With the stock market’s Dow Jones Industrial Average down yesterday 666 points, many investors who are not used to this volatility are getting spooked. And that’s in spite of the number ‘666’ being the Biblical sign of the beast!
Is this the end of good times? Or, is this just a quick correction where the market turns around only to make new highs?
Let me first say, I have no idea where the market will close on Monday. What I can say for certain is the same things I have been saying for the past 6 months. These are:
- The market is significantly overpriced, and remains so even after this pullback.
- The collapsing bond market is what will cause the stock market bull run to fail.
- Gold is a better place to be.
Stocks are still trading at the 3rd highest price-to-earnings ratio since the year 1870. It doesn’t take a degree in statistics to realize the market is significantly overstretched.
The bond market concerns me more. At their recent bottom, interest rates had not been this low since the year 1800, and possibly longer if records went back that far. Since bonds move opposite of interest rates, this means that bonds are also at the highest levels on record.
These distortions in the markets were caused by Central Bank and Treasury interventions, in multiple countries, flooding the currency markets to prevent a complete economic collapse brought about real estate markets imploding nearly a decade ago. The Federal Reserve expanded their balance sheet to roughly $4.5 trillion, up from $700 billion. Recently, they began to reverse the process (quantitative tightening?).
Money printing comes at a cost, and now it’s time to pay that cost. When the Federal Reserve declined to raise interest rates to more normal levels this week, they essentially told the markets, “Let the Inflation Begin!”
Inflation is the worst enemy to a bond investor, savers, and the average person on a fixed income. It eats away at the value of their future receipts. When that happens, bond investors pay less for bonds, causing interest rates to rise.
Rising rates cause stock markets to drop, especially overpriced markets. They also cause economic activity to decrease. This will offset the positive effect to the Trump tax cuts.
Inflation is very good for those who owe money. They can pay back their debts in dollars that have a lower value. It is also very good to those who own real assets such as precious metals, oil, and other commodity-related items. Real Estate is also an asset to own, but it’s price increases will be muted by rising rates since real estate is typically purchased with credit.
A gradual accumulation of gold or oil shares is a way for a typical investor to protect themselves in an inflationary environment. Gold can be purchased directly, or via the Gold Shares ETF traded on the NYSE (NYSE:GLD). The easiest way to purchase gold directly is on EBay’s bullion hub, and right now the American Eagle 1oz coins are some of the most preferred. Just make sure you are purchasing from one of the larger dealers and look through the inventory for bargains.
In the coming months, I expect the stock market to remain very “choppy”, and to ultimately give way to a downturn much larger than most believe at the moment. Stock markets do not like inflation!