A Pile-Up on the World's Financial Highway

I will wear my pant-legs rolled And walk along the beach... Then, I will drown myself in the pool

The terrible pile-up on the world's financial highway has left us all in shock. We check to see if our fingers move. We look in the rear-view mirror to see if there is blood on our face. And then we crawl out of the car. Thank God, we can still walk! No broken bones.

What's our name? Count back from 10.... Okay, no brain damage.

But oh...look at our ride! The car is totaled. There's only about $100 trillion worth of wealth in the world. At least, that's the figure we read recently. We've also read that the total loss of wealth from the global financial crisis could be as much as $50 trillion. That was Rupert Murdoch's estimate. And he's probably not far off. Half the world's stock market value. Twenty percent of property values. Trillions in derivatives, SIVs, CDOs and IOUs. It adds up fast.

But wait...what luck!...we're still in one piece. And there, on the side of the road, there's still a gas station...a pizza shop...a mall. Life goes on. Most of the wealth that was lost was only imaginary wealth - confections spun out of sugary dreams. Put a little water on them and the melt away... But the real wealth is still there...more or less.

So cheer up. It's not so bad!

Those who feared the 'end of the world' can relax. A financial crack-up doesn't mean that real assets disappear. Houses are still right where they were before the crack-up began. Factories are there too - with their assembly lines and heavy machinery. Every backhoe and tractor- trailer is still just as ready-for-service as it was before the crisis began.

So what's the problem?

Who said there was a problem? We don't have a problem...do you have a problem?

It's just that the world economy is going through a major re- examination of its life. It was shaken up by the accident. Not just physically... emotionally too. It stared death in the face - or so it explained to friends, a bit too often and too dramatically, after the crash. So, it's decided to take a long vacation... After many years of working day in and day out...buying, selling, investing, speculating, leveraging, borrowing...whew!...it is ready for a rest. So, it's taking some time off. Thinking about things...re-evaluating things.

'What am I really doing with my life?' it wants to know.

'Is this the right way to go?' 'Does this take me where I want to be? Maybe I should have gone to law school like my mom wanted.'

'And my marriage...what the heck is going on there? Evelyn was so nice and sweet when I married her. Now, all she thinks about is redecorating the house...and hanging out with her friends. And look what she did to her face! She's got those cardboard lips that never crack a smile... And now, she's mad at me because I lost money in the worldwide financial meltdown. But who didn't?'

While all this deep reflection is going on, the world's income is falling rapidly. Businesses are closing their doors. Working stiffs are working a lot less. Machines are slowing down. The capitalists are just trying to hold on to what they've got - forget about making more.

On Friday, the Dow fell another 100 points. It's headed down to the 3,000-5,000 level. Could there be a big rally first? Could it fall like a stone...even lower than 3,000? You bet.

And look at what's going on with gold - up $25 on Friday to close over $1,000! The Dow is on it way to 3,000...and so is gold. Remember our 'Trade of the Decade?' Never mind...of course you do. Buy gold on dips...sell stocks on rallies. So far, so good...and only 10 1/2 months left to go.

(More on gold, below...)

Gradually, a stark and uncomfortable realization is setting in. It's like a middle-aged man who suddenly realizes he's wasted the best years of his life...

The world's enterprises are set up for an economy that no longer exists! Factories were built...along with a whole chain of production, delivery, and sales...to provide too many things to too many people who can't pay for them.

And now, in these moments of soul searching...of walking along the beach and hearing the seagulls speaking each to each...comes another realization: almost nothing is worth as much as it used to be. Take IOUs from people who can't pay their debts, for example. Houses lived in by people who don't have jobs. Shares in companies that sell stuff to people who can't afford to buy it. The 'wealth' that these things represented was mostly imaginary. And now that imaginary wealth is disappearing - poof!

Dear reader, we are in a period of discovery - 'price discovery,' as economists call it. It's a time of growing self-awareness...of dawning reality. At moments...it is terrifying. For all of a sudden, it occurs to us that we have been dunderheads. We have paid too much...saved too little...

We have misspent our time...mislaid our fortune...and misunderstood everything...

..and now, terrible truth strikes us like a Mac truck. We have been rear-ended, so to speak. Our life is a wreck...a wasted opportunity...a dead end.

Is it too late to start a new one? A new career...maybe as a bankruptcy lawyer. And a new love in our life - maybe with one of these young surfer bunnies from California. Or perhaps a local girl...?

*** Our intrepid correspondent, Byron King, with his thoughts on the recent gold rally:

"I'm bullish on gold. Actually, I think that gold could go to $3,000 per ounce in the next 30 months. Really bullish.

"There's no fever like gold fever. Right now, we are on the cusp of a great run-up in gold. I believe that there's still time to get into some excellent stocks. The gold miners have room to grow. They should benefit from rising gold prices. And we might see higher dividends down the road.

"Is there a caution? Always. Could gold prices tumble? Well, yes. That would hurt us. But for gold prices to tumble would take a lot of investor dishoarding. That is, people would have to hit the 'sell' button en masse. And that would require some tectonic shifts in worldwide tax, fiscal and monetary policies by a host of socialist- leaning governments. For the moment, I think we're safe from any counterrevolutionary antics like that. As Charles de Gaulle once noted, 'People get the history that they deserve.'"

Even though the stock markets are vicious, Byron sees the precious metals environment as healthy...especially for some of the elements in his Outstanding Investments portfolio.

In fact, he knows of one way for his subscribers to buy gold - without taking delivery...or worrying about storage...bookkeeping...or security. You just benefit when the price of gold rises. And the way it's looking now; that's a pretty safe bet. Learn more about this 'golden opportunity' here.

*** Colleague Manraag Singh brings us up to date on what's going in the monetary experiment known as Zimbabwe:

"The Cato Institute estimates Zimbabwe's inflation rate at 89.7 sextillion percent. That is 89.7 million million million, or twenty-one zeroes behind the number.

"Putting that into perspective, the official count of stars in the universe is about 70 sextillion, apparently...

"On the plus side, Zimbabwe's share index is expected to double this year now that are re-opening it with trading in US dollars...

"Gideon Gono had shut it down about three months ago after accusing some traders of using fraudulent cheques worth '60 hexillion' Zimbabwe dollars to buy shares. I haven't been able to find out how much a hexillion is..."

*** Last night, at the bar...a friend told this story. Every word is true, as far as we know, except those that aren't:

"You know, Nicaragua is a poor country. And you gringos are rich. I know, you're not all really rich. But the local people don't know who's rich and who's not. They figure you are all rich.

"And when you gringos come down here, I guess it is just inevitable that there are some problems between the local people and you. That's why, here anyway, we don't let the local girls fools around with the visitors from North America. I mean, we can't stop them...but if they do, they are fired. We have to do it. Otherwise, it leads to trouble. The local guys don't like the gringos taking their women. And then, they get into fights. And down here, bar fights usually end up with someone dead.

"And think of the poor girl. He goes back to the States and the poor girl has problems with her family and the community...you can imagine.

"Well, not here, but up the coast I was working with a guy from Cincinnati. He was in his 50s, I think. He and his wife decided to build a house on the beach, so I was helping them with it. But then they got divorced; and he came down here to live to put his life back together.

"He was there by himself. I don't know what he did. Maybe real estate. And he had a nice woman, named Rosalita, come in to cook and clean. She was just a girl, only in her early 20s, I think. A beautiful girl, and very nice. I liked her. I knew the family. Very sweet smile...always smiling...so I felt like looking out for her.

"After a few months, though, I was visiting and I noticed that he was treating her like hired help. They smiled at each other all the time. She patted him on the shoulder. He put his arm around her. And then I realized that she was living there with him.

"'Russell,' I said, 'what is this, my friend? If I understand what is going on, I am happy for you...but this can be trouble too. She is a young girl. She needs to find a husband. Of course, she is happy to go with you because she thinks you have money. No, I didn't mean it exactly that way. But these people are poor. And they think you are all rich. And you offer her a better life, which is maybe a good thing. But it isn't that simple. Because she wants to get married and have kids. And in this country people get married when they are young. And if they don't get married then, they have a hard time getting married later. That's just the way it is.'

"'And when you leave, what is going to happen to her? I'm not trying to make trouble for you, my friend; I just want you to understand what is involved here. You don't want to take advantage of her because she is young and naïve...and very poor.

"'And you have to watch out too. Because when you go to a local bar on Saturday night you might run into a boy who liked her...or maybe her brother. And somebody makes a comment. And her brother gets into a fight. You don't understand. Family honor means a lot down here. And a lot of the local men don't like it when you take their girls as girlfriends. Sometimes they want to start fights with in bars. And those kind of fights usually end up with someone getting killed. And I can tell you something, it's usually not the gringo; he just stands on the sidelines and doesn't know what is going on.'

"Well, I talked to him. My friend, Russell, I mean. But he didn't listen to me. He was probably lonely down here. And why shouldn't people get together if they want to? But I didn't like it. I felt sorry for her. She must have thought he would marry her. And that he had a lot money. And I knew she was wrong about both of those things, because I had gotten to know him. And I knew he didn't want to get remarried. And I knew he didn't have any money, because after the divorce, he had a hard time paying me.

"But a couple of years went by...and I saw them once or twice. And the last time I saw them, she wasn't smiling so much. And he wasn't smiling so much either. I thought something was wrong.

"You know, money is funny. I don't think she liked him because she thought he was rich. She wasn't, what do you call it, a fortune hunter. It wasn't that simple. But because he was a gringo, she must have assumed he had some money. It probably wasn't because he had money that she liked him; on the other hand, having money is just something that is part of being a gringo. Or, at least that is the way they look at it down here. So, if she realized that he really didn't have any money, maybe she was disappointed about the money. And maybe she was just disappointed because he wasn't the man she thought he was.

"All I know is that I had a beer with them...and nobody smiled.

"Then, a couple months later, a friend of mine called me. He said, 'Did you hear about Russell?'

"I said, 'No, what?'

"He told me that Rosalita had left Russell a week ago.

"'What, did she go back to her family?' I asked him.

"No, she took up with one of those surfers over at the beach club. But that's not the important part. They found Russell in his swimming pool...he was dead. They think it was a suicide. He drank a whole bottle of whiskey and passed out in the pool..."