As the Fed steers the Titanic straight into the QE iceberg one must seriously begin asking themselves if they want to be in hard assets over stocks.
After all, the dollar will almost assuredly see further tankage once further easing is announced. This will then place further pressure on the consumer as the bare necessities begin eating up more and more of their disposable income.
As we saw after the commodity bubble in March of 2008, equities down the line are at high risk of getting slaightered as the our purchasing power dries up.
It's important to realize that stocks are pretty much priced for perfection at this point because the the Fed's threat of quantitative easing has created high demand for stocks as traders try and front run the Fed's actions.
The problem here is stocks are not being bought for earnings or fundementals. They are being bought based on pure speculation that the Fed will save us if the economy does not turn around.
Essentially, the Fed has created a false sense of security for investors which is a very dangerous precedent. I am sure they are thrilled to see all of this bubble blowing. Ater all, their jawboning is designed to try and lure investors back into taking risk.
In their eyes, the only way to escape this Great Recession is to grow out of it. The problem here is there is no way to grow out of this nightmare because our foundation is built out of sand.
None of the real issues have been dealt with:
- The trillions of dollars of losses still remain on the banks balance sheets.
- Our government continues to run massive deficits as they try and fend of this financial collapse.
- The bailouts that add to our deficits have not been stopped.
- The fraud that has created this mess has turned into one giant cover up.
- Foreclosuregate continues to grow like a cancer without a cure throughout the banking system.
What did Einstein say?: "The definaition of insanity is doing the same things all over again and expecting different results."
Have Investors Had Enough?
This is what has me concerned. When I look at certain areas of the market you have to wonder if the market is trying to send a message to Washington that they are sick and tired of watching this trainwreck.
Some signs of this are clear:
- Gold is hitting new highs on an almost daily basis.
- The Yen(which is currency of a country that's more bankrupt then we are) is now sitting at 15 year highs against the dollar.
- Central bankers are beginning to back away from our treasury debt.
You have to ask yourself: If the dollar continues to lose it's purchasing power are you really growing your wealth if the market goes up?
This is why I asked the gold question in the headline of this post. Before I start here let me state that this is not investment advice. It's just how I see things right now.
So why gold over stocks? Well, first of all, there has been a strong correlation between the way gold and stocks have been trading(especially in the last week):
Here is the S&P over the past few weeks:
And here is etf GLD which tracks gold:
What I like about the gold versus stocks year to date is it's been less volatile and it has also performed better. Gold is up over 20% versus the single digits seen in the S&P.
What's more attractive to me when it comes to gold is the current economic climate. You have every tailwind possible for the gold trade. We have tremendous amounts of fear, lack of confidence in the US dollar, and plans by the Fed to cheapen the currency even further.
To be fair, stocks get help from some of these tailwinds as well. The problem here is when it comes to valuations or more importantly real wealth. The risk to equities is two fold in my book:
First: You have stocks priced for perfection in an environment where the cheapening dollar is going to hamper consumer spending. This will eventually be realized in bad earnings.
Secondly, if stocks go up(and thats a big if moving forward), you are increasing your wealth in a currency that is losing it's value. As a result, your real growth in wealth relative to the drop in the value of the currency could actually be a net negative.
Think about it this way: If stocks rise 8% but the cost of living in inflation adjusted terms rises by 10% during that same period have you really gotten anywhere?
The Bottom Line
Let me be the first to say that I am not suggesting that you sell all of your stocks and buy gold. What I am trying to do is make a point that having all of your assets priced in denominated dollars is very risky when you look at the world we currently live in.
Inflationary and even hyperinflationary panics have been seen throughout time. They can also hit very rapidly which is why you need to be prepared for them. Art Cashin was actually talking about the risks of hyperinflation today.
Folks, risks that were unthinkable a few short years ago are now real. The impossible has now become possible.
Foreclosuregate has only heightened the level anxiety out there and the market is acting extremely unstable.
If you are long you might want to think about adding gold to your portfolio because they are both headed in the same direction.
The key advantage of owning gold is if the financial world panics and stocks fall off a cliff, gold will hold up much better than your equity positions because it will be one of the first places money runs to hide.
The one downside to the gold trade is the risk that the Fed does a 180 and realizes that they must raise rates in order to fight inflation and stabilize the bi-polar market.
This of course would lead us into a deflationary collapse so the risk here is minimal in my view because the Fed does not seem to be able to accept such an outcome.
These are certainly unprecedented times and as I always preach: Diversification is a must and that includes diversifying out of the US dollar.
Disclosure: No new positions taken at the time of publication.