Thursday, March 26, 2009
The primary trend
cannot be changed by government bureaucrats or central bankstas. Keep that in mind every time you hear some new program, plan, wish list, stimulus, regulation, emergency measure or decree. What governments and bankstas can do is amplify or mute the primary trend to a limited degree.
So, the reckless, irresponsible policies of the early 2000s amplified the bull markets in commodities and housing and ensured that their eventual bust would be more severe. Now, we are in a deflationary period and the government is piling on debt to offset the contraction in private debt, monetizing the debt, and solidifying the corporate fascism model. This will prolong the current depression and ensure that it is worse than it would have been and also ensure the first few attempts at recovery will be muted.
When measured in gold (and to lesser extent silver), the form of money with the longest track record and most stable history, many illusions are revealed. This is why the Dow to Gold ratio is key to understanding long term trends in financial markets and it will continue to be until we abandon the fiat system and back currencies with hard assets like gold. I am not saying that a gold-backed monetary system is not without problems and I am not saying that it prevents boom-bust cycles, I am simply saying that it is confusing to the average retail investor when the measuring stick is unstable.
A perfect example is the double top in equities between 2000 and 2007. This is not a "real" double top, as our dollar was debased by 40% to achieve this double top. Additionally, this 40% dollar debasement is an understatement and is based on the U.S. Dollar Index ($USD), which means only that we depreciated our dollar faster than other countries could depreciate their paper currencies.
The chart below (can't remember where I stole it from) illustrates this well, as it shows that the 1970s were basically as bad as the 1930s in terms of inflation-adjusted returns:
However, people think to themselves: "Hey, I broke even in the 1970s. At least I didn't lose money in the stock market." This is the illusion that a paper fiat system demands the sheeple swallow to avoid revolution. The Dow to Gold ratio cuts through the crap/illusion to show the truth when markets are measured in hard currency that cannot be debased by government apparatchiki.
We are going to a Dow to Gold ratio of less than 2 and probably less than one this cycle. This alone should be enough to keep you out of the stock market, unless attempting to time and trade short-term swings. The policy of quantitative easing has never worked at this point in the business cycle and won't work now. Ask Japan, which remains mired in a 28 year bear market that is not over yet.
The only wild card is whether or not our reckless, short-sighted policies will permanently eliminate us as the holder of the printing press for the world's reserve currency. In other words, gold will either go to $2000-$2500/ounce in a worst-case scenario hard deflation or it could go to $10,000/ounce or more if we have a currency crisis, but it will outperform the stock market either way.