Japan versus USA: Same Depression with a Lag

Charts speak more eloquently than I can and they speak a brutal truth. Perhaps it is my scientific background or perhaps I appreciate the art that can be found in price charts. In either case, I prefer the message of charts to CNBC blowhards and other so-called experts.

Anyone who currently has excess savings they want to invest is in the minority of the world's population. They are also likely "rich" and "evil" according to populist sentiment. In any case, these aren't the best of times for advanced/Western economies.

We are currently in the midst of an unmistakable secular bear market for general equities in the United States. Such bear markets don't end with the current obscene valuations and they don't end because government saves the day. If it were only true, writing everyone a check for $700 billion dollars (i.e. treating everyone like a Wall Street bank) would bring endless prosperity and create an endless bull market.

The piper waits patiently, knowing that he will be paid. Currency debasement and allowing survival of the most unfit is not the way to restore a secular bull market. Ask Japan how QE1, QE2, and QE3 helped their stock market for the long haul.

Speaking of Japan, do you realize that we are on a similar course when stock markets are priced in Gold? I am not saying deflation or inflation, I am saying "priced in Gold." Only Gold bulls are used to such pricing strategies, but it is time for reality to intrude on the paperbug world.

Whatever monetary chaos we are in store for, Gold will outperform stocks over the next several years. This is open for debate in my mind as much as the question of whether fiat money will retain its value over the next decade is open for debate. Believe what you will.

But notice the "phase shift" chart message between Japan and the USA shown below. The chart is a monthly log scale chart of the Nikkei stock index ($NIKK, the main Japanese stock index) divided by the price of Gold ($NIKK:$GOLD), shown in a black and red candlestick format, versus the Dow to Gold ratio ($INDU:$GOLD), shown in a black line format:



Same chart with a phase shift, no? The corrections in this ratio lasted longer for Japan because they entered their secular depression when everyone else's economy was booming. We don't have that luxury, so our corrections in the Dow to Gold ratio have been shorter. We are about to begin the biggest leg down in this ratio since the "secular bear market" in this ratio began in 1999. This is not a drill and this is not a call for the end of the world. Be careful out there if you're not in the precious metals sector.

The End of the Road

For kicking the can down the relative road, that is. The Dow to Gold ratio is getting set to expose the insanity and reward those willing and able to fade the "don't worry, be happy" herd. I am not necessarily talking about nominal wealth, although that seems the most likely path, but rather relative wealth. When you live in a world with Monopoly money, nominal gains aren't always what they're cracked up to be. If the Dow hits 20,000 and gasoline is $10/gallon (as it is approaching in Europe), the herd will be poorer and not necessarily understand why. But you, dear sir or madam, are hopefully a precious metals investor and not a paperbug.

What I am speaking of is becoming richer in stock, bond and real estate terms. In other words, the scoreboard proffered by CNBC and generally preferred by "old" money. The best thing about thinking in this manner is that your investments will prosper in spite of (and partially because of) the ridiculous whims of the apparatchiks, who are only following the script laid out for them by previous empires in decline. You also can ignore the inflation versus deflation debate if you think in relative terms, as Gold will thrive in any of the potential chaotic monetary situations that develop. Those expecting the end of the world and total economic collapse are likely to remain frustrated. After all, did Icelanders starve to death once the bankstaz cut them off (or was it the other way around?) and their markets and currency were shunned?

I cannot speak adequately to those in the Gold and silver crowd looking for the end of the world, as I am too optimistic to concern myself with such scenarios. After all, who gives a shit about investing if we are all doomed? In the 1930s and 1970s, did guns and a log cabin work better or did investing in Gold and Gold stocks and staying nimble? To me, it is just the swinging pendulum of history. And forgive me for not mentioning silver enough in the past, as I am one of the ones who misjudged silver's massive intermediate-term potential. Oops...

Anyhoo, the topic currently is the Dow to Gold ratio and the pending disaster in this ratio for the Wall Street crowd. Of course, Soros, Paulson and other smarter sharks are already positioned for the move and waiting patiently for the Western herd to wake up (the Eastern herds have been awake for some time). The average money manager, on the other hand, is not prepared for the storm about to strike in the Dow to Gold ratio, which will soon become a fairly mainstream concept and a self-fulfilling prophecy. The question is not "will we really reach 2 in this ratio?" but rather will we potentially hit 1 or even less than one in this ratio?

I love charts and their messages, as I trust them more than the words of the latest guru (present company excluded, as I love to hear myself talk...). Without further ado, here is the most important secular chart I know of for those who have the capacity for independent thought and who understand the concept of relative wealth. Following is a 41 year monthly chart of the Dow to Gold ratio using a log scale:



Becoming 4 to 8 times wealthier in terms of the amount of common stocks you can buy at a time when common equities are likely to finally be cheap and provide a decent dividend yield is a massive shift in relative wealth for the average person. In other words, it is far from too late to join the precious metals party. Also, please remember that Gold stocks have made some of their largest intermediate term gains AFTER the Dow to Gold ratio has bottomed in the previous two cycles (i.e. the 1930s and 1970s)!

This is not a get rich quick scheme. This is a get rich in relative terms scheme that may take a few years to play out. Secular equity bear markets, which correspond with a falling Dow to Gold ratio, usually take less time than the bull markets that precede them, but Japan's miracle 1980s decade has yielded two decades of bear market so far and their massive equity bear market ain't over yet. I think 5 years is the maximum time it will take to realize the completion of the current secular bull market in Gold and nadir in the Dow to Gold ratio. However, I do not know the future any more than you do (though I must like to think so enough to bore you with my opinions).

Good luck out there. Hold onto your precious metals investments. We will likely see a summer correction after some further bullish spring fireworks in the sector dedicated to things shiny and precious, but these are shorter term considerations and predictions in this time frame are even more unreliable than longer term predictions, as I have discovered the hard way. I remain long via physical Gold (and a little silver) and GDXJ ETF long-term LEAP option calls that expire in January 2013. I think I may start posting again sporadically on my blog. If you have the interest, stop by and let me know you're out there reading.