Lance

Buying Gold to Keep Up with Inflation

The bad news for equities is probably bad news for gold as well.

The Fed is not entirely stupid, and it realizes that the excess money creation has to be reversed as soon as economic conditions allow. They will probably act sooner than the equity market will prefer, and that may keep demand well at bay, which would not promise any return for gold investors either.

Inflation really takes off from a *combination* of money creation and strong goods demand. We'll have to wait for the latter to really materialize before we can understand Fed strategy, and if it is in front of or behind the curve. But we may have a while to wait for demand to develop to a point that it begins to push inflation. And without serious demand: no serious inflation.

Bespoke's Country Snapshot (5/6/08)

Japan in a "perpetual downtrend"? I guess perpetual would be since the end of last July, then. Prior to the end of last July, Japan spent nearly a year in an uptrend coming off the mid-year '06 worldwide equity snap-correction. Prior to that '06 correction, Japan had risen about 40 percent in the previous 12 months. So, no, hardly "perpetual" at all. While Japan has certainly lagged in some time frames (like the past 18 years as a time frame), it has not been, particularly recently, a perpetual laggard. It just seems that way to some people, especially to those who don't time the market very well.

If Not Now, When Mr. Bernanke?

If the Fed has to react to every market correction, then something is wrong with the market. If the market is going to "crash" unless the Fed acts, then something was already wrong with the market.

Maybe they want to do something. But maybe they want to do something at a time when the market isn't going to drive over them like cheap roadkill 5 minutes after they do it. You get more bang for your buck by picking your shots carefully. It's also very doubtful that the situation is that dire, except perhaps to people who thought S&P 1550 five years into a bull market was a good place to hop on board.

I'd like to see this panic extended a few days so I can buy some values. I don't need a 5 percent Fed-induced burp that will fade like last summer's suntan, thanks.

Why I'm Not 100% Convinced That We've Entered A Bear Market

First, even if we are in a bear market, they are notoriously difficult to play. Slow slides followed by short covering rallies that will make your head swim.

I think you've made some good points, and considered this from several angles. The way I would play this if I was in US equities is pretty straightforward. I'd be oscillating between zero and about 50 percent long, as apparent buying opportunities presented themselves. I would hold the other 50 percent in reserve for the 25 to 35 percent pullback, which may never come, but which is much more likely under the current circumstances than it was before. I think if you go 100 percent long here, at any point near term, you risk getting trapped.

I agree, there is no bubble waiting to be popped. The downside is very, very unlikely to be 50 percent, or 70 percent. But the downside is certainly 20 to 30 percent possibly. Thirty percent off S&P 500 at 1500 is way, way down there at about 1,050. Even 20 percent puts it at about 1200. Anybody willing to have 100 percent get trapped like that? Anybody think it can't happen?

Try 120-dollar oil for starters. Try and imagine what earnings might be like in the next two "earnings seasons".

P/Es are reasonable? Sure, but not cheap. I go back to when they have slumped to 12, or even 10. It happens.

The game is rigged to the upside, and anyone who doesn't realize that is not too clever. But from time to time there is substantial downside risk. This next 6 to 12 months is one of those times, I think. Keep an oar in the water if you must, but don't get sucked in. There are times, not often, but I think this is one of them, that call for more substantial cash reserves than normal. I want to buy at 1100 or 1200. It will take cash. I will have some.