Gold, Budgets, and Down Grades...Oh My!

What a week!! S&P (Standard & Poors), a company that specializes in assigning credit ratings to corporations and companies (sort of like a Free Credit Report.com for big companies and governments), came out this week and officially stated that the future outlook for the US is negative. This means that they see problems in the future as it relates to our country being able to pay its debts! My use of exclamation marks are to express my amazement, not to celebrate or underscore my unbridled enthusiasm at the impending fiscal disaster we are facing. But come on, this is historic stuff. I understand that it's scary and disheartening, but we are firsthand witnesses to unprecedented economic occurances. In addition to the S&P downgrade, the head of HSBC bank came out this week and stated plainly that Americans are in debt denial. I know I have promised to avoid politics but all of these historic developments have forced my hand. We as a country, must wake up to the fact that we are out of money. We owe nearly 15 trillion dollars and are forced to pay interest on that ghastly amount every year. We are adding to that debt to the tune of 1.6 trillion a year. You are going to hear so much political nonsense on both sides of the aisle as it relates to this budget issue. The truth is simple: cutting spending isn't cruel, mean, heartless, greedy, or unfair. Reducing our spending is a necessity. Let me ask you a simple question: what good are we to ANY ONE of our downtrodden or needy citizens if we default on our loans and experience catastrophic fiscal collapse? This is not a political issue. It's a reality issue. Anyone that tells you ANYTHING else is either uninformed, illiterate, dishonest, or attempting to use this disaster as political leverage. Focusing on any other issues in the political arena at the moment would be the equivalent of arguing about the color of paint on the walls while the house is on fire. Both parties must get serious about this issue unless they want to relegate the US to third world status. It really is that simple.

Despite all of this bad news, the market goes up. It may sound strange, but the market is going up because of our problems, not despite them. The weaker the dollar gets, the more investors will migrate from federal and municipal bonds into stocks with the hope of making money faster than our currency is depreciating. Also, many money managers, myself included, are terrified of the unavoidable interest rate hikes that are coming our way. You see, as the dollar continues to weaken, the fed will be forced to raise rates to keep our debt attractive. In an effort to get out ahead of this, we are abandoning our bonds and migrating to stocks and commodities. This migration is forcing the market higher.

I cannot tell you how many times I have been laughed at over the past five years whenever I expressed my belief that gold would rise to $2,000 an ounce. Well, we have hit $1,500. I have talked about gold ad nauseum in this blog so I will keep it short. This meteoric rise is simply due to the diluted US dollar. I'm not forecasting $5,000 gold. However, I'm certainly not confident in our politicians' intestinal fortitude that will be needed to reign in this riotous spending. Until that happens, stay long gold. This same scenario holds true for oil. While the threat of Middle East unrest resulting in supply disruptions has certainly propelled oil higher, the falling dollar was already pushing it in that direction.

If you want to be a real market geek, pay attention to the VIX going forward. Just type in VIX in whatever tool you use to look up stock market prices. The VIX is the volatility index. It measures the number of Put option contracts that are being purchased. Put option contracts are just instruments that pay off in the event that a stock goes down. It's like placing a bet that a stock is going to lose. The VIX is historically low which has me worried. As Warren Buffet says, "be greedy when everyone else is afraid, be afraid when everyone else is greedy." This economy and country are on very shaky ground and everyone is being VERY greedy. I'm not freaking out and selling every stock we own. However, we continue to proceed with caution.

Where's The Recovery???

Here's a challenge: turn on any news channel or stock market show and see if you can go five minutes without hearing some Ivy League blue blood opining about this incredible bull market and the continuing recovery. They cite earnings, balance sheets, employment numbers, and a plethora of other "Wall Street" stats. It's actually pretty convincing, at least until you talk to your neighbor who hasn't worked in ten months and who is raiding his IRA in a futile attempt to keep his house out of foreclosure. So, why the huge discrepency? Why is this magical land of 7 figure bonuses and penthouses overlooking Central Park that we call Wall Street seem to be swimming in cash while the rest of us are hawking family heirlooms so we can afford to fill our gas tanks? Before I attempt to answer that question, lets go over what has been taking place in the market.

For the most part, stocks continue to go up. The relentless upward trend continues but is failing to keep up with rising commodity prices such as gold, oil, timber, silver, and natural gas. As I have said before, this trend will continue as long governments, namely ours, continue to print money and devalue our currency. Personally, I don't see any sign of the money printing subsiding. We continue to love gold and oil. Natural gas seems to be gaining some momentum as our brilliant politicians begin to reluctantly accept the fact that wind and solar technology are nowhere near being able to power this country. Domestically, the US has more natural gas than the Middle East has in oil reserves. What fuel, other than natural gas, do you know of that you can burn in your home 24 hours a day without sacrificing the quality of the air that your family breathes? Natural gas is clean and is just as effective in providing power as coal and gasoline. Natural gas will be a vital part of our energy independence going forward. Silver continues to move sharply upward as investors continue to believe it is undervalued compared to gold. Be careful with silver. Rising inflation should push silver higher but don't expect it to keep up with gold. A lot of people out there are misunderstanding the difference between the two metals. Gold is being traded and treated as if it were an actual currency. It is seen as a shelter from all of the currency devaluation. Silver may go higher for many of the same fundamentals that are pushing gold higher. However, simply put, silver isn't gold. When the proverbial excrement hits the fan, governments and institutions want to own gold. Gold is in much shorter supply than silver and is a hallowed and intimate aspect of both Chinese and Indian cultures. Gold is the true currency hedge. Be wary of higher silver prices. In my humble opinion, silver is riding golds coat tails. Companies will begin to announce first quarter earnings in the near future. I'm paying close attention as I believe that these higher commodity prices will begin to erode corporate earnings. In the short term, I expect this market to continue to drift upward. BUT, I'm being very careful as global conflict and rising material costs could bring an ugly and sudden end to the party.

So, where is the recovery? Why are companies posting record profits while the rest of us are sucking wind? Well, in an attempt to "save" the economy, the government has been pumping unheard of amounts of cash into the market. Why isn't this money filtering down to the average worker? Well, if someone handed you a million bucks right now, would you be lending it out or purchasing businesses in this market? I certainly would not. I would be investing in inflation proof assets and staying liquid in case this economy and market takes another tumble. Well, corporations are doing just that. Business is just as hazardous and precarious as it was 3 years ago. Costs are going up and tax rates are just as penal as they were before the crash. Washington, in their infinite wisdom, have stuffed the pockets of corporations hoping that money would filter down and feed into the economy while taking no measures to decrease the cost and risk of doing business. In my humble opinion, we would have been much better off cutting corporate taxes and employment taxes. This would make the cost of doing business much less and encourage companies to actually do more business and make more money. In other words, to benefit from lower taxes a company MUST do more business. In order to do more business you have to hire more people. As companies begin hiring more people, they begin to compete for talent and are forced to raise wages to stay competitive. Corporate America would still be able, through lower costs, to build up the large cash stores they currently enjoy but only by actually doing more business. As it currently stands, they have all the cash WITHOUT having to take the risk and do anymore business. Essentially, this money pumping is actually preventing corporations from hiring and expanding; they simply don't need to. Many of the politicians claim we can't afford more tax cuts. Well, that is true only because we have spent ourselves into oblivion through all of this "stimulus" spending. If we are going to spend the money one way or the other, why not spend it in a way that actually encourages investment and expansion rather than hoarding? But, now I'm assuming that politicians actually make sense and are capable of making rational decisions. Who's the idiot now??