Subscribers will be aware that we recently increased our gold weighting from 5-10% to 10-15%. We have become increasingly concerned that investment risks, both short and long term, appear to be rising. This reflects four major issues: 1) an extraordinary over-indebtedness in the rich world (OECD total public debt is over 96% of GDP in 2011); 2) the near-certainty of well below normal growth due to public and private deleveraging and the continuing long wave economic decline; 3) a seriously flawed international monetary system and eurozone structure; and 4) dysfunctional politics and profound lack of leadership in Europe, the U.S. and Japan.
We arrived back from holidays in the Northwoods of Canada to find the financial system once again in shambles, the U.S. economy weakening from a sharply downward revised level, investors once again losing their nerve and speculative hedge funds piling on.
This note is a quick reaction to the heightening global crisis. More detailed analysis and discussion will follow in the coming days and weeks.
The Obama and Republican fiscal proposals and the political circus over debt extension in recent days have highlighted once again the inability of the U.S. political system to function in the face of a near and present danger.
This report is a follow-up to our Special Report, dated January 17, 2011, “Why the Secular Bears are Wrong.” For a variety of reasons discussed in that report, we argued that investors should at least examine the possibility that we are in a secular bull market. We pointed out then that at the beginning of secular bull markets, the macroeconomic conditions (and frequently geopolitical as well) are always frightening. Fundamental pessimism among the most credible gurus is widespread. It is never possible to “prove” that a secular bull market has begun when it is still in its early stages. In fact, it is much easier to assert the opposite.
Be Wary of a Consensus
There is a pretty widespread consensus that U.S. stocks are in either a secular bear market or a sideways trading range that will last for years. Such a view is not surprising since a consensus is almost always formed by what has already happened in the recent past, an experience that has not been kind to equity portfolios. In the last 11 years, the U.S. experienced two of the worst bear markets in history and the S&P 500 is still 16% below its all time high in early 2000 in nominal terms. After adjusting for price inflation, it is down about 35%.
Many investors and economists fear that QE2 will fail and that the U.S. has entered a lengthy period of weak, stop-start growth and chronic but gentle deflation, like Japan has been in for 20 years.
There is an obvious connection between the just announced round of Quantitative Easing - (QE2) and the disastrous election results for the incumbent Democrats. The link is the state of the economy and, in particular, the state of the labor markets (Charts 1 & 2). As is well known, the unemployment rate is stuck at a little under 10%.