Mark Twain is reputed to have said this:
"October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February."
And that was said before the US Fed even existed. We are sure of this because we know that Mr Twain died in 1910. We also note that Mr Twain used the word "speculate" rather than the word "invest" in his quote. Being a man of considerable intelligence and wit, Mr Twain knew that - dictionaries to the contrary notwithstanding - the terms "speculate" and "invest" are a perfect example of a distinction without a difference. Then as now there was said to be a sharp distinction between a (fly by night) "speculator" and a (pillar of the community) investor. In reality, both do precisely the same thing, put their money in a place where they have reason to believe that it will increase in the - UNCERTAIN - future. In other words, they both speculate.
Then there is the famous sharp distinction between the concept of "price" and the concept of "value". We have never seen this one so starkly and humourously demonstrated as was done in a classic investment book - Where Are The Customers' Yachts?" by Fred Schwed Jr. Mr Schwed wrote as follows:
"I will conclude this discussion of Price and Value with the following unimportant occurrence, circa 1928. There was at that time engaged in the bank stock business, along with an awful lot of others, a large red-necked Texan. He had brought to his profession a booming Texas voice and a calcified conscience. On this occasion he had just sold a customer twenty shares of Guarantee Trust Company stock at $760 a share at a moment when it could have been purchased anywhere else for $730. The customer, the big sorehead, had just found this out, and had called back with a view towards remonstrance. The Texan cut him short. "Suh", he boomed, "you-all don't appreciate what the policy of this firm is. This-heah form selects investments foh its clients not on a basis of Price, but of Value!"
Note the provenance of both these delighful pieces of irreverance. Mark Twain' s world was that of the second half of the nineteenth century in America. Fred Schwed's world was that of the first half of the twentieth. In Mr Twain's world in particular, but also in Mr Schwed's, neither speculation nor investment loomed large on the horizon of the "average" person. There were exceptions, of course. Mr Twain was on the spot for the Colorado silver boom and lived through the panics of both 1873 and 1907, while Mr Schwed had a ringside seat (as a Wall Street broker) for the roaring '20s, the 1929 crash, and the depression of the 1930s. But even with these gyrations, the "system" itself proceeded in a comparatively unruffled manner. Unruffled, that is, compared to what is accepted as quite "normal" today.
In the US, for most of the century between the end of the Civil War in 1865 and the mid 1960s, most people were not directly involved in investment (or speculation) of any type. A person's source of income was his or her salary or wage. Most people lived within their means, well within their means actually as most people saved. With prices relatively stable for most of that period, budgeting was comparatively easy. Up until the mid/late 1960s, dependence on the government for either unemployment payments or "welfare" was stigmatised, and avoided with horror and at almost any cost by the vast majority. Despite the major setback of the 1930s depression, standards of living were rising throughout as was the expectation that the next generation would enjoy a better standard of living than the current one.
In such a climate, people could and did laugh at the foibles of the investment markets and even more heartily at the high falutin economic "theories" which underpinned such foibles. Both the foibles and the "theories" doing the rounds then pail in comparison to those doing the rounds now, yet few are laughing now. The reason is simple. To a hugely greater degree than was the case in the century up to the mid 1960s, people today look at the investment markets as about the only route they have left to getting ahead in the world.
Gambling is rife, from government sponsored lotteries to charity house draws to casinos in almost every city worthy of the name. Five years ago, people were day trading on Wall Street. Now, they are day trading on Florida condominiums. The act of saving is seen as a one way ticket to the poorhouse. Most people think that the only means of "getting ahead" is by means of borrowed money, and the bigger the debt, the further one is "ahead". Fifty years ago, there was a link between the real producing economy and both the consuming economy and the investment markets. Today in the US, the less REAL goods are produced, the more consumer goods - imported from all over the world - are consumed. And investment markets are no longer driven by profit and loss, but by the level of interest rates and the amount of leverage deemed "prudent" to employ.
The antics which have taken over global investment markets over the past few years would have amazed and astounded individuals from ANY previous era. The "explanations" proffered for these antics would have amazed them even more. What would amaze them most of all is the newly-concocted conventional "wisdom" that the higher interest rates now being gradually imposed by the Greenspan Fed on the US economy will prove to be "good" for the US Dollar. In any previous era, it was trivial and common knowledge that the lower the interest rates prevailing in a given nation, the sounder the currency of that nation. This was and still is so for the simple reason that the more (soundly based) confidence there is in the future purchasing power of a given currency, the lower the compensation desired to defer consumption. A man or group of men who expect a Dollar to retain its purchasing power over the next year or decade will demand a lower return on funds he makes available for lending than one who does not. It's as simple as that.
Today, we are in the midst of absurd gyrations. With expectations of an accelerating decrease in the purchasing power of the Dollar (higher prices) increasing daily, the exchange value of the Dollar is RISING and US interest rates, at least over the last few days, falling. With these expectations rising, and being validated by huge leaps in the price of oil (up $US 3.36 since March 30) and metals, the $US prices of the precious metals are, at best, standing still.
Mr Richard Appel has called the recent price moves of the $US and Gold "surreal". They are more than that. They are, to the economic and financial "powers that be" inside and outside the US, NECESSARY! In this context, no matter how high inflation expectations become and how high actual prices go (Goldman Sachs recently predicted oil at $US 105), these "expectations" will not become fully "real" as long as they are not reflected in Gold (and Silver) prices. Everybody "knows" that there can't REALLY be "inflation" without higher Gold prices, right?
This is a two pronged assault on what has become a very foolish investment world. One is the current "strength" of the US Dollar, based on the farcical contention that higher interest rates = a sounder currency. The other is the recent fall of the $US Gold and Silver price, thereby casting doubt on whether there really IS "inflation" out there or not. The proof of the foolishness of the modern investment world is that these amazing events, akin to water flowing uphill in the natural world, are been taken seriously. Nobody dares to take them anything but seriously, because to debunk them, one has to take a clear-eyed look at what is REALLY going on.
Mark Twain did that, so did Fred Schwed. No "April fools" they. Nor are we.