The Brownest Bottom
Gold's big slump, Biden's "accountability" and one very contrarian trade...
(The view from our office window, Buenos Aires.)
Joel Bowman, serving up another Sunday Sesh from Buenos Aires, Argentina...
A time to be born, a time to die
A time to plant, a time to reap
A time to kill, a time to heal
A time to laugh, a time to weep
~ Turn, Turn, Turn, a song by Pete Seeger (with a little help from his friend... the Book of Ecclesiastes, Ch. 3)
The seasons are changing here in Argentina’s world-weary capital. Up and down her majestic boulevards, the leaves turn from pale yellow to fire orange, from fire orange to penny brown... before being taken up by the fall breeze and scattered along the sidewalks, across the parks and around the plazas.
We’ve been in the capital – on and off... but mostly on – for about a dozen years now. A young(er) man when we arrived, your faithful correspondent has since become a husband... and a father. Perhaps not coincidentally, our own foliage has turned, too, from “carefree sandy blonde”... to “careful salt and pepper.” Now, when the fall breeze blows, we check our reflection to see how many leaves have fallen...
During our stay here, we’ve watched the city change plenty, too. When we first arrived, in 2010, there were only three options on the menu: empanadas, milanesas and various cuts of bife. (If you ordered a salad, you did so in hushed, furtive tones.) Basic, in other words. No frills. Del barrio.
Now, within a few blocks stroll from our apartment, the gourmandising flaneur can expect to encounter everything from Armenian dolma to Japanese yakitori to Peruvian ceviche, plus a bevy of chic wine bars and third-wave coffee houses in between. Even the local “immigrant’s kitchen” is now ranked one of the Top 10 Restaurants in Latin America. Mishiguene!
It is sometimes said of Argentina that it is the only place in the world you can leave for ten days and return to find everything changed... or leave for ten years, only to return and discover everything the same as ever.
Change is the only constant, observed Heraclitus. One such constant, observed from the mountains of Salta to Tierra del Fuego, is the nation’s unwavering commitment to numbskull economics and political flim flams.
Tariffs... subsidies... price-fixing... boondoggles... windfall taxes... make-work programs... outright bribes... the Argentine politician never met a public scale on which he didn’t want to plant his culo gordo.
As for the poor ol’ peso, long tattered and torn, the federales abuse the national currency in such a fashion as would make a women’s prison guard blush. We watched the ignominious unit of account fall from 3 to 1 against the greenback, back in 2010, to where it is today... at about 200 to 1. As Bill noted this week, there is little in the way of nonsensical economic policy the Argentines haven’t tried and retried... and stand ready and willing to try again.
But there is a time for all things on this mortal coil. As is found elsewhere in that oft-quoted book, “The first shall be last and the last shall be first.”
If recent murmurings from the other end of The Americas are anything to go by, our northern neighbors are beginning to feel the kind of financial uncertainty that is considered almost banal down here on the pampas.
Inflation... falling real wages... empty shelves and even riots civil unrest “peaceful protests.”
Not to worry, folks... just like politicians in every rat corner of the planet, your dear leaders are stepping up and taking full responsibility for the consequences of their actions. It’s called “adulting.” Here, take a look... (H/T @DefiantLs)
Oh well...
Meanwhile, we were reminded this week of another “first-to-last” kind of story, the likes of which could only have an earnest member of the elite public service at its heart. Let us then take a little stroll down memory lane, shall we, back to a time when up was down, down was up and what was found was promptly lost...
The Brownest Bottom
By Joel Bowman
When Bill Bonner issued his novel “Trade of the Decade” idea, back in 2000, a couple of major trends had been in play for a long, long time. First, gold had been in steady decline for nigh on two decades, having peaked in 1980-81 in both nominal and real, which is to say, inflation-adjusted terms. (In fact, to this day, gold has still not taken out its real high of just over $2,200 per ounce. The Visual Capitalist has some neat visuals here.)
Second, US equities had been on the upswing for at least as long, with the S&P500 having raced from roughly 350 points in 1990 to over 1,440 at the turn of the century, a more than four-fold increase. (And up about 14x from where it began the previous decade, back in 1980.)
It seems obvious now, with the benefit of the proverbial “2020 hindsight,” that these asset classes were probably due for a correction. A mean reversion. And yet, to have suggested so at the time would have put you squarely in the minority. Which is exactly where Bill placed himself, when he issued the following pair trade to readers of his Daily Reckoning newsletter:
Buy gold. Sell US Equities.
It was a classic contrarian play, from a classic contrarian. To most people, stocks, then as now, were fully expected to continue their record-breaking run, led by the tech darlings of the day and cheered on by their own cadre of true believers. Likewise, the Midas Metal was expected to continue languishing in the financial doldrums, a quaint anachronism which had long outlived its use as real money.
How the times would change…
It’s hard to imagine, given what we know came to pass in the ensuing ten years (2000-2010), that people could not have seen such a reversal of trends as imminent. And yet…almost nobody did. Why is that?
There’s been plenty written on manias, bubbles and the reliable madness of crowds, but the preponderance of such literature does little to diminish man’s propensity to repeat past errors.
Knowing this tendency, then, how do we steer clear of it? How do we properly evaluate where we are, in the moment?
Before issuing any presumptive “to-dos”, perhaps it might be helpful to take a look at the “not-to-do” list first. That is, to follow the first rule of medicine, primum non nocere (first, do no harm). And for that, we’ll go back to the time when Bill was reckoning over that very first trade...
Herewith, a little vignette from those halcyon days around the turn of the century, when it seemed as though stocks had nowhere to go but up!
Picture the scene...
It was the year 1999, when the Y2K bug was helping to relieve bunker-building survivalists of their senses... and a brand new drug, known as Viagra, was inspiring a generation of men to regain theirs.
Across the pond, meanwhile, a generously-jowled politician by the name of Gordon Brown was plotting to lighten his Queen’s Treasury of about half its gold reserves...
As mentioned, the Midas Metal had been in a secular bear market for almost two decades, declining steadily from its highs back in the very early ‘80s. Popular economists had long written it off as a go-nowhere, do-nothing asset. The public hated it. The papers sounded the "barbarous relic" requiem and everyone marched along in lockstep.
Gold appeared to have lost its luster for good.
Surveying the scene around him, Mr. Brown, then-Chancellor of the Exchequer, must have thought it was his own personal time to shine. On May 7, 1999, at the Chancellor's urging, the U.K. government announced something radical: It would auction off almost 400 tons of gold, an amount equal to roughly half its total foreign currency reserves.
The price, at the time of the announcement, was $282.40 per ounce. Low, in other words, but not as low as it would eventually go. Gordon Brown himself would make sure of that!
As one might expect, Brown's bold decision to broadcast advance notice of the auctions was not without consequences. Even a casual understanding of supply and demand economics might have predicted the subsequent drop in gold's price, as the market prepped for the U.K.'s great unloading. Short sellers entered the pool like sharks circling a pod of hemophiliac dolphins, eagerly anticipating that first tasty drop of Brown’s blood.
By the time of the first auction, which was carried out on July 6 of that year, the gold price had fallen by 10%. And it would continue to decline in the coming days, eventually reaching its ultimate nadir, the so-called "Brown Bottom," on July 20.
The price: $252.80 per ounce.
The "strategy," according to Brown, was to diversify the Treasury's holdings, to reinvest the proceeds from the auctions into foreign currency deposits – including, most notably, euros - and to deal with gold's "unacceptable" level of volatility. Her Majesty's Treasury, under Brown's deft stewardship, actually produced a series of in-depth reports forecasting "the overall volatility of the U.K.'s reserves could be reduced by 20% from the sale." (Not 19%, mind you; not 21.3%. Exactly 20%. Because, math.)
In reality, Brown had chosen - and in some very real ways caused - a bear market low during which to unload half his country's gold reserves; a low, needless to say, that has not been revisited since, even now, more than two decades after what one wincingly refers to as his disastrous dump.
The sales, which took place over 17 auctions between 1999 and 2001, averaged out at roughly $275 per ounce, raising for the crown some $3.4 billion. Were she to have a change of heart and decide to buy that very same gold back today, her majesty would need to fork over all the money she raised from those initial sales, plus an additional $20 billion or so on top. Ouchie!
Shockingly, Brown's boneheaded decision did not seem to hamper his political career. The cheeky fellow went on to be elected as his country’s Prime Minister in 2007 - an office he held until the end of the decade, proving that, when it comes to the realm of politics, no bad deed goes unrewarded. Long-suffering subjects in the United Kingdom must have been jolly glad Brown was out of #10 Downing Street by 2011, when gold hit its then (nominal) record of $1,900 per ounce…or about $1,600 and change more per ounce than when he sold it.
And so, from last to the first, the first to the last, we say, bottoms up!
And now for some more Fatal Conceits...
For this week’s podcast, we caught up with the manager and co-founder of Woodlock House Family Capital fund, and longtime friend of the show, Chris Mayer.
As news of Elon Musk’s bid to take over Twitter continues to dominate the public debate (to the extent there is even such a thing anymore), we thought it might be interesting to revisit Neil Postman’s classic 1985 book, Amusing Ourselves to Death: Public Discourse in the Age of Show Business.
Over an hour long discussion, Chris lends us his insights on Postman’s work, from how individuals can better understand media culture today to how investors might cut through the “information glut” and get to the core of what really matters. As usual, Chris’s wide-ranging interests make for terrific and informed conversation. You can listen to the entire podcast - free - below or, for the audio-impaired/disinclined, there’s a transcript, lightly edited for clarity.
Please enjoy, and feel free to share with your media consuming friends...
And that’s all from us for another Sunday Sesh. Tune in again tomorrow, when Bill returns with his regular missives. In the meantime, we’re off for a nice kale salad (just kidding...) at our favorite parrilla, Don Julio’s, where the cuts are thick and juicy and the malbec flows well into the autumn afternoons.
Whatever you’re up to this fine Sunday, remember to be good... or be good at it.
Cheers,
Joel Bowman
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Awesome Joel. Wonderful read on a Sunday afternoon.
This is great.
Now we need to hear from you on the Saudi decision. Will MBS allow payment in Yuan for Saudi oil?