Gold Looking Forward

The halcyon days for gold in the late 1970s were distinguished by soaring inflation and double-digit interest rates, both of which are conspicuously absent. Geopolitical upheaval around the globe is an obvious analog to that period, but now it has had the effect of pushing the dollar higher-ironic, given the low esteem in which the U.S. is held in much of the world.

Massive Fed money printing has totally failed to produce the inflation that was widely predicted. In fact, Ed Yardeni Research, posits that QE ironically has had a deflationary, rather than inflationary, impact.

Much of the abundant, cheap Fed-created credit has gone to finance projects to expand supply, not just demand. For instance, expectations of booming demand for commodities, in part from China, spurred expansion of supplies. In addition, opportunities in U.S. oil production made possible by hydraulic fracturing and easily available financing in the junk-bond market, helped spur the shale boom. Along with globalization, these supply-side boosts have kept a cap on prices of tradable goods.

At the same time, the Fed’s simulative policies were supposed to mean an inevitable rise in interest rates. But nearly six years after the Bernanke Fed cut its key short-term rate to virtually zero, it’s still there. The near-universal prediction is that the liftoff will take place next year.

The Treasury securities market doesn’t see signs of inflation. Each time the Fed talks about raising short-term rates, the inflation premium in long-term government bond yields comes down.

Long-term bond yields should remain low as a result, which should underpin the stock market. Lower-risk stocks that act like bonds, such as utilities and health care, should do best, with lower bond yields, rather than market expectations of higher future earnings.
Based on our recent history, a period of low inflation, near-zero interest rates, and sluggish growth would seem an incongruous time for gold to shine. Gold, after all, is supposed to be an inflation hedge.

But there is a precedent for the metal to act well in a disinflationary or deflationary period: the 1930s, when countries devalued to gain global markets. So, with central banks printing money like never before, maybe it really isn’t so different this time.

Market Top Signals

For many months I have written about the over valuation of the stock market and the need to hedge one’s portfolio.

There are street savvy experts and Nobel Prize winning financial gurus that I follow. Over the years they have hit the market moves consistently on countless times.

Here are some of their excerpts to make my point.

    • According to midyear annual data the median U.S. stock price in 2014 stood at a post World War II high of over 20 times earnings.

    • The median price-to-cash-flow ratio, at 15, was also at a postwar high. In fact, the median P/E alone had jumped from around 12, at the depth of the Great Recession in 2009, to the aforementioned 20-plus.

    • After similar previous highs of the median P/E in 1962 and 1969- the periods most comparable to today’s broad-based high valuations- a nasty selloffs of 27% and 35%, respectively, occurred.

    • They are all concerned over the declining participation of individual stocks and sectors in the market’s snapback rallies in the past six months. This phenomenon can be seen in declines in the advance/decline figures and the number of stocks hitting new highs and trading above their 200-day moving averages.

    • Complacency has replaced fear.

    • A growing boom in “nonpurpose loans” that Wall Street is proffering to wealthy clients who have large portfolios of stocks and bonds that serve as collateral for the borrowing. The only proviso on the cheap financing is that the money not be used for securities purchases. The money is going into illiquid assets like second homes, condos for mistresses, yachts, and insensate consumption. In a market selloff, the liquidation of securities collateralizing these loans could add tinder to any market conflagration.

    • The psychological setup for a market bust has been present for more than a year. Investor liquidity continues to dry up, and sentiment indicators show increasing stock-investor derring-do.

    • A resurgent U.S. economy will not afford much protection for stocks. Take the much-heralded initial jobless claim numbers that hit a 14-year low last fall. That number also hit lows in June 1987, March 2000, and June 2007, which were all close to major market highs.

    • Coincidence or correlation? Who knows. But we’ll most likely find out soon.

Look at your Investment Policy statement and review how much of a loss you are willing to take in your portfolio. Then, hedge your position so you do not lose any more than that amount.

The Oil Price Roller Coaster

Over the past 40 years I have seen oil prices go from $8 per barrel to $150. It has vacillated in between countless times.

For a great summary on the topic please read the article by Thomas Donlan in the January 12, 2015 edition of Barron’s.

The stock market bubble continues

Weak oil prices and low interest rates are a double edged sword. Although the consumer may be happy short term it is a troubling signal about the long term health of the economy. The markets, in general, are saying that they do not believe we are in for expanding economic growth. If the markets thought our GDP would grow at 4-5% then the bond market would get hit hard, yields would be rising, and stocks would be pulling back.

The average stock has gotten quite expensive relative to the market. People are whistling by the graveyard. Areas of concern looking forward:

    • Abenomics could fail to lift Japan out of deflation
    • Europe’s economy could continue to deflate pulling down the global economy
    • China’s growth could continue to sputter
    • Increased Terrorist activity worldwide
    • Russia standoff with Ukraine
    • Low oil prices push countries to invade others for raw materials
    • Federal Peserve raises interest rates prematurely

Alternatives to High Health Premiums

President Obama promised a $2,500 annual premium savings for a family with his ObamaCare program. The costs, for most families have been more than $5,000 higher than they were originally paying. Wow! That amounts to $7,500 more than was promised. For 2015 it appears premiums will rise another 25%. So those big mean, terrible insurance plans of the pasts were really not so bad!

Here are some ideas to soothe the pain a little for you.

• Set up a Health Savings Account.

    (1) You can set aside $3,300/year for an individual or $6,550/year for a family. If you are 55 or older you can add $1,000 extra per year. It is deductible going in, it grows tax free and when you take it out for qualified medical expenses it is tax free.

    (2) If you put away $6,500/year starting at 45 and increase it to $7,500 at 55, by the time you are 80, with a 4% growth it will be worth $660,000. This amount can be helpful in your retirement years for health costs including Long Term Care.

    (3) The tax benefits are helpful. If you have maxed out your 401k, or, want to divert those 401k contributions to your HSA it may not be a bad idea.

    (4) An HSA would allow you to lower your health premiums by purchasing a high deductible plan.

• Concierge Plan

    (1) For $1,800/year in Florida up to $2,500/year in New York you get access to your physician 24/7/365

    (2) Each appointment is 1 hour, no rushing, and, a better physical

    (3) You can contact the doctor by email or phone when you need

    (4) You still need a basic health insurance policy to cover office visits

    (5) This concierge fee is an extra costs on top of your health insurance

• Get into a Wellness program, lose weight, cut down on fatty foods and reduce alcohol consumption. People that have done theses few things have lowered their medical visits and costs.