When Worlds Collide
The study below originally appeared at Treasure Chests for the benefit of subscribers on Friday, April 7th, 2006.
Stocks are not cheap by any measure, but as you can see in the attached, they likely still have a ways to go in relation to inflation adjusted extremes, meaning both inflation and rising prices should be with us for sometime yet. This realization should become evident in viewing Figures 1 and 2 in the attached above. At the same time however, and an understanding embedded in lessons offered when measuring relative asset valuations against gold during inflationary times, if one's portfolio is not properly structured during circumstances like these, a slow grinding ascent in the stock market will not mean you are keeping pace with future purchasing power requirements. This understanding is reinforced in reviewing Figures 3 and 5 of the attached, where although stocks are rising, inflation and overall price levels are rising faster, a condition not likely to end soon. This of course means an accelerating loss of relative wealth (purchasing power), with absolute losses to follow assuming deteriorating fundamentals and the appropriate circumstances --- collide --- at some point.
What can we expect in the future given lessons from history in this regard? Making the assumption this is a Grand Super Cycle top, where in the end, a complete collapse of modern day stock markets would not be out of the question, while stocks are rising, commodities and precious metals will undoubtedly continue to out-perform. Furthermore, based on previous modern day bubble examples, some of the attached comparative plots suggest a degree of caution should be excised as early as this summer however (Figures 1, 2, & 3), while others, which perhaps involve a better comparison since both populations primarily reside in the States, suggest if history is a good guide, stocks (equities) should remain firm until early 2008. (See Figures 4, 5, & 6 attached directly above.) Of course there are other studies which were covered earlier this year (see Figure 2) that suggest pressure should remain in the pipe until early 2009, or perhaps slightly beyond, as long as sympathetic free radical elements associated with quantum mechanics particular to this universe are still roaming. (i.e. a logarithm is generated.)
Supporting this view, a historical review of how US stocks have reacted to bouts of real rates climbing out of accommodative circumstances sheds some light on what we should expect in the future, but only when analyzed in the proper context. What context do we mean? Why -- the Greenspan context of course, where the Maestro was never shy about ensuring liquidity was plentiful when problems arose, especially ones big enough to potentially leave a lasting blemish on his record. And in viewing Figure 1 of the attached, which was the first instance of real rates jumping into tightening mode above zero on his watch, you can see he was taught a memorable lesson about what such circumstances can do to the stock market in 1987, especially if asset prices are in bubble mode. In this respect he never forgot this lesson throughout his tenure, where the popping of the tech bubble in 2000 was more a mistake than planned, but even there, he made sure to show us all who was boss before he departed. That is to say undoubtedly kinder characterizations of his legacy would never paint such a picture, but Mr. Greenspan showed us all he has the heaviest fingers of any central banker in history, an accomplishment earned in his willingness to allow them to sit on the printing press buttons without fatigue.
Taking this analysis back further in time, past the Greenspan experience, and thereby furnishing a better understanding of the messages found in the attached, Figure 6 provides a composite of the various outcomes from 17 real rate tightenings throughout the years, including Paul Volcker's watch, and encompassing the entirety of the post 'gold window era.' Here, as you can see, the maturation of the current fiat currency system has produced a loss of volatility in stocks, where accordingly our current condition is what should be expected given the aged nature of the causal backdrop (fiat world), one of a dull buoyancy in the broad equity complex characterized by rotating / spotty bubbles as process unfolds. In this respect it should be recognized that price managers are now at the top of their respective games, but that this condition cannot last forever. Moreover, in viewing Figure 7, we can see that once again real rates are threatening to push considerably higher into tightening mode, where like that which was presented to Greenspan in his first few months in office, Mr. Bernanke may be facing an unexpected test in the not too distant future. That is to say the feel good party associated with the new job may be over soon if the signals gold is throwing off have any merit, and where the term 'no free lunch' should be remembered by all.
How long can this go on? Well, I would take a very good look at Figure 6 in the attached for an answer to this question. Notice the similarity between the post-bubble patterns in the Dow of the 30's compared to the NASDAQ of today, and that if history repeats, a lasting top in the broad measures of stocks should be expected sometime in the first quarter of 2008. One thing is for sure, if stocks rally unabated for another two years, once they roll over, it will take a miracle to get them back into rally mode again, so one better make his or her money while still possible. Of course precious metals will likely still rise for a few years after stocks top out, but it should not be forgotten the Grand Super Cycle chart for gold (see Figure 2) also demonstrates a lasting top will be coming here at some point as well.
Until this point arrives however, it appears both gold and silver are destined to reach far higher prices in coming years as growing numbers become increasingly disenchanted with the inflationary policies of the New World Order. Further to this, many are now rushing into an overheated precious metal market for various reasons that could prove ill considered in hindsight if one's objectives are speculative in nature, or rooted in reaction. Past this however, where gold and silver's intrinsic value as grounded currencies coexist within both old and new paradigms concurrently, for those who are equally well grounded in reason and aware of future challenges, swapping today's fiat currency for precious metals continues to make a great deal of sense to the broad minded.
In leaving you now, we invite you to visit our site and discover more about how an enlightened approach to market analysis and investing could potentially aid you in protecting your finances into the future. And of course if you have any questions or criticisms regarding the above, please feel free to drop us a line. We very much enjoy hearing from you on these matters.
Note: Special thanks to Jesse's Roadhouse Café for all of the wonderful images comprising many of the buttons one can view above.
Good Investing all.