By Filipe R. Costa
During euphoric times, most investors don’t waste time rationally analysing things. If markets are going up and everybody is bullish, why bother examining the reasons for it? There’s no time to waste when every stock is a buy! The only thing that really matters is to hurry up and fill your boots.
We’re living in such times now. The major stock markets continue breaking record highs, bond yields are near their lows and the price of gold is relatively depressed. Risk is most definitely on.
Unfortunately, the underlying economic data aren’t looking too healthy at all. This isn’t to say there hasn’t been improvement, it’s just this improvement has been mild, to say the least. Ben Bernanke knows this and this is the second reason why he isn’t going to taper his unconventional asset purchase program (with the primary reason being his fear of rising bond yields). There’s much more money still waiting to be printed and whoever doesn’t realise this will be caught in one of the worst bear markets for stocks and bonds ever to happen in our opinion.
Ned Goodman, a Canadian billionaire involved in fund management, seems to agree with our views at SBM. He believes the collapse of the dollar is inevitable. He even believes this collapse is imminent, as the dollar is far removed from the stable currency anticipated in the 1930s. At a time when the inflation rate was nearing 1.3% per year and the US government was concerned with assuring convertibility of their currency into gold, the dollar was the asset of assets. Now, inflation averages more than 4% pa (the annual average since the collapse of the gold standard in 1971) and the dollar isn’t backed by anything other than fresh air. In short, the dollar is no longer aligned with its original function. International trade is starting to adjust to this, as countries like Russia and China already put the dollar aside in many bilateral businesses, making swap agreements in other currencies.
With the dollar worth nothing (as measured in terms of the hard assets behind it) and some strong countries wishing to end its supremacy, Ned Goodman believes the key is to buy physical assets. He is bullish on gold, as never before. His view of precious metal miners is that they are “dirt-cheap” as he told Bloomberg in a recent interview.
The Federal Reserve injected trillions of dollars into the economy, which until now hasn’t resulted in inflation. Goodman believes that much higher inflation is inevitable; we just don’t know for sure when it will start showing up. But when that happens it may be too late for investors to take action.
We’re probably going through a period of stagflation at the moment. Economic growth is mild and real inflation has been rising substantially. We can’t know for sure what the consequences of throwing trillions of dollars at the economy will be, but basic economic theory predicts a dark future. Economics 101 tells us prices are inextricably linked to the money supply and its velocity. They move, more or less, in tandem.
According to Goodman, “the world is totally upside down right now – it’s completely crazy”. We couldn’t agree more with the Canadian billionaire. Just look at bond yields and stock prices and compare them with the real economy. With US debt-to-GDP nearing 105% and constant disagreement between the Democrats and Republicans regarding the debt ceiling, do you believe a yield on 10 year debt of about 2.6% or even 3% reflects current reality? With unemployment near 7.3% and GDP growing mildly, do you believe stocks should be at record highs? With Europe also in the doldrums, that isn’t exactly good for American exports, is it?
Goodman predicts the Fed will have to continue printing money to keep yields low because the economy cannot afford higher rates (nor can the government!). A future rating downgrade will occur, he believes. We agree with him regarding money printing but not on the ratings downgrade. Do you remember what happened to the S&P President in 2011 after the company downgraded US debt from AAA to AA+? US debt ratings are untouchable.
At some point, the dollar will be dropped as a safe currency and the need for printing will rise even more. At that point we will get hyperinflation and it will be too late to cover losses. It is time to look at assets that don’t suffer when inflation rises. This means investing in precious metals. It’s simple really.
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