"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Wednesday, September 10, 2014

Something to Consider

Ever since the Fed embarked on its journey with Quantitative Easing, we have all been getting an education in how the markets are responding to this grand experiment. Now that they are scaling back their bond buying program, we are also getting an education in how the markets are responding to that as well.

Most of the longer term readers here at the site will know that during the initial years of QE, nearly every asset class began moving higher. Some moved in response to ideas of liquidity injections while others moved higher in response to anticipated currency weakness.

This rising tide continued in near perfect sync until sometime in early 2012. That is when the commodity sector in general divorced itself from the rising equity markets.

As you can see from the chart that follows, stocks have moved relentlessly higher while the overall commodity sector has continued to sink. Just today it notched a 27 month low.

Yet in spite of this, we still have some telling us to prepare for runaway inflation any day now and of course with that, soaring precious metals prices.

The question one should pose is "WHY?". What evidence is there to suggest that a soaring move higher is just around the corner in precious metals?

Let's consider what this comparison chart is telling us. It is my contention that the reasons equities continue to rise is because they have become the only game in town when it comes to large speculators obtaining yield in a near zero interest rate environment. Also, something to consider is that US Dollar strength is attractive to foreign investors looking not only to obtain yield but also to capitalize on currency gains. In an environment in which the Dollar is generally strengthening against the majors, a foreign investor can move money into the US markets, not only obtaining a capital gains but also getting more "bang for their buck" when they finally cash out and make the currency exchange.

So not only do we have domestic-based firms and funds buying equities, we have strong inflows of foreign capital also feeding the equity bull.

That being said, a rising stock market does not necessarily equate to a strong and healthy overall economy. We have come to see this over the many years that this experiment in QE has been ongoing. When investors are looking for yield, they go where the bulk of the action is and that has been equities. Ask any competent money manager and they will tell you that they will not long be in the business if they are not producing solid gains for their clients. In a sense, they have no choice but to buy equities. I might add that I believe this is precisely what the Fed intended by driving interest rates to extremely low levels and providing so much liquidity. That money had to go somewhere and into stocks it has gone.

Central Banks want rising equity prices to feed consumer and business sentiment and they got just that!

The shortcoming of this experiment has been growth, while it has leveled off here in the US is not strong. As a matter of fact, one can see that whether through falling demand or rising supply or a combination of both, hard asset prices, aka, commodities, are falling in price.

I have long maintained and continue to maintain that this is evidence of a deflationary wave that Central Banks have not been able to reverse. They have succeeded somewhat in blunting its worst effects but reverse it they have not. Consider the fact that the ECB might yet be forced to effectively go the way of both the Bank of Japan and the Fed and implement its own version of QE if their recent measures fail to generate any strong growth in the Eurozone.

I have said all the above to come to this point - I will not argue whether stocks are overpriced or not. Frankly I do not care nor does the market at this point. Stocks are where the gains and have for the last few years, especially compared to commodities in general since 2012. Once that is understood, whether or not one likes it or approves of it is immaterial, one is on their way to understanding something about the nature of our modern markets. Money flows to where it can obtain a yield. It is that simple.

However, and this I believe is most important, if the economy was actually growing as robustly as the soaring equity markets would seem to indicate, commodity prices would NOT BE FALLING. I think that is axiomatic and needs no further explanation. Look at the comparison chart and tell me that they are not going one way while equities are going the other. What this does tell is however is that current levels of demand are not strong enough to absorb the current supply.

Along that line, I have maintained also that inflationary pressures cannot break out here in the US, or elsewhere for that matter, unless and until WAGES MOVE HIGHER. They remain stagnant however.

Many of those who oppose my current outlook on gold will bring up the fact that the cost of many basic items seem to be going up and that this is evidence that inflation is present. They also maintain that the rise in prices is threatening the middle class and its way of life. They cite that as a reason to buy gold - to protect their purchasing power. I will only comment on this insofar as to say, that for the last few years, gold has been a pathetic investment to "protect one's purchasing power". The metal has collapsed in price from $1900 all the way to its current price of $1250, much like the vast majority of individual commodity prices have collapsed lower. What is so sad is that many of those advocating such things are generally much more in tune with what is happening in the broader global and national economy that the average Joe and Jill, who stuck with stocks and did nothing. The latter looks like investing geniuses while the former look like dolts. It is said that "Ignorance is Bliss" ( a saying that I personally do not ascribe to ) yet in their case, it sure seems like that is the truth! 

I sincerely believe that is not the point, at least as far as investing or trading goes. What is the point, and this is assuming that their claim is true, is that wages are failing to keep up with the rise in services or goods and thus that is crimping peoples' disposable income.

After all, one has only so much money to spend, based on their take home pay, which has been relatively stagnant for many years now. If a larger share is given to buying "essentials", it is mathematically simple to understand that leaves less money available to spend on "wants". My question is, in such an environment, in which wages are flat, and growth is slow, and disposable income is tied up in essentials, where are the pressures going to come from to launch this long-heralded wave of inflation that will drive gold and silver prices inexorably higher? I maintain that the ingredients are therefore missing.

To me it goes back to Wages and thus back to the Velocity of Money. Until wages move higher it is my contention that inflation of the scope great enough to attract the attention of market participants of size will not occur. Currently the TIPS Spread is falling, not rising. That is the best source to measure the sentiment of those who watch this sort of thing most closely. Any open-minded, objective survey of the chart will show FALLING INFLATION EXPECTATIONS are currently in ascendency.

I have said it before and will so say again - falling commodity prices are not conducive to bull markets in gold and silver. It will take a geopolitical occurrence at this point to change the bearish sentiment that is currently dominant in both markets.


  1. This comment has been removed by a blog administrator.

    1. August and September annualized inflation will be negative for sure.

  2. First of all, we all must congratulate Trader Dan for calling the exact top in the energy market, almost to the day.

    Ever since, the oil market has crashed in one of the steepest, fastest declines since 2008.

    As far as the consumer, its never been better.

    Sure, jobs are out there but don't pay as well, but sooner or later wages will start creeping up.

    Right now, the consumer is doing fantastic, because:

    1) U. S. government is able to hand out freebies like EBT cards and finance it at practically zero cost

    2) Home debtors were able to skate for 2 - 4 years without making a mortgage payment until they were HARPed into a restructured loan.

    3) Prices on commodities have been crashing, so purchasing power has been improving the last 3 years. And with the explosive move in the dollar, their purchasing power is now even higher than it was 4 years ago

    4) Credit is plentiful and cheap, with the longest period of low interest rates ever recorded

    5) Stocks keep skying higher and higher, creating a huge wealth effect and self-reinforcing confidence

    The bottom line is that price tells all.

    XRT and XLY are still within a stone's throw of record highs, as the institutional investor has spoken by buying names like HD, TGT, LOW, UA, NKE, etc.

    So its best to "Stay in the System" and enjoy life.

    We are now living in the greatest moment in financial market history in real time.

    1. Sounds like the bernanke miracle is still in effect even after leaving office.

    2. 1929 all over again. How did gold do during the "deflation" back then ?

    3. "The bottom line is that price tells all."

      In rigged markets? LOL!
      Price tells nothing. Price is only one thing: price. It's the only thing that counts for trading. But it tells nothing in rigged markets.

      And how useful is it to write about the reasons of price movements but ignoring the biggest players in the markets?

      "Cluster Of Central Banks" Have Secretly Invested $29 Trillion In The Market

      Besides funny money, CBs have been the reason for the equity valuations - not the lie of a self sustaining recovery.

      "The price tells all." Incredible.

  3. Dan, one of your better pieces yet.

    Mark, I beg to differ with you on the consumer being strong, and my simple argument that the real world economy is just treading water is that, as stated above, wages are flat, commod mkts are falling and finally look at the Baltic Dry Index charts which are plumbing the depths, indicating worldwide contracting demand. Capital continues to trump labor, and career risk compels money managers to chase equities until...............

  4. In a world market, everyone is looking for returns. Any negative bonds rates anywhere will chase money to park in the US stock markets. Along with good crops, abundant fuels and increasing police actions, the US appears stable compared to the rest of the world. Markets will skyrocket here esp. the S&P.

    Euroland has just now gone officially negative where you pay banks to hold your money with no signs of recovery anywhere. Japan like old Russia will never recover from their nuclear meltdowns except they have nowhere to escape to. An ongoing black hole of cleanup money sucking down any economy.

    The oil chart is what it is, could be US manipulation to punish Russia with lower world oil prices, the US is certainly in the driver's seat to accomplish that with its fracking outbreak. Russia depends on a high oil price to run its old school social agenda of expansion.

    More likely wars would send commodities climbing again as countries begin to default on each other. This time around, silver will be the better buy at the lows because it is an industrial mental that could end up in short supply during war times. Gold not so much.

    1. How many of you guys really want to top tick USA Inc ?

      You are aware that the EU is a net creditor with no trade defict right ? Compared to the USs 60 billion per month merchandise deficit.

      Europe has more gold too. And only expanded it's balance sheet by 11% since 2008. Fed and BOJ have increased by 70 and 80%

  5. Thanks Dan - good overview. Agree with the angle on state of consumers. There may be a certain sect of consumers enjoying the benefits of a rising market, but most are not doing so well with stagnant wages. And to get wages moving up again will be difficult in an unfriendly business environment where allot of small business are not confident in the short to intermediate term outlook. This could change with the next Presidential election or may start to shift in 2015 if the Senate goes republican in the mid term elections. Market is also getting fueled with corporate stock buybacks on low interest borrowing...

  6. Great points Dan.

    And the Fed surely has to see this global deflation on the charts too.
    They must be thinking oh oh here we go again with deflation as QE ends.

    So its not just commodities that would risk falling in price here with QE ending one has to figure?

    Equities have had a great ride but why would anyone risk staying in equities if deflation is taking hold again?

  7. Agree, one of Dan's best articles yet, and his articles are always a must read for me. But Dan admits he is a trader and short term oriented, while I am not.

    My question for Dan is if he had to allocate his portfolio today, and could not trade/reallocate his portfolio for 5 years, then how would he invest...?

    This is how I have proceeded within these guidelines:
    Cash - 5%
    Gold - another form of cash = 20% (have physical possession)
    Oil & Gas Working Interests and Royalty Interests = 25% (have title in my name/company name)
    Stocks (no bonds) = 25%
    Real Estate (net of mortgage debt) = 25% (title in my name)

    (No debt except for modest home mortgage debt)

    In a few years, will inherit some farm land, a great addition to my real estate.

    This is a somewhat diversified portfolio, but heavily weighted into hard assets. I can sleep at night with this portfolio allocation.

    1) Do not have to worry about Bank Bail-In's
    2) For the most part, do not have to worry about Brokerage Firm Bail-In's on my stocks, some of which are held in SEP-IRA retirement plans. If stocks go up, I am happy as this is 25% of my portfolio.
    3) Most of my assets I have title to or are in my physical possession. It will be hard for USA "rule of law" to take them away. Heck even most Trial Lawyers support the "rule of law"...
    4) Most of the cash I do have is in 3 safe banks with Texas Ratios below 7.
    5) Have small commodity brokerage account to hedge oil prices for my Oil & Gas Working and Royalty interests. This cash is not safe, given commodity brokerage bankruptcies, ask Jim Rogers... (just google Refco and MF Global). I often wonder how Dan mitigates this potential risk.

    My personal belief is that we will have a global financial market reset within the next 5 years to expunge sovereign debt and bank debt, as commented on by Jim Rickards. This does not imply the end of the world or that we are going to be living in caves. But this global reset does mean someway, somehow that governments and banks are getting out of debt, and it is only prudent therefore to get much of your assets outside the financial system.

    The first reference to getting your assets outside the credit and banking system I credit to Fexlix Zulauf in 2010. It has taken me 4 years to do this properly. His scenario at that time was that US Fed will have to print over $50 trillion to get us out of the next financial crisis. I am not sure if $50 trillion will create inflation or not, but it likely will either create inflation or destroy the US Dollar. From Rickard's articles/books, he suggests similar outcomes and/or chaos.

    Now, if anything, I am overly cautious/paranoid in my portfolio allocation toward hard/safe assets in my title or possession. This allocation is certainly not recommended for everyone. But I can sleep comfortable without having to trade often.

    FWIW, the Zulauf interview from 2010 from that infamous news source, always worth an additional listen:

    I look forward to reading comments on how Dan (and other paranoid investors like me) are allocating their portfolios to get their assets out of the "formal" financial system.

    Thanks for listening...

  8. Equity Ratio constant at 35% (mostly Hong Kong & China)

    Short-dated bonds & CDs 15%

    Non-residential Real Estate just under 10% [reducing]

    Gold 10%

    Productive Commercial Assets 30% [opportunistically increasing]

    Minimal cash balances, other consumer assets (cars, bike, holiday apartments) are cashflow-negative and consequently disregarded, as are retirement and insurance assets

    I actively trade the equities portfolio, but thats pretty much it (though His Highness punts FX Options from time to time. with mixed results)

    As we age, the Equity Ratio will come down to under 10% and the Income Generating Assets will hopefully go up to around 50%. Gold only comes into focus at either $1000 & 2000 (consider reducing holding) or at $1500 (consider further purchases)

    We are essentially $-based, with most revenues denominated in HK$ and most physical assets in Renminbi

    1. Interesting, thanks for sharing. Your expertise is obviously real estate while mine is more oil & gas. USA has private ownership laws for O&G assets. Are your real estate assets spread across multiple countries...? One issue with USA real estate is local governments have property tax laws based on property value, making Real Estate a "tax magnet" for local governments to raise additional cash...

  9. This comment has been removed by a blog administrator.

    1. Shikah Vermacht is a spam bot leading to a useless website.
      Don't click on the link or all you'll do is give those spammers more unique visitors and money.

  10. I'm out of my last 1/3 short position in gold at 1242 $.
    The position was taken at 1314 just under the red downwards resistance on the weekly time unit (but hey, what do I know, "M" wrote we are in an uptrend, so I'm wrong, but fortunately I made money being wrong).

    Now I'll wait to see what happens in the 1240 area.
    Imho closing under this area will be a catastrophy for bulls. I will probably go back in the short train if we do.

    1. Gld futures short and/or inverse Gld stocks?

    2. Casey Research recommended that short at the same price. I took it as a hedge.

  11. SI has finally worked its way down to a do-or-die position, just starting to peek through a weekly downtrend line set from the 4/11 high. So far, it has slid down it, managing to stay on top of it, month after month, but now it is finally having to show its cards. IMO, the odds actually favor yet another bounce, but if it fails, that'll be it--there's nothing but air below that.

    If that happens 1) the desperation of the stackers will be palpable 2) a large chunk of the audience which has been keeping these predatory internet shills in business will mercifully evaporate.

  12. I would just Love to see the Fed put the nail in the coffin on Silver next week. $15 to $18 trading range looks like the next step downward. There are No existing catalysts to propel that market higher for the foreseeable future. Deflation has taken over Europe, China, etc.

  13. Dan, you are a pro's pro. A well written piece indeed...

  14. $18.65 critical level for Silver. Holding for now...by the skin of its teeth.

  15. Its not big to gloat

    (but, yes, $15 and a G:S ratio in triple figures would be quite a giggle)

  16. Gold getting blowtorched again in yet another "devastating collapse"

    Just as the boys at King World News predicted, LOL!!!!

  17. Kinda fun to watch in real time--and on the 13th anniversary of 9/11, no less...

    Oh, the humanity!

  18. Does anyone believe that the Fed will actually taper?

    1. Freemarket;
      they have been tapering for the last few months... where in the world have you been??

    2. With the Belgian buying and China , there is more buying now then there was under 85m QE.

    3. This comment has been removed by the author.

    4. M

      Why do you feel the need to pontificate on matters you really don't understand? China has been systematically reducing its purchases of US Govt debt and, more importantly, shortening the tenor of its investments http://img.qz.com/2014/08/change-in-china-s-fx-reserves-and-us-treasury-purchases-vs-previous-year-reserves-purchases_chartbuilder-1.png?w=640

      Is this some form of twisted ego trip you are on, or just plain ignorance?

  19. "Many of those who oppose my current outlook on gold will bring up the fact that the cost of many basic items seem to be going up and that this is evidence that inflation is present. They also maintain that the rise in prices is threatening the middle class and its way of life."

    Yes, and how many of these people are actually investing in the stock market now and improving their way of life? This market is going up on record low trading volumes.

    1. freemarket;

      and your point is what?

      Buy gold?

      Gimme a break.....

    2. It has nothing to do with gold. My point is that a stock market being propped up while the middle class erodes and jobs disappear doesn't mean anything. There are less and less retail investors out there to take advantage of this run.

    3. Free Market;

      Again, your point is what?

      The stock market is no more being "propped up" than there is a man in the moon. I just explained why stock prices are moving higher but your preconceived biases prevent you from seeing a simple fact. Take the blinders off

    4. What the hell do you mean "it doesn't mean anything"?? It means PROFITS for those who have been long. What part of that do you not understand? Why do YOU invest? As a political statement??

  20. Lan, what do you think about this post?


  21. we had the stock mkt bubble into 2000, then the housing bubble into what 2006, then the commodity bubble starting with bubblin' crude to 143 and ending with what, gold to 1923. now it's the stock mkt bubble again, so time to look for cheap real estate!

    foreign bidders have taken huge chunks of our bond auctions this week...TLT holding the 50-day MA second session:

    gold,silver,XAU,HUI if they are weak on the thursday they tend to be poor on the friday.... bond yields up and poor china ppi/cpi said to be helping today's weakness.

    usda report on deck this morning, would keep wallet on hip til tonite's reopen when all commentary has been digested. will be nice to get sept contracts off the board manana in ags- will clean up the charts, especially in beans and soymeal.


  22. oh forgot the 'velocity of money' that's it for sure! usa corporations and individuals continue to refuse to spend money, so debt levels are very low and cash in bank very high historically for both. can't get any inflation rolling into that. perhaps stock mkt deserves this valuation into this wonderful condition of our corporations!

  23. This comment has been removed by the author.

    1. Dr. Don;

      Another Johnnie -one note.... "Good is getting beaten down by the powers that be". The problem you have is one of facts. It is hedge fund selling that is driving the metal lower right along with the rest of the commodity complex as supply exceeds demand at current levels.

      But never mind - facts don't matter to the gold cult guys. the yellow metal has to only go in one direction, namely up, or evil, nefarious forces are at work.

      The sheer folly of you people is further evidence of how deeply entrenched in the gold cult you are. I am pleading with you, for your own good, to wake up and come out of that snare.

    2. Meanwhile, gold and silver have now gone down 64 Sundays in a row - another example of a perfectly normal pattern!

    3. Free Market:

      repeat after me: It is a bear market....

      That is all one needs to know...

      wake up....

    4. This comment has been removed by a blog administrator.

  24. Support for gold from Ukraine looking weaker and weaker. Putin has Ukraine by the jugular, having seized a sizeable chunk of territory whilst hovering outside Mariupol, which will force Peroshenko to accede to concessions for the eastern provinces, by alternately intensifying pressure and relaxing it during negotiations. Eventually, everyone will accept these with relief and move on, with Putin basking in popularity with the Russian electorate, and Ukraine somewhat humiliated but still nominally a whole country. Gold would need other exogenous events for support, which may well be latent, but could take some time to emerge.

    What else does gold have going for it short-term, except for a feeble dribble of purchasing from India during the wedding season? Another negative could come next week from Yellen if she even so much as mumbles the possibility of rising interest rates. Gold could be smashed, and also the stock market.

    1. This comment has been removed by a blog administrator.

  25. Dan, If you thought your hate mail has been bad over the past few years you have not seen the worst my friend. I just know you will start getting death threats when we enter the next LOWER trading range in the precious metals (soon?). Please be careful.

    1. Bob;

      What is really sad is if some of these cult members could just take off their rose colored glasses long enough to see what was right in front of their eyes, the many warnings could have saved them a lot of money and prevented some deep losses. For that, they could have given me a bit of thanks instead of cursing me for trying to tell them the truth and save them from themselves.

  26. However, with next week's FOMC meeting past, one might well anticipate a golden bounce of sorts, good for a short ride, but advisedly to sell into. I say this whilst looking into my crystal ball (joke), though I think could be good for a flutter.

  27. Just one point:
    We might be confusing the effect for the cause. Rising wages are not the cause of inflation; they are the consequences of it. The price inflation is caused by:
    1. Increase in quantity of money (monetary inflation)
    2. Increase of velocity of money
    The reason why we have not seen significant price inflation here is because you need both of the above to be fulfilled in order to see it. So far #1 has been met, while #2 has not.

    1. So, why don't they increase #2? There must be many ways to stimulate the velocity of money, by releasing it into the general economy. Lowering taxes, or just giving it away should do the trick. If price inflation is increased, and also wage inflation, the staggering debt is being liquidated. What could possibly go wrong?

    2. Soren;

      interesting points... I would not quibble with you on this except to say that I tend to look at these questions of economic matters in much simpler terms and not so much as trying to figure out which comes first, the horse or the cart.

      For me it is very simple - Consumers need higher wages to feel more comfortable about taking on larger levels of debt. In a consumption based economy, that means the lack of spending results in slow growth, resulting in lower upward price pressures.

      Business has no need to raise wages given the rather poor hiring environment which is mainly to blame on the current hostile business environment.

      If we had a business friendly administration, companies would have more incentive to increase production and hire more people. Many businesses still are extremely nervous to take on any new hires over the issues still surrounding obamacare, not to mention the onerous regulatory environment.

      As long as wages are flat, consumers will be squeezed and that means they spending will remain only moderate at best. Without hire wages, consumers are not going to ramp up spending, thus less upward pressure on prices.

      It may not be economic textbook stuff, but it is how the real world works in my view. Show me an environment in which business is expanding and hiring more people and INCREASING WAGES, and I will show you one in which upward pressure on prices is very real.

      Thanks for the comments.

      Got to get back to markets...

  28. "So, why don't they increase #2?"
    Excellent question, Peter. My guess is that they do not want inflation just yet. They will ramp it up at their time of choosing. It is ridiculous to assume that they have so much power and yet that they will refrain themselves from using it. If you suggest anything of the kind, you are automatically labeled "conspiracy theorist".

  29. Steve

    a significant underestimate: sometime between 2016 - 18 I reckon the probability is closer to 90% because of

    - The coronation if Queen Hillary

    - Taiwanese elections (rigged & disrupted by the USA)

    - Hong Kong elections (rigged & disrupted by the USA)

    - Abe and the failure of his domestic economic policies

    - US meddling in the South China Sea and Xinjiang

    - US meddling in the Middle East (threatening China's oil supply)

    - US meddling in sub-Saharan Africa (threatening Chinese investments)

    - Systematic and habitual misuse of sanctions, the IMF and the UN, polarising Eurasia (BRICS & SCO) and EU-USA (Australian economic collapse)

    There are very troubled times ahead

  30. Next week's FOMC meeting is going to have a big impact on the markets, including gold and S&P. Maybe the Mock Turtle can throw some light on the situation about interest rates.

    The Lobster Quadrille

    '"Will you walk a little faster?" said a whiting to a snail.
    "There's a porpoise close behind us, and he's treading on my
    See how eagerly the lobsters and the turtles all advance!
    They are waiting on the shingle—will you come and join the

    Will you, won't you, will you, won't you, will you join the
    Will you, won't you, will you, won't you, won't you join the

    "You can really have no notion how delightful it will be
    When they take us up and throw us, with the lobsters, out to sea!"
    But the snail replied "Too far, too far!" and gave a look askance—
    Said he thanked the whiting kindly, but he would not join the
    Would not, could not, would not, could not, would not join the
    Would not, could not, would not, could not, could not join the

    '"What matters it how far we go?" his scaly friend replied.
    "There is another shore, you know, upon the other side.
    The further off from England the nearer is to France—
    Then turn not pale, beloved snail, but come and join the dance.
    Will you, won't you, will you, won't you, will you join the
    Will you, won't you, will you, won't you, won't you join the

    1. Peter;
      How do we plot the Turtle at the bottom of our price charts? Is that a new technical indicator that we can use? :o)

  31. Don Coxe latest:

    US frackers—deploying advances in science and technology with guts and skill—have averted fuel inflation. And farmers, using the tools of modern agriculture—GMO and hybridized seed, farm machinery equipped with GPS and logistics, and carefully monitored fertilizers—have combined with Mother Nature to unleash record crops of corn and soybeans. So much for food inflation.

    Capitalism is doing its job: to expand output of goods and services, thereby preventing shortages from derailing recoveries through inflation. That success story means central bankers can keep printing away.

    So what should investors do? The S&P’s rally has been sustained through near-zero-cost money used to: (1) buy back stock to enrich insiders and please activist hedge funds which have borrowed big to buy big; and (2) prop up the overall market because investors have learned that buying on margin when the costs are minimal—and below dividend yields—just keeps paying off. Stein’s law says, “If something cannot go on forever, it will stop.” Too bad it doesn’t say when.

    Gold loses its luster when: (1) inflation seems to be as remote as a pot of gold at the end of the rainbow; and (2) even a concatenation of crises fails to send investors rushing into the time-tested crisis consoler.

    We had predicted in February that 2014 would be the year of increasing geopolitical risks that would challenge conventional asset allocations. We see geopolitical risks expanding from here—not contracting—and stick to our investment advice that the broad stock market is precariously valued. A range of options is available for those who wish to hedge themselves against even worse news.

    Gold is part of any such risk mitigation. So are long government bonds.

    Most importantly, we have entered an era when wise investors will devote as much time to reading the foreign news as they allocate to reading the investment section.

  32. A very good post Dan and a couple of excellent posts from Mark ( finally ).

  33. gold could do very well in a weak economy that is drenched in debt, for who would keep their wealth in iou's ?--at the moment it seems stocks are not considered iou's or capital is forced there for some yield, iou or not.
    im inclined to believe that serious capital has a % in hard assets, including gold

  34. Gold and oil could rebounce up for a while, 1400$ and 100$ respectively but both still in the bear markets.Nothing bullish until 2016.Gold was in a range of 1900$-1500$ for 18 month so it could stay sideway longer until Jan 2015. Price tag under 1000$ not far-fetched .Stay put !

  35. Hey Lieutenant Dan, just what do you call the nationwide push for $10-12 minimum wage that is building force and can't be stopped? Do you think the millions of people currently making that will be hunky dory not getting a $3-5 raise?!? What about the people on crappy small salaries? Since Mickey Dee teenagers can make 25k don't you think they need a $200 week raise?

    Explain to me how prices raced out of control in the 70s when the economy sucked balls


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