E.D. Hart

A Dow Double in 10 years? Easy

Check out graphs of the Nikkei falling from PE of 80 in 1989 to less than 15 today. Earnings rose at a un-constant rate over the last 20 years--but due to debt deleveraging--the PE fell by more than 2/3.

Nikkei--39,000 in 1989 to 9,832.47 today.

Couldn't happen here right, because that's Asia--like a different planet.

But wait, housing prices don't always increase--sometimes they decrease for a decade or more. Virtually no one talked about that before the crash.

Where else did real estate crash? Japan. Prices falling for the last 20 years, more or less. Couldn't happen here though. This is America. Stocks and homes go up over the long run.

I hear this argument all the time. It makes sense.

And Its wrong. The market could (not predicting it will) be cut in half from here. Its possible to have deflation in some asset classes and inflation in others. Stocks can decrease while gold increases or vice versa. Inflation and deflation often occur simultaneously.
Hedge your bets and consider the possibility.

A Dow Double in 10 years? Easy

If you look at the ratio of Dow to gold, bear markets bottom at a ratio of 1:1. I think that Gold $5000 is possible, DOW 5000.

Markets trough at PEs of 5 or 6, not the current 16-17. We have a potentially large correction of 40%-50% ahead.

I'm not saying it will happen, only that it is possible, and historically analogous to current times.

If I had to bet a dollar I'd say DOW 5000 is more likely than DOW 20,000. Something to think about.

Preserve Your Wealth with Precious Metals

A well written summary of many of the same points made repeatedly here at seeking alpha.

We are looking at the decline of dollar hegemony and incremental loss of purchasing power for at least a decade. Those who argue that credit collapse, excess capacity, and a decrease in the money supply are looking at the short term and the narrow view.

Sure, we might see deflation and drop in oil and gold by another 20%. But it will be short term-- one to two years at most.

Its much more clear to predict the economic landscape 5-10 years out than 1 year out because the fundamentals will drive the outcome in five-ten, but almost anything can happen in 1 year.

My bet is on continued decline of the dollar, greater inflation, and loss of US economic and political power as we must reel in spending. Its already baked in the cake.

The Coming Economic Collapse, Part 2

Governments Failed. Regulators failed. Markets failed. And by the way there are no free markets without regulations. They are tied at the hip. I agree with the post that said free markets exist only as an abstraction. Here on Earth, we have markets CREATED by governments, and regulations. Even black markets are not free markets as they are encumbered by unwritten rules of the players. Please do not imbue Free Markets with some sort of mystical religious reverence. Markets are made up of people who sometimes make irrational decisions. Yes, markets are fallible.

Sustainable Bull Market Unlikely

Chris--thank for the reality check, I agree with your assessments, and I love to read your facts and analysis to back up what you say. Very insightful article. Thanks.

Stock Rally Built on Fundamental Sand

Schiller calculates the S&P PE at 14 (ten year Trailing) and this points to something that I saw on SA a few weeks ago. At major market meltdowns with economic fundamentals declining such as the 73-74 bear market, and today--PEs can go, and do go, as low as 6 to 7. Therefore, the worst case scenario is that markets fall 50% from here. Don't just hope for the best, but be prepared for the worst. Not many are prepared for a 50% loss from here. They are the ones in denial.

Siegel vs. Standard & Poor's

Averages are overused ...we need to think about worse case scenarios.

Complacency and Lack of Support Highlight Need for Risk Management

Chris,
Your the best writer on the site, with your collegues there. Your last sentence rings very true and was your best point, at least for me:

"Rather than worrying about forecasting, investors would be better served to think in terms of probabilities associated with numerous outcomes, both favorable and unfavorable."

Simple wisdom, and underpracticed in risk management.

Economy Watch: What if Stocks Were Priced in Gold?

Stock bugs point to the "stocks for the long run" arguments and others of those who point out that, on average, stocks are the best investment asset class based on historical relationships.

They are mostly right. I certainly have most of my wealth in stocks.

But there are a few things to consider:

(1) Armageddon and civil war doesn't have to break out for gold and commodities to do well, better than equities in fact over long periods of time, all it takes is for inflation to tick up, or the expectation of inflation. The gold market is very small, relative to other asset classes. Just a 1% shift from other asset classes into gold can double the price of gold according to Rob McEwan (spelling?) CEO of US Gold and former CEO of Goldcorp. Look at the current Treasury bubble for evidence that bonds are going to be losing investment for the foreseeable future. If a fraction of a percent of this money went into gold, look out

(2) Much financial analysis has the potential to go astray by looking backwards, and finding historically relevant periods to compare today to.
Perhaps however, the world has undergone a seismic change where the worlds financial tectonic plates are permanently shifting beneath our feet, and we just experienced a few earthquakes. Then, what would it all mean? It would mean that looking backward would be fairly useless for predicting the future. Things happen every day that have NEVER happened before. In endeavors of state and economics, the experts make the same mistakes--by "fighting the last war". By looking backward, you can be annihilated going forward.

(3) I certainly don't know the future, and perhaps the author is correct, and perhaps the author is wrong, but it is smart money management to hedge your bets. What if I'm wrong and gold declines? No problem, my stocks and bonds do well. What if gold and commodities do well, and stocks tank? No problem, my gold investments will make up some of the difference. So, you see it is not an either or argument that you only need gold if there is a war outside your window, and by then it is too late because, after all, then it would be useless.
Tiny changes in sentiment towards gold by the worlds middle classes world result in very large changes in the price.

(4) The CPI as constructed has been periodically revised in methodology. Therefore comparisons of the gold to the inflation rate are very misleading. In fact, by my calculations, using the methodology that was in place for calculating inflation in 1980 were that in place today--inflation would be averaging 6 to 8% over the last. (see Shadowstats.com) if I use the lower figure of 6% for the actual non-reajusted figure for CPI, the true (i.e. apples to apples comparison) for the inflation adjusted price of gold from 1980 would be roughly $4200 in today's dollars, not 2272.

(5) Summary: The gold to Dow ratio is not a useful timing technique, for the same reason that p/e ratios are not good timing techniques, they fail to account for the fact that averages are very poor indicators in a random and dynamic market. (proof of that is clear if you look at the huge valleys and troughs of the Dow to Gold ratio). However it is a useful picture of what is possible in the future. It is possible that the ratio goes back to 2:1 or 1 to 1 Dow to gold. With gold at $4200 and the DOW at 8400 in five to ten years, that a real possibility, and a 2:1 ratio. A 1;1 ratio could mean DOW 4000, gold 4000, or Dow 5000 gold 5000, or a nearly infinite series of possibilities. Why not hedge a little in case you are wrong?

Long: AUY, UXG, GG, SLW.

Economy Watch: What if Stocks Were Priced in Gold?

The Japanese citizens were much better savers than their US counterparts, and the comparison with the Japanese is somewhat different as this time the global deleveraging is massive, global, and unprecedented. All countries are deleveraging at the same time and devalauing their currencies simultaneously. What are the floods of currencies being devalued against, if they are all moving down together (over the long term) ?

Commodities in general, and of course gold as a subset of commodities in particular.

The U.S. Economy After the Bailout

One word: Japan

The Japanese are still digging out of their credit contraction, some twenty years later.

We are in for a similar decline, I fear.

The Calm Before the Storm?

Inclined to agree with SWRichmond...well said.

The U.S. on the Precipice

“Capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich.”

This is at the heart of the follies of the last eight years.

Please pay my student loans and mortgage for me, Bushies.

Thanks!
(oops, that wont work, I'm not rich)

How We Lost Faith in the Financial Superstructure

Peak oil has already occurred in the US, and is currently being repeated worldwide. Matt Simmons is not the originator of the idea, but several well respected geologists have confirmed that, it is a fact, at least in the US.

Inflation Fears Are Overblown

The article is not contrarian, but very mainstream. The media is using the bogus government numbers, and swallows the governments party line that although inflation is in a slight uptrend, the expectations going forward are for inflation to moderate.

This is the majority view of the Fed, of Bernanke, or many Wall Street firms, and of the vast majority of media reporting. Then, the author goes onto repeat this mainstream consensus view as somehow contrarian.

In fact, almost everything the author says is incorrect. The contrarian view is that money supply growth has exploded and that inflation going forward will be much worse. This is not reported in the mainstream media, and isn't even acknowledged as a possibility by the fed.

The facts that the author uses to suport his claims are mostly either irrelevant, or incorrect. For example, lack of wage growth is real, but is not necessary for inflation. Wages can rise with very little inflation, and wages can fall in real terms (as they are now) with real substantial increases in inflation.

Globalization is keeping wage growth in check, but global money supply growth is causing global inflation.


Those who think for themselves and care to dig deeply into the numbers, and arent afraid to go very far out against the herd will see that stagflation is a real phenomenon that is likely here, and liikely to get worse. Real inflation is much more than twice what the government reports.