It is essential to absorb the fact that the economy and the markets often live in different worlds. Understanding this should clear thinking about the path of the indices in 2013. To impress upon one's thinking and expectations the fact that the markets and economy often diverge in a large way, look at a chart of the Dow in the midst of the Great Depression. From a high of 386 in September 1929, the market fell 50% by that year's end to 195. After a strong recovery to 297 in summer 1930, the government got busy and a two-year flush ensued, leaving investors crushed by July 1932 at 40.56, a seven-fold collapse that prepared a rationale for salvation as sold by the urbane Franklin Delano Roosevelt.
But here's the point: those able to hang on or buy in '32 were about to participate in a powerful bull market that lasted four years. After making a double bottom when Roosevelt was inaugurated in March '33, the DOW surged to 197 in mid-1937 quintupling its level (charts vary slightly but the trend is clear). The nation was crushed: unemployment was as high in 1939, on the brink of war, as it was in 1932. Yet while the government managed the economy, keeping the depression in place, the markets boomed. Fortunes were made while America became a socialist state setting macro-cultural and policy patterns that still persist. The 1933-7 bull also set a template for what we can expect this year, a powerful market while many fundamentals of the economy are grim. Since 2007, median family net worth has plunged from $126k to about 76k, a terrible tale along with low savings rate and negative real return on bonds.
But corporate balance sheets, like most banks, are flush with cash; small investors who have piled into Treasuries and money markets despite negative real interest rates likely will wake up to improving trends for equities this year. Don't miss the train.
Look at another chart of the recovery from the bottom of March 2009. Drawing a line through the steadily higher lows, it shows that the bull market trend is rising at more than a 30% angle although the effects of successive Fed purchases seems to be less lasting. Going forward there will be drops for reasons many writers have noted: fundamentals are troubling as is the addiction to stimulus. But the trend for equities is plain: 2013 should be another year of 12-15% gains in the S&P. Prepare to buy and hold through the dips. The SPY ETF should perform well according to experienced analysts.
In a previous piece, I quoted Sir John Templeton's famous formula for bull markets. The euphoria following Congress' New Year's partial patch already is fading. Major disagreements on governance will mark the year, a good thing since in their absence, current trends would soon bring completely imperial governance -- prompting cause for pessimism and skepticism: but that, Templeton argued, is bullish for markets. Economic policy, workforce participation and family income are bad. Women in the workplace and the two-income family have damaged finances while potentially increasing the tax base. Major cuts in government size and spending and consequent debt reduction (debt and high taxation feed on each other) are needed to save the nation from collapse. Medicare liabilities are about $85 Trillion and Social Security, -- an Orwellian term - is about $14 trillion yet people, except on the very high end, cannot live without these benefits.
October's adjusted SSI reportedly was the lowest since 1975 and the CPI on which COLA is based doesn't jibe with real world numbers. The change in figuring CPI-COLA in 1980 was a cruel one. Means testing will reduce but not stave off collapse while the markets ride a depression bull. The five main aspects of our budget, Medicare; servicing the debt which grows with the size of government; Social Security, Medicaid and military spending are embedded in the structure of society and governance. The debt has more than doubled in four years, rising at an almost vertical line and in another four years will soar from $16.3 trillion to nearly $25 trillion. The system is broken yet the trend for the market is rising.
It is a good year to buy, so having cash ready can buffer against the other maladies of the nation. It is a sauve qui peut situation like that in early 1933. The Federal Reserve will create 'money' for the banks and increasingly they will put it to work in the markets. Private investors also should put their investable assets to work. It is an understandable but tragic error that about $550 billion has been pulled out of equity funds in the past five years. Going forward, there will be inflation in share prices, goods and services but money will be made. Equities will rise. Experienced firms believe that "stock valuations remain exceptionally cheap, especially relative to fixed income and cash alternatives."
A very different trend shows itself in silver. Despite its myriad and growing industrial uses, despite its value in jewelry, de facto currency and as a collectible store of value, the charts of the last eighteen months tell a sorry tale. Since its high on April 28, 2011, the white metal has made a consistent series of lower highs. From $49.51 in April 2011, it fell and climbed and fell to a lower high of $44.34 in late August 2011. Six more months of familiar volatility for the asset found it at a yet lower high of $37.46 on February 29, 2012. A steady decline followed by a sustained summer trough eventually saw the spot price rise to a yet lower high of $35.36 this past October. Since then, silver has sagged to about $30. The trend is clear: a sustained descent. But amid the volatility and drop during this period there is a bit of clarity and hope: since the decline in fall 2011 there has emerged a consistent support level between $26.50 and $27. Wang Tao of Reuters sees a possible fall to a break or bounce point at $26.11 (he also has a bearish view on gold, see below). So the descending wedge of the past eighteen months can be viewed as a tightening consolidation. The fundamentals of silver's utility suggest this is the area from which a strong move to the upside would occur. Silver's intrinsic value continues to increase while its price is one of many examples of the disjunction between economic basics and the markets.
My previous column noted that Elliot Wave analysts believe that if silver falls toward $27 without reversing, it could drop clear to $22/oz. But the consistent support level above $26 suggests that is an area of consolidation. Given the long established trend, it would be prudent to wait till the metal approaches $27 to increase holdings. It is as certain as human events can be certain that demand for the product is strong and that prices will rise considerably. But those trying to protect or build a nest egg might do well to wait longer to add via silver ETF (SLV), coins, silver streaming king Silver Wheaton (SLW) or the highly regarded Silver Standard Resources (SSRI).
On a closely related commodity, a Reuters analyst has suggested gold could continue its recent decent till it reaches a level around $1400/oz. This is not a consensus view. Jean Maire Eveillard likes to note that "gold is protection against extreme outcomes," that it is a vital hedge and buffer to volatility, uncertainty, currency devaluation and inflation. And it is likely that some major buyers, such as China, would be glad to see price depression so they can continue massive accumulation at lower levels before allowing the basics of demand to kick in. Keep that point in mind in your allocations and buying. Even if $1400 is exaggerated to the downside, and most analysts, including Goldman Sachs think it is, various forces could push gold down to its extended summer bottom between $1530 - $1580/oz. Since most people need to make prudent purchases it probably is better to wait for continued settling before adding to a position. This is a volatile commodity in a volatile year when long-established patterns are inflected by massive central bank involvement and geopolitical goals including a new world currency system. Those who are playing SPDRGold ETF (GLD) or established miners like Barrick Gold (ABX) must keep this in mind. The latter at $34 or below seems a solid value with 140 million ounces proven reserved at an average cost of about $540/ and analysts seeing an average target about $51/share.
Taking in all of the above and despite the counsel of Mr. Russell and other knowledgeable hands I would keep gold plus silver allocation, in the proportion that suits you, to not more than 20%. Emerging and international markets as well as the S&P are good options for this year despite volatility. Matthews Asian Growth & Income Fund (MACSX) has a stellar track record and for those with means, multi-use farmland remains among the best options. Jim Sinclair, a bull on gold, believes PIMCO All Asset All Authority (PAUDX) is a good choice with good ratings and results. Amid the turbulence, Nova Copper (NCQ) is a splendid play for your mid- to long-term assets.
Pessimism and skepticism remain warranted, but Templeton argued that this is bullish for markets if not for cultures and economies. The S&P charts noted above bear him out at present. Remember too in your strategic thinking that population reduction remains, as it has been for a century, a major macro-political goal of the directors of the grand game. That will impact commodities and security - related assets. But while it will re-shape socio-economics, its drag on the markets is not clear and not imminent.
My recent column, "Skepticism, Euphoria & Asset Allocation" mentioned the Matthews fund MSMLX but slightly erred in its full name which is Matthews Asia Small Companies Fund. It returned nearly 24% in 2012.
Additional disclosure: I own shares of SLW and NCQ