The S&P500 is at an all-time high. Will this last? Over
the last two years, new highs have been erased with corrections, resulting in a
market that until Brexit was trading sideways, and going virtually nowhere.
Britain voting to rescind its membership within the European
Union was supposed to be a really bad thing. Yet, subsequent to what has been
considered a devastating election outcome, markets have rallied. In the U.S.,
the market has broken out of its two year trading range. And, it seems as if a
new all-time high is hit almost every day post Brexit. What gives? The only
conclusion is that once again the market is interpreting bad news as good news
in hopes of more easy monetary policies and low interest rates for longer.
The very same monetary policies and authorities who created
inflated housing and stock markets before the 2008 crash are back at it. But
this time, it is with vengeance. Interest rates around the world have never
been lower. In fact, bonds issued by about a third of all the world’s developed
countries issue negative interest rates. You have to pay Switzerland, Japan,
and Germany for the privilege of lending them money. No thank you very much.
The July issue of the Felder Report illustrated how the inflation
of asset prices relative to disposable income has never been higher, including
the dot com and housing bubbles. For the last five quarters in a row, the
cumulative earnings reported by the companies within the S&P 500 index have
declined. World trade is compressed. And, gold which is a fear indicator has
been by far one of the most superlative places to invest this year.
Because of the rise in gold prices this year, there has been
tremendous demand for investing in the precious metal. Most Americans invest in
gold denominated in dollars. There is generally a well -established
relationship between gold and the U.S. dollar. The weaker the dollar, the
stronger prices for gold go. Because of subpar GDP growth in the U.S. as well
as other measures that do not indicate a strong economy, the U.S. dollar for
the last year has declined.
The market is pricing in almost no chance for any
significant interest rate increase in the U.S. before the end of 2017. All of
this has led to a weaker dollar, and a boon for gold denominated in dollars. By
loading up on gold expressed in U.S. dollars, investors are knowingly or
unknowingly making a bet on when interest rates in the U.S. will rise and the
inherent strength of the dollar. This to me is a big bet. Many of the same
market participants who didn’t expect Britain to leave the EU are now betting
on how far out the Fed will go before raising interest rates.
The stock market is trading in a way that is ignoring the
fundamental weakness of the underlying economies. It is betting on more
monetary stimulus and continued almost zero interest rate policy out to the
distant future. Investing is about taking calculated risks. It should not be
about gambling. This cycle has transpired longer than I imagined. Just like
real estate that was appreciating from 2000 to 2007 at a rate far in excess of
peoples’ wages, this cycle has gone for a long time.
I don’t know if the stock market can be compared to the
housing market of 2005, or if it is more akin to the market of 2007, but for
me, the mixed messages are disconcerting. There are many investments whose
performance is agnostic to the direction of the market. One of these is gold.
However, unlike the majority of U.S. investors who are allocating to gold
denominated in dollars, I believe that notwithstanding our challenges, the U.S.
is by far the strongest economy on the globe. I also feel that Europe is a
grand experiment that is becoming undermined. For these reasons, where I am
allocating to gold, I am doing so expressed in Euros. I believe these will
appreciate not only with respect to appreciation of gold, but also relative to
that appreciation compared with any depreciation in the Euro. I believe in the
long term strength of the dollar, and I also believe that interest rates will
rise sooner than the market is pricing. I also believe that the Euro will lose
ground because of the fundamental weaknesses and challenges within the region.
For all of these reasons, I want my gold measured in Euros, rather than
dollars.
Unusual times call for outside the box thinking and
strategies.
The opinions voiced in
this material are for general information only and are not intended to provide
specific advice or recommendations for any individual. To determine which
investment(s) may be appropriate for you, consult your financial advisor prior
to investing. The fast price swings in commodities and currencies will result
in significant volatility in an investor’s holdings and may not be suitable for
all investors. All performance referenced is historical and is no guarantee of
future results. All indices are unmanaged and may not be invested into
directly. There is no assurance any of the trends mentioned will continue in
the future.
