The "Golden Compass"

In the recent film by the same title (I’ll leave the celluloid reviews to Ebert & Roper), legend had it that an ancient “Golden Compass” could be used to foretell the future. The rub, however, was that only a select few with the inherited knowledge of its antediluvian alchemy could interpret its cryptic symbols. In the end, of course, only a beguiling blond child whose purity and innocence was beyond filmic reproach, held the key. To her alone, fell the task of defeating the great evil.

Such notions may be terrific Saturday matinee fare, but in the harsh truths of today’s global economy, we had better hope that the “tea leaves” may be read by a wider cast of characters.

Over the past several weeks, financial talk show hosts from CNBC to CNN have probed a parade of experts about whether a recession is upon us. Their responses are reminiscent of a famed First Amendment obscenity case heard by the U.S. Supreme Court. In trying to explain their definition of unprotected “hard core” pornography, Justice Potter Steward, opining for the majority wrote, “"I shall not today attempt further to define the kinds of material I understand to be embraced . . . but I know it when I see it . .” In other words, “objects in your rear view mirror may be closer than you think.”

This whistle-stop in our economy has created tremendous angst among analysts and economists alike. Inverted (down sloping) yield curves have historically been a reliable indicator that a recession was on the way. In past crises, we saw the inverted curve for what it was; an indication of high demand and liquidity, not a reflection of a market where interest rates had been pushed too far.

Tragically, Fed Chair Ben Bernanke has a much tougher situation on his hands than Greenspan had to deal with 3-4 years ago. Over the next several months, life will become very tricky for central bankers. While the choices are few, Bernanke now must navigate the economy through a literal minefield.

Deflationary monetary events like the one that can be precipitated by the subprime collapse, are far more perilous to a central banker than “garden variety” recession. The world’s central bankers simply do not have an adequate array of weapons in their arsenal to fight this battle. As history has shown, circa Japan 1990-2005, the slide from recession to deflation can happen in a blink. If this occurs, central bank intervention may be of little value. While the Bank of Japan eventually cut rates to 0%, there now is no dispute that it waited too long. Once confidence evaporates, the dominoes fall.

The only bright spot may be that no matter the action taken by the Fed, or other central banks, gold and other “alternative” investments may benefit. The virtual implosion of the U.S. Dollar since September has been the main driver for the stratospheric prices of gold. On January 15th, spot gold prices broached $900 and nearly reached $915 by day's end. Although the prices have since retreated below $880 (mostly on profit-taking), you need not be the keeper of “ancient knowledge” to realize that gold is on an inexorably journey to $1000.

It certainly can be argued that the “gold train” already has left the station. There is no question that those that had the foresight to purchase gold in 2001 when it passed the $300 mark, may be ahead of the curve. But very few of us (including yours truly) believed that the economy could sink to such depths or that gold would push to the pinnacle it now has reached. Even in the dark days following 9/11, did any of us believe that we would see the type of tectonic shift we now are seeing in the economy.

Against this backdrop, investors are faced a decision that may be problematical. Do they ride out the storm in hopes that the economy will find new ballast? Or do they abandon ship? In its best light, this is no more than a classic “Hobson’s Choice.” Consequently, crafting an investment course in the middle ground may be the only prudent path.

The stock market will find a bottom. When it does, investors who are liquid will be an advantageous position to make great buys. Until then, however, investors must look elsewhere to build and retain wealth. Although I believe that gold still is good bet, I think silver and platinum have a similar upside. With Asian demand on the rise, commodity prices will continue in an upswing. Likewise, as emphasis away from the dollar as the world’s only reserve tender edges forward, investors should eye other currencies as an alternative. For example, yesterday, the Swiss Franc rose to a record high against the dollar as speculation of financial-sector losses swelled and the Euro flirted with 150.

Perhaps there is a “Golden Compass,”

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