“Men, it has been well said, think in herds; it will be seen that they go mad
in herds, while they only recover their senses slowly, and one by one.”
—Charles Mackay

Thinking in Herds
We agree with Charles Mackay’s opinion stated in the quote above. Human beings – like many other animals tend to feel safe in groups. We think it’s a naturally developed biological imperative. The old adage “safety in numbers” probably does work most of the time. We’ve all watched nature documentaries on Animal Planet or The Discovery Channel when herds of thousands of wildebeests or zebras attempt to cross a crocodile infested river. While some of them don’t make it – most do. The same goes for a herd of gazelles being stalked by lions. Odds are that you’re not the one who’s going to be singled out as a target for lunch. Animals who stray from the herd often get picked off. Even predators like wolves and lions hunt in packs and prides with great success. So we certainly understand the concept of strength in numbers.

However, when we look at humans, most of whom view themselves as thinking, rational beings – we notice that some of their most destructive (self-destructive included) behavior is done in large groups. And it starts in their minds. We think of mobs, riots, and war – when people buy into a destructive behavior, often without much thought at all. And we also think of market bubbles throughout history – the 1920’s and 1990’s (tech) – along with the recent bubble in housing. All of which ended badly. Motivators are often fear and greed. As students of history (which we feel is the study of human nature) we’ve noticed when large numbers of people start to think one way – it’s often at a time when they’ve stopped thinking for themselves. In our opinion, it’s precisely at these times when you need to make sure you’re thinking as objectively as possible – and for yourself.

Thinking With What?
We also believe one of the greatest challenges we face as humans, is not to think with our hopes and expectations – but with our brains. It’s our opinion that hope alone is not a good strategy. As we listen to certain folks talk about economic recovery taking place, we wonder if they’re thinking more with their hopes and expectations. Yes, U.S. retail sales in August grew the most in three years – but it was led by rising car purchases prompted by the government’s “cash-for-clunkers” stimulus program.[1] And yes – gas stations, clothing, sporting goods and department stores all reported gains of over 2 percent last month.[2] But one wonders how much of that growth was due to late summer vacation traveling and back to school purchases. We shall soon find out. We’re paying special attention to the losses shown by furniture and building-material stores.[3]

We also don’t buy into the belief that the consumer, who’s spending accounts for 70 percent of the economy[4], is back. Especially after a recent poll published by Bloomberg showed only 8 percent of American adults plan to increase spending, close to one-third will spend less, and 58 percent say they’ll “stay the course.”[5] The poll also reported that over 75% of people surveyed said they’d spent less over the past year.[6]


We’re also paying close attention to what’s being said by the Fed. Chairman Bernanke recently stated, “Even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”[7] He also said, “Unemployment will be slow to come down” if growth ends up being “moderate.”[8] To us, this sounds like a man carefully selecting his words – and hedging his bets. What it does not do for us is instill confidence that economic recovery is around the corner.

In a recent speech, Federal Reserve Bank of San Francisco President Janet Yellen stated, “We face an economy with substantial slack, prospects for only moderate growth, and low and declining inflation… We need to defend our price stability goal on the low side and promote full employment… I expect the recovery to be tepid… The gradual expansion gathering steam will remain vulnerable to shocks.”[9] Regarding unemployment, she stated that it would remain “elevated for a few more years.”[10] This sounds to us like a Fed official calling for more money printing and stimulus because she fears the good old-fashioned deflation which seems to want to occur.

When we digest what both Bernanke and Yellen are saying, we remember the Fed’s tendency (in our opinion) to understate how bad things really are. Remember this quote from Chairman Bernanke in July 2005?

“Well, I guess I don’t buy your premise (that housing is in a bubble which will burst). It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So what I think is more likely is that house prices will slow, maybe stabilize: might slow consumption spending a bit. I don’t think it’s going to drive the economy too far from its full employment path, though.”

Seriously though, how could a man that smart be that wrong? In our opinion he was either badly mistaken – or he’s a cheerleader. We suspect the latter, and therefore raise the “Spock Eyebrow” most times we listen to him speak. Thus, as we revisit the quotes above from both Yellen and Bernanke, we suspect things may be a whole lot worse than the Fed’s letting on.

In our opinion deflation (money contraction) is the natural tendency after decades of inflationary money printing. However, our regular readers know we believe the Fed will print money like mad to avoid such a deflationary scenario. Our belief is based on history’s lesson that overly indebted governments tend to repudiate their debt by printing it away. The last thing a massively indebted U.S. Government wants is to pay the trillions of dollars it owes with a stronger currency. Thus, we believe it will do whatever it takes to dilute the value of the Dollar. That’s your Dollar.

Golden Canary

Back in November 2008 in “Canary in a Coal Mine” we wrote:

“Just like the Canary who warned miners about too much poisonous gas – we believe that Gold has, for the past 94 years been trying to warn investors that there is too much of another potentially deadly thing – an overexpanding supply of U.S. Dollars. This decade, with massive money printing hitting overdrive – the golden canary seems to be telling us to get out of the mine – and fast.”

As we write, the Golden Canary is trading at $1018 an ounce. What does it know? We shall see.

While there is a lot of tough reality going on out there – we maintain our positive outlook. That outlook is based on our belief that a bear market in one thing is often a bull market in another. And bull markets are what we hunt.

As we enter this critical time – now, more than ever – we believe investors need to focus on their investment strategies. Those readers who are clients are fully aware of the strategies we’re implementing in light of unfolding economic circumstances. Others may feel free to contact us to learn more.

Stephan R. Ernharth, JD, AIFA
Vice President
Ernharth Group
Go to www.ernharth.com/econonomic-commentaries to read past articles from our Economic Commentary series.

  1. Bloomberg; “Retail Sales in U.S. Jump 2.7%, Most in Three Years”; September 15, 2009
  2. Ibid.
  3. Ibid.
  4. Ibid.
  5. Bloomberg; “Americans Plan to Limit Household Spending, Survey Shows”; September 17, 2009
  6. Ibid.
  7. Bloomberg; “Bernanke Says U.S. Recession ‘Very Likely’ Has Ended”; September 15, 2009
  8. Ibid.
  9. Bloomberg; “Yellen Says Fed Should Boost Jobs, Curb Disinflation”; September 14, 2009
  10. Ibid.