Relax: There Will Be No Depression
Gerbino & Company
Jan 27, 2009
I want everyone to relax. You
are being bombarded with numerous facts and figures that look
pretty bad, but the facts are being interpreted with emotion
and hype and hysteria. The predictive value of mis-emotion is
usually chaos. There will be no Great Depression.
First, let's review what happened
in the last few years in simple terms:
- The Federal Reserve manipulated
interest rates below the real market rate for over a decade,
creating dislocations in the normal markets.
- Low interest rates forced
retirees and savers to abandon safe investments and buy into
all sorts of higher risk investments, including the stock market.
(As a grandmother of one of my employees said many years ago,
"I can't afford to live on 3% interest when I use to get
6%"... a sad but true story).
- Easy money created speculation
and an artificial business expansion as the good times rolled.
- The dot.com bubble was the
first sign of trouble from the recent easy money regime. The
solution: more easy money to bail out Wall Street and avert further
- Commercial banks are allowed
to become investment banks as Glass-Steagall is repealed. Commercial
banks can now invest and speculate globally outside of their
normal areas of expertise.
- Real estate booms, as new
and creative ways to lend money appeared. Lending became a no
brainer as loan packages could be sold away to another institution
covered by a new insurance scheme (Credit Default Swaps). Therefore
credit worthiness of customers became less important. Lenders
became undisciplined. Who cared if the loan defaulted if the
loan was "insured?"
- Other exotic derivatives were
concocted by the investment banks and commercial banks to make
more fees and profits. Tried and true centuries old banking policies
101 were thrown out the window.
- The government pressured financial
institutions to lend money for homes to millions of borrowers
who were not only unqualified but high credit risks.
- The excessive and low interest
rate loans for homes fueled an even more over-heated and extended
housing boom and housing price inflation - creating a housing
- The over-the-counter derivative
market went beyond $300 trillion and no one cared. $400 trillion
- no problem. $500 trillion - no big deal.
- Wall Street and the establishment
press and authorities did not pay attention to the hard money
newsletter writers who were screaming bloody murder about derivatives:
Schultz, Skousen, Dines, Wood, Daughty, Sinclair, Russell, Mauldin,
Casey, Katz, Turk, Taylor, Adens, Coffins, Lundin, Morgan, Ruff,
Roulston, Grandich, Nadler, Bonner, Day and others.
- Complacency was everywhere.
The Dow was over 14,000. Wall Street and Main Street thought
the economy was "fine," paper money was "working"
and debt levels were high but no big deal, the Fed was in control.
So far so good.
- The banking industry usually
gets hit hard when the economy gets hit hard. But this time the
major commercial banks were also speculating along with the investment
- Huge losses from leveraging
and speculating in stock and bond markets as well as derivatives
start showing up at the largest commercial and investment banks
in the U.S. and abroad.
- A national nightmare now is
- Global stock markets collapse
and credit markets seize up everywhere. Many foreign countries
are as bad off as the U.S.
The financial pyramid was brought
on by easy money. We are now faced with global investment losses
and economic numbers that are at dangerous levels, and foretell
a drastic future.
But the future will be the
exact opposite to what Wall Street and Main Street think will
Why There Will be No Depression
- The Fed, U.S. Treasury and
foreign central banks will print their way out of the problem.
A bad solution to a bad problem.
- The U.S. is in a recession.
This is the natural reaction following the huge economic paper
money binge that has taken place the last 15 years. The major
banks, insurance companies and investment houses are in real
trouble. The pain is too much and the government will print the
money to bail these institutions out.
- 3 million people are losing
their homes. They should never have bought the homes in the first
place. These people will go back to being renters. The homes
are still there, they have economic value.
- Investment bankers that busted
Lehman, Bear Stearns and Merrill and lost their jobs will form
hedge funds and buy many of these homes for 30 cents on the dollar.
Then they will sell them in a few years for 50 cents on the dollar
to people and other funds. Some people will move into a home
and get a good bargain. Funds that buy these 50 cents on the
dollar homes will sell them in 2-3 years for 70 cents on the
dollar. Life goes on.
- Banks and investment houses
that lost money on these homes are already being bailed out.
The losses are being covered by the printing press or debt from
- Unemployment: This is bad.
In the U.S. we are at 7.2% and going higher. We are not at 10.8%
('82 recession) or 9% ('74-'75 recession) and may not even get
to these levels. Sophisticated investors say, "Unemployment
is being low-balled by the government, it's much higher".
I agree. But check out Shadow Government Statistics' website
run by brilliant economist John Williams (who should be a White
House Adviser). This shows that the "shadow or real"
unemployment number could actually be 17%. Sounds like a disaster.
But back in 1994, the "shadow" unemployment number
was 15%. So what happened in 1994? GDP was up 6.2%. The S&P
500 the following year was up 34%. There was no Depression from
this horrendous unemployment. Official U.S. unemployment hit
an 8-year high in 1992 at 7.8%. The solution to this was a 14%
increase in the money supply (M1) and the stock market went up
6%. Do not panic because of unemployment.
- There are still 144 million
people getting paychecks. This means the economy is not dead
yet. They will either spend the money or save some of it. When
they save it, sooner or later the banks will lend to someone
to buy or build or invest in something.
- The average wage earner in
the U.S. makes $47,000 a year. Multiply this by a possible 12%
official unemployment rate which would be considered a disaster
in this country, and you have the following: 18 million people
out of work. Using $47,000 per person, this would equal about
$850 billion a year of lost income and GDP. That would be a huge
hit to the economy.
- But wait a minute. Unemployment
insurance for a $47,000 worker is about $400 a week. That reduces
the $850 billion considerably. Also, the Government will simply
print more money to handle this. They could print half the amount
of the possible lost GDP - $425 billion. Using Washington logic,
this would effectively handle half the consequences of 18 million
unemployed people. Then it would be like there were only 6% unemployed.
Printing or borrowing $425 billion would not be difficult compared
to what they are already doing.
- The great recessions of 1974-5
and 1981-82 resulted in the following: GDP increasing on average
15% within 36 months, the stock market booming the following
year, and unemployment going down dramatically the following
two years. Why? Because they increased the money supply and "bailed
out" everyone with paper money.
- The 74-75 recession had an
85% (that is eighty five % and not a typo) decrease in the price
of the average NYSE stock from the previous high in 1973 and
the Dow was down 41%. In 1982, the Dow Jones dropped 34% from
its previous high. Both these market wipe outs were handled by
the money supply being increased by 12.6% in 18 months in 74-75
and 14% in the 81-82 period.
- The money supply increases
in 2009 and 2010 could reach 50%!
- So far, with bailouts, guarantees,
the stimulus packages, $2-3 trillion of new money is already
a foregone conclusion. This will equal a 25-35% increase in the
money supply. The U.S. government will print as much money as
is needed. They have panicked and are now going overboard. It
is obvious that whatever happened in the past is going to happen
- This means that we are not
going to have a Depression but a huge paper money induced boom.
It will be artificial and inflationary. It is all in the works
- Finally, if we were going
to have a so-called Depression, why is copper above $1.50? Copper
for delivery in December of 2009 and 2010 is above $1.60!
You have heard the expression Dr. Copper. It is because as this
commodity goes - goes the industrial world. It has always been
a great economic indicator. Copper prices would be at 60 cents
if a Depression was coming. Copper above $1.50 is saying, despite
all the horrendous layoffs and headlines, that there is a lot
of life left in the global economic patient.
The financial system will be
temporarily "saved" by paper money but working people
and savers will be eventually crushed by this currency depreciation.
Capitalism and free enterprise will get another bad rap when
inflation rips through the system. Honest capitalism and classic
free enterprise does not include paper money... the cause of
all modern day economic problems.
What to Do
- Expect Inflation not a Depression.
- Expect a boom to start sooner
- Know the past and respect
logic, not headlines.
Am I telling you all is OK?
No. I am telling you things are as bad as you think. But the
authorities are using this crisis to bail out the system with
paper money and because of that, the economy will once again
go into a so-called boom that will be very inflationary. If you
think a Depression is coming you will have your assets in the
wrong place at the wrong time.
What Happens Next
- The economy stagnates for
another 9-12 months then turns around.
- Unemployment goes down with
the induced economic upturn.
- The stock market rallies but
never gets above its old highs.
- Inflation comes back with
- Commodities resume their bull
market and turn the deflationistas into inflation believers.
- Interest rates will go up
with inflation and probably to much higher levels.
- The stock market will go down
when interest rates start going up.
- Long term bonds will become
the worst investment in the world.
- The dollar will go down but
so will other currencies as many world governments print their
way out of their economic woes as well.
- Gold will go to new highs.
- Housing and real estate will
recover but higher interest rates will slow this sector down
considerably in the future.
- The gold and silver mining
stocks will become the best performing sector on Wall Street
for many years.
- The price of oil will go up
due to inflation and global production declines of 5-8% per year
from most of the largest oil fields in the world.
- The U.S. "recovery"
will help the world recover and almost all countries will have
another artificial economic expansion from all the paper money
they have printed as well.
- China and India will create
more shortages of basic materials and commodities by the sheer
size of the populations and their economic and industrial progress.
- The U.S. will have even more
economic dislocations from all the new paper money and debt taken
on by Washington.
- The country gets set up for
the next horrible recession some time in about 3-4 years.
A Depression is impossible
in the old sense of the word. If one describes a depression as
the loss of purchasing power of the wage earner (a correct definition),
then we have been in one for the past 50 years since wages have
not kept up with the cost of living. But since everyone is thinking
breadlines and the 1930's, I will stay with that picture for
our definition. It is not going to happen.
Also, remember that the $2-3
trillion bail out numbers you are reading about can easily be
bumped up to $4-5 trillion. Why not? The reason for the increase
is simple... "We are heading into the Greatest Depression
in history." As long as this misguided concept gets press
and the NY Times, the media and politicians buy into it, then
the government has a green light to create as much money as is
Next week I will finally get
to the promised article about deflation and inflation.
For more articles on the economy,
gold and mining stocks please visit our website at www.kengerbino.com.
January 26, 2009
Kenneth J. Gerbino & Company
9595 Wilshire Boulevard, Suite 303
Beverly Hills, California 90212
Telephone (310) 550-6304
Fax (310) 550-0814
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