While the dumb money is chasing the rally in stocks; the smart money is keeping a close eye on the economy. Bill Bonner has been hammering home this point in the Daily Reckoning. We’ve been doing the same here at Notes. (Consider it a friendly warning.)
There may be money to be made in stocks right now. However, before jumping in consider the following facts (which we’ve plundered from yesterday’s Daily Reckoning):
1) Unemployment has risen to 9.4 million, according to heavily doctored “official” Bureau of Labor and Statistics figures. In reality, the number is much higher. People without jobs don’t spend money. They also rely on handouts from the government. One in every six dollars of personal income in America now comes in the form of federal aid.
2) Housing prices have so far been knocked down 32% since the slump began. Housing expert and Yale economist Bob Shiller reckons we’re a long way off from a recovery. People with mortgages whose house prices are falling don’t have room for discretionary spending – the kind of spending that helped keep US GDP in positive territory for so long.
3) Defaults and foreclosures aren’t confined to the subprime part of the mortgage market. Prime and Alt-A mortgages are now under severe pressure. The contagion is spreading. And it will continue to spread thanks to record job losses and the contraction of credit.
4) The resulting fallout in consumer spending is impacting production. This is evident from the severe fall-off in the transport sector. Traffic in the trucking sector is down 13% year on year – the biggest drop in 13 years. Airlines are carrying 21% less cargo. Cargo rates are down a whopping 90% in shipping.
We could go on… and on… But you get the point. As least we hope you do. The plunge in the economy may be slowing, but the data points are still heading in the wrong direction. Until this changes, we don’t fancy our chances in stocks.
We’re conservative that way: we like to have a reason for investing other than “everybody else is doing it, so it must be right.” That attitude will get you killed. You may make some money on the way to the chopping block. But sooner or later your head will still end up in a basket.
Of course, a bet on stocks right now is a bet on inflation (although not necessarily a good one). This is where the plot thickens, as a good plot always does.
We suspect the reason traders and investors are ignoring economic fundamentals in their flight from relatively safe-harbor investments (think Treasurys) into stocks is because they’re counting on the Fed flooding the economy with liquidity.
As we’ve discussed before, stocks tend to be particularly sensitive to fiscal and monetary stimulus. The problem is such overwhelming stimulus is likely to make the currencies stocks are valued in worthless.
There are better ways to bet on inflation – ways that also allow you to benefit from currency dollar devaluation. At the risk of repeating ourselves, there are two easy ways to do this.
You can go long the SPDR Gold ETF (NYSE:GLD), which has been on a tear since mid-April.
Or you can go long the PowerShares DB Agriculture Fund (NYSE:DBA), which has also been a great performer since mid-April.