John Williams of ShadowStats concisely summarizes all you need to know in his reaction to the recently revised GDP data:
Economic Data Will Get Much Worse.
The kindest thing I can say about a stock market that rallies on the “stronger than expected” news that annualized growth in second-quarter GDP was revised from 2.4% to just 1.6%, instead of to the expected 1.4% (keep in mind those numbers are quarterly growth rates raised to the fourth power), or that gyrates over meaningless swings in seasonally-distorted weekly new unemployment claims, is that it is irrational, unstable and terribly dangerous.
As the renewed tumbling in the U.S. economy throws off statistics suggestive of a continuing collapse in business activity, as a looming contraction in third-quarter GDP becomes increasingly evident to all except Wall Street and Administration hypesters, who professionally never admit to such news, it would be quite surprising if the financial markets did not react violently, with a massive sell-off in the U.S. dollar contributing to and coincident with massive sell-declines in both the U.S. equity and credit markets.
Recognition is growing rapidly of the re-intensifying economic downturn. Yet, little analysis so far has been put forth to public as to some of the unfortunate systemic implications of this circumstance. The problems range from extreme growth in the federal government’s operating deficit, tied to reduced tax revenues and to bailout expenditures for the unemployed, bankrupt states and continuing banking industry solvency issues, to U.S. Treasury funding needs to pay for same. The latter issue promises eventual heavy Federal Reserve monetization of Treasury debt, with resulting inflation problems and eventual hyperinflation (see the Hyperinflation Special Report).
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Monty: I agree with you with this caveat: if Mr. Russell waits too long, he may miss the bull market caused by the QE. The million dollar question is: Should investors fear another drop in the stock market more than the onset of inflation? The Canadian investment solution may work for some for a little while (until everyone and his brother gets in on the act)–or other offshore companies because they will not be subject to higher corporate taxes–of course what you say is true regardless, since the US govt will ding the US investor in his personal taxes no matter where the income is generated.
Dave: Personally, I am bullish on precious metals. Yet physical gold and silver have two main values: (1) as a store of value; (2) when the hyperinflation hits the US, physical metal will be an alternate currency. If I lived in the US, I would consider holding a few thousand in gold and silver coin–not so much as an investment, but as a medium of exchange in an economic meltdown. But you cannot live off gold as an investment because it pays neither dividends nor interest. Unlike stocks in companies that generate positive cash flow, gold and silver make no profits, so they don’t grow. As an investment it is therefore limited, neither losing nor gaining much lasting value. I was discussing this with my wife this morning: which is worth more, cash flow or net worth? Our net worth is down over the last month because of the market dip, but because of our increasing the number of dividend paying stocks, our cash flow has increased. When we look to retirement, cash flow will be an extremely important consideration, perhaps more than net worth. Holding gold may increase one’s net worth as measured by dollars, but it produces no cash flow and is therefore a limited investment vehicle: you have to sell some of it, but then your net worth diminishes (as measured in gold) in order to realize a gain (as measured in dollars). But if you fear a meltdown more than anything else, well by all means buy physical gold and silver and in the meantime, hire a few bodyguards to protect it.
Per The Mogambo Guru http://dailyreckoning.com/author/mogamboguru/
‘ Surprisingly, buying gold, silver and oil is an investing strategy made especially for us morons, because it requires no thinking and, “Whee! This investing stuff is easy!” ‘
Stocks are a better inflation hedge than bonds, of course. Yet they are imperfect inflation hedges because the rise in nominal income, as a result of the inflation, results in taxes taking more of the corporation’s cash flow. I will try to do a post on this issue within the next few days.
The other problem, of course, is that stocks bottom at much lower levels than they are currently at. As Richard Russell points often points out, his interest in stocks will return when PEs are in the range of 5 – 6 and dividend yields approach 8 – 10%.
I don’t doubt for one second that there will be stock market sell-offs. But I think that one is better off owning a stock than holding cash. What is a stock? it is a fraction of a company which has assets, usually produces something, and has both debt (an important hedge against inflation) and cash flow. If history is any guide, when the hyperinflation hits in earnest, the stock market will experience even greater volatility: remarkable spikes upward followed by severe corrections. Still, it seems better to focus on what stocks really are and become a value investor which means picking stocks that are selling at high book to price ratios and that have some promise of regular cash flow because they are selling something everyone needs that appreciates in price in times of inflation (e.g., sugar or gasoline).