Don’t Trust This Market
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Following my update, I have included an article from one of the foremost economic analysts of our time, Ambrose Evans-Pritchard. He called the subprime crisis just 6 months before it hit, and this weekend came out with extraordinary comments about the banking and currency crisis hitting Europe and parts of Asia right now. The reasons why his warnings are important will be obvious, and it’s important to remember that just as the US appeared to coming out of the Great Depression in 1932, a foreign banking and currency crisis helped to push the US back into a Depression that lasted another eight years. We live in a global economy that is interconnected more than at any point in history, and as difficult as it is already going to be for the US to recover from the recession/depression at hand, any kind of global meltdown will make the recovery that much more complex and lengthy.
Economic Update
I’ve yet to see a single economist that I respect come out and support Obama’s stimulus program, and we already know that Guiethner has no real plan to solve our banking crisis. As a Barron’s article said this weekend, it’s important to look at this crisis from the economic side as well as the financial-sector side. On the economic side, our consumer debt is now at 130% of income. In 2000 it was at 100% and 10 years earlier it was at 80% Consumer debt simply has to come down and there is absolutely nothing that the government can do to change this. They got us into this mess with a fiat currency and easy credit, so the first step now is that we have to complete the natural deleveraging process...by at 10 to 20 percentage points…to repair the consumer's balance sheet. In a normal economy this would take 3 years to accomplish and in the current economy it will likely take 5-7 years. This is one of those basic “laws of economic cycles” and it has to be allowed to complete its course of action. It’s going to happen one way or another, and the sooner we allow it to happen the better.
We know we’re in a recession, and for the first time we have respected leaders calling it a Depression (International Monetary Fund, Merrill Lynch’s top economist). We may have some false starts, but believe me when I tell you that it’s going to several years before things are back to anything close to normal. Again, the more the government intervenes the worse they will make the situation. Instead, we’re seeing some very strange actions from the government….they aren’t thinking about deleveraging at all. Amazingly the government is talking about jump-starting consumer credit. Jump-start consumer credit for what? So we can be more indebted? A third grader can understand the lack of logic behind this strategy.
The bottom line is that we have to reduce debt. If you jumpstart credit, you are just going to prolong the problem and deepen it. What we need now is the patience to “de-lever”. We don't need the stimulus package. We need a savings package, but that couldn't be further from their goals at the moment. The mistake is that the government believes credit drives the economy, instead of the economy driving credit. They have got it all backward, and this is a very dangerous time to be confused.
We’re going to find out in the very near future that $3 trillion in additional debt on our backs was the exact wrong action to take, but by then it will be too late. By then the Dow Jones will be at 5000 (or lower), the US dollar will be in freefall, and no one will be willing to buy more US debt. This will push interest rates sharply higher, and leave our policy makers will very few options.
Precious Metals and Market Update
The article below will make this point more clearly than I ever could, but we will soon reach the day where the only trusted currency will be silver and gold (along with platinum). That’s because every other currency on the planet is fiat, or backed by nothing but the full faith and credit of the government of that particular country. This was the danger of dropping the gold standard, and could ultimately result in the “sum of all fears” in the global currency markets. While there’s a chance that the stimulus and bank bailout programs could buy us some time, and help to move the economy and stock market a bit higher, I wouldn’t put much confidence in this as an investment strategy. The markets will soon break their November 2008 lows on their way to much, much lower prices. I keep making this next point over and over again, but in my opinion it’s the one thing that market observers should be aware of. In 2009 the earnings on the S&P 500 will come in well below $50. Using a price/earnings multiple of 10 (which is still generous as the average bear market bottoms with a p/e of about 7), this puts the S&P at 500 by the end of the year. This indicates that we should expect a 40% drop in the overall market before the year is over. This would also mean that the Dow will drop another 3000 or so points to…you got it…just below 5000.
In light of all of this, we should expect to see a continued and sharp move higher in gold and silver in a classic flight to safety move. However, there is one point that I need to caution you on. Typically, when the stock market takes a fast and steep move lower, we also see a move lower in previous metals mining stock prices. We saw this exact thing happen in the 3rd and 4th quarter of 2008, and I fear that we could be in for a repeat of the same situation.
Since last November we have big gains in PM stocks and while I could well be wrong, I don’t like to give back hard earned profits…especially as big as the ones that we have on the books. Look at it this way, if I’m wrong, all you’ve done is taken some very nice gains and you still have healthy positions in our favorite precious metals stocks. In the meantime, continue to add to your gold and silver coin purchases as this bull market is just getting underway…and when the time is right we will go back into the mining stocks and in a big, big way.
I simply see little chance of a significant stock market advance over the next 12-18 months; although we will continue to see bear market rallies when the markets become too oversold in the short term (we are not close to oversold at the time being).
The following link will take you to the article from Ambrose Evans-Pritchard and I highly recommend that everyone read it. If he’s right, and I believe that it’s likely that he is, the next surprise from this brutal bear market is about to hit home.
Kip Herriage
Editor, VRA
