Get Ready for a World of Hurt - Buy Your Gold Today
George Clemenceau, the premier of France in WW1, once famously stated that “War is too serious a matter to be left to the military” (often misquoted as “to be left to the generals”). 100 years later, on another battleground, the global economy, the Central Banks are battling to get people and businesses to spend. While Central Bank buying in bonds, mortgages and corporate debt to press interest rates lower and lower, has been the main weapon in this war, at least one central bank, that of Japan, has turned to buying equities and thereby supporting the Japanese stock market and maintaining that “feeling of wealth” which shareholders have when they are making money, thereby encouraging them (hopefully) to spend some of their gains. I suspect that Japan’s approach is more and more likely to be adopted by other central banks as it becomes clearer and clearer that all that Quantitative Easing is having less and less of an impact on local economies. In other words, when QE fails, direct intervention in the stock market wealth generating machine is likely to be next. The stock market is becoming too important to be left to investors. I would remind anyone who doubts this hypothesis, that a rising stock market has long been an openly acknowledged benchmark of success of U.S. Federal Reserve Board policy for years.
Today, the U.S. economy is operating at stall speed. The U.S. is in the 5th quarter of y/y overall earnings declines, valuations are among the highest in history and interest rates at the lowest ever thanks to the QE intervention (and the ongoing lack of demand for loanable funds!). A critical election is looming, with the U.S. Fed on the side of Mrs. Clinton, I suspect. Nothing must happen between now and then to kill the last generator of spendable value, the stock market, – and so nothing will. You can count on it! After November? Who knows yet? But between now and then, betting against the stock market is likely to be a fool’s errand.
The problem, of course, is that valuations are very high. We can identify 25 or more massively popular big cap stocks which, if a bear market were ever to transpire, will collapse easily as much as some of the massively over-valued high-tech stocks that we identified (many on BNN) in 2000. Only the Financials can be considered as being cheap, but they require rising interest rates to shine again, and we are not going to get rising rates – yet. Too risky to the stock market’s health.
What do we do today in this environment with our client’s money? We invest for the least risk that we can manage, holding a gold hedge in all portfolios, while maintaining a touching if naïve belief in the sweet hereafter by holding a fair amount of cash. Winning is not our goal: surviving is.