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WHY GOLD MAKES MORE SENSE THAN STOCKS

Blog Dec 13, 2013

From the Desk of Craig Griffin, President and Founder of ITM Trading

I have warned in these reports that the stock market is a dangerous place to be. Why? Because the stock market has not been rising on good economic fundamentals, it has been rising mostly because of QE or Fed stimulus! This has provided money to corporations at extremely low interest rates and those companies have been using that money to buy back stocks.

Over the last two years the S&P 500 has risen 45% while earnings have only gone up five percent.

Former Director of the United States Management and Budget, David Stockman, was interviewed on Bloomberg. I got the story from Ed Steer’s Gold and Silver Daily on December 11, 2013.

Source: http://www.zerohedge.com/news/2013-12-09/david-stockman-rages-market-valuation-has-lost-any-anchor-real-world

INTERVIEW HIGHLIGHTS
Former Director of the United States Management and Budget David Stockman and Bloomberg’s Tom Keene:

Stockman: “The Russell 2000, that’s main street companies, small and mid-caps, they are trading at 85 times trailing reported earnings… that makes no sense!”
Keene: “So you are saying that the equity market is a bubble right now?”
Stockman: “Of course!”
Keen: “What do you mean of course?”
Stockman: “Of course it’s grossly overvalued on any sustainable basis!”
Keen: “You would not own stocks right now?”
Stockman: “I think it would be very dangerous to own stocks right now, to buy stocks. The S&P 500 even is trading at 19 times trailing earnings reported through the third quarter. In the last two years the S&P is up 45%. Earnings, reported earnings are up 5%! We have massive multiple expansion driven by the liquidity injection by the Fed!”

RECESSION
Lakshman Achuthan of Economic Cycle Research Institute (ECRI), was interviewed by BNN. In this interview Achuthan points out that ECRI believes the U.S. entered a recession last year, probably somewhere in the second half of the year. Achuthan also said that it is normal not to be able to see that right away due to the large revisions in the data such as GDP and jobs, which get revised as much as two to four percentage points.

ECRI specializes in calling the beginning and ending of recessions. Their track record is stellar. They generally forecast six to nine months in advance of both the beginning and the end, and they have called every recession since 1990 without a false call in between!

Achuthan points out that if you strip out a little spike in agricultural inventories for Q4 of last year and Q1 of this year you have GDP growing at just one quarter of a percentage point for a full half year, and that is before any revisions which are out in front of us, and again, these revisions can be anywhere from two to four percent!

There was one more significant fact that came out of this interview, which Achuthan brought up; BNN showed a chart of harmonized CPI (Consumer Price Index), which included the Eurozone, Japan and the United States. Achuthan said that it is pretty well accepted now that Europe is really bad, kind of becoming like Japan and the “Lost decade”, but that if you look at harmonized CPI in the United States in September, that the U.S. is actually worse than Europe – but that this fact is largely being denied. He also said that this is a story that is going to persist in the coming months.

CONCLUSION
One can see clearly that there is a disconnect between what is going on in the stock market and what is going on in the real economy. And for all the rhetoric (which is normal during times like these) the Fed’s action tells the story. The Fed would not be injecting $80 some billion a month if the economy was on solid ground. So, we have the Russell 2000 trading at 85 times trailing earnings which is off the charts and the S&P has risen 45% while earnings are up only 5%.

This is going to end…it always does, and it is a matter of when – not if! Now the public has been conditioned to believe that the Fed can always pull the rabbit out of it’s hat, but I am not convinced. I have seen this story to many times in the past and the real question becomes, “When do we get a crash and bear market that lasts?” The high that was reached in the Dow in September of 1929, which was 381 points, was not crossed again until 1954, some 25 years later!

ECRI points out the U.S. is closer to deflation than at any period since 2009. What will be the Fed’s answer to this? More and more money printing! And that has some very bright analysts predicting that the U.S. is heading for a big dose of inflation! Deflation or inflation, gold and silver should be a part of your insurance program!

But remember, “It would be foolish to acquire gold for the short term, but it would also be unwise not to own some gold for the long term!”

Thumbnail Photo We believe that everyone deserves a properly developed strategy for financial safety.

Lynette Zang

Chief Market Analyst, ITM Trading

Sources & References In This Article

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