THE WAY IT WORKS

For those of you who know how much I like to keep it Real, know this: it’s easy to get caught up in the daily mumble-jumble of every day life. Perspective is key during times like these. Now, more than ever, losing focus is a costly proposition.

Stocks bounced around this week but gold was steady, another mixed signal offered up by “the market.” The Dow gained 1.7% this week and gold ended up 2%; while stock market strength went nowhere, posting a small .2% loss for the five-day week. Here’s the year-to-date chart.

6-18-12a

Don’t get lost in this picture. Gold has been moving with the Average for sometime now, while stock market strength has posted above-average returns. The above-average 15-51 Indicator has produced a 27% gain so far this year. The Dow and gold are deadlocked around 4%.

This trend continues for the most recent twelve months. See below chart.

6-18-12b

Again, average stocks and gold are in a ballroom dance to mediocrity, while stock market strength has outperformed the average 40% to 6%. But this picture is not what prudence would logically expect.

In times like these – with a global currency crisis, on debt overload, with impendent economic zealous – one would prudently expect gold to surge, strength to falter, and the average to underperform.—So not true in the above pictures.

But so true in reality, which is best viewed in 20-20 hindsight. Recall the Market’s condition in the run-up to the crash of 2008 (see my book for details.) That Market condition was similar to today’s situation.

In theory, bad money policy should cause a surge in gold and make it easy for above-average stock portfolios to outperform average ones. This can be demonstrated by the below chart, which starts from January 2007 and runs until current.

6-18-12c

Just so you know, gold’s torrid run began before 2007. Cheap and easy money and lending policies that began in the late 1990’s ignited the run. But that’s not the point here: accuracy is.

The above chart is the most accurate picture of the Market’s current condition. Gold has outperformed in this bad money period, stock market strength has produced above-average gains, and the Dow has underperformed Real GDP – indicating a long term recession that started in 2008 and has continued to this day. That’s more recessionary proof – and it makes total sense.

The most common mistake investors make is getting caught up in the mumble-jumble of daily reality. Days are numbered, indeed, but long-term trends are easy to read. Stay out of the moment and step into the year – or better yet, step into the decade.

Market conditions have changed little in the past ten years, and for that reason gold remains the highest growth opportunity – with stock market strength continuing to run a close second. Expect average portfolios to continue sucking wind against a flat-lining GDP.

That’s just the way it works.

For those of you who missed other blogs from this week – here they are:

The European Irony

Market Dysfunction & You