A New Year's Resolution

Well…it's over.

"I'll be glad to put this year behind us," said a fellow we met at a New Year's Eve party last night.

"What a disaster. I've never seen anything like it."

The fog was thick when we set out. We had been invited to a party about an hour away…but it was an hour of twisty roads we'd never been on before…in some of the thickest fog we've seen in years.

"Just stay on the little road…you'll see the old castle in ruins on your left. Turn there…and take the bridge over the river…" we had been told.

It sounded easy enough. When we got to the village, there was the castle…a huge thing on a hill in the middle of town…but where was the bridge? We couldn't find it. So, we drove around in the fog for another half an hour until finally getting our bearings. Then, walking to the house, we nearly fell into a moat.

"You didn't tell us you had a moat around your house," we told our hosts.

"Well, we didn't think we needed to. You can see it. You're supposed to stay on the path to the house."

In the fog, we couldn't see much of anything outside. But the house was warm and inviting, with a huge fireplace that must have dated from the medieval era.

"This part of the house is from the 14th century," we were told.

In the fireplace was a huge crackling fire. We stood in front of it, with our backs to the fire, to warm up. Then, we commenced explaining.

"What is going on in the financial markets?" people wanted to know. They had heard we were an economist. They thought we might know something. We didn't want to disappoint them.

"Yes…it's a rare, but typical, meltdown. Like America in '29, but without the flappers. Like Japan in '89, but without the sushi. Nothing to worry about really. Just the end of the world as we have known it. Asset prices will fall - erasing trillions of dollars worth of 'wealth.' Millions of people will lose their homes. Millions will lose their jobs…their pensions and retirement savings…their self-respect. Hundreds of thousands of businesses will go broke. And the monetary system we've had since 1971 will collapse. Nothing special. And, oh yes, there will probably be a revolution in China."

"Sounds terrible."

"No, actually, that's the good news. The bad news is that government meddlers all over the world are making the situation much worse. They don't have any choice. They have to react. And the only things they can do are the usual claptrap remedies. More government spending. More giveaways. More bailouts. All they are doing is trying to avoid the 'creative destruction' that a real economy needs… and postponing the inevitable adjustments and corrections that must be made.

"But it gets worse. Because the world's main debtor - the USA - is also the custodian of the currency that most of the world's debts are denominated in. And Ben Bernanke is hellbent on making sure that the US does not follow the Japanese example…or the example from the U.S. in the '30s. He won't stand for deflation. He'll wants to fight it in the worst possible way, because he wants to go down in history as the first and only central banker to beat it. What's the worst possible way to fight deflation? Print money. We call this policy 'Gonoism,' after Zimbabwe's top man at its central bank - Gideon Gono. Gono did what neither the U.S. in the '30s nor Japan in the '90s was able to do. He made prices go up - 230 million percent in a single year. Of course, he destroyed the economy completely… So Bernanke won't be the first. And we may not get to 230 million percent. Maybe 20%. But even that level the destruction will be massive."

With introductions and explanations out of the way, we sat down for dinner…said goodbye to 2008 with champagne, kisses for the ladies, and handshakes for the menfolk…and then made our way home by 3AM.

Checking the news this morning…here's the low-down from the last day of trading.

The Dow rose 108 points, after being up 184 points on Tuesday.

Oil rose $3 - to close the year at $42, which is $105 below its high for the year.

The dollar gained a little yesterday, ending the trading day at $1.39 per euro. And gold rose $14, to $884.

Thank God for gold. 2008 was a tough year for everyone….everyone, except for those who held gold and stuck to gold. Over the course of the year only two asset classes rose. US Treasury bonds and gold. One of these things, we believe, is in a durable, reliable bull market. The other is a fake-out. Which is which?

First, let's look at what happened to most investors last year.

Those who had their money in U.S. stocks lost about 40%. Those who invested in Europe were down a bit more - about 45% - 50%.

Investors in Japanese stocks lost 42%.

And investors in Chinese stocks lost 70% of their money.

We interrupt to come to our first resolution for the New Year: We will stick to the basics.

Yes, Daily Reckoning readers got good advice last year. Stick to the basics; stick to the Trade of the Decade. Sell stocks on rallies; buy gold on dips. Now, we see the results for the year. The S&P is down 40%. Gold - bless its heart - is up 5%.

Unfortunately, good advice is easier to give than to take. Besides, we don't trust any market forecaster - including ourselves. With the family money, we took the long view…and decided to diversify. 'In twenty years, what is most likely to have made the most money,' we asked ourselves.

Gold? No. Over long periods, gold makes no gains at all. It is only valuable when other gains are fraudulent…when there is a crash…or inflation. That is why it is so valuable now. We face all of those things.

But over the long run, gold does nothing and goes nowhere. That makes it a bad investment usually and a good investment occasionally.

The most obvious and most tradable long term trend is probably the regression to the mean in the world labor market. Broadly, a working stiff in Shanghai ought to make about as much as his counterpart in San Francisco. That will probably mean a huge rise in consumption in the Orient…with fast-growing economies and asset prices. Taking the long view, we invested in India and Vietnam - believing that they would be relatively safe from the worldwide financial meltdown we saw coming. We also invested in Japan, believing that after an 18-year slump, it was unlikely to slump more.

We were wrong about both those things. In the long run, we still have faith in India…we're not so sure about Vietnam. And we still believe that Japan offers good value. But in the short run, we have lost money. Hence, our new year's resolution: stick with the basics.

Sell stocks on rallies; buy gold on dips.

Until tomorrow,

Bill Bonner
The Daily Reckoning

The Daily Reckoning PRESENTS: The beginning of a New Year is a good time to reflect on the months that just passed us by…and wonder how they will affect the months ahead. 2008 certainly had its fair share of ups and downs (mostly downs)…let's see how the last six months of the worst year in stock market history treated us…

2008: A YEAR IN REVIEW, PART II

07/01/08 - The Greater Depression and What You Should Do About It
by Doug Casey - "For international investment expert Doug Casey, there's more than a recession on the horizon. He recommends battening down now for the rough seas ahead…with some special information about making sure your investments can weather the coming storms. Read on…"

07/25/08 - Lovable Moronic Capitalists
by Bill Bonner "Modern economists are more like auto mechanics. They think they can control the economy with a screwdriver. And to some extent they're right. Which is why the world economy is in such a mess; they turned the wrong screws."

08/18/08 - Unemployment Survival Guide
by The Mogambo Guru - "Thanks to the horrors of inflation (brought on by the despicable government), many people are turning to subsistence farming just to survive. Of course, the Mogambo has a few other suggestions. Read on…"

08/27/08 - "People are Policy"
by Byron W. King - "Pity the next president. A worldwide economic slowdown, a flailing housing sector, and the need for the United States to become less dependent on foreign sources for their energy supply, lands squarely on his shoulders. Bryon King explains that while there are many new and exciting options out there that will change the landscape of how we utilize our energy supply, the real issue is knowing which one to pick. Read on…"

09/09/08 - Investing in the Age of Scarcity
by Chris Mayer - "In just the last couple of months, commodity stock prices have melted like ice cream on a hot summer day. Chris Mayer has been burning the phone line and firing off e-mails to people in the field about what they see. What he found, below…"

09/19/08 - The Dumbest Man in America
by Bill Bonner "AIG…Lehman…Fannie…they believed their own guff! It wouldn't be the first time that something like this happened."

09/26/08 - Too Big to Bail
by Bill Bonner "When everybody thinks the same thing, no one is thinking. And now, everyone thinks the market screwed up…and the bureaucrats rush in to unscrew things."

10/09/08 - Welcome to Murphy's Market
by Byron W. King "If you sold out of the stock market last year - or even back in June or early July 2008 - you probably feel pretty good right now. And if you took the cash and spread it around to a group of well-run banks, so as to take advantage of the FDIC insurance, then you must be feeling fine. Read no further. Take the rest of the day off. But if you still have some skin in the game, you'll want to hear what Byron King has to say…"

10/30/08 - An Interview with Paul O'Neill
From the companion book to I.O.U.S.A. - "Today, we bring you another exclusive interview from the companion text to the documentary I.O.U.S.A., with former Treasury Secretary Paul O'Neill. Read on…"

11/07/08 - Apocalypse Now
by Bill Bonner "The last time the sky fell was 96 years ago. Few saw it coming; no one panicked. But panic wouldn't exist if it weren't a useful instinct from time to time. The celestial bricks came unglued in August 1914…"

11/24/08 - Roasting G-20 Weenies on a Golden Spit
by The Mogambo Guru "Whenever you hear Keynesian economists try to wax philosophical about modern economic theory, the Mighty Mogambo's chilling cackle can always be heard in the background. This week, he takes on the G-20 meeting, the abandonment of the Bretton Woods agreement, and his not-so-secret plan to maintain personal wealth. Read on…"

12/04/08 - Gold Looks Bullish as the Dust Settles
by Ed Bugos "The price of gold is seeing a modest rally…and Ed Bugos wonders if it is just a 'retracement rally' that will give way to new lows, or if we've seen the bottom for the yellow metal, and this is just the first of many rallies to come. Read on…"

12/12/08 - Le Bubble Epoque
by Bill Bonner "All over the world, prices are falling. Inflation is no longer a sure thing. For the first time since the 1930s America, and many other nations, run the risk that inflation rates will turn negative."

So that does it for 2008…but we do have one more piece of unfinished business spilling over from last year. Until midnight tonight, you can get all of Agora Financial's best investment and research services - for life. The Agora Financial Reserve is only open to new members twice a year, so take advantage of this opportunity while you still can. Keep reading here…

-- Posted Friday, 2 January 2009 | Digg This Article