Last night, we went for dinner in the tallest building in the world — the Burj Khalifa, an immense tower of mirrored metal and gleaming glass.
From our restaurant on the 122nd floor, we could look down on the hotel below:
The whole experience was odd and unnatural. But not unpleasant.
Markets or politics
Meanwhile, the Dow popped up again. But it is still short of its October 3, 2018 all-time high of 26,828.
More important is the ratio of the Dow to Gold. This morning, it stands at 19.13, down from its 2018 high of 22.36. It tells us a deeper story…about which more below…
‘Businesses are either expanding or they are contracting,’ explained a colleague to our group yesterday.
‘When they are expanding, they are driven by markets…looking outward to find new customers, new products, new ways of doing things. They invest in new factories and new employees. And they are not afraid of competition; they welcome it.
‘But when they are contracting, they are driven by politics. They look inward, and everybody tries to get as much as he can. The shareholders, managers, and employees all try to protect themselves…with bonuses, non-compete clauses, golden parachute clauses…whatever they can think of to avoid competing in the outside world.
‘Of course, it’s never 100% one way or another. Even in growing, expanding businesses, there are always some people who play politics. You should try to get rid of them.’
The same is true for countries, societies, and economies. They are sometimes driven by markets. And often by politics.
The more markets dominate, the more freedom and progress you have. But the more you let the rascals and scoundrels of politics dominate, the more repression, recession, and hornswoggling you suffer.
And just to be sure we’re on the same page…let’s describe the difference.
Markets are based on cooperation. You make win-win deals…hoping to come out ahead. The leading emotion is greed — the urge to get more.
Politics are based on force and the lust, not for progress or prosperity, but for power. And as Chairman Mao put it, power comes ‘out of the barrel of a gun.’ The leading emotion is fear — the desire to protect what you’ve got.
Politics got a boost with the election of Donald J Trump. Before his administration took over, trade was very low on the feds’ agenda. Most of it took place as a purely market-led activity.
Now, hundreds of billions of dollars’ worth of goods are subject to political whims and insider payoffs. The trade deal with China, for example, is pure Swamp Food, with more than 2,500 pages of lobbyist-inspired fat and sugar.
We doubt that a single elected representative has even read it. But more than 1,000 companies have already hired lawyers and lobbyists to angle for exceptions and exemptions.
The Fed was already lolling in the Deep State before the coming of The Donald.
But now, monetary policy is a subject of dinnertime conversation. And the president of the United States of America openly pressures the Fed — which is supposed to be independent of politics — to gun up the stock market with lower rates.
Immigration policy, too, became more political. Mr Trump realised that many Americans preferred the country as it used to be, rather than what it was becoming. He proposed to build a wall to Make America Great Again.
Expansion and contraction are just the natural way of things. We get bigger as we grow up. We shrink and need flu shots as we grow old.
Countries are natural things, too. After a period of expansion, the elite begin to look inward; they use the fed’s power to pass laws, write regulations, and issue fake money to extract wealth from the middle classes.
Typically, in a period of expansion, you want a piece of the action; you want to profit from progress.
But in a period of contraction, the scales fall from your eyes…projects fail…hopes disappear…and you want safety. Historically, investors favour gold.
Colleague Tom Dyson reminded us of why the Dow-to-Gold ratio — which we call our Greed/Fear (G/F) gauge — is so important.
It looks deep, beyond stock prices and the headlines. It peers into dark, desperate hearts…and measures financial lifecycles…and the tides.
When it is going up, greed is king. When it is going down, fear is Number 1. [More from Tom below].
And now, we see that people may be buying stocks, but they’re buying gold, too. Here’s Bloomberg:
‘Gold Bursts Past $1,400 as Bulls Buoyed by Dovish Central Banks
‘Gold’s firmly back in favour.
‘Prices have taken off after a lacklustre few months, passing $1,400 an ounce for the first time since September 2013 on Friday. Investors have piled back into exchange-traded funds and the U.S. Federal Reserve gave bulls a major boost this week when it opened the door to reducing interest rates, weakening the dollar and adding to gold’s appeal.’
The great economic tide is ebbing, we think. It has been since 1999. As we saw yesterday, the Fed’s ultra-low rates goosed up stock prices but made the real decline worse.
And if we’re right, G/F will tell the story. No matter what the Dow does, it will sink below 5 before it finally reverses.