One of the things that truly peeves me is when I am grouped together with other bears who are forever predicting deflation, hyperinflation, or a stock market collapse. Sure I predicted a crash in stocks, but that was two years ago, before it actually happened. Let me make myself clear: I am not predicting a stock market collapse or hyperinflation. I am not predicting a collapse in real estate. However, I am predicting new highs in gold that will come off of a spike move that leaves mainstream analysts baffled. I am predicting a collapse in U.S. government bonds, which should be obvious to all since the majority of our current debt is composed of accrued interest. I am predicting a major shift in the way Americans think. This crisis will be different in many ways from anything we have ever experienced.
Although I am bearish on the United States over the next decade or so, I am not foolish enough to predict, as some other bears do, that the U.S. will reach third world status. We still control all the major waterways, which means we control global trade. The dollar is still the reserve currency, and even if the dollar loses its reserve currency status, the U.S. will play a prominent role in any new currency arrangement. We have nukes and we have military bases across the globe. It's more accurate to say we are witnessing the early stages of the decline from the peak in our power relative to the rest of the world. I think the days of accounting for 1/3rd of the world's GDP are behind us. Asia is knocking on the door, and financial power will shift in that direction over the next couple of decades.
I understand that the natural assumption for those bearishly inclined is to think that stocks will fall. However, this is simply an assumption that doesn't jive with empirical evidence. Sometimes stocks rise against the grain of a weak economy. In the coming years stocks will rise since they will serve as the domestic hedge against inflation and a spendthrift government. Stock prices and earnings will rise, but this will not necessarily be "good." Think of it this way. Assume you have a savings account with a fixed 2% interest rate. Every year your "earnings" go up even though you didn't increase your return on capital. That is essentially the role stocks will play, with a little added boost due to what I perceive as a bond bubble.
Real estate is a more traditional hedge against inflation. However, coming off the heels of a major banking crisis, this won't be the case. Without the will on the part of banks to bring 30 years of earnings forward, all leverage is removed from the system. You are seeing right now how the lending practices of banks is very pro-cyclical. This is neither good nor bad; it is what it is. All I am saying is that a prudent investor should understand not only the drivers of real estate, but what the trends are going to be moving forward and why. It is too early to predict a sustained rise in real estate, although I believe a "dead cat bounce" is approaching. Don't be surprised by a 10% increase in national home prices that has everyone falling over themselves predicting the worst is over. If you are waiting for your opportunity to sell, this will be it.
The best way I can explain capital flows is that there is always an initial shift in the relationships between assets that very few recognize. What eventually occurs is a huge movement in the direction of the secular trend. Essentially, this is the point when everyone recognizes the trends that were obvious to only the "smart money." The spike moves that results turns a legitimate trend into a bubble. Look out for this in gold. When you see gold double in 6 weeks like it did in 1980, that will be a huge sign to get out. The price movements will resemble the flash crash in reverse.
I think it is truly ironic that the people who didn't see the bubble in stocks and real estate are some of the same people who are predicting a bubble in gold. Why should anyone trust their judgments when these people couldn't recognize some of the biggest price distortions in history? Look around you. How many people do you know who are rushing to buy gold at $1400? How many people do you know who have more money in gold than they do in their 401k? How many people have more money in gold than they do in U.S. dollars? At the end of the day, the masses are still asleep. There is only one true hedge against the fiscal mismanagement of the government, and that is gold. Believe me, the big moves are still ahead.
Disclosure: I am long GOLD.