Bill Fleckenstein
First up this week I want to point out a story carried by The New York Times on Oct. 23, not because regular readers aren't aware of the issue it brings up, but because it is a problem we are going to see facing many, many state and local governments over the next few years.
Pension tension
Headlined, "The Little State With a Big Mess," the story is reporter Mary Williams Walsh's chronicle of Rhode Island's financial plight. She notes, "As Wall Street fixates on the financial disaster in Greece, a fiscal wreck is playing out right here. And the odds are that it won't be the last. Before this is over, many Americans may be forced to rethink what government means at the state and local level."
She is exactly right about that.
I don't want to reprise the entire article, but the fact of the matter is that many people have been distracted by the European financial melodrama. These longer-tailed issues like pensions and Social Security -- loosely termed "entitlements" -- are going to be a battleground for some time. They are examples of problems that don't matter until they do, at which point they become the only thing that matters.
When that will be, I can't say. It could be part of the funding crisis, in which governments will have increasing trouble financing their debts. But it will most likely become a focus before then.
As anyone who is paying even a little attention probably knows, certain cities and states are already running into trouble with regard to pensions. At some point, I suspect the federal government will be forced to help many of these constituencies since, after bailing out Wall Street, it will be difficult to say no to a state government in dire straits.
Gold bubble argument still doesn't stack up
That leads directly to the subject of money printing -- the protection from which is owning gold -- so I thought I would touch on comments made by James Stack in his most recent newsletter.
I have the utmost respect for Jim and his track record with the stock market. His ability to negotiate the ups and downs over the last decade has been extraordinary. That said, he wrote what I think is a very misguided article about gold.
In it, he basically tried to say that because the price of gold has risen more than the dollar has declined against other paper currencies, and more than the cumulative amount of inflation since 1982 (as if the Consumer Price Index calculation were actually accurate), the "premium" people are paying for gold had to represent, in essence, fear. Thus, given the size of that premium, he thinks it is "a tad bubblish."
It strikes me as overly simplistic to think that the only thing that matters to gold is the perspective from the United States. Besides, the fact that the dollar has declined against other pieces of paper misses the point: All of them are worthless.
The price of gold is going up because the world is voting against paper currencies. In addition, many countries, such as China, are experiencing a rate of inflation that is much higher than in the U.S. (and here it is far higher than the CPI suggests). The money printing and consequent erosion of the value of paper currencies are behind the rise in the price of gold. Just because you can't measure exactly why it is where it is does not mean that it is a bubble.
I have said the same thing on this topic so many times I am sick of saying it. (I devoted a whole column to it as recently as Sept. 2.) But I would point out that most people who seem to think gold is an asset bubble are those who missed the previous two, with Stack being an exception. (To be fair, he did not say it was an outright bubble; he just noted it was a potential example of bubble psychology.) On the other hand, most everyone who identified the prior two bubbles correctly owns gold.
So when it comes to the gold bubble question, remember that -- pro or con -- how you answer it aligns with you with one group or the other. I know whose company I would rather keep.
At the time of publication, Bill Fleckenstein owned gold and stock in gold-related companies.
This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.
