Let me emphasize, I think this economic crisis contains a cycle that swings from inflation to deflation to inflation, etc. The permanent portfolio plan has a bias in favor of inflation, so it builds profits during inflationary periods. These profits then offset losses during the deflationary periods. From mid-2007 to mid-2008, we were in an inflationary stage. Since then it¡¯s been deflation. Next I think we¡¯ll go back to inflation. From the beginning of the economic crisis in August 2007, The Permanent Portfolio (PRPFX) is down 7%, compared to 45% for the S & P 500. Please read Harry¡¯s book, it takes no more than an hour.
The bitter fact is that nobody, no brilliant analyst, has any idea of where this bear market will end. What if earnings and dividends collapse, and price/earnings sink below 6 (it's happened before)? Under those circumstances, the Dow could sink as low as 1000 or even lower. We know that bear markets, following great bull markets, tend to overrun themselves on the downside. Therefore, my own advice (to you and myself) is that we should have no preconceived notions as to where this bear market will end.
How bad can it get? I honestly don't know. A lot of seasoned investors are congratulating themselves on being smart enough to be largely in cash over the last year. But wait -- suppose the US dollar collapses along with most fiat money? In that case, nobody will want to hold Federal Reserve Notes. Nobody will want any fiat money backed by any country (remember, all fiat money must be backed by the country of issue).
Wait, there's only one currency that needs no backing by any nation -- the money that has no counter-party liability -- it's gold. When all is lost, when the Dow is down to 2000 or less, when the dollar has no friends, the last asset standing will be gold.
Those who denigrate gold don't seem capable of understanding this. The reason they don't "get it" is that they can't conceive of how bad a bear market can be. It's the reason I've coined the term "dollar bugs." These are the poor optimists who cannot visualize how bad things can get. They can't believe that Federal Reserve Notes (dollars) can fall. Fall how far? Fall to the point where no one wants them.
If the dollar can fall to uselessness, gold can rise to infinity. I think it could happen. I think it "could" because I can visualize how bad things can get. I told you above that this bear market, so far, has wiped out better that half of all the price appreciation and stock values since the depths of the Great Depression. Is the market telling us something? My instinct (belief) is that this bear market may be just about half over -- with another dreadful half to come. How bad can the second half be? Damned if I know, and nobody else does either. But remember, great bear markets tend to bring great surprises. And one surprise is often just how bad a bear market turns out to be.
(Dow Theory Letters, April 6, 2009)
Speaking to a dinner party, one person asked me what I would do if I was running the country now. I answered, ¡°I wouldn¡¯t do a thing. I¡¯d allow the bear market to run its course.¡± To my surprise, the crowd applauded wildly. Obviously, a lot of people disagree with the current policy of bailing out everything that looks sick. I think this is a policy that is going to fail, and it's a policy that's going to strap the US with almost uncontrollable debt and interest on the debt for years to come.
The policy is: "Spend whatever it takes now, and as for the trillions of dollars in new debt, let the politicians of tomorrow deal with the 'impossible debts' and let our kids and grandkids pay with rising taxes."
There are two things I will say about the situation with certainty. The standard of living in the US is sure to decline. And the international power of the US will decline. To put it bluntly, the US will not be the undisputed leader of the world, as it has been since World War II.
The US cannot lead the world and at the same time be the world's biggest debtor. The marvelous US life-style of recent decades depends on our creditors sending us their goods and their savings (over $2 billion a day). This is unsustainable. That which is unsustainable will end.
I've taken the position that this is a bear market rally (correction). As such, it is entitled to regain one-third to one-half of the ground lost since the November 2007 high. And you can be sure that the bear will do his best to look "powerful and irresistible," thereby drawing in as many eager stock-buyers as possible.
(Dow Theory Letters, April 7, 2009)
The market situation has seldom been more confusing. Many analysts are convinced that we are in a new bull market. Others (me included) believe we are in a bear market correction (rally).
I believe that we're in a secondary (upward) correction of a bear market. I'm going to guess that this correction could rise further or at least last longer than most people are expecting. A bear market rally is supposed to convince the majority that a new bull market has started. The rally will often continue until a large number of investors are back on board, and then the bear will kill them as it fades away, leaving the new optimists high and dry and with losses.
Gold is in a downward correction of its primary bull market. Gold may decline or stall until it convinces the majority of gold-fans that the gold bull market has died. What we're experiencing now is the big correction that often occurs prior to the third speculative phase in gold. So what are the markets trying to do? They're doing what they always do, keep investors in the bear market and keep investors out of the gold bull market. Why would they do that? Because that's the very nature of markets. Markets tend to thwart the majority. And that's logical and self-evident. If markets existed to make money for the majority, then most market participants would be millionaires, and we know that sadly, that is not the case.
(Dow Theory Letters, March 20, 2009)
I started building my gold position in 1999. At the time gold was flat on its fanny well below 300 -- what few gold mining shares were still alive were selling under $5. I wrote at the time that many gold shares were so cheap that you could buy them as if they were perpetual warrants.
My gold position now is comparable to my market position back in 1958. My gold position represents maybe 30% of my total worth. Why have I done this again?
For the following reasons: I believe gold is in a major or primary bull market. I believe the gold bull market is currently in its second phase. This is the phase where sophisticated and seasoned investors and the funds enter the market. I don't believe the public is in the gold market to any extent. They are interested and watching the action, but they do not have the nerve to buy gold. In fact, the public doesn't know how to buy gold, although ads are now appearing telling them of the "wonders" of gold and how they can buy the coins (at huge premiums over spot gold).
I believe the bear market in stocks will continue erratically and the deflationary trends will persist. This will drive Fed Chairman Bernanke up the wall, and I think he will stop at nothing (including massive printing of dollars) in his effort to halt deflation. The real story will be as I've been saying for years --
"INFLATE OR DIE."
This will serve to feed the gold bull market.
I'm in no hurry. Gold will ultimately fully express itself. The gold bull market, like all bull markets, will do its best to shake us off its back. The gold bull market wants to go up without us. The gold bull market will roar when least expected, after it's worn out many of its followers.
Do you see commodities as an inflation hedge?
Are we going to see another food-price spike sometime soon?
How are you investing in commodities?
SUMMARY ¨C JAY¡¯S TWO CENTS WORTH
Here are a few brief observations on the above comments, as well as those from several other of my experts.
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