Dilbert, The Dow and Gold Theory

“I’m only happy when it rains,

You wanna hear about my new obsession ?

I’m riding high upon a deep depression

I’m only happy when it rains;

Pour some misery down on me..”

- ‘I’m only happy when it rains’ by Garbage.

It is as if Al-Qaeda were now in charge of the world’s central banks. Policy makers seem to believe that the best way for cash-strapped banks to attract desperately-needed capital is to reduce deposit interest rates to zero. But savers are not the only innocents being forcibly impoverished. Dresdner’s Peter Tasker expressed the problem of sovereign misfortune nicely in connection with Japan:

It seems so unfair. Those who partied hardest should get the worst hangovers. Japan stayed in its room sipping mineral water. Yet it is now suffering from a humdinger of a headache.

Quite what kind of headache can be seen in the chart below, courtesy of KBC’s Jonathan Allum, which shows Japanese electricity usage and industrial production:

A freshly globalised economy is now experiencing the flipside of untoward leverage. And then there are the countries that are a little less blameless. Eastern Europe, for example, looks to be imploding. A note from Strategic Energy reports that:

The sums needed [to support the banking and credit system] are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland and Pakistan – and Turkey next – and is fast exhausting its own $200 billion reserve. We are nearing the point where the IMG may have to print money for the world, using arcane powers to issue Special Drawing Rights. Its $16 billion rescue of Ukraine has unravelled. The country – facing a 12% contraction in GDP after the collapse of steel prices – is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6 billion. Latvia’s central bank governor has declared the economy “clinically dead” after it shrank 10.5% in the fourth quarter. Protesters have smashed the treasury and stormed parliament.

And the weekend protests in Dublin at the Irish government’s handling of the recession are unlikely to be the last among western economies.

So far so bad, but negative corporate newsflow has turned torrential. 15,000 job losses at Panasonic (PC) and 20,000 at NEC; the first dividend cut at Dow Chemical (DOW) for 97 years, and more of the same at the likes of Anglo American (AAUK) and CBS (US dividend cuts in the first quarter have already reached record levels); General Motors (GM) and Chrysler, like so many banks, shambling along only due to the involuntary largesse of taxpayers.

Equity investors will require iron constitutions to make it through the end of just this year with their sanity intact. Fortunately, to paraphrase Jeanette Winterson, Equities are not the Only Fruit. As a good example of the looking glass world we now inhabit, some outstanding financial advice can be found in the work of a cartoonist – Scott Adams to be precise. ‘Dilbert and the Way of the Weasels’ carries the author’s unified theory of everything financial, namely:

1. Make a will.
2. Pay off your credit cards.
3. Get term life insurance if you have a family to support.
4. Fund your 401K to the maximum. (For British readers, read: pension.)
5. Fund your IRA to the maximum. (For British readers, read: pension.)
6. Buy a house if you want to live in a house and can afford it.
7. Put six months of expenses in a money market account.
8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement.
9. If any of this confuses you, or if you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner.

One can take issue with some of the micro facets of this advice (we would favour an absolute return approach as opposed to an index-based approach to the equity component, for example), but the essence of Adams’s counsel is sound, and engagingly brief and simple enough to put it beyond real sniping. It also removes equity investing from its pedestal and demotes it to a suitable humility within an overall financial plan.

About the only other cavil is that it does not make room for gold. Economist Krassimir Petrov wrote on the topic of gold last year and pointed out that secular bear markets for stocks (we’re in one) tend to coincide with secular bull markets for gold:

At the secular peak for gold, the Gold-Dow Jones ratio is in the range of 1 to 2. As you can see on the chart, 1900 recorded a low of 1.7; 1929 recorded a low of 2; 1980 recorded a low of about one. This means that when the gold bull market peaks, the price of gold will roughly equal the Dow Jones Index. Thus, we should expect that gold outperform the Dow in the coming years about 10 to 20 times, in order to bring that Dow-Gold ratio down to the range of 1 to 2.

The Dow Jones – Gold ratio, 1800 to 2000

Courtesy: Financial Sense.

Some economists have been wrong-footed on gold, we think, by treating the metal as a commodity as opposed to a currency. A synchronised global financial crisis and depression is, of course, consistent with falling commodities prices. But exactly the same environment, as we can now see, is hugely positive for gold, what Nathan Lewis in his recent book on the subject referred to as “the once and future money”.

And there may be no hurry to get back into stocks for those who insist on scratching that equity market itch. The Dow Jones Industrial Average hit a high of 386 in September 1929. It did not exceed that level until November 1954. Now that is stocks for the long run.

Comments

[Mad Hedge F...:]

GOLD! GOLD! GOLD! This is the cry being heard worldwide by investors in the Great Gold rush of 2009, looking for a generic “short America” trade. Where in the past gold seekers used sluices, shovels, and jackhammers to extract the glittery stuff in California’s Sierras, Alaska’s Klondike, and South Africa’s Rand, today the instrument of choice is the mouse. Online traders are unleashing clicks by the millions to buy ETF’s, American Eagles, mining shares, and futures contracts. With stock traders sitting on their haunches, wondering if the Dow will hold 7,000, this is the only thing that is working right now. Gold is no longer just catastrophe insurance. Traders are buying gold more for what it isn’t, than what it is. It isn’t made of paper, made in the US, or held in custody by Bernie Madoff or Stanford Financial. The yellow metal hit a new high for the year of $1,007 overnight, and the risk of a “melt up” is increasing. The Street Tracks Gold Trust ETF (GLD) is now the seventh largest holder of the barbaric relic in the world. For the newly aggressive, look at the DB Gold Double Long ETF (DGP), which gives you a 200% long exposure to gold, and is up 54% in a month. Who says there is nothing to buy out there?

Feb 22 12:55 PM

[Matthew Avi...:]

Gold is a firm example of a good buy right now

Feb 22 01:03 PM

[Neilich:]

1) Bubbles break the world economy
2) Governments cry for regulation
3) New (Gold) bubble threatens
4) No one notices
5) Bubble pops making people unhappy
6) Governments cry for regulation
7) New bubble threatens

Feb 22 05:39 PM

[GCherer:]

Re: DGP from the mad hedge fund trader.
DGP is an ETN, not an ETF, and there IS a difference, especially in a world where banks are tipped over easier than cows or port-potties.

Feb 22 08:23 PM

[REBEL:]

Investors; As free individual persons we all want solid investments and right now Gold fits that profile nicely. So the GLD ETF has over 1000 tons of Gold. However, this is a threat to Big Brother in their fight against 'individualism'. So now that humongous pile of Gold is easily accessible to the Fed and will be nationalized for the good of the country.

Feb 23 10:18 PM

[Dean M:]

Great chart, thanks. It looks like gold might have some more room to run but it would have been alot safer to buy in the late 90s when it was above that upper limit as opposed to now when it is just above the trend line. Also you noted that the Dow didn't return to pre September '29 levels for a couple decades, however if someone picked off the bottom of the market in the beginning of '32 they would have had 300% profits over the next five years so I would say that this is no time to get complacent.

Mar 02 01:41 AM