November 29, 2012
The Weekly Standard reports that Senate Minority Leader Mitch McConnell burst into laughter while he was attending a briefing by Treasury Secretary Timothy Geithner on the administration’s plan to avert the impending “fiscal cliff” that threatens the US economy and financial markets.
It’s disheartening for investors to hear that the two political parties are so far apart with this unprecedented set of circumstances set to converge in just one month’s time.
This is certainly no laughing matter for investors. Not only might large amounts of our wealth be taken away by higher tax rates and closures of so-called tax “loopholes,” but we are also threatened by fiscal policies that could continue the devaluation of the US dollar and even accelerate what many see as inevitable high inflation. What may be even worse is that the impact could send the US economy into another recession in the process.
That combination of recession and high inflation is called “stagflation,” a phenomenon that we have written about from time to time. The last time the US was inflicted with serious stagflation in the mid-1970s, the stock market fell 45% in 21 months, the price of gold tripled and a broad index of rare coins appreciated by some 1,000%
November 16, 2012
Many investors do not remember October 19th 1987.
That was the day the stock market crashed. The Dow fell over 500 points/23% in one day. The crash was a culmination of a decline that had started in August.
It is important to note that gold served as the best source of liquidity during that crisis and increased in price between October and the end of 1987.
We bring this up because there is an important article on Marketwatch that points out distinct parallels between the conditions that existed in 1987 and today:
Current drop echoes 1987 crash prelude
By Jon D. Markman
The Dow Jones Industrials have fallen 450 points over the past two days, and a lot of the blame has been placed on the re-election of the president. But anyone paying attention to the market over the past three months recognizes that the peak was actually made the week that the Federal Reserve announced a third round of quantitative easing. That was expected to be a positive event, but in retrospect, it ushered in a rolling thunder of value-eroding news events.
Soon after began a very underwhelming earnings reporting season, word of a deepening industrial slump in China, a broadening recession in Europe and the martyrdom of Spain. And then this week it suddenly dawned on people that if U.S. lawmakers can’t stop acting like stuck-up brats, then $1.2 trillion worth of ham-handed spending cuts and tax increases are about toplotz on red states and blue states alike in the coming year.
Independent estimates suggest that would shave four percentage points off GDP faster than you can say “sequestration,” or “defenestration” for that matter, and lead to millions of lost jobs. It looks like the president would be OK with that, since he booked a tour of Myanmar for next week.
In short, the election put an exclamation mark on a parade of indignities, but it is far from the only proximate cause. Investors have liquidated U.S. assets for a while; it’s just more noticeable this week.
November 16, 2012
Despite very questionable economic news, the stock market has appreciated in much of 2012. It was led principally by Apple Computer, the darling of the tech industry.
In case you haven’t noticed, Apple is in trouble now. It’s stock is down, way down from its highs. In fact, Apple shares have fallen 25% since late September. Yesterday the stock fell 2.4%.
Investors must consider whether or not Apple is the “canary in the mineshaft.”
How can a company whose shares investors chased up 74% in a year suddenly fall out of favor like it has?
Something is spooking investors. And we suggest that that something should not be viewed as exclusive to Apple. The stock market is vulnerable and investors should diversify into assets that are not closely correlated with stocks.
Rare gold coins are particularly useful in this regard.
November 13, 2012
As many readers already know, due to long-term irresponsible fiscal policies, the US government finds itself headed to the edge of a so-called “fiscal cliff.”
Policymakers in Washington are trying to strike a deal to head off the carnage, but their track record is awful on such deals. What we are soon to be faced with is a combination of large budget cuts and sizable tax increases, which will kick in if nothing is done.
Faced with the possibility of tax hikes, America’s wealthy investors are taking action ahead of time and it isn’t good news for the markets; wealthy investors are liquidating stocks, real estate and even whole businesses to avoid higher tax rates in the future. This is obviously terrible news for the stock market, the real estate market and the economy as a whole, creating the type of environment in which hard assets, such as gold coins, thrive.
Meanwhile, long-time market analyst, Marc Faber of The Gloom Boom and Doom Report actually says that there will be no fiscal “cliff.” Nevertheless, he predicts that corporate profits are certain to disappoint, resulting in a stock market decline of 20% or more. Faber points to Apple Computer as a leading indicator; Apple’s stock has fallen 20% in recent months already.
November 7, 2012
The US stock market appeared to have an allergic reaction to the results of yesterday’s presidential election, with the Dow falling some 313 points, or 2.36%, today. The S&P 500 slid 34 points, or 2.37% and the Nasdaq Composite fell 75 points, or 2.48%.
Actually, it wasn’t just the outcome of the election that stocks were reacting to, there were other factors in play.
Traders were very concerned about the approaching fiscal “cliff” and fear that the sharply divided government and country will be unable to come to terms to deal with it as 2012 winds down.
In addition, traders are once again worried about Europe. Greece is set to have another parliamentary vote on yet another austerity package designed to prevent a frightening default and there is a great deal of uncertainty surrounding whether that vote will produce a favorable outcome.
What all this indicates is that the US and Europe are both awash in debt and the financial world is skeptical that either will take meaningful steps to solve their problems. This is an environment fraught with risk and, in a risky environment, there is no better safe haven than gold.