Contemplating Investing from the Demythologization of Fairy Tales

Contemplating Investing from the Demythologization of Fairy Tales

“Toto, I have a feeling we’re not in Kansas anymore…”

Dorothy (from the Wizard of Oz)The 1939 film: “The Wizard of Oz” was made from the L. Frank Baum book, “The Wonderful Wizard of OZ”, written in 1900. Baum had a life of financial volatility, and at one time even declared bankruptcy. He wrote prolifically: books, articles, songs, and plays. Many of his Oz books were banned by certain libraries in the States, from political pressure due to their misconstrued belief that Baum was a Communist. And, Oz itself was an approximation of the Marxist utopian dream. In any case, he was a children’s fairy tale writer and playwright, first and foremost.

Along came Henry Littlefield in 1964, with an interpretation of the Oz books, in: “The Wizard of Oz: Parable on Populism”. From this we are told, Baum’s “Wizard of Oz” was based on a political and economic commentary, over the debate of “sound money”, or the interactions of gold, silver and the dollar. Listed below are the main correlations:

• Dorothy: represents traditional American values
• Dorothy’s slippers: originally were Silver, then they were later changed to the Ruby color
• Toto: represented the Populists, part of the Silver coalition.
• Scarecrow: is a simile for the American farmer
• Tin Man: represents the working classes
• Lion: depicts William Jennings Bryan, Democrat candidate for the 1896 election
• Wicked Witch of the West: symbolizes Republican President William McKinley, who won the 1896 election
• Wizard of Oz: represents Mark Hanna, chairman of the Republican Party (not a very popular guy)
• Yellow Brick Road: represents the Gold Standard
• Oz: the country, named after the gold ounce abbreviation

 
Congress passed the Contraction Act in 1866 to remove money from circulation. The result: money in circulation per capita, went from $50.46 per person in 1866, to $6.67 per person in 1886; a 760% loss of buying power. This shows what the working man was faced with in 1886, because of stupid economic policy.

Before 1873 the US$ was pegged to either 22.5 grains of gold or 371 grains of silver. The gold silver ratio was about 16:1. People played an investment arbitrage game with the metals, whenever this ratio changed. Congress’ 1873 Coinage Act prevented the silver dollar from being minted, and the country went onto a gold standard. Silver became less valuable, and in fact, other countries also took on this gold standard. The resultant problems from this were that American farmers saw a large rise in their debt values, from the dollar/gold standard, along with a drop in agriculture product prices. Along the way came the Sherman Silver Purchase Act of 1890 and the depression of 1893. By the 1896 American election the population was getting tired of the politics and continuing schemes that were not working.

William Bryan was the Democrat choice for the 1896 election, hot to trot on keeping both silver and gold in circulation and gave a rollicking speech on the “Crown of Thorns and Cross of Gold” theme at the Democratic Convention that year. These political events roused the voting public into a frenzy for a “time for change”. The Populist movement was begun as a view against evil Eastern influence (New York bankers) on Western honest labour. Silver was the Populist movement’s answer to the American economic problems of the day.

However, New York money backed the Republican William McKinley, who won the election. McKinley wanted a gold standard only, not silver. As an aside, Mark Hanna, the big shot Republican chair, had his industrialists inform their employees that if Bryan and the Democrats were elected, all factories would close, and employment would drop heavily. Not an ethical kind of guy. The Republican’s under Hanna made numerous promises they couldn’t keep.

Does all this sound vaguely familiar to our current day politics and policies in both countries’ “systems”? Incidentally, the value of a current US$ in 2012, measured in 1900 dollars, is worth only three cents! Since we almost have parity with the CAN$, we can assume the same devaluation for the Canadian dollar.

All this fairy tale stuff and all this monetary history is actually prescient for the investors of today. That last paragraph tells you the US$ is breaking down. Back in April of 2011, The India Times reported the BRICS would start using local currencies instead of the US$ for trading between them. (BRICS are the countries: Brazil, Russia, India, China, South Africa; the fastest growing economies of today.) We can see charts of currencies, and we can perhaps relate to the terms billions and trillions, regarding current bail outs of a variety of institutions. To paraphrase: the US$ has lost its ubiquity for world trade. So who really needs the US$ anymore? (The answer would shake you up severely…)

There should be a follow up to this mythology. The Broadway play “Wicked“ is a prequel to the Wizard of Oz. Someone needs to get into that 1995 book by Gregory Maguire (The Life and Times of the Wicked Witch of the West) written before this play, and find out the real economic and political satire behind today’s schemes that aren’t working. Today’s malaise might be from President Roosevelt in 1933 making a Confiscation Order for Americans to return all their gold to the government for $20/oz. Immediately thereafter the price of gold was fixed at $35/oz by the same people. Then, in 1971, President Nixon repealed the Roosevelt 1934 Gold Reserve Act, allowing Americans to buy gold, and by 1980 the price of gold was $880/oz. Would you think all this intervention might be reason for current pricing discrepancies?

The Federal Reserve wants a lower US$ to increase exports, encourage inflation, and allow the ability to pay back their debt with cheaper dollars. This would be bullish for equity markets. Currently gold is completely disconnected from gold stocks, silver does not have a fixed ratio to gold, and both metals are making further consolidation patterns. All of you know precious metals stocks are just about worthless from when you bought them a few years back. Sometime soon, when world bankers realize just how gold and silver are shadow boxing with the fiat dollar currency, we’ll see these disconnects rapidly go into another cycle. As a point and figure charting technician, I am keen on seeing the change, and extremely keen on seeing the result of all this hubris. There’s money to be made here!

Just like the people asked for change from the 1896 newly elected crowd, they will do the same with the November 2012 newly elected crowd. And wasn’t that what we just heard in Alberta? “Plus ça change, plus c’est la meme chose”, as they say in French.

Gregory Berko
Senior Advisor