So far, September trading has not confirmed our hypothesis about the fall season. We guessed US stocks would go down and gold would go up. So far, stocks have gone up and gold has gone down!
If the markets were voting machines, we’d have to say that the early returns point to a victory for higher stock prices and cheaper gold. But over the long run, markets, as Ben Graham reminded us, are weighing machines. And that should worry over-bullish stock market investors.
Our “Crash Alert” flag has been up for a couple of weeks… flapping in the September heat… with no sign of a crash.
But what the heck… Over the long run, we still believe it’s better to stay away from stocks and hold onto gold. That is still the most prudent position. Because stocks are priced for a world that doesn’t exist… and gold is priced for one that does.
By our reckoning, gold is about where it ought to be. It is real money. It can be used to buy real things. In 1950, you could have taken 30 ounces of gold and bought a new car. You can buy a new Buick for $38,000 today. That’s about 30 ounces!
In 1950, that same new car would have cost you about $1,300. Can you buy a new Buick today for $1,300? Not even close. Gold is relatively stable; the ersatz money – the kind that really does grow on trees (or at least in cotton plantations) – loses value fast.
When in doubt, hold gold and dump dollars.
And what about US stocks? They are priced for a world of recovery, growth and prosperity. But where is that world? It doesn’t exist.
Here’s Robin Harding in the Financial Times:
It is depressing to consider, but on its current path the US is headed back to the same economic structure as before the recession: driven by consumption and sucking in imports. These are the first steps towards a future crisis.
Start with trade. The current account deficit fell to 2.5% of gross domestic product in 2009 but then got stuck. Mr. Obama’s 2010 goal of doubling exports in five years looks like a pipe dream. As the US recovers and emerging economies slow down, the current account deficit looks likely to widen.
The personal savings rate tells a similar story. In the wake of the crisis it jumped from 3% of incomes to 6%, but has since drifted down again nearer to 4%. Corporate saving – all that cash on corporate balance sheets – remains high even as the public sector battles to reduce its deficit.
Median household incomes are lower than before the recession as inequality rises. Worst of all, private investment remains below even its long-run share of national output, while public investment peaked with the stimulus in 2010 and has been falling ever since.
In other words, the US economy is not really recovering. It is merely picking up its old fantasy – in which people spend more money on more stuff they don’t need and can’t afford.
And there’s the Fed egging them on!
Could stocks rise this autumn? Yes, of course. No one knows what the future holds. But this is not a “stocks for the long run” kind of market. It’s not a safe place for ordinary investors. It’s not a good place for your money.
A Family Affair
On another subject completely, dear readers have asked about our daughter’s recent wedding.
It was a small family affair. But the families aren’t small. So it quickly spun out of control… with one “mize-well” after another.
But the most interesting feature of it was the heroic effort that went into seating the two families at dinner.
At church, seating is no problem. It is done like a balance sheet. Bride’s family on the left. Groom’s on the right. They take their places. They present no problems.
But seating for dinner is a much more delicate matter. We recall Elizabeth’s explanation:
“You can’t just seat people willy-nilly. There is a protocol that must be respected. When Aunt Sally asks why she was seated next to loudmouthed Cousin Larry we have a ready and soothing reply: That’s the way it is supposed to be done.”
“Well, there’s a protocol for putting the wedding party at the head table,” we began our question, “but you put everyone else where you want, n’est-ce pas?”
“You always seat the most senior woman on the host’s right. In South America you always seat husbands and wives next to each other. But you never do that in a proper wedding in Europe. Here in North America, we follow the European rules, of course.
“Those are just the basics. But at a wedding you get into much more complicated matters. Tables should be mixed – with the two families interspersed. The idea is that the two families must get to know each other. But you do not want anyone to have a really awful time. And you don’t want people to feel embarrassed or slighted.”
“Why not just allow them to sit where they want?”
“Don’t be silly. Some people put all the young people at one table and the old at another. Some try to put all the witty and charming people with each other so they can entertain each other. Others organize people by profession, on the theory that they will have something to talk about. Still others try to put people who know each other together so they will be able to talk easily.
“All of these approaches have serious flaws. First, you have to understand that the goal of a wedding is not to give people a good time. It’s designed to bring the families together in the hopes that they will unite in a common cause – to keep the married couple on the rails. Whether they have a good time or not is incidental, not essential.
“But what you definitely don’t want is for people to find the other people at their table annoying or excruciatingly boring. And you don’t want to offend people by putting people at the ‘wrong’ table.”
“Why not organize the tables by IQ?” we proposed. “Put the smart people at one table and the dumb people at another. Then at least they’d all be talking on the same level.”
“I don’t think that would work. Even if you knew the IQ levels of the people involved, you’d be taking serious risks. First, because smart people tend to be competitively intelligent. They want to win arguments and one-up each other with facts, opinions and ideas. Smart people can be very combative with their intellectual peers.
“Second, because you are likely to get it wrong. Suppose we put one of the groom’s distinguished relatives with your half-wit relatives, for example. It could be a serious problem… and result in a family feud that might last for decades.”
“Wait a minute. There are no half-wits in my family.”
“What about your cousin Albert?”
“Oh… yes… well… he’s a little slow…”
“And your nephew Julian?”
“He just drinks too much…”
“And what about Oscar?”
“He’s not a half-wit. He’s just crazy.”
“Well, I certainly have to be careful about where to put him. He’s always pinching ladies and making inappropriate remarks.”
“Maybe you could put him with Aunt Louise. She’s a widow. I think she’d like to be pinched.”
“Exactly. That’s what makes organizing these tables such a challenge. You have to find out enough about everyone who is coming so you can put him in the proper place. And by the way, the only proper organizing principle is by rank. You organize the tables by social rank… making individual exceptions for the social misfits among your friends and family.”
“I wish you would lay off my family. And friends. But what do you mean by ‘rank’? How do you know what anyone’s ‘rank’ is?”
“A good hostess knows these things. And if she doesn’t, she checks the Social Register.”
“I don’t think you’ll find many of my relatives in there.”
The Broken Trend in Bonds
From the desk of Chris Hunter, Editor in Chief, Bonner & Partners
US stocks and gold may be not be moving in line with Bill’s forecast. But the Treasury market is certainly looking weak. This is in line with Bill’s call that the 32-year-long secular bull market has topped out.
As you can see from the chart below of the 10-year Treasury bond price (which moves inversely to yields) going back to October 2009, the multiyear trend higher in prices has been broken.
At Bonner & Partners, we believe this trend has a lot further to run… as bond yields rise and bond prices fall.
US commercial banks appear to agree with this view. Treasury holdings are down to $1.8 trillion from the peak of $1.9 trillion in December 2012.
And the share of Treasury holdings of total bank assets is below 13% for the first time in over three years.
Prior to the crisis, that percentage was just 10%. If banks continue to find better uses for their cash, it signals more pain ahead for the Treasury market.