However, we all know now that the system is potentially being "saved" by the ongoing economic bailout: including Ben Bernanke's QE1 and now QE2. We are now faced with a new economic reality raising the following five questions regarding the potential growth of one's money and one's financial survival in an economy with potentially high rates of inflation in 2011 and beyond:

I do not think that it may be a "given" that some or all of these events may happen, but that by our government and Federal Reserve leader's present course: there may be a reasonable probability some or all considerations may occur in the next five to ten years. Yet the power to moderate some of these potential events is in our hands today. But it appears that due weight should be given to these risk factors in planning not only one's potential investment strategy, but also how one may plan one's families daily lives and economic survival strategy in the intermediate term.

The first question regarding whether the economy may experience a dramatic worsening of the rate of inflation in the coming years has already been addressed by the current buoyant behavior of the and commodity markets going into 2011. The gold market, addressing the second question, is traditionally a barometer of inflation and economic distress and has experienced a long term bull trend lasting over a decade, potentially telegraphing future price inflation. The mini-gold contract currently trades at $1424.60 per troy ounce.

A nascent bull market in gold began at the Millennium as the internet bubble popped, signaling that there were imbalances building in the economy at that time: the growing housing boom and credit bubble. These may have been the creation of the maestro himself: former Federal Reserve Chairman Alan Greenspan, who lowered interest rates to 1% in 2003 in order to combat potential deflation.

The recent extension of the gold bull market and the uptrend in equities that began in March 2009 may be in part the result of the economic bailout: Ben Bernanke's QE1, QE2 and Fed-engineered low interest rates. This in turn may have made the gold and the stock market an attractive investment relative to interest bearing debt instruments. Warren Buffett once remarked in an interview after the 2008 Crash that he could envision the likelihood of greater rates of inflation down the road than the double-digit inflation experienced in the 1970's. Gold, silver, oil, and the basic materials sector of the stock market may do very well under that scenario.

The decade of the 1970's provides an example to study to gain clues about the future direction of gold and silver prices. The rise in the gold and silver markets during that period was epic: the gold price rose over twenty fold to a height of $850 in 1980, and the silver market price rose to $50 per ounce when the Hunt brothers attempted to corner the silver market. The gold market later bottomed out at approximately $254 per ounce after an extended bear market and silver collapsed as well. If gold were to have the similar percentage gain now from the last 1970-1980 bull market in the metal - it would reach over $5,000 per ounce. However, a reminder is in order that precious metals may not be permanent investments unless you hold them as portfolio insurance. You may encounter both secular gold bull and bear markets over time as we have seen.

Yet today, some notable hedge fund managers including John Paulson and George Soros have profited handsomely from the ongoing increase in gold market prices. Soros has even claimed that gold is "the ultimate bubble." I would add that you may have to be nimble in owning precious metals in the likelihood that these markets get ahead of themselves.

The third question asks whether U.S. deficit spending may stimulate higher inflation or even economic hyperinflation in the future. While some have said that U.S. policies have contributed to food price shocks in other countries, it is also true that food prices have been going up in every exchange rate. At home, the rate of inflation shows signs of percolating as the producer price index rose by 0.8% in January 2011.

The National Inflation Association states that hyperinflation may be caused by 2015 "primarily by the healthcare bill and rising interest payments on our national debt." They state that the healthcare bill may actually cost "several trillion dollars." They further state that annual interest payments on the public debt could reach $1 trillion or 29% of projected tax receipts by 2015. They state that "the only way it will be possible to prevent hyperinflation is if the U.S. government dramatically cuts spending across the board and if the Federal Reserve raises interest rates from near zero percent ...to a level that is higher than the real rate of inflation."

The Obama administration is estimating that the deficit for 2011 will reach almost $1.5 trillion. The federal debt is being monetized, as it was in the 1970's, auguring higher market prices for investments such as gold and silver, oil and oil service equities, fine art, and even well financed real estate in select locations.

The fourth question concerns the fate of the dollar. The dollar index currently trades at 76.67. The U.S. government may not be able to continue the massive deficits without risking destroying the dollar and making most Americans poorer. Creditor nations are already taking actions to break away from the dollar as the world's reserve currency. Should that occur in full force, the U.S. may succumb to the folly of its own monetary ease and fiscal mess. The advantage that the dollar enjoys as the current world reserve currency may allow our policy makers the luxury of proceeding with monetizing 30% of our national spending with the prospect of more to come. Our leaders are trying to save us, but they may starve us instead. The result of this strategy in the past in the U.S. has been greater inflation: a further reduction in living standards for most all Americans. In other words, a cascading cost of living could potentially throw millions more into poverty.

The fifth question asks whether a confluence of some of these risk factors may come into play. I think that the answer is that they may, but there is a lot Americans may do now to prevent a unwelcome outcome. I would encourage you to ask your legislators to seriously address the federal deficit which includes finding a more cost effective solution to our healthcare needs than we currently have in place. An unwelcome economic outcome may be brought about by our own inaction on the deficit front, or if the financial market vigilantes or our foreign bondholders force us to balance our books during another crisis. As an aside to my comment on healthcare, I do not believe any individual should be denied health insurance because of a pre-existing condition (which is true for adults under the current law until 2014) or should go bankrupt as a result of not being able to obtain insurance.

What may individual families do (i) that still have some assets left or (ii) are living from paycheck to paycheck in order to protect themselves financially from further economic downsizing in a potential inflationary economy? Though I am not an investment advisor and cannot give specific investment advice, I can relate my own financial strategy and describe what I am doing with my own funds:

• I own some gold coins and bullion, and silver bullion as portfolio insurance and for growth of capital in the current economic environment. In addition, gold and silver represent potential financial protection against the worst case scenario of hyperinflation.
• I am trying to keep expenses down; for example, by buying cheaper food ingredients and cooking all in one meals such as soups (which helps me with my weight control).
• I use a financial software program to keep track of the growth of my money and track in categories my spending every month. There are also free websites that may do this task for you.
• I have a fixed rate mortgage on my residence which may allow me to pay off my mortgage with cheaper dollars if the value of our currency is debased by a continuation of quantitative easing and the potential emergence of embedded inflation in the coming years.
• I monitor the stock market carefully and adjust my equity positions as necessary (the Dow Jones Industrial Average closed at 11,193.16 and the S&P 500 closed at 1296.39 today). I subscribe to equity selection services that provide me with a flow of investment ideas and I plug the symbols into analytical software for study. Should I have positions that have large percentage gains in companies whose businesses are improving and where the technical outlook remains strong in my view, I usually give them room to run. I sell losers unless my ongoing fundamental research and analytical software indicate that I should stick with them.
• Most of my U.S. equities are companies with strong growth characteristics or special situations with catalysts for growth. For example, two equities that I own are restaurant companies whose businesses are strong enough at this time to overcome increases in their commodity costs.
• I have a long term position in an international oil firm, and have a few smaller positions in resource plays.
• I have a position in a mutual fund that invests throughout Asia and a fund that invests in currencies of countries with low inflation rates. The potential downside risks to U.S. equities as opposed to that of Asian stocks include (i) if the U.S. federal debt growth is not curtailed and spending cuts not enacted sufficient to reduce our $13.8 trillion federal debt, (ii) should Bernanke launches QE3 or QE4, or (iii) if an external economic event or another economic downturn cause the dollar and U.S. equities market to decline in a crisis atmosphere. Asian creditor nations' stock markets may then decouple from the U.S. and offer potential purchasing power to the U.S. consumer. Regarding the ongoing awful tragedy in Japan and the threat of multiple nuclear meltdowns at the Fukushima Daiichi facilities, the situation is still fluid at the plants as I write this. If there were one or more complete meltdowns at the facilities and radiation were released into the atmosphere, I think that the U.S. market's reaction may be a short to medium term correction that appears to have already begun. But bear in mind that the threat of more than one meltdown at a single facility has never happened before.

If our leaders in government choose not to seriously tackle the federal deficit, then the financial markets may force us into another economic crisis in the coming years. Ben Bernanke should end QE2 as planned in June 2011 and not embark on another round (easy for me to say!). So investors' stock portfolios may go down.

May we really postpone indefinitely the next bear market for stocks when the next downturn hits in the future? The business cycle ensures that there will always be another recession. Yes, we are currently no longer in a downturn. The recession officially ended in June 2009! At some point the stock market's ability to rise further may have to rest on the coattails of the economy and not on the growth of the Fed's balance sheet. That being said, for now we have QE2 and its potential successors to keep the market going for now. Though employment is lagging, the prospect for future economic growth during the rest of this bull market seems fairly bright.

Related posts:

Inflation Hedge Strategies and Thoughts for 2010 and Beyond

The Bernanke Exit Strategy: Seven Stock Market and Economic Consequences

The End of the Dollar as We Know It?

May one project the future dynamic of the U.S. economy from the current price behavior of commodities or equities sectors whose price performance is affected by economic activity relevant to their underlying businesses? The stock market has long been thought of as an economic forecasting tool, however imperfect it may be at that task.

Permit me to use the history of my own personal experience and analysis of both the physical gold market and the oil equity sector to illustrate this concept.

The economic and political events of the 1970's in the U.S. left an indelible image on many of the youth of that generation. I was studying economics in college during that time, while nurturing my interest in investing in equities. The 1970's has been called a pessimistic decade by some, marked by the unpopular Vietnam War and economically broken up by the quite severe recession of 1973-1974; the Dow Jones Industrial Average fell below 600 in 1974, marking the low of a lifetime and a wonderful long term buying opportunity for equities.

I also witnessed the double digit inflation (or stagflation) and interest rates of the latter part of the 1970's. I watched with amazement as the gold market traveled to its zenith of $850 in 1980 and oil topped out at $40 per barrel as the second oil shock occurred in 1979-80. Many commentators at the time thought that we would then enter hyperinflation. The gold market subsequently fell into an almost twenty year bear market as Federal Reserve Chairman Paul Volcker squeezed inflation out of the system through a restrictive monetary policy. Crude oil hit $10 per barrel in 1986.

Fast forward to 2003: I noted a long term breakout of gold on the monthly chart and made the inference from that price behavior that the U. S. economy could be potentially headed for a similar economic dynamic as the 1970's, complete with elevated inflation, gold and oil price levels. At the least in 2003, I projected a potential continuation of what I believed to be secular bull market for gold bullion similar in form to the bull market from 1970-1980.

I later made the case on this website in several articles and blog entries (see gold and silver investing categories) that this bull market for gold and oil was potentially no ordinary cyclical or short term uptrend, but a secular or long term one for the gold and oil markets. In fact gold has run from below $400 per ounce range in 2003 to its current market price of $1431.10 per ounce on March 5, 2011. Oil is only now moving past the $100 per barrel mark for the first time since the commodity collapsed from its high of $140 per barrel in July 2008.

I bought gold bullion bars and gold coins starting in 2003. Much later I bought silver bars. I continued to hold my largest equity position, which is a major integrated international oil firm, among other equities.

Commodity price pressures are now manifesting themselves today especially in worldwide food price inflation, felt acutely by the citizens of developing economies. It appears that the food price surges in many developing countries (particularly in the Middle East) have made many of these counties citizens day to day survival quite difficult. In some Middle Eastern autocratic regimes, a new outspoken generation is demanding more freedom from their rulers than their rulers may be willing to give. Thus the current violence in Libya (which has disrupted oil exports from that country) and protests in Bahrain and Saudi Arabia have propelled the oil, gold and silver markets and their associated stock sectors upward.

In our own country, the recent upward pressure in oil prices is producing rising gasoline prices affecting the already strained pocketbooks of consumers. However, the oil equities sector is benefiting from the currently strong prices of the underlying commodity. In addition, gold and silver bullion and the miners are currently surging strongly higher at the moment.

Was a future long term bull market in gold telegraphed by the bullish breakout by the yellow metal on the monthly chart as I described in 2003? That's the importance I gave the breakout. Did this further forecast at the time that our economy may experience some of the problems normally associated with and witnessed by many in the past accompanied by a secular upward trajectory in the gold market price: potential high inflation, economic upheaval, or even war? I am not sure that I have the complete answer to the latter question. But In my own work, I placed great significance on the long term breakout and have written about my projections about the economy, gold, oil and political issues as well as a variety of other topics on this website.

Gold bullion has been in long bull market lasting over ten years. Now silver is joining the party, and may represent a greater opportunity in the longer term. The only thing that I can say is much of the easy money may already been made - we may be firmly in the "optimistic" stage in my opinion, as legendary investor John Templeton defined the various stages of a bull market. Now we may just have to wait for the market "euphoria" accompanied by investor and public hysteria over gold and silver investing accompanied by further price progress - a euphoria that may be building now.

Fundamentally, this may be caused by a number of catalysts: the Federal Reserve embarking on a QE3, an unaddressed Federal debt burden potentially resulting in highly elevated domestic inflation level or an "unmanaged decline of the U.S. dollar. Additionally should China stop supporting our Treasury market, the Federal Reserve might continue or restart QE to pick up the slack, which could under that potential scenario escalate the level of demand for gold and silver as the public witnesses sharply escalating price levels and turn to a recognized store of value in order to protect their purchasing power. The Federal Reserve is committed to modest inflation of 2% (engineering that is a different story). That target might be exceeded if the velocity of money increases, bank lending to creditworthy companies quickens or should economic activity pick up. Then the much talked about Bernanke exit strategy may come into play.

I believe that we still have time to put our house in order. Yet, we may need a different President or have to undergo another economic crisis in the future to spur an environment where long lasting economic growth and meaningful debt reduction can occur. Time is limited: hopefully citizens and lawmakers may take the opportunity soon to have a national dialogue in 2011 on important economic issues as debt reduction and maintaining a sound currency as we are all in this together.

The Dow Jones Industrial Average currently rests at 12,169.88 while the S&P 500 closed at 1321.15 as of this writing. Gold trades at $1431.10 per troy ounce while silver trades at $35.60 per ounce. Crude oil is at $101.91 per barrel.

Technically, silver appears to have the most potential for gains in the next couple of years, though my work shows that if it reaches the $38 - $42 range, the time may be ripe for a correction in the range of 24% to 50% from that high range before it potentially reverses again and may exceed the previous high over time.

I am maintaining my core gold or silver bullion positions at this time as well as positions in a silver miner and ETF. The fundamentals behind the continued upward price movement in these markets are in my opinion still formidable: (i) the Federal Reserve has said that quantitative easing (QE2) may continue at least until June, and (ii) neither party in Congress nor the President at this time and for that matter many members of the public appear to desire to sit down and seriously discuss the need to downsize federal spending and government to a degree that it would meaningfully reduce our debt burden and contain inflationary federal stimulus (we currently have QE2 to counteract many potential economic effects of cuts in government spending).

For the time being, I have a strong allocation to U.S. equities, but am monitoring carefully whether or not the succession of higher lows and higher highs in the S&P 500, NASDAQ Composite, and the Russell 2000 on the daily chart will continue. Should that uptrend be violated, I would look for the indexes to maintain strong support at the indexes 50 day simple moving average range. Should the latter range be violated on higher volume, I would look for potential opportunity to realize past gains and reduce risk. My technical studies appear to indicate that the S&P 500 may have further up to go, but a stronger case may be made for greater upside progress if we penetrate the 1335-1356 resistance area on the S&P. The Nasdaq Composite and the Russell 2000 indexes appear to me in better shape technically than the large cap indexes - which has occurred in the past in the more speculative stage of a stock market advance.

I believe that the stock market low of S&P 666 that we witnessed in March 2009 may have been a low of similar importance as 1974 and may have represented a stellar buying opportunity for the long term. Just remember the after the stock market low in 1974, the stock market struggled for years after the initial market recovery and the economy experienced two more deep recessions punctuated by the 1980 oil shock (also the gold top) before finally the stock market lifted off in August 1982 for an 18 year long bull thrall. We may very well in the next several years be in store for another recession. No one that I know of has repealed the business cycle yet. What ammunition may the Federal Reserve have left to fight this inevitability, especially after the Fed's extensive response to the 2008 debacle, or if Americans and their leaders do not face our mutual debt burden in a timely manner?

Just as the breakout in gold on a long term monthly chart may have telegraphed further upside price progress in the yellow metal on a secular basis, the U.S. stock market has been interpreted and publicized by some as a recession forecasting tool. However, the stock market has a mixed history at predicting such events. Looking at economically important commodities and their associated equity sectors price behavior may render clues not only regarding the potential future price progress of the commodity or sector, but may render insights into future economic dynamics.

As new technologies and industries sprout up demanding new skills from their workers, obsolete technology and outmoded production, creative destruction happens. Work itself is transformed, as workers must find ways to adapt to an ever dynamically changing economic system. That's been the economic history of America. Another example more salient to the modern era is how the discovery of new ways to tap huge untapped oil reserves resting deeper than previously thought attainable in the early 1900's led to the widespread development of fossil fuels as an energy source in the 20th century fueling new technologies and our modern way of life.

Just as Al Gore may not have invented the internet, Barack Obama may not handpick or legislate the next energy technology that will transform our economy to enable us to stop importing oil from the Middle East. Barack Obama with his top-down approach toward economic management may be the source of some level of destruction of jobs, but I do not think that he represents the transforming power of creative destruction in our country.

When Barack Obama was running for President with his promises of directing federal funds toward the laudable goal of developing "clean energy," did he anticipate that the oil industry in certain areas of the United States is now being transformed by a process called hydraulic fracturing, a process that can recover untapped oil reserves in great volumes. One estimate is that the process could lower our foreign oil imports by 60% in the next nine years. The EPA is now investigating the environmental risks of hydraulic fracturing - a process that has not developed without growing pains and the appearance of unscrupulous developers causing environmental damage. Reference this article about hydraulic fracturing.

Barack Obama may not be the person who has the expertise to make us completely independent of foreign oil imports. A technology may be developed that we cannot conceive of yet.

We must as a people tell our legislators to address duplicative and unnecessary spending and to genuinely foster new business creation. A healthy stock market may play a role in this as new companies go public and raise funds to grow, further develop and hire additional employees. Economies and entrepreneurs operate in a dynamically always changing environment. The next transformative process or technologies may lie in the hands of researchers only a handful of people ever recognized or who may even be totally unknown in the present day. Even President Obama recognizes the importance of research and development in creating new jobs in the long run. The only problem is that the government cannot force technological change (they may encourage it through research tax credits, etc.), but the creation of life changing new technology for the masses comes from individuals, teams of people, and entrepreneurs.

How does this discussion bring us to the Bailout of the economy and its relationship to the power of creative destruction? When the stock market and the world economy almost came to a standstill in 2008, U.S. policymakers were given two choices: bailout both the market and failing important U.S. banks and brokerages by increasing federal indebtedness or no bailout. We all know what the consequences have been so far in the greatest bailout in American history orchestrated by the monetary ease of the Federal Reserve and the fiscal stimulus of the Obama administration: the stock market has doubled from its Crash low of 666 on the S&P 500, economic deflation has been avoided in my view, it is not likely in my view that there will be a double dip recession unless the economic numbers change in the coming months, the economy should accelerate in the coming months, and as job holders with financial assets may be feeling better about the state of the economy - consumer spending may improve. This in turn may inspire businesses to invest a bit more in their businesses, potentially hiring some new workers. It sounds great, doesn't it? Just what the doctor ordered? Good or bad?

But this may not represent creative destruction in my opinion: new ways of thinking and technologies supplanting the old. The Bailout may be keeping the old ways on life support. May we have had a mass run of corporate and individual bankruptcies greater than today had Wall Street been allowed to fail? I am sure that we may have. Wall Street misbehaved, but they may have been saved. Why? Well, I suppose that one good result from the bailout maneuver was that companies may still offer stock to the public in IPO's, raising money to hire new workers and expand. There are currently winners and losers from the Bailout. Perhaps the next generation may even see Wall Street as a good place to place their retirement nest eggs. Perhaps the mistrust of the Street may eventually wear away. We and our policymakers may have stewarded economic evolution rather than creative destruction at this time: financial reforms have been legislated and our policymakers have chosen to move forward.

As most people recognize, one problem with the bailout is the cost. The Congressional Budget Office in a report issued in August, stated that the national debt could grow larger than 100% of GDP in just 10 years. Citizens Against Government Waste stated in a letter to certain of its members that "under that scenario, half of all income taxes will go toward paying interest on a $23 trillion national debt... The national debt per household, which was $52,000 before the recession, would approach $150,000 by 2020." The financial markets and the bond vigilantes may eventually stop tolerating this position, or our foreign trading partners and competitors may.

However, once the drug of quantitative easing by the Federal Reserve stops in June 2011, assuming there will not be a QE3, the stock market's fate will rest on the economy's laurels.

The keys here may be U.S. monetary policy and the debt that we are all mired in. We do not want the United States to hit an inflection point where the there is a QE3 and QE4, which inflation sensitive equities may love, but which may cause interest rates to move further upward. There may be also a potential risk that China stops buying Treasury bonds in retaliation to the cheapening of our currency (and their U.S. dollar holdings) through our Federal Reserve's extreme "monetary ease." This may be two gambles our policymakers are taking.

A third potential gamble by our policymakers whose outcome may be delayed by several years down the road is be that the U.S. debt balloon is not deflated in time before either the international currency markets or our own financial markets anticipate and/or react to potentially extremely high levels of inflation not seen before in the U.S. in the modern period: the stock market could cascade down from elevated levels, the bond market bubble may have already deflated quite a bit by then, the dollar could waterfall downward as gold and silver potentially polish off their decade plus bull market with a flair.
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The American citizenry really may hold the power here, just as they always have. We must support those in government who want to bring government costs down to size. Freezing spending at elevated levels is not good enough. The government needs to pare down its spending just like the citizenry of America have.

The Dow Jones Industrial Average rests at 12,105.78 and the S&P 500 closed at $1,307.40 as of this writing. The mini gold contract is at $1,412.40 and the mini silver contract is at $33.494. The dollar index rests at 77.297.

Since my last blog post here, I have done little to change my investment positions. I took off a small portion of one of my silver miners as the price of silver surged and sold two smaller Chinese equity positions. Please reference the foot of that blog post for some of my other current positions.

Please see comment box below.

Related posts:

U.S. Economic Future: May We Lose Complete Control over our Destiny?

posted July 10, 2009

How to Invest in Barack Obama's "Workers Paradise"

posted March 13, 2009

The Obama Factor: Why His "Change" May Make You Economically Worse Off

posted July 28, 2008

And what is the nature of such economic knowledge and experience if it exists? Of course, when we think of visionaries, we normally think of great religious figures or artists, or just persons with unusual foresight or invention in his chosen field. I do not mean to compare equities investors to great religious figures - that would be absurd; however, consider whether great investors such as Warren Buffett or deceased mutual fund family founder John Templeton could be considered economic visionaries?

Did these two investors in their investing choices and economic prognostications have the quality of foresight? My answer is that through their educations, hard work, long investment experience and impeccable track records, they have achieved this vaunted status. They have been founders and expanders of great investment wisdom practicing their craft with great expertise. Their work and some others like them have sometimes led to the creation of a great deal of material wealth and hopefully improved the lives of American families of all walks of life who invested with or like them. They have consistently expanded knowledge about how to invest one's money to help protect one's material journey here on our planet. Significant original contributions have been made by a short list of fund managers and investors to the book of knowledge and ideas about how to survive as an individual well beyond subsistence in a capitalist economy through being shareholders in publically traded companies.

In my book, A Way to Wealth: The Art of Investing in Common Stocks, I describe how many years ago I read and listened to interviews about the economy and the direction of individual stocks and the general stock market with such investors such as Warren Buffett and Bruce Berkowitz (after which I later bought Wells Fargo in 1993), Martin Whitman (MBIA, which I sold before the bulk of the stock market decline in 2008, and Peter Lynch and John Templeton in the early 1990's (Johnson and Johnson) when their preferences about individual stocks were made clear. I combined these investors opinions with my own personal research included in my book, to reach firm buying decisions which led to a high level of return on my investment. I should say that like many equities investors during the stock market Crash of 2008, my investing account declined markedly in value during that year's market swoon.

Why should we care whether some money managers may have great long term track records, and that they may help us make money in equities? It is in the average persons' material self interest to improve his or her lot in life by work or also by making careful investment in equities or gold or silver, or other investments that may increase in value. Every year Forbes Magazine rates their mutual fund universe and gives each fund a grade for performance in up and down markets. This may be useful to some investors. The grade for equity funds in down markets is important, as the investor might do well to have some downside performance protection for his equity funds.

The task of creating long term wealth in the stock market was complicated by the 50% decline of the S&P 500 in 2008, when the entire financial system as we knew it was brought to the brink of collapse. U.S. equities have now recovered a great deal of their previous decline and have been rallying strongly into the early part of 2011. The Dow sits as of this writing at 12,062.26 and the S&P 500 rests at 1307.10.

The gold market, on the other hand, has been in a bull trend for ten years. Gold sits now at $1,351 per troy ounce and silver is at $28.81 per ounce as of this writing. Readers of my blogs may go to the Blog and Articles navigation tabs on this website and click on the Gold Investing and Silver Investing "categories" to see all relevant historical entries on these metals markets. The Gold Investing category in the Articles section shows posts going back into 2007 on the yellow metal.

Granted, the end result of making good stock market investing decisions and having some extra funds at one's disposal may just mean having the cash to save for one's retirement. That money can also help provide for your children's college tuition or even be donated to charities. We do live in a capitalist society with all its faults - and capitalism may have been proven by history to provide the most for the largest group of people possible on the planet by an economic system. Mankind has not discovered a utopia yet. Without free enterprise, I believe that we would be back in the Dark Ages.

Our American society in particular idealizes the pursuit of happiness - the right to make of one's life what one desires and to keep its material and spiritual fruits as long as one does not break the law. We can all aspire to any level of the good life we desire - whether that be owning a home that is affordable to our means, having a family, doing work we love to do, getting involved in the community, or achieving a philosophical or religious plateau of enlightenment. It's a big world, and one has to survive somehow.

Since my last post, I bought 2 silver mining stocks, still maintain an international oil firm equity, a Canadian gas pipeline company, a railroad company and various other equities. I purchased a domestic equity benefiting from the rise in oil prices and also two restaurant stocks among a few other equities. In doing so, I have slightly reallocated out of the diversified equity fund investing throughout Asia and significantly reduced my position in the Franklin Templeton Hard Currency Fund. I maintain core gold and silver positions.

Related posts:

Protect Your Investment Portfolio from Inflation and Rising Interest Rates (and Ben Bernanke)

posted July 21, 2009
Inflation Hedge Strategies and Thoughts for 2010 and Beyond

posted June 2, 2009

Why Long Term Investing in the Stock Market is not Dead

posted December 8, 2008

If the Federal Reserve led by Ben Bernanke adopts this much anticipated policy of a second round of quantitative easing , then U.S. economic deflation for the foreseeable future may be off the table. A cautiously rising stock market may be reflecting the belief that "the huge bond-buying effort they (the Fed) ended in March (2010) is likely to be resumed." We know that the U.S. Dow Jones Industrial Average peaked shortly after that bond buying ended and fell rather dramatically.

The fundamental precept behind a strongly rising stock market may be a resumption by the Fed of its bond buying campaign in order to "combat ineffective fiscal policy and high unemployment" (my quotes). A U.S. November 2010 Congressional midterm election result favorable to the markets may propel the cautious advance we are seeing today. However, the potential resumption of debt monetization does not offer good prospects for future U.S. inflation.

Bill Gross of Pimco has made the point that the last round of monetary ease after the 2008 financial debacle generated a 50% stock market rally. No one can guarantee that a rally of this magnitude is in the cards right now, but the first important line of price resistance should the rally continue appears in the Dow Jones Industrial Average at the 11,150 range, and further resistance at the 11500-12000 area. If this area should be penetrated, then we could reach the 15,350 area in well over a year's time. On the cash S&P, the first line of resistance on the daily chart appears to be at the 1175 range and then at the 1250 area. If we are fortunate enough to surmount those areas, then a rise to 1330 area may be possible and even the 1550 area in time. If I am wrong, then the only other two choices are to retrace back into the recent trading range or less likely, in my opinion, to violate the low of the trading range (presently the lows of the recent range are Dow 9760-9940 and S&P 1040 areas). In the event the lows of the range are broken, I believe potential downside risk are Dow 8850 or cash S&P 926 areas.

All Americans of voting age will hopefully vote in the Congressional mid-term elections in November. I would like to draw your attention to the Iowa Electronics Markets, an election futures market run by the University of Iowa. This election futures market has an admirable record predicting which party is going to win elections in politics, and correctly predicted President Barack Obama 's ascent to the Presidency.

Please see http://iemweb.biz.uiowa.edu/graphs/graph_congress10.cfm for the Iowa Electronic Markets October 2010 midterm elections futures results for control of Congress. In the chart, the the green line shows that these markets are predicting about a 60% chance that there will be a Republican House and a Democratic and Independent Senate.

Please see: http://iemweb.biz.uiowa.edu/graphs/graph_house10.cfm for the October 2010 midterm election futures results chart illustrating the race for control of the U.S. House of Representatives. This chart shows that the futures market is predicting an 81% chance Democrats will have 217 or fewer House seats after the election. Under this outcome the Democrats would lose their absolute majority in the House.

The Iowa Electronic Futures website reported on September 15, 2010 "that the strong showing of Tea Party supported candidates against more moderate Republicans in the primary elections hurt the chances for a Republican sweep of both Houses, but that traders believe a Republican takeover of the House of Representatives is even more likely." Please see: http://tippie.uiowa.edu/iem/media/story.cfm?ID=2457.

I believe we have three potential scenarios to consider concerning the election's outcome and its effect on the economy and our investments' future for the near and medium term. I believe the stock market is anticipating a change of control in the House of Representatives and thus is now ascending slowly and with some hesitation.

The first scenario is that the Republicans and the burgeoning Tea party movement take control of one House of Congress after the elections (in concert with Democrats disaffected by the Obama economic policies) and are able to effectively block the President's Progressive's legislative agenda, Obama might reflect at that time and decide to compromise with these new opposition forces in Congress. Under this outcome, the President, possibly unable to move his agenda forward, may show willingness to bend on some of his anti-growth policies and deliberate to stop class warfare rhetoric that has been dominate for two years (but I would not count on that). However, He presently shows no sign of discontinuing the rhetoric.

Obama's ability to compromise on issues important to small and large businesses under this scenario may be essential to our future economic progress and could bolster the stock market should one House of Congress fall to his opposition. Given the great leap of faith that after the election, Obama softens his rhetorical stance and compromises on policy, the banks may feel more confident lending out their reserves again to creditworthy businesses given the greater certainty of a more favorable business climate. Under the circumstances of increased bank lending, consequent business expansion and new hiring combined with healthy doses of Bernanke's monetary ease, stock market inflation hedge equities such as oil and oil service firms and materials equities could lift many other equities on their coattails. Yet monetary ease combined with greater economic growth might also dramatically accelerate the inflation rate under this outcome. Silver may also continue to do well and the bond bubble could start to pop as potentially increasing economic activity spurs interest rates upward.

The second likely scenario is that the Republicans and the Tea party gain control of one House, and Obama does not compromise on policy. The stock market rose from March 2009 to May 2010 during Obama's Presidency even with the anti-business rhetoric . When the Fed took away the punch bowl of bond buying, the stock market corrected. Even if there is gridlock after the midterm election and our elected officials agree to butt heads and do nothing, the stock market could still rise with the potential and reality of resumption of Fed bond buying. Faced with potential political gridlock for two years: at least the rhetoric wouldn't be all bad for small and large businesses.

Under this second scenario of political gridlock, the economy might not do nearly as well as under the first. it is not clear to me whether the banks would feel confident enough to lend out their reserves to companies to expand their businesses and hire new workers due to a prolonging of the uncertain regulatory and political environment. Also, the inflation rate could rise a bit less than in the first scenario if the economy continued to stall. Stock market inflation hedge equities and a broad range of other equities may still do relatively well in the muddle in this scenario.

The third scenario is that the progressives are reelected. I think that in this case the banks may continue hoarding their reserves and business may be inhibited from making capital investment and making new hires by the potential continuation of uncertainty and the open waging of class warfare. I think that in this case the economy may struggle mightily and the stock market may be left at the mercy of the generosity of the Federal Reserve - which would in this case probably would oblige the equities markets and a faltering economy by further monetizing the debt. We could get an illusionary playable stock market rally which might run out of gas as soon as the Fed takes away quantitative easing.

The economy and the stock market are in an important way fueled by confidence. Without business confidence to invest and hire new workers and consumer confidence to purchase goods and services, the economy may not make much progress. Without the confidence of individual and institutional investors in the stock market, there may be nothing to hold the market up. There has been much discussion that the recent "flash crash" removed some of the underlying confidence of individual investors in the integrity of the stock market: the rules of the game favor some moneyed interests over the individual investor. Time will tell whether the retail investor returns to the stock market. See related posts below for my entry on the essential role of investor confidence in keeping the stock market ball rolling.

I have made the point many times before on this blog that the U.S under Obama is spending its financial resources profligately, effectively placing one out of two dollars of spending on the national credit card. Simply put, I believe that the growth rate of spending should be less than the growth rate of GDP.

Gold and silver have broken through ceilings of resistance and the prospect of Bernanke's continued "monetary ease" augurs for higher prices for the metals for the medium term.. I would caution that these markets are highly volatile and susceptible to violent corrections at any time. I would not consider them as "forever" investments but I personally have core insurance positions and do speculate in gold miners occasionally. That said, though there appears to be room for price expansion. A continued parabolic (straight-up) move in the metals would likely be a signal that the move may be exhausting itself for now. It appears to me that hard assets, including "hard currencies" such as the Swiss franc may still have play left for the intermediate term as the decline of the dollar shows increasing force.

Should U.S. policymakers decide after the election to get religion and cut back spending in a serious way, I think that the gold market might take that as a signal that the American government wants to preserve the value of its money and not debase the currency any further. But I still believe that in many ways, an unseating of political power in the Congress in November and the actions of Ben Bernanke's Federal Reserve may determine the course of the U.S. stock market, gold and silver, as well as the rest of our U.S. investments. Some investors may determine to escape this cycle by investing outside the direct sphere of American influence, but this brings additional political risk into the picture. These investors who invest abroad (either through ADRs, certain widely available mutual funds, or directly on foreign exchanges may wish to benefit from the progress of companies domiciled in creditor nations.

Bernanke's debt monetization is historically quite inflationary. It simply may create a bubble in gold and another bubble in oil, and finally debase our money. Hopefully, a changing of part of the guard in Washington D.C., courtesy of a vote of the People, will lead to an improvement in the economy and a conclusion to the greatest bailout of all time.

I added to my stock market exposure commencing on September 22, 2010. Among additions to my portfolio are dividend paying foreign companies domiciled in creditor nations in Asia as well as one major consumer products company traded in both the Netherlands and England. Dividends in the nations' respective currencies are converted into dollars. I have held various other equities for many years including an international oil firm, a Canadian gas pipeline company, a railroad company and various other U.S. equities. I continue to hold a diversified equity fund investing throughout Asia and the Franklin Templeton Hard Currency Fund. I still maintain an insurance gold and silver position. Should gold experience a violent correction in the near future, I would consider adding an additional position.

Related posts:

Silver Rally: Is It Ready for Primetime?

posted September 25, 2009

Protect Your Investment Portfolio from Inflation and Rising Interest Rates (and Ben Bernanke

posted July 21, 2009

Why the Stock Market May have Collapsed Months before Barack Obama was Elected President

posted February 28, 2009

Will the U.S. Suffer an Inflation or Deflation in 2009-2010, (or Both)?

posted February 3, 2009

Why Long Term Investing in the Stock Market is
not Dead

posted December 8, 2008

How Obama May
Bomb the Stock Market and the Economy in 2009-2010

posted June 19, 2008

The Level of Confidence in the Stock Market and Our Social Contract

posted October 1, 2007

The Dow Jones Industrial Average closed at 10136.6 on Friday, May 28, 2010. Gold closed at $1,212.20 per troy ounce and silver closed at $18.43 per ounce on this date. (Editor's note: oil traded at $74.09 when this post was written).

My immediate fear is that a general liquidation of assets may be underway. I hope that I am wrong, but I am considering and hedging the bear market case in my own investments.

We were the largest creditor nation on earth in the 1970's in spite of our economic woes at that time. Now we are the largest debtor nation. As a result of the level of potentially unserviceable public and private debt that pervades our society's households and many financial institutions - that it extends to parts of Europe, and due to the current unsettled price behavior of our stock market and their potential outlook - investors need to be mindful of the possibility that our markets may breakdown. The potential for asset liquidation similar to a depression environment may exist. But rest assured, our central bank should do everything in its power to stop this from happening and should continue monetary ease if general asset liquidation occurs. After asset liquidation (falling asset prices), reflation of many of the same investment class may occur.

The Dow Jones average, after reaching a closing high of 11,205 on April 26, 2010, just shy of my lower price target of 11,129 proposed in my last blog entry, is trending down at least for the short term. The demand for the dollar (the dollar index is now at 86.88) is strong on a flight to "safety" as the risk of European contagion potentially increases.

The last secular bull market in the U.S. equities market lasted from 1982-2000 (eighteen years). Long term bull markets are usually always followed by long term bear markets. We have been in a secular bear market since 2000. If the duration of this secular bear trend follows the pattern the last one from 1966-1982 (16 years), then one may not expect the next long term bull market to begin until around 2016.

Until recently, we have experienced a shorter term bull market which took the Dow Jones to its highest closing price ever of 14,163 in 2007. Then the financial crisis imploded, cutting the average by more than 50% to the March 2009 low of 6626, From that low, the Dow Jones average ascended to 11,205 on April 26, 2010 until the recent sharp decline. There is potential for the secular bear market to trade within the area of the current defined range of Dow 6626-14,163 or to break the March 2009 lows. Once the long term bear trend plays out, a new secular bull market can begin.

I have recently reduced my general equities positions meaningfully, including some oil and gas industry securities and have placed the funds in a U.S. government money market fund. I still maintain a core position in an international integrated oil firm and some other equities. I still maintain my investment in the Franklin Templeton Hard Currency Fund.

Please see my earlier post dated February 3, 2009 which discusses the possibility of deflation:

Will the U.S. Suffer an Inflation or Deflation in 2009-2010, (or Both)?

Addendum: Gold, Silver, and Oil:

The price of oil, now at $74.09, has the potential to fall further in the near term - though oil is still a very precious asset.

Silver, at $18.39 as I write this, has had a weekly momentum non-confirmation and potentially risks going lower.

There has been a ten year bull market in gold with the price rising from below $300 to over $1,200 per troy ounce. The 1970's commodities bull market also lasted ten years before collapsing.

The investing public is heavily in the gold and silver trade. These asset prices may follow the stock market down as liquidation of certain asset classes I describe potentially takes hold. Gold and silver prices may be in their peak range for the intermediate term. I have sold my silver holdings bought for speculative purposes and look to re-enter in the future. I still maintain a core position of gold and silver holdings as insurance or to participate should these assets continue to rise in price.

Please see my post: dated June 23, 2009, which describes why I realized profits in physical gold bought at much lower levels:

Why I Sold Part of My Gold Position after a Six Year Hold

Should liquidation of asset prices take hold for the intermediate term in the financial markets, our stock market, silver, oil, and potentially gold may suffer, at least for a while. If this is the case, it may play out gently in our stock market as a slow decline such as the Japanese stock market and economy experienced in its "lost decade," or it may be more rapid. We now have our own "zombie banks," just as occurred in Japan. At that point, the Fed may be desperate to inflate - and the assets that may have suffered during asset liquidation may then potentially rise in price exponentially.

Editors note: My website readers and subscribers to my RSS feed have likely noticed that I have not posted since October 2009. I have been on sabbatical from the website and am still very busy analyzing the markets from my point of view and always attempting to understand the markets better. This long weekend has provided me the time to post an investment update, especially timely as it offers a different outlook for many of the investments about which I have written in the past. Please refer to the "site map" for the complete list of blog entries and articles.

I want to personally thank all the readers who have followed this website since its inception. I hope to provide more investment updates as time allows.

I may take some profits in equities should the Dow rise between 11,129 - 11,490 including intraday price action. Should the general market continue to rise from that band to the higher weekly band of 11,899 -13,045 on the continuation chart, I may take more profits.

As I have stated before (see related articles below), the long view is best when considering equities. We have just endured a huge stock market crash and credit contraction. Unprecedented government spending by way of our national credit card and Ben Bernanke's monetary ease are giving the financial markets a good ride now.

These policies may produce higher inflation down the road. Should a future Fed exit strategy "cool off" the economy, the stock market may suffer. I do not believe the authorities will exit from monetary ease if the economy takes another dive. The dollar could continue to fall and stocks may rise as more and more money is printed.

On the other hand, if the economy does reasonably well, the stock market may remain fairly buoyant, though it may experience corrections of 25-30% such as we experienced after the dramatic 22 month 76% rise in the stock market from the 1974 bottom in equities.

I have sold stock in the month of October. I am considering whether to sell a portion of my non-inflation hedge positions should the scenario described in this article occur. I currently maintain positions in various oil and gas industry companies, other equities, domestic and international stock funds, agricultural, natural gas, and silver ETF's, the Franklin Templeton Hard Currency Fund, gold and silver.

Related posts:

Stock Market Rally Supported by 20% of Consumers with Substantial Assets

posted September 18, 2009

Stock Market Bull Run May Last say Two Top Performing Money Managers

posted September 9, 2009

Economist Richard Hoey Sees Stock Market Climbing a Wall of Skepticism

I am adding detail to my previous post that the case for a sharp increase in the price of silver may now be clearer. At the time I wrote that piece, silver had closed for the trading month of May 2009 at $15.73 per ounce on the futures continuation chart. I stated that the silver price could touch the $17 - $20 range, with the possibility of reaching the old 1980 high range of $32-$42 within one to two years in the form of a blow-off top.

In fact the price rose to a high of $16.25 shortly thereafter before going into a correction. Silver has since rebounded, reaching as high as $17.69 while closing for the week of September 25, 2009 at $16.06 on the futures continuation chart. In view of this action, where might we go from here?

In my view, there were two stages to that dramatic 1980 market top. In the first stage, silver traveled from a substantial low of $6.05 per ounce on January 15, 1979 to $9.30 per ounce on August 13, 1979. This journey represented a 64% price increase in a period of 31 weeks.

The second stage, a rapid price ascent, carried the price of silver from $9.22 per ounce on August 20, 1979 to as high as $41.50 on the week ending January 21, 1980. This 450% increase in silver took an additional 23 weeks to accomplish.

Both stages together totaled a 686% rise in the silver price in a time span of 54 weeks (from January 15, 1979 to January 21, 1980). It was basically one large move in silver, divided into a bull phase and a parabolic final stage.

Though it may be impossible to be certain, we may now be in time for the finish of the bull move in silver. In my view, the substantial low for silver before its current bull market began was at the beginning of July 2003 at $4.545 per ounce.

Stage one for this run lasted 55 months traveling to a high of $21.40 per ounce on March 6, 2008 for a gain of 471%. After this bull run, there was a retracement to the $8.40 per ounce level, from which silver has increased its current price.

Might stage two of today's run in silver complete a similar move as the 1979-1980 bull market? In that event, silver could rise over $31 per ounce, similar to the conclusion from my earlier post. Support on the downside appears first at $14.71 - $15.62 per ounce. If the low of $12.435 per ounce is violated on the weekly continuation chart, then this particular uptrend could remain in question.

Another possibility is that we may see a 600% plus move from the recent reaction low of $8.40 per ounce - which would bring us to an eventual target range of $50 - $58 per ounce.

Aside from the key limitations of chart analysis (editor's note: charts will be featured soon on this site), I think the fundamentals may carry the day. The Board of the IMF has approved the sale of over 12.97 million ounces of gold or $13 billion to be sold to central banks and gingerly sold on the open market. If the sale wins approval from the appropriate government authorities, gold might be affected negatively and silver could fall in sympathy. But this might provide a deeper buying opportunity.

The American government and Federal Reserve's current campaign to bring the economy out of the hole seems to be benefiting the stock market. It is only natural that inflation at this time is somewhat quiescent as the economy only now appears to be emerging from a very deep recession. What remains is that monetary excess usually leads to greater inflation down the road - which might be two or three years from now.

Gold and silver may benefit from an increase in inflation expectations. Gold is now more regarded as a store of value against an increasingly fragile U.S. dollar, though we do appear to be in a somewhat optimistic phase of the precious metals bull market. It is possible that the extent of this bull market could surprise on the upside.

I currently own silver bullion and SLV.

Related posts:

Protect Your Investment Portfolio from Inflation and Rising Interest Rates (and Ben Bernanke)

posted July 21, 2009

Why I Sold Part of My Gold Position after a Six Year Hold

posted June 23, 2009

Silver Market May be Embarking on Important Price Rally

posted May 30, 2009

The Dow Jones futures contract on the continuation chart closed at 9733 on September 18, 2009. A 25-30% correction in the Dow would not be unwarranted, though it may occur from a higher price level. However, there is weekly chart support at the 8640 area on this contract and a daily support band between 8290-8415, either of which may act as a barrier to further decline should a correction ensue. I expect these support ranges should hold. Note: this website will soon present charts on a regular basis.

The Wall Street Journal reported today that "for the first time in nearly two years, households grew wealthier. Household net worth grew 3.9% to $53.1 trillion in the April-June period from the first quarter." The financial journal continued that growth in investor stock portfolios was a major part of the increase, but also that households have cut their debt for four consecutive quarters. Also, home prices are increasing in many parts of the country, which augurs well for next quarter.

I would add that the minority of investors with significant assets invested in equities may feel richer as stocks have rallied and some of these investors who have jobs may feel a bit more secure in them. Others may be buying stocks or reallocating to gold or silver in order to hedge against an expected inflation.

More well-off consumers who feel as if the worst has passed may reward themselves by spending a little of their newly reclaimed wealth. The rich may not be back to where they were before the Crash of 2008-2009, but their mood may certainly be better.

Just about everything that can happen has happened to this country economically and to the stock market in the last year. I won't spend time here going through the laundry list of events and government actions that have been the subject of many "Last Year of Crisis" programs on popular financial television networks lately.

The widely discussed 50% Fibonacci resistance area on the Dow rests at 10,363 on the Dow futures continuation chart. There is no other resistance on the daily or weekly charts at this Fibonacci level. More importantly in my view, the next ranges of resistance are between bands of 11,050-11,554 on the daily chart and of 12,235-12589 on the weekly chart.

So I expect the first area that the Dow may reach to be the lower daily band, where a correction may ensue. Should that band be exceeded, I expect the higher weekly band may stall the advance.

My investment positions are unchanged from my last post. I continue to hold gold and silver. The Franklin Templeton Hard Currency Fund, which can invest in countries with low inflation, continues to benefit from the dollar's decline. Many inflation hedge stock and ETF positions are participating in the equities rally.

I will stick my neck out and say that the longer term picture for stocks may be brighter than many might imagine. If the March 2009 low of 6469 on the Dow turns out to be as important as the 1974 low of 577.60, then we may see a series of shorter term bull and bear markets within an overall loose trading range for several years. Should a long term multi-decade bull market liftoff occur after that trading period, such as the long term bull that began in 1982, some seven years after the 1974 bottom - then reality might look brighter for stock market investors.

But for now, the market is rising.

Related posts:

Stock Market Bull Run May Last say Two Top Performing Money Managers

posted September 9, 2009

Economist Richard Hoey Sees Stock Market Climbing a Wall of Skepticism

posted August 10, 2009

Is the Stock Market Rally for Real? "Yes," says Richard Hoey of BNY Mellon & Dreyfus

posted July 28, 2009

Why Long Term Investing in the Stock Market is not Dead

posted December 8, 2009

Bloomberg.com reported on September 9, 2009 that Price, who sold his Mutual Series Funds to Franklin Resources in 1996, is finding value in selected equities in today's market. He sees similarities between the 1974-1982 100% stock market rise, and today's 50% ascent from the March 2009 bottom of 6469. The 1974 market trough to which Price alluded was a once in a generation buying opportunity, when the Dow ascended from a low of 577.60.

Price advises investors to do their homework and to be selective - he points to companies with sound long term fundamentals that are beaten down by Wall Street after missing earnings estimates.

In the September 7, 2009 edition of Forbes Magazine, David Dreman says not to worry about timing the stock market and to think "about the purchasing value of the dollar." A wide swath of Americans and many non U.S. investors are well aware of the risk to the domestic and international value of the U.S. dollar posed by the Treasury printing money and reckless government spending under the thin guise of fiscal restraint. The September 09 dollar index contract closed September 8, 2009 at 77.34 and the index looks to be continuing its long term decline.

I agree with Dreman that current Fed policies may eventually lead to a greater inflation than the late 1970's as the Fed may not be able to gracefully exit from its current monetary accommodation in time to stop escalating prices or without grinding the recovery to a halt.

Dreman's advice is to "buy stocks, buy real estate, and sell bonds." I would add that owning assets may be the only way to protect your dollars' purchasing power if an inflationary economy develops over the next few years. In the 1970's inflationary economy, integrated oil equities, oil, physical gold, foreign currencies such as the Swiss franc and the German mark and real estate were fine investments.

I still maintain my positions in physical gold and silver, inflation hedge style equities, various other equities, agricultural and natural gas ETF's, and global and domestic mutual funds. I have sold my position in the Currency Shares Japanese Yen Trust (a temporary investment), but retain my position in the Franklin Templeton Hard Currency Fund, which has been benefiting from the declining dollar.

Related posts:

Economist Richard Hoey Sees Stock Market Climbing a Wall of Skepticism

posted August 10, 2009

Is the Stock Market Rally for Real? "Yes," says Richard Hoey of BNY Mellon & Dreyfus

posted July 28, 2009

The Future of the Dollar: Worth Less or Just Worthless?

posted April 6, 2009

Many observers have speculated on what form the Chairman's exit strategy from his policy of monetary ease will take - a policy that saved a select group of failing companies (and their employees' jobs) and potentially prevented a deeper collapse of the stock market and financial system.

1. The American stock market, after benefiting from the current high level of money creation, may suffer once the effects of potential Fed tightening tools (such as successive Federal Reserve discount rate increases) are felt. The discount rate is the interest rate at which banks may borrow funds directly from the Federal Reserve bank.
2. The U.S. dollar may continue its long term decline as foreign nations see in the Obama administration's "buy now, pay later" fiscal policies, an unwillingness to address our fundamental debt problems by cutting spending and paying down our public debt. These nations may simply lose confidence in the dollar.
3. Americans may perceive their currency to be unsafe should the long term decline of the dollar become unmanaged. Capital flows could accelerate out of the United States, possibly inciting government restrictions on capital flows by Americans (there is precedent for restrictions on capital flows in democracies, as was demonstrated after the rapid collapse of the Icelandic economy and currency in 2008).
4. Interest rates may rise as a consequence of the Federal Reserve removing the current policy of monetary ease, lowering the value of long term bonds and raising the cost of debt financing by the U.S. government.
5. The budget deficit may grow more than expected as a result of higher debt financing costs, possibly leading to future forced budget austerity by the Obama administration, or more likely, its successor administration.
6. Higher inflation may accompany loftier interest rates as both a longer term consequence of monetary ease (too much money creation) and the timing of Ben Bernanke's potential tightening strategy. Stocks may be a reasonable hedge against inflation as company profits may rise in nominal terms along with costs.
7. As a result of higher price levels, hedges against inflation such as oil, certain oil industry equities, physical gold and silver may polish off their ten year bull market.

Please see posts below for more information.

Related posts:

Is the Stock Market Rally for Real? "Yes," says Richard Hoey of BNY Mellon & Dreyfus

posted July 28, 2009

Protect Your Investment Portfolio from Inflation and Rising Interest Rates (and Ben Bernanke)

posted July 21, 2009

The Future of the Dollar: Worth Less or Just Worthless?

posted April 6, 2009

In his piece, Buffett quotes economist John Maynard Keynes, who wrote that through the tax of inflation governments can secretly confiscate much of the wealth of their citizens. The middle class can be economically damaged by an embedded inflation, as occurred during the late 1970's.

Indeed, Buffett has stated that inflation in the coming years could be greater than that of the 1970's. The annual inflation rate topped out in 1980 at 13.5%. If Buffett's prediction of higher price levels comes to pass, it may take a greater number of dollars to buy a can of Coca-Cola. The dollar may be worth-less.

Buffett concludes that the fate of the U.S. dollar lies with Congress.

Pimco's Curtis Mewbourne in an August 2009 report writes that we are witnessing "a loss of status for the U.S. dollar as a store of value" even while there may be no sole real alternative to the dollar as a reserve currency at this time. The U.S. dollar benefited during the financial crisis, but those capital flows have reversed to a degree, he reports.

Mewbourne states that emerging countries hold a large share of international reserves and that the dollar is likely to continue to decline, especially against emerging market currencies. Further, he writes that China may be transitioning from an export-led to a domestic demand driven economy. While China with its stimulus plan has been able to maintain GDP over 6%, India has kept GDP over 5% without such a plan, Mewbourne notes.

China and India have 30% of the world's people. China's car sales may soon eclipse U.S. car sales. In July, Bloomberg reported that Franklin Templeton's Mark Mobius stated the Chinese stock market capitalization may exceed U.S. capitalization within three years. However, this would include Chinese state-owned enterprises.

Mewbourne writes about the "New Normal," where highly indebted developed economies such as the U.S. experience potentially reduced growth rates. Accordingly, the emerging economies may experience less export demand from more levered developed countries, but they may have opportunity to grow their internal markets.

I believe that the "New Normal" economic order may bring investment opportunities. I have written in this blog commentary on the potential decline of the U.S. dollar (see related articles below).

I own in my portfolio investments which may benefit from a further decline of the dollar over time. These include the Franklin Templeton Hard Currency Fund, the Matthews Asia Pacific Fund, and other funds holding international equities. I also continue to own gold and silver, though I would look to unload partial positions should those markets take off.

Related posts:

Protect Your Investment Portfolio from Inflation and Rising Interest Rates (and Ben Bernanke)

posted July 21, 2009

The End of the Dollar as We Know It?

posted April 13, 2009

The Future of the Dollar: Worth Less or Just Worthless?

posted April 6, 2009

Hoey stated "we are at a particular cyclical moment." Further, he said that the global recession is over and that the leading economic indicators for every major country in the world are rising. "We are going to have rising real GNP for practically every significant country in the world in the third quarter," Hoey stated.

Hoey's argument has some appeal. There is nothing better to the long stock market investor than a market climbing a Wall of Worry as many investors fear to step in because of a precarious economic situation. They may be caught underinvested or just may never get in.

This stock market rally may be similar to the ascent out of the 1973-74 bear market, which occurred during a decade of generally rising gold and oil prices and a final culmination of these prices in 1980. As I have mentioned repeatedly in my blog, inflation sensitive equities did well in the late 1970's, punctuated by the stock market "October massacres" in 1978 and 1979 when the market fell 11% and 10%, respectively.

However, I would caution investors that fundamentally, our budget deficit, our accumulated public debt, and current account deficit are much worse now than in the earlier bear market periods to which Richard Hoey refers. We are the world's largest debtor nation. Also, the Obama administration is now trying to pass an extremely expensive and hastily considered overhaul of our healthcare system that, if signed, may place much greater strain on our small businesses and country's financial position.

But this does not mean that our stock market cannot go up strongly.

I currently own oil and oil service stocks, physical gold and silver, and agricultural and natural gas ETFs. I also own equities and mutual funds whose prices would not necessarily go up in an inflationary economy.

Related posts:

Is the Stock Market Rally for Real? "Yes," says Richard Hoey of BNY Mellon & Dreyfus

posted July 28, 2009

Will This Stock Market Go Lower?

posted March 17, 2009

Would You Rather Be a Trader or an Investor?

posted February 23, 2009

Why Long Term Investing in the Stock Market is not Dead

posted December 8, 2008

Hoey states that "massive inventory liquidation" took place during the 2nd quarter and that auto and housing weakness was so profound that there will be no more exhaustion. He notes that Chrysler has shut down all its plants in America (a sign of the times...) and that you cannot exhaust something further that is not there. Hoey sees the roughly 20% of consumers who still have assets left carrying the weight for his projected economic turnaround.

I would add that the inflation of the 1970's was likely caused by the Fed's excessive money creation, which many observers agree is happening again under Bernanke. Yes, Fed policies in the early 1980's and 2009 are different, but the Fed's current policy of effectively debasing the dollar to "ensure" recovery may lead to much higher prices and interest rates in future years. At that point in the future, Fed policy may need to be tightened, which could result in another stock market downturn and another recession.

It appears that the stock market retrenchment we witnessed from September 2008 to March 2009 is similar in severity to the 48% stock bear market seen in 1973-74. I am convinced that if Bernanke did not and was not continuing to pour money into the financial system, the damage today to the stock market would have been much worse than 1974. However, this Fed policy, including sustaining Japanese style "zombie banks" and companies, may be merely postponing our ability to recover in a dynamic way economically by many years.

We may have seen the stock market low for the bear market in March 2009 at Dow 6469.95. This assumes, though, that Bernanke can succeed in getting the economy going without excess inflation and the Obama administration can rein in spending (something that the administration did not appear to be concerned with until the recent blue dog Democratic challenge to the Obama healthcare plan). These are challenges for the stock market, though technically it appears to have room to continue upward.

We will have to observe Bernanke's future exit strategy to get us out of the mess that we are in to determine the longer term direction of the stock market and the power of future inflationary forces.

In my December 8th 2008 article, "Why Long Term Investing is Not Dead" (see related posts below), I noted that one could consider holding stocks as portion of one's portfolio even during a bear market. I further outlined some of my positions at that time and made the case that asset diversification can help mitigate the effects of a severe downturn in stocks.

However life-altering the stock market Crash of 2008-09 has been, it does have precedent in financial history. The American stock market and economy have always recovered in the past, though poor policy choices on the part of our leaders can extend the time for that recovery considerably.

Related posts:

Will This Stock Market Go Lower?

posted March 17, 2009

Would You Rather Be a Trader or an Investor?

posted February 23, 2009

Why Long Term Investing in the Stock Market is not Dead

posted December 8, 2008

Stock Market Investing and the Power of Contrary Opinion

posted March 22, 2007

While President Nixon was in office, Fed Chairman Arthur Burns responded to pressure from the White House eager to have a strong economy when Presidential ballots were cast in 1972. Burns expanded the money supply to help ensure a growing economy in time for Nixon's reelection. Inflation soared to 12% by 1974. The oil shock in 1973 compounded the economic and inflation situation. The stock market lost almost half its value, and inflation hedge investments such as gold and silver plummeted from their highs when the economy dove into a deep recession in 1973-74. In this case, political expediency led to easy monetary policies and extremely high inflation.

One can draw lessons from history about how to position one's portfolio to rise along with a potential future inflation and higher interest rate level. Fed Chairman Ben Bernanke may indeed be able to engineer a successful unwinding of his policy of monetary ease, but there is no guarantee. According to Mr. Bernanke in his July 20th Wall Street Journal article, there are various tools available to the Fed which could accomplish the unwinding, but Bernanke has also stated that Fed policy may be accommodative for some time .

I believe that a continuation of expansionary monetary policy may be beneficial to investments such as gold and silver in the coming few years , just as it has been in the past. We already have buoyant gold and silver prices, though their bull market is showing signs of age (gold is currented at $949 per troy ounce and silver is at $13.55 per ounce). I believe that the unprecedented nature of the Fed's "rescue" of the economy may augur for an extension of the bull market in gold and silver, though their short term direction appears less clear to me. The oil market may be buoyed by a favorable long term supply decline as well.

I am positioning my portfolio in the following ways:

1. I own physical gold and silver, looking to unload the metals in stages should a bubble appear in these markets in the next few years or sooner.
2. I own natural gas and agricultural stock ETF's to potentially benefit from commodity price inflation in these areas and a stock market favoring these sectors (the prices of these commodities are sharply down from their climax highs in 2008).
3. I own multinational integrated oil company and oil service stocks to benefit from potential oil price increases and a possible return to an inflation hedge friendly stock market such as we experienced in 1979-80 and during the commodity price bull market from 1999-2008 (the 1979-80 bull run in oil and oil service stocks was punctuated by sharp declines, one of which was called the "October massacre.")
4. I continue to own shares in the Franklin Templeton Hard Currency Fund which can invest in the currencies of countries with low inflation and which may benefit from a falling U.S. dollar.
5. I own various other diversified equities and mutual funds to "hedge" my portfolio should my outlook on inflation be wrong.
6. I own my own residence and have a fixed rate mortgage. My residence is not underwater.
7. If prices of the daily staples I buy rise at a faster clip, I plan to stock up on them to beat the next price increase.

If a bubble develops in these sorts of investments, then their elevated price levels may eventually pop, just as the stock market bubble popped in 2000 and the real estate bubble began to deflate in 2007. Tight monetary policy may then be needed to contain a potentially powerful inflation.

But until then...

Related posts:

Why I Sold Part of My Gold Position after a Six Year Hold

posted June 23, 2009

Inflation Hedge Strategies and Thoughts for 2010 and Beyond

posted June 2, 2009

Silver Market May be Embarking on Important Price Rally

posted May 30, 2009

Gold Market Strategy: An Upward Price Acceleration May be Imminent

posted March 23, 2009