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This article is NOT relevant to High Frequency Traders, Hedge Fund Managers, the political and financial elite, or central bankers. It is relevant if:

  • You sense or know much is wrong in our financial world…
  • You worry that the furious rally in the stock market since 2009 might be close to a peak…
  • You know that exponentially increasing debt can’t continue forever…
  • You think that a 36 year bond bull market might have rolled over…
  • You own no politicians and have no Senators on speed-dial…
  • You are worried about the following questions

1. Has the stock market reached a peak or will it rally further?

2. Have gold prices bottomed or will they correct under $1,000?

3. Have bond yields bottomed or will they make another leg downward?

4. Who will be confirmed as the next Fed chairman?

MY OPINION:  These are not useful questions.  They are distractions! 

Instead of short-term predictions, calling tops, and precise timing, consider long-term risk and reward analysis.

  • Has the risk/reward calculus shifted sufficiently in the stock market that the sensible approach is reallocation of some or all profits to another asset class? Or are stocks still a good buy?
  • Is the downside risk in gold small while the upside potential is large, or not?
  • Does it make sense to short bonds, buy bonds or ignore them?

THE STOCK MARKET:

From (the always brilliant) Dr. John Hussman:  Why Market Valuations are Not Justified by Low Interest Rates

“At present, the most reliable measures of U.S. equity market valuation – the measures that are best-correlated with actual subsequent market returns in market cycles across history – are 2.75 times (175% above) their historical norms. Given that depressed interest rates are matched by commensurately low U.S. growth rates, little or none of this premium is actually “justified” by interest rates. Rather, the S&P 500 is likely to post negative total returns over the coming 10-12 year horizon, with a likely interim loss in excess of -60%.”

Quick Summary:  Stock market prices are high. Expect eventual losses in excess of 60%.  Total returns over the next decade could be zero or negative. Risk is substantial, potential reward on a medium to long term horizon is minimal.

Margin Debt:

From Jill Mislinski:  NYSE Margin Debt and the Market

Quick Summary:  Margin debt is much higher than at previous market tops.  Peaks in margin debt often match market tops. Stock market risk is high.

From Chris Hamilton:  Economic Recovery – But for Who?

Household net worth as a percent of disposable income looks impressive:

However, most of the increase in net worth during the last decade went to the top 10% – not the middle class. Unsustainable!

Quick Summary:  The top 10% of households have expanded their net worth in the past decade.  The last decade has not been good for the lower 90%. A booming stock market helped the top 10%. Time for a reversal?

Shiller PE – A Better Measurement of Market ValuationThe ratio is nearly 90% above historical average.

Quick Summary:  Stock market is near a top.  Risk is high, reward looks minimal.

Buffett Valuation Indicator

Quick Summary:  Stock market is near a top.  Risk is high, multi-year reward looks minimal.

The Dow over the past 40 years (log scale).  The market crashed in 1987, corrected in 1998, crashed in 2007, and … is a high risk for 2017 or 2018.

Quick Summary:  The Dow is near a top.  Risk is high.

The monthly RSI for the DOW shows a multi-decade high!

The NASDAQ 100 Index (log scale) over 30 years:

Quick Summary:  The NASDAQ is near a top.  Risk is high.

Over-valued markets correct when “they are ready to correct.”  An over-valued market can surge higher, bubble into more over-bought territory, and correct or crash when complacency is highest.  It is better to exit early than too late. How many times have you heard the following?

  • “I wish I had sold stocks (gold, silver, bonds, real estate) early and booked my profits.”
  • “I was late and lost 15% in one week. By then I figured it was too late to sell, so I made another mistake and held on for an additional 30% loss.  I hate this market.”  Gold in 1980, NASDAQ in 2000, real estate in 2006, crude oil in 2008 and more come to mind.
  • “The market always comes back. This crash was nasty but I’m gonna hold on for the long term.  Buy and hold always works, even if it takes a decade.”

What about the gold market (log scale) for the past 30 years?

Gold peaked in a bubble in 1980, corrected for 20 years, and has rallied since 9-11. Massive expenditures for wars and social programs, deficit spending, over $20 trillion in U.S. official national debt, declining use of the dollar in global trade, continual dollar devaluation, and diminishing confidence in central banks and politicians have boosted gold prices since 2001.   Gold prices are more than 30% below their all-time highs and remain at the bottom of a twenty year log scale trend channel.

Quick Summary:  Gold prices have considerable upside and minimal downside …  unless you expect balanced budgets, sane economic policies, and huge debt reductions.

Comparison between Gold and the Dow:

Examine the ratio of gold prices to the Dow over 46 years.  The 1980 gold bubble is evident.  Gold was NOT in a bubble in 2011. Gold is relatively inexpensive compared to the DOW in late 2017.

Quick Summary:  Gold price risk is low and potential reward is high.

What about Bonds?  Consider the yield on the 10 year T-Note since 1999.  Note the falling yield since 1999 and possible breakout above the down-trend line.  Bonds have rallied and yields have fallen since the early 1980s.

Higher yields will create considerable trauma in our over-leveraged financial system, but central banks and governments need lower rates. Yield breakout or yield collapse? We shall see.

Quick Summary:  Bonds may have finished a 35 year bull market, but if not, their upside seems small.  Risk to reward analysis favors gold over bonds in my opinion.

CONCLUSIONS:

  • The stock market is expensive and over-valued by many different measures. Timing and valuation indicators show the DOW and NASDAQ are expensive and vulnerable to considerable downside risk.
  • However, over-valued markets can become even more over-valued. Examples are gold in 1979, Japanese real estate in 1989, Internet stocks in 1999, and houses in San Francisco today.  The important question is not about identifying the exact top. INSTEAD …  IS THE ADDED RISK WORTH THE POTENTIAL REWARD?
  • It is safer to exit early and leave possible profit on the table than to hang on too long, feel trapped, and be unable to exit while you watch paper profits evaporate.
  • The risk – reward analysis favors gold (and silver) over most stock indexes and bonds.
  • Gold has considerable upside as long as congress spends, the military fights wars, costs for Social Security and Medicare increase, and politicians make deals.

My short book explaining why gold at $10,000 per ounce is a reasonable expectation is available at:  Amazon and gechristenson.com.

Call Miles Franklin at 1-800-822-8080 to recycle stock market profits into gold and silver bullion. Take advantage of current risk and reward conditions.

Gary Christenson