Gas prices in my area have once again started rising and are now comfortably over $4 per gallon. With another northeast winter just around the corner, home heating oil is poised for $5 per gallon by first frost. Consumers and investors alike should expect a steady and rapid rise in price from these current levels. Sad to say…
For two reasons:
- A major increase in worldwide Money Supply, and
- Escalating turmoil in the Middle East, Africa, and Europe
Let’s take these items one by one before applying them to the stock market.
Major Markets Ramp Up Printing Presses
America led from behind in this newest round of quantitative easing. After flirting with the idea for months, Ben Bernanke’s European counterpart fired the first salvo by announcing the European Central Bank’s first QE program. A few days later America’s central banker, Fed chairman Ben Bernanke, attempted to upstage the European effort by announcing the most aggressive QE program in American history – one with no time expiration or monetary limit. A few days later, Japan announced their first QE endeavor.
In a nutshell: more Money = more Inflation
We have seen this before. In fact, every time the Fed has dumped new cash into the system in this manner it has only produced short-term commodity and stock market inflation while the underlying economy remained weak. Monetary shell games solve nothing, and only make economic matters worse.
People often forget the origins of recent African and Middle Eastern revolutions – extremely high food costs (a.k.a. inflation), excessive unemployment, and corrupt governance. Many of these countries import wheat from America, China, and/or Europe – all of whom have driven down the value of their currencies over prolonged periods of time. This, in effect, has made their exports more expensive to countries like Egypt and Libya.
Massive amounts of new world currency via QE will only make matters worse in politically challenged countries. Hostilities will likely rise, and force oil and other commodity prices higher. This dynamic will negatively affect world Markets that are already sliding into recession from here to the Far East. As a result, investors should expect to see more volatility in the investment markets – especially in commodities like oil and gas.
Since the assassination of the United States Ambassador to a newly formed Libyan government, parts of the Middle East and Africa have turned into one big anti-American protest – with flags burning and unified chants of hatred, death, and destruction to the United States and Israel. As you may recall, the U.S. led from behind in Libya’s revolutionary cause and it was France – not Israel, who was out in front. I have yet to see a French flag burning. Call me a cynic.
At the United Nations last week, Iran look defiant, Israel looked ready, and America looked weak. The rest of the congregation looked lame. In such an environment, world peace is further than an arm’s length away and war is at the tip of a tongue.
These are dangerous times.
Investors shouldn’t be naïve. When oil is all you have, escalating oil prices is all you want. And when a country, or a collection of countries, can’t play the monetary game that the U.S., Europe, or China, can – some resort to wartime tactics, which sometimes leads to wars. No shock there.
The uncertainty surrounding such a condition will cause increased volatility in the least case; and World War in the worst case scenario. None of which are good for consumers, business, and many investments.
Poor monetary policy, brought upon by poor fiscal policy, has produced poor diplomatic relations and political unrest in many Markets – many of which are large Suppliers of worldwide oil Demand. This condition is ripe for stifling inflation. Investors must take note.
# # #
Add to the above two recent economic releases by the U.S. government:
- Real GDP was revised down to a pitiful 1.3% (FYI, 3% can be considered good but at least 5% is required to get America out of its current financial mess) and,
- Personal income is growing at just .1%
In other words, American consumers also continue to fall behind by a wide margin. Prices are growing much faster than incomes, and according to these new government releases inflation stands at 1.7%, and with food and energy inflation greatly beyond that meager average, Consumers will soon feel a stronger pinch to their pocket books. Unemployment is still over 8%, and a "fiscal cliff" is in clear view.
It’s really ugly out there.
Yet despite these many negative circumstances, the stock market remains valued as if some sort of peaceful economic boom was underway. The year-to-date chart below shows the misleading picture.
"The market" average, as indicated by the Dow Jones Industrial Average, is up 10% in the face of this year’s lackluster economic performance. It once again ended the week above the action zone high, representing the Dow’s historical average high since 1995. The question of over-valuation need not be asked here.
"Market strength," as indicated by the 15-51 Indicator, remains up a stunning 43% in the nine months thus far even though it has fallen nearly 6% since reaching its all-time just a couple of weeks ago. It looks like it wants to go lower. And who could blame it.
"Gold" continues to rebound from its annual low, up 15% since its May 16 bottom and 13% for year. It looks to be signaling trouble in the currency markets, and poised for growth.
And while things look very clear to me, the most asked question I hear in my travels is: How do I make money in this market?
I tell long-term investors: Markets are on the brink of correction, so:
- Have a stockpile of cash on hand;
- Buy gold because the market is ripe for it;
- Short the S&P 500 because stocks are over-valued; and to make more money –
- Get a third job…
- How much of each is totally up to you.
When doing so, consider Cash your long-term investment allocation. It’s the money you don’t need to touch for five, ten, or even fifteen years. A significant portion should be used to buy low when Stocks correct and go on sale. In this allocation, too, should be the amount of cash reserve you always intend to keep – a safety net, if you will.
The Commodity you choose – be it gold, silver, oil or copper, etc. – should be your interim growth component until Market dynamics change. Be comfortable with locking this allocation up for one to five years, and be willing to sell at any time you achieve your objective or must rebalance.
To hedge these investment tactics, I say Short the S&P 500 because stocks are so over-valued at these levels. Again, world economies are shrinking, Europe is a disaster, and parts of the Middle East and Africa are on the brink of civil war – and all of them seem to have a major league gripe with the U.S. and her Israeli ally. All of this will greatly affect gas and oil prices and further pinch the pocketbooks of middle class Consumers everywhere. And "market" valuations are boom-like high. So not the case.
And while free markets don’t like war, acknowledge that war is part of "the market." As such, defense stocks should see increasing demand and higher prices in times like these. Food, energy, and healthcare should remain expensive and volatile. This will squeeze companies supplying consumer discretionary products, those things that most middle classers and young adults can easily do without. Consequently, these Stocks should experience the most significant price deflation and are the greatest short opportunities.
That’s all I have for now – but please, let me know if I missed something.
PS: One recommendation for the third job: make it your passion and it will always pay dividends, in either fun or money. Both are well worth the investment.