Wednesday, April 1, 2009
Most people just don't get it
which is good for those that do, as the trade is not too crowded (yet). Here are some prime misconceptions that will take the majority of people at least another year to get:
1. A secular deflationary credit contraction is in effect and cannot be stopped at this point.
2. An economic depression has already begun in the United States. In 1930, the unemployment rate was slightly over 8% in the U.S. (it's 8.7% now) and there were no soup lines!
3. Governments are powerless to stop #1 and #2 and only have the ability to make them worse and the depression more prolonged via their incessant meddling and piling debt on top of a debt crisis. This demoralizes and crowds out the private sector and squanders precious capital.
4. The G20 summit is a worthless event (as are other such pomp and circumstance government meetings) and will not produce significant economic change, though whatever is said will be used as an excuse for whatever move the market makes during the days they say non-newsworthy things.
5. Deflation is good for gold and UNBELIEVABLY BULLISH for gold miners.
6. When the general stock market goes up, gold stocks will outperform and when the market goes down, gold stocks will outperform. Gold stocks are in a bull market and general equities are in a wicked bear market.
7. At the end of this bear market in general stocks, gold stocks will be much higher while general stocks will be much lower.
8. The same forces in effect that caused the last so called "great depression" are in place now but the forces are even stronger, thus a 90% top to bottom drop in 5 years or less in the stock market is absolutely possible (not saying it will happen, but it could). This bear market is not even close to being over.
9. Inflation is highly unlikely to be significant in the next 12-18 months in the U.S.
10. Gold is better thought of as a currency than a commodity - the "hardest" debt-free currency out there. Once you understand that, you understand why gold does well during deflation and why gold miners kick ass during deflation (digging money out of the ground is more profitable when costs drop and everyone wants cash in a deflationary crash).
Hold your gold and hold your gold miners. Ignore the conventional wisdom and have a profitable portfolio.