Buying Gold and selling stocks was a phenomenal trade this decade. Now what...?
YOU MAY RECALL our Trade of the Decade, writes Bill Bonner in his Daily Reckoning, which marked its 10th anniversary in August 2009...
Buy Gold on dips...sell stocks on rallies. Well, we've been very happy with it. But the decade is coming to an end. It's time to thinking about the NEXT decade.
You may also recall that as gold went up, we became more and more concerned.
When Lehman went down, it seemed obvious that the feds were going to do the wrong thing. We were right. They did. They put up trillions of dollars to 'rescue' the economy. Since we knew the 'rescue' wouldn't work, we guessed that they would continue pumping in money they didn't have in order to keep trying to do what couldn't be done. Under cover of an 'emergency' they were able to siphon off billions of dollars for their friends on Wall Street and for their pet boondoggles. And the voters couldn't complain...at least they were 'doing something' to fix the economy!
This led to a very simple observation – eventually inflation (and Gold Prices) would go up even more. Because the quantity of money would increase faster than the goods and services that it could buy.
What bothered us here at The Daily Reckoning was that this analysis was too easy and too obvious. What's more, it was an analysis that was widely shared. We don't like it when our points of view become fashionable. And we don't like it when the "story" is too easy to tell and too easy to understand. When you have a storyline that everyone picks up, it almost always turns out to be wrong.
Then, the smart money began Buying Gold. John Paulsen made a fortune in the '07-'08 period by correctly understanding the bubble in the financial sector and betting against it. A few months ago, he announced his next big bet: gold.
He explained that gold was a "can't lose" investment. If the economy recovered, inflation would come back and push gold up. If the economy didn't recover, the feds would continue pushing money and credit into the system, making the eventual inflation worse than ever.
John Williams of ShadowStats came to a similar conclusion. He noted that the recovery wasn't working...and that the feds had no choice but to continue piling up inflationary tinder. When the spark finally reaches it, he says, the result won't be inflation, but hyperinflation of the blazing sort.
We don't disagree. The logic seems right to us. That is what OUGHT to happen. But what bothers us is that Mr. Market is a contrary ol' coot. He always does what he ought to do. But he rarely does it when and how you expect.
What is he up to now? Darned if we know. The dollar is going up. Is it just a bounce? Or is it a trend?
What would be the most surprising and most mischievous thing Mr. Market could do? Make the Dollar more expensive!
- A strong Dollar would undermine hopes for an export-led recovery in the US (American made goods would be less competitive...)
- It would whack the carry-trade speculators hard. They borrowed cheap dollars. Now they'll have to pay back expensive ones.
- It would encourage people to save dollars rather than spend them - thus undermining a consumer-led recovery too.
- A rising Dollar would also drop the Gold Price – temporarily – shaking off the fair-weather gold buyers in advance of the next phase of the bull market.
So, ask yourself. If you were as ornery as Mr. Market...what would you do?
On the other side of our trade – "Sell stocks" – it's been "A nightmare decade for stocks," says a headline in the Wall Street Journal.
"Investors would have been better off investing in pretty much anything else, from bonds to gold or even just stuffing money under a mattress. Since the end of 1999, stocks traded on the New York Stock Exchange have lost an average of 0.5% a year thanks to the twin bear markets this decade."
The 1990s was the best calendar decade in history for stocks, with an annual gain on average of 17.5%. This decade, by contrast, was the worst calendar decade for stocks going all the way back to the 1820s.
Which gives us a sense of triumph...you know, the very thing that comes before a fall. Ten years ago, we warned readers that the US stock market was going into a bear market that would be like the Japanese market following the stock crash in Tokyo in '89. It would be "long, soft and slow" we said.
Then, the market rebounded. Investors thought the promises of the '90s – "stocks for the long run" or even "Dow 36,000" – were still good. As for The Daily Reckoning, it was obvious that we didn't know what we were talking about, because the Dow just kept going up...first above the high set in 1999...and then all the way to over 14,000.
Even we had to admit: If this was a bear market, it was a very strange one!
Ten years later, the decade of the '00s has proven to be the worst ever. Yes, dear reader, the '00s were the worst for investors ever, even worse than the 1930s.
Now, we are wondering what's next for the stock market? More of the same is our guess. The bear market that began in January '00 still has not fully expressed itself. Stocks have not been beaten down to bargain levels – where they sell at 5 to 8 times earnings. Investors have not given up. There is no widespread sense of disgust and disillusionment with the stock market.
And it still takes about 10 ounces of gold to buy the Dow stocks. At the bottom, you'll be able to buy the Dow for just 1 or 2 ounces. And then...you'll think twice. Because everyone around you will be telling you that stocks are 'finished'.
And who knows? Maybe they'll be right...
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