Gold and Currency
Trends / 2 + 2 Still Equals 4
Here is an extract from commentary
that was posted at www.speculative-investor.com on 29th May 2002.
Gold and
Currency Trends
We've previously discussed the secular
downtrend in interest rates that began in the early-1980s and how this
trend has influenced the way that central banks have been perceived (central
banks have been major beneficiaries of this long-term trend). Long-term
interest rates have not yet broken out to the upside (the primary trend
is still down), but when we zoom in on the trends in the gold and currency
markets over the past 7 years we can see that important changes are underway.
These changes are consistent with our view on interest rates (interest
rates are headed MUCH higher).
Below is a chart comparing the XAU
with the Swiss Franc since the beginning of 1995. The Dollar embarked on
a bull market in 1995 (indicated on this chart by the Swiss Franc's post-1995
downtrend) that ended during the final quarter of 2000. The SF has gradually
moved higher against the Dollar since October of 2000 and recently broke-out
from the downward-sloping channel in which it had traveled since 1995.
Not surprisingly, gold stocks (as represented by the XAU) trended strongly
lower with the SF during the 1995-2000 period and turned higher with the
SF during the final quarter of 2000.
The XAU's upside breakout from its
post-1995 downtrend has been far more decisive than the SF's breakout.
This is indicative, we think, of a growing distrust in all fiat
currencies and central banks (not just the US$ and the Fed).
2 + 2 Still
Equals 4
Here is an extract from commentary
that was posted at www.speculative-investor.com on 6th June 2002.
The following was taken from Jim Stack's
InvesTech web site (www.investech.com):
"Something doesn't add up between
the economics of Main Street and the financial world of Wall Street. The
stock market, which normally leads and foretells the outlook for the economy,
has been heading down since mid-March. Many indexes are at 6-8 month lows.
That seems to warn of another dip back into recession for the U.S. economy.
Yet some of the most leading and
reliable economic barometers are on stable footing or moving higher - including
consumer confidence and the Purchasing Managers Survey (shown here). Monday's
release of this survey data for the manufacturing sector showed a rebound
to 55.7 -the best reading in over two years. Clearly, either these economic
barometers will experience new weakness in the months ahead... or Wall
Street's woes and concerns are overdone."
We don't want to pick on Jim Stack,
but he is bullish on the stock market and his growing sense of frustration
at the stock market's lack of response to positive economic data provides
a good example of where many stock market bulls are going wrong. One of
the reasons consistently cited by today's stock market bulls for being
bullish is that the economy is recovering. Conversely, almost all stock
market bears are bearish on the economy and have found reasons to doubt
the generally bullish economic data over the past 6 months. Our view differs
from that of most bulls and most bears in that, as far as this year is
concerned, we are bearish on the stock market whilst being bullish
on the economy.
Rather than wondering if Wall Street's
concerns are overdone or if the economic barometers are going to experience
new weakness in the months ahead Mr Stack would do better to pose the following
questions:
1. Is it reasonable to expect a stock
that is twice as expensive as it should be to become even more expensive
just because the economy returns to a moderate growth path?
2. Is it reasonable to expect stocks
that are already over-priced to become more over-priced in a rising interest
rate environment, that is, in an environment where price/earnings ratios
will tend to contract?
3. Why should this month's reading
of 55.7 for the Purchasing Managers' Survey cause investors to pay substantially
more for stocks than they were prepared to pay during the many other times
over the past 35 years when the survey result was at this level or higher?
The major problem faced by the stock
market - the main reason that the senior stock indices continue to sink
in the face of bullish economic data - can be quickly recognised by doing
a valuation analysis of almost any of the large-cap tech stocks. For example,
let's take a look at Intel. Intel should benefit greatly from a strengthening
economy since it is, in effect, a commodity-cyclical company (the computer
chips Intel produces are 'new age' commodities). The problem is - and this
is the problem faced by the entire market - Intel is selling at twice its
historic price/sales ratio.
'Old age' commodities, however, are
quite cheap (in CPI-adjusted terms many commodities are selling near their
lowest levels of the past 80 years). So, there is every reason to expect
a strengthening economy, even if the strength is only nominal, to result
in considerably higher prices for 'old age' commodities such as copper.
In summary, it's all a matter of valuation.
The bullish analysts who expect an improving economy to push the major
stock indices higher will continue to be disappointed because these indices
are still heavily influenced by the leaders of the last bull market. And,
in most cases, the leaders of the last bull market remain very expensive.
The best the bulls can reasonably hope for is that the improving economic
backdrop will limit the downside. Then again, if the stock prices of Intel,
Microsoft, et al, get cut in half over the next few months then we really
could have an excellent set-up for a bull market.
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and
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