Economic Stabilization Measures And Their Effect On The Consumer

Posted 18 Jun 2010

Trace: Welcome back to the RunToGold Podcast. This is Trace Mayer. And I have with us a special guest, Bill Laggner of Bearing Asset Management. Welcome Bill.

Bill: Trace, good to hear from you today.

Trace: Wonderful. Now can you tell us a little bit about Bearing Asset?

Bill: Trace, we run a hedge fund, macro oriented hedge fund here in Texas. We began back in the summer of 2002. A lot of views that I'm sure that you have are the views that I will probably share with you today.

[pullquote]The biggest difficulty in analyzing this phase of the macro environment is how much of a true contraction in economic activity will we see, and then how much of a contraction in asset prices will be witnessed before we witness the central planners truly panic and implement the next round of money printing experiments.[/pullquote]Trace: Yeah, we actually met you up at the Mises Institute Conference in New York City, and we kind of hit it off and I think we have good things to talk about.

Now before we started recording, what we were talking about the rail numbers being down, Best Buy earning report that came out, and conversation that you had with a bankruptcy lawyer in Las Vegas. Can you expand a little bit on this and the outlook for the US consumer?

Bill: I think that when you try to find good, anecdotal muses that you can stitch together some type of a theme that could be acted upon, and I think that we are at the stage now, we look at just general leading economic indicators that are rolling over. We are over a year past the stimulus measures and spending that the government implemented.

You can see now in some of the other data points that you just referenced, the rail data, something about Best Buy with regards to the retailing space, high-end retailing, and a conversation I had with a Las Vegas bankruptcy foreclosure lawyer; the consumer is in deep trouble. I don't think that the employment numbers are truly representative of how difficult the consumer situation is. You have the mortgage market, according to him in Las Vegas, where 60% of people are now upside down in their mortgages.

Trace: Oh my goodness...

Bill: Yeah, and if you compare that to... I know that you and I talked about Florida. I got family in Florida and know that you do too. Parts of Florida may be 25 to 28% of the mortgage wars in Florida that may be upside down.

So, some of the states that have real consumer problems, of course the BP oil spill is not going to help the Florida coast or the Louisiana coast, but I just think that the consumer in general is throwing up the white flag at this juncture.

Trace: Yeah, and you know I have to agree with that, look at what’s going on with BP, it’s shutting down a lot of the fishing, that can't be good for what little business was remaining down there.

And now who exactly could they help the US? You know we were talking earlier, I’m over here in France watching the World Cup and on Friday I go to Rome... well Italy owes France 511 billion in its banks, and then Portugal owing Spain 58 billion, Spain owes France 2 20 billion, and so even with this trillion dollar bailout package, I don't necessarily see the European economy coming to the US's rescue.

Bill: Well, as good as they are the backdrop in the Eurozone is very similar to the backdrop in the States. We have New York, Illinois, California, and Arizona running huge deficits and taking extraordinary measures to try and keep this façade alive.

The state of New York borrowing money from a pension fund...

Trace: Wasn't that just ridiculous?

[pullquote]When the Germans riot they buy gold.[/pullquote]Bill: …but we are in the shell game-phase of this unwind, and Spain has to, actually at 4:30 Eastern time, will be auctioning off quite a bit of debt. If you look at the way that the Spanish bond market is reacting versus say the German bond market, the market smells problems in Spain, and if they can get this auction off tomorrow morning, I think that that's another feather in the cap of the bearers with regards to economic activity in Europe.

I think that the Germans, I know the constitutional courts turned down the request to listen, hear the bailout case and maybe put it on hold, but I know that the German people know that they are going to get hung with most, or all, of these liabilities . And so I think that the backlash in Germany will only continue to build as we move into the fall here.

Trace: Yeah.

I would like to close with one tip, and I hate to say that it's the same as the Germans have. You know the saying is that when the Germans, when they riot, they buy gold.

Bill: Yeah.

Trace: So going into this next leg of The Great Credit Contraction, and it’s down where we’re seeing real economic activity grinding to a halt, moving money slowing to a Bush pace, the consumer drying up both in Europe and in the US, the budget deficits with the States, both in the individual states in the US and with the nations in Europe and as we were talking about the protocol and number one killer for small businesses is cash flow.

So when you have these state budget deficits, we are borrowing from a pension fund, making your pension fund payment or maybe your payment to some type of business that relies on government revenues, when these show gains start to collapse in this next stage of the credit contractions that are happening, what would be your tip to the people listening to this show, what should they do to protect themselves and their capital?

Bill: The biggest difficulty in analyzing this phase of macro environment is how much of a true contraction in economic activity will we see, and then how much of a contraction in asset prices will be witnessed before we witness the central planners truly panic and implement the next round of money printing experiments. And that's what exactly they are. They are experiments.

We don't know exactly which sectors are going to be getting handouts, Trace. We don't know what sectors can be ignored, we can see the battle of the states between the political class and the real economy.

There is a huge battle going on right now as we go into the elections this fall, you can see some of the primaries. So I do think that they will not sit idle, they will at some point panic but we may not see a panic until asset prices go down another 20% or more and the question then becomes Will they come to the rescue with $1 trillion or $5 trillion and that's one reason why I think that gold, even in a deflation should perform well because most people realize now that any significant decline will just be met with even more money printing. And more handouts. And more intervention. And more misallocated science projects.

So gold on weakness makes sense. I don't think that you'll see the gold price decline, percentage-wise, as much as it did in the fourth quarter of 2008, because I think that these central banks will intervene and print relentlessly and that will ultimately, at some point, slow the decline, nonetheless, of prices.

Trace: Yeah. You couldn't get a better run to gold, right? And during this depressionary environment, cash is King and gold is Emperor because of these fiat currencies of operations is nothing, you can still make payroll with gold coins.

Bill: Absolutely.

Trace: You will still be able to buy things, so I think that I have to agree with you on that. And avoiding things like Starbucks (SBUX) and their five dollar coffee when there are substitutable goods like McDonald's (MCD) available, stuff like that. Oh, anything else to add?

Bill: Well I think that that makes a lot of sense. Being very prepared and know that the central planners at this juncture are taking extraordinary steps to try and fight the deflationary waves that we have right now and know that they will continue to try to pull rabbits out of their hat as things become more and more difficult.

Trace: Exactly. Well thank you very much Bill.

Bill: Thanks Trace Mayer J.D..

Trace: You've been listening to the Podcast.

DISCLOSURE: Long physical gold, silver and platinum with no interest in Starbucks (SBUX), McDonald's (MCD), the problematic SLV or GLD ETFs or the platinum ETFs.