be designed and tested using in silica simulations before testing in the lab.
The development of these virtual molecules, the heart of computational biology, is ending the practice of shooting blindfolded while hunting for drug candidates. Instead of randomly testing different drug candidates and analyzing the results, the field of candidates can be significantly narrowed using simulations. This radically improves the "hit rate," increasing the speed of drug discovery and lowering costs.
Moreover, computer cell simulations improve as additional data are collected and integrated back into the models. Significant advances have already taken place in this transformational space. Medicine, incidentally, is only one area that is benefiting from bioinformatics. Many of the benefits are taking place in the agricultural sector. The genetic engineering of microorganisms is another area of enormous potential.
This new science of building and experimenting on virtual molecules may be the most important new experimental tool since the scientific method was codified by John Stuart Mill in the 1840s. As Moore's law (the exponentially increasing power and cost-effectiveness of computers) continues to prove true, so will the power and importance of bioinformatics.
Patrick Cox for The Daily Reckoning
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Editor's Note: Patrick Cox has lived deep inside the world of transformative technologies for over 25 years. In the 1980s, he worked in computer software development and manufacturing. By the mid-1990s, he worked as a consultant for Netscape - the company that handled 90% of all Internet browsing traffic at the time. InfoWorld and USA Today have featured Patrick's research many times. He's also appeared on Crossfire and Nightline. This expertise bought him to Agora Financial, where he now heads Breakthrough Technology Alert, the only place you'll find the truly transformational technologies that offer exponential gains.
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About The Daily Reckoning: Now in its 10th anniversary year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists.