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2008 What a Year! So what does 2009 have in store? In today’s post we explore a “Golden Opportunity” Imagine re couping your 2008 losses and more! Everything is lining up in place for our “Golden Opportunity”, read on and find out how you can benefit in 2009- jschulmansr
Source: Sovereign Society- Eric Roseman
Records were broken in 2008 – money-losing records from an investor’s perspective.
U.S. stocks will record their worst calendar year since 1931. As measured by the S&P 500 Index, the broader market tanked 40% this year while the Dow Jones Industrials fell 36%.
U.S. stocks are already “dead money” since 1996. They’ve shown no net gain at all – including dividends. The ongoing market environment is eerily similar to another period of dismal returns – from 1966 to 1982. During those 16 years, the Dow and S&P 500 Index posted zero profits. Adjusted for soaring inflation, the markets actually recorded a loss.
Global equities as measured by the MSCI World Index posted its worst year since inception in 1969. International equities fared even worse with European and Japanese stocks down more than 45% and the MSCI Emerging Markets Index clobbered – down 53% in 2008.
World Markets Got Trashed in 2008
For stocks, the ongoing bear market has resulted in record mutual fund outflows as investors continue to dump their holdings and run for cover into money market funds.
Unfortunately, money market funds are now paying barely any yield at all since the Fed slashed interest rates to effectively 0% on December 16.
Only Treasury bonds, European and Japanese government bonds yielded a profit for investors in a wickedly harsh year for investors. As a currency investor, naturally you already know that the Japanese yen was also a winner against the dollar and euro as the “carry-trade” came to a crushing halt.
So Much for “Diversification”
With the exception of super-safe and low yielding U.S. Treasury bonds, yen and gold, the entire gamut of assets from stocks to non-Treasury bonds all plummeted in 2008.
Commodities, certain currencies, fine art and hedge funds all succumbed to brutal price declines. Overall, 2008 was the first losing year for U.S. and global stocks since 2002 and the worst period to be invested in financial and hard assets in more than 75 years.
Stop-losses rang out like pinball machines in 2008. Diversification across sectors, industries, countries and currencies proved futile. Almost everything was pummeled. By October 10, a panic gripped world markets as the threat of systemic collapse threatened the viability of the banking system.
Chaos to the Rescue
In late 2007, I introduced the TSI Chaos Portfolio to my Sovereign Society readers. It’s a U.S.-based portfolio of six equally-weighted investments, including short-term Treasury bonds, gold, Japanese yen and reverse-index funds that bet against the S&P 500 Index. Recently I added a seventh safe-haven – short-term German government bonds.
This cost-effective strategy dominated my recommendations in 2008 rising more than 17%, including dividends.
For growth investors, hedging your market exposure is vital in a secular bear market. I continue to like the TSI Chaos Portfolio in 2009 even though the stock market has probably suffered the bulk of its declines at this point.
Volatility will remain rampant in an uncertain economic environment marked by growing consumer credit woes, massive government bond issuance to support gargantuan fiscal spending plans and weak corporate earnings. Investors must hold downside market protection.
Short Most Commodities, But Stock Up on Gold/Silver
Starting in October 2007, I recommended my Commodity Trend Alert (CTA) subscribers begin to bet against oil and gas stocks as a way to hedge against the energy sector. At the time, oil prices were racing to US$100 a barrel and the oil stocks were in the midst of a multi-year bull market. We all know how that story fared in 2008.
Since peaking in July, the benchmark CRB Index has crashed more than 50% as the entire commodities complex continues to aggressively deflate in a rapidly slowing global economy.
To protect our natural resource exposure in CTA, I immediately issued a series of reverse-index purchases betting against commodities. We were most successful betting against industrial metals or base metals, as copper and other metals collapsed. That position, still open, has gained a cumulative 80% since August 2008.
And since September, CTA has been riding a broad commodity index to the basement as part of our reverse index strategy – up more than 60%. We also maintain hedges against gold, oil, gas and long-term Treasury bonds.
Gold has also been a strong performer compared to most other assets in 2008. Significantly, gold is the only asset that is completely outside the credit system and the only asset that has no liability.
In 2008, spot gold prices gained a modest 1% – not much in absolute terms but certainly impressive compared to other plunging assets. Silver, more of an industrial metal and therefore more vulnerable to broad economic trends, declined 18%.
Looking ahead to 2009, growth investors will only reluctantly return to stocks. Losses have been massive for investors since late 2007 as mutual fund redemptions hit records.
Stocks might indeed offer better values compared to mid-2007 after plummeting more than 40% from their highs. But domestic consumption in the United States, Japan and Europe is depressed and likely to remain under threat as unemployment rises and savings rates begin to rise again.
The correlation between a higher savings rate and corporate earnings is negative. It’s difficult to be bullish on earnings when the world’s largest economy will remain mired in a period of sluggish growth, debt retrenchment and rising job losses. The same is true for Japan and Germany – the second and third largest economies, respectively.
This is not the time to be aggressively buying stocks. Odds are prices will get cheaper again following any bear market rally. That’s certainly been the case every time stocks have rallied off their lows since October 2007.
Instead, make sure your portfolio includes gold, portfolio hedging strategies and income from high quality investment-grade corporate bonds in 2009.
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The year 2008 is coming to a close. Good riddance! 2008 will be remembered as the year that the chickens came home to roost for America’s brand of “elitist capitalism” and will long be remembered as the year where the greed of so few penalized so many.
In 2008, the vast majority of pension plans and retirement accounts incurred losses of one quarter to one half of their value because of the greed of Wall Street. To me what is most sad is that Wall Street’s greed not only devastated the savings of a generation of Americans but has also shackled future generations of Americans with the bondage of enormous amounts of debt.
Echoes of History
Human greed and financial bubbles are, of course, nothing new. History has many examples of manias and bubbles such as the South Sea Bubble. To me, most striking is the parallel between today’s hedge funds and the investment trusts of the 1920s.
Investment trusts used leverage as do hedge funds. Investment trusts were able to get away with revealing little about their portfolios because the equity bubble of the 1920s conferred an aura of omniscience on their managers. Sound familiar? Their managers, by the way, were also very highly compensated.
Reputations inflated in the bubble of the 1920s promptly evaporated in the 1929 crash and the 1930s bear market. The 1930s bear market also exposed numerous outright swindles by Wall Street. Some of the swindles were all too reminiscent of Bernie Mad(e)off and his Ponzi scheme. I believe that, as in the 1930s, many lofty Wall Street reputations will be washed away.
Recently, the Financial Times had an interesting article about 19th century Victorian England and its literature. Financial crises were part of everyday life at that time, which greatly affected their literature. The article spoke of authors such as Charles Dickens, Anthony Trollope, Elizabeth Gaskell, and William Makepeace Thackeray.
A character in Charles Dickens’ Little Dorrit – Mr. Merdle – whose schemes initially offered his investors huge returns before wiping them out definitely reminds me of Bernie Merdle, I mean Madoff. The literature of those times definitely echoes in our times.
A Penny for My Thoughts?
Obviously, at the end of last year no one predicted the dire straits that we would face in 2008. This just reinforces in my mind one thought. Why does anyone still watch CNBC and listen to what any of those shills has to say? The only person on CNBC that has some brains is my paisano – Rick Santelli. The rest of the people on CNBC are absolutely worthless.
Since at the start of a new year everyone seems to like to make predictions, I thought I would throw my two cents out there for readers to ponder. Please contact Oxbury Publishing for your comments on my predictions or feel free to make your own predictions about the upcoming new year.
The Biggest Loser(s)
Picking the biggest losers for 2009 is relatively easy. You simply find the assets that have the most fat. I believe that in 2009 we will actually have two biggest losers. Which asset classes?
As I said – where the fat is. The fat is where the Wall Street money managers have run to hide and cower in fear for their jobs. That is, of course, the US Treasury Market! As I stated in my previous article – the HMS Treasuries – the “pirates” of Wall Street have loaded all of their ill-gotten booty onto the ship called the HMS Treasuries. I firmly believe that this ship will follow its predecessor, the HMS Titanic, into history and sink below the waves. Remember – both ships were considered to be ultra-safe and “unsinkable”.
A close second ‘biggest loser’ will be the US dollar. The US dollar has been strong in 2008 because of the perverse reaction of Wall Street money managers. An analogy I used in previous articles was that a nuclear blast went off right in the middle of Wall Street.
Even a rudimentary knowledge of science would dictate that you get as far away as possible from the blast. Yet, Wall Street money managers ran full speed toward the nuclear blast – nobody said that Wall Street money managers were smart. Most of them sold all of their assets overseas and moved the assets into dollars.
I believe that this move will prove to be “radioactive” in 2009, as overseas investors seem to be waking up to the fact that the US will need many trillions of dollars to bail out the US economy. Overseas investors may not sell the US dollar outright, but they will not be anxious to add to their positions.
My first prediction is that in 2009, ‘bombs’ will continue to go off up and down Wall Street. I predict that the Bernie Madoff $50 billion Ponzi scheme will be just the first of many such major swindles that will be revealed on Wall Street.
I predict that the government will be forced to inject many more trillions of dollars into the black hole laughingly called bank balance sheets, inflating our government’s deficit to levels undreamed of only a few years ago.
However, I also predict that the amount of money sunk into banks will be miniscule in comparison to the amount of money that will be created out of thin air by the Federal Reserve in 2009. This money creation will puncture the balloon of the deflationists.
In astronomy, when talking about the distance between stars, astronomers don’t measure the distance in trillions of miles. Astronomers use light-years as a convenient measure of distance. So instead of trillions of dollars, perhaps some similar measuring stick will be adopted as a measure of how fast the Federal Reserve will be create funny money.
I can hear it now – “yes, in the last light-second the Fed just created $10 trillion of funny money”. Instead of the Big Bang Theory, perhaps there will be the Fed’s Big Buck Theory. This theory will describe how out of deflationary nothingness, the Federal Reserve created a rapidly expanding inflationary economic universe.
Will there be any winners in 2009? I guess I have to predict some winners, huh? Which asset classes?
I am looking at the asset classes most beaten down by the forced liquidations of hedge funds and other Wall Street fools.
One such asset class is corporate bonds. Corporate bonds are priced right now by the Wall Street numbskulls for conditions to become worse than the 1930s and a 25% default rate. I predict that corporate bonds will have a very good year.
Another asset that has been sold off by the Wall Street numbskulls who have bought fully into the deflation myth are TIPS or Treasury Inflation Protected Securities. When the Fed’s Big Buck Theory becomes apparent, I predict that TIPS will be a huge winner.
I also predict that most commodities will stage a decent comeback. I believe that gold will have a decent year and re-visit the $1000 per ounce level. I also believe that oil will rebound to a more fundamentally sound price of between $71 and $87 per barrel.
I also predict that the best of bad equity markets will be in the countries that actually have cash and/or assets and do not have to borrow enormous amounts of money. Sovereign debt will become two words that are not spoken in mixed company. I don’t believe it’s a wise economic policy for a nation to rely on the kindness of strangers. Examples of the “better-off” countries would be China and Brazil.
Gulf Cooperation Council leaders yesterday concluded their 29th annual summit meeting in Muscat, Oman with a final approval for the creation of a single currency for the six-nation economic bloc, still targeted for 2010.
Saudi Arabia is the largest economy in the GCC and boasts substantial gold reserves. But whether gold will be included in the currency basket has not yet been decided.
GCC assistant secretary-general Mohammad Al Mazroui told Gulf News: ‘We first have to decide on the location of the Central Bank, then the Central Bank and Monetary Council will have to decide on the gold reserves for the Central Bank’.
The creation of the GCC single currency – likely to be known as the Khaleeji which means Gulf in Arabic – is a major gold event for two reasons.
First, the breaking of their dollar pegs by the Gulf Arab nations is clearly dollar negative. Secondly, any inclusion of gold either as a part of the monetary basket, or in the reserves of the new GCC Central Bank will create additional demand for the precious metal.
The project is gathering pace, and no lesser a figure than Saudi Arabia’s King Abdullah has directed that GCC economic integration committees speed up their work and complete the whole exercise by September 2009.
It is only a couple of months since a group of Saudi businessmen allegedly bought $3.5 billion worth of gold, believed to be the largest ever single transaction for the precious metal. Perhaps in 2009 it will be gold rather than local currencies which become of interest to speculators about monetary reform in the GCC.
Gulf countries are keen to break away from the link with the US dollar because it ties them to inappropriate monetary policies that exaggerate the boom-to-bust cycle in their economies.
With the massive monetary expansion experienced in recent months and the promise for unprecedented levels of money and credit supply increase in coming months, the United States Federal Reserve looks on paper to be sending America straight into hyperinflation. Germany’s post-World War I Weimar Republic, post-World War II Hungary, 2001 Argentina, and present day Zimbabwe are all analogous examples of massive debt monetization, which all led to hyperinflationary disaster. Never before has the entire world’s economy been linked to one nation’s, however, as is the case today with the United States.
In a case of economic mutually assured destruction, foreign creditor nations and their central banks can’t afford to spark a run on the US Dollar, because it would kill their own export-based economies, as well as devalue their debt repayments and foreign exchange reserves. But the United States has been financing consumption through debt for decades and has resorted to monetary expansion to finance its debt and deficit spending, which is only going to increase with Barack Obama’s infrastructure and social programs. The Troubled Assets Relief Program (TARP) itself amounts to $700B, all of which will essentially be “printed.” Foreign demand for US debt is all but gone, as creditor nations are now attempting to unwind their USD positions. Huge creditor nations like China and Iran were net sellers of US Treasuries in recent months, attesting to the weakening of the American debt bubble. So where’s all this excess liquidity go?
The answer is gold, and it is the only way to prevent the hyperinflationary scenarios referenced above from materializing in the United States.
The Fed has been on a money printing binge of unprecedented proportions, but has been able to thus far “trap” the excess liquidity from reaching the consumer level, which is what causes price inflation. It started a massive foreign currency sale this summer through the Exchange Stabilization Fund (ESF) that led to a supply increase of Euros and suppression of dollar usage. It has been liquifying troubled banks by issuing them T-bills financed through monetization in exchange for toxic assets by utilizing reverse repurchase agreements. And it has used the recent deleveraging and commodity collapse (partially caused by credit defaults in many of the overleveraged institutions that were supporting the commodity bull) to supply the temporary demand for US Dollars and feeding its own foreign exchange reserves.
But the excess liquidity thus far is trapped in time-sensitive and manipulated instruments now, and without a demand for American debt, it has to go somewhere. As T-bills expire and the stock market descends further, actual currency is going to be released out of sequestration into the economy. The Fed cannot allow the market to breach below its November lows, unless it wants widespread insolvency in insurers and banks, which are legally required to halt operations in the event of insolvency. I’ve heard estimates of 7500 and 8000 in the Dow as being minimum support levels that, if broken for an extended time, would lead to economic collapse in America as financials would all go under. To prevent this and to finance Obama’s deficit spending, actual dollars will have to be injected into the system and they will be.
Weakness in the dollar causes strength in gold, which is something the Fed (through America’s banks) has been suppressing for years. COMEX shorts dominate this suppression of gold prices, but this act will be discontinued to prevent economic collapse. Allowing gold’s price to rise to current fair levels (and then rise further to represent gold’s rising fundamentals) will soak up much of the excess liquidity, preventing hyperinflationary price increases in consumer goods. Gold reached backwardation this month, signifying the big gold market manipulators are abandoning their short positions.
Ben Bernanke is a proponent of dollar devaluation against gold and is a staunch advocate of Frank D. Roosevelt’s decision to do so in 1934 during the Great Depression. Dollar devaluation is one of the government’s most prized tools, as it allows debts to be paid back in devalued nominal terms, transferring risk and purchasing power destruction to American taxpayers, who have no clue what is going on. Inflation is a tax on the people and with a fiat currency, a power-limitless Fed can (and has) tax the hell out of the American people.
The dollar, and fiat currency as a whole, faces collapse now, however, as the artificial wealth created and used in the past few decades is now showing its nature as being just that– artificial. The global monetary system will have to return to some sort of precious metal backing, directly or indirectly, and surging gold prices is essential for this to occur.
Rising gold prices represents the excess liquidity being soaked up and also causes nominal equity values to rise without dramatic rises in consumer goods. Gold has little utility outside of store of value, which is why its price hasn’t collapsed at nearly the same rate other commodities, like oil and natural gas, have. As crude and steel suffered demand destruction from consumers losing wealth quickly, gold was barely touched at all and in fact probably would have shown even more strength hadn’t it been for the aforementioned manipulations of the Fed and the global deleveraging of financial institutions.
Creditor nations like China and Iran are buying as much gold as is possible without dramatically disturbing prices, and Iran has said it wants to convert the majority of its foreign exchange reserves into bullion. Gold-buying sentiment is getting stronger as the massive seigniorage of the Fed, and with gold shorts being abandoned by the Fed, the huge demand is finally going to surface into price expansion.
Technically, gold appears poised to break out of its countertrend down move in its primary bull, leading to much higher prices soon. It broke out of its 50DMA on strong volume recently and is approaching a 200DMA breakout. With backwardation occuring this month, all indicators point to gold surging in the coming months.
Gold and gold miner stocks are also looking quite bullish. I recommend Royal Gold (RGLD), which recently broke out of a great long-term base, as well as El Dorado Gold (EGO), Goldcorp (GG), Iamgold Corp (IAG), Barrick Gold (ABX), Randgold Resources (GOLD), Jaguar Mining (JAG), Anglogold Ashanti (AU), Agnico-Eagle Mines (AEM), and Newpont Mining (NEM) for the coming year. Also, look into buying the Ultrashort 30-year Treasury Bond ETF (TBT) as the US debt bubble collapses and debt monetization starts to show up in the Fed’s balance sheets. I do suggest buying lots of bullion, however, as stock market returns are in nominal dollar-denominated terms.
The American total credit market debt to GDP ratio is at unprecedented highs, well above 350%, and this with ridiculously manipulated inflation numbers artificially deflated through hedonics. The government deficit could top $2 trillion next year. And the Fed is going to print money to pay for it all. The only way to prevent hyperinflation is to return to some sold of hard asset-backed monetary system and to allow gold’s price to rise dramatically.
My prediction: gold breaks $2000/oz in 2009 and $10,000/oz by 2012.
Disclosure: Long gold bullion; no positions in stocks.
Source: Monday Morning
By Don Miller
The currency markets reaction to the Federal Reserve’s recent interest rate cuts has ignited a rally in gold, as investors weigh the benefits of owning the yellow metal versus U.S. Treasuries and the dollar.
As a result, gold has started to shine again as a stable source of value at a time when the dollar and other commodities – like oil and copper – have fallen hard. The spot price of gold has climbed above $870 an ounce on the New York Mercantile Exchange, up about 20% from its October lows.
Gold has been on roller coaster ride in 2008, moving from its all time high of $1035 in March, to as low as $681 an ounce. Some of that decline occurred during the recent stock market plunge. Many investors were forced to liquidate profitable gold positions in order to raise money to cover their paper losses.
Its decline was then accelerated by the recent onslaught of financial bailouts, as many investors held a preference for liquidity and safety in the form of cash holdings guaranteed by the U.S. government. That was reflected in the skyrocketing prices of government bonds and investments in government-backed banks, which also lowered yields.
But with the Fed’s recent decision to cut its target interest rate to a range of 0% to 0.25%, the dollar has suffered a significant decline. Suddenly, foreign investors who were scooping up dollars have cut back on their flight to safety, knocking the dollar index (NYBOT: DX) down 10% in the last month. The index reflects the dollar’s value against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, and Swiss Franc.
The Fed’s interest rate cut may also have given gold a comparative boost in the eyes of investors. Gold, which never pays interest, suddenly doesn’t look so bad when compared to T-bills, which also are paying zero interest lately.
Volatility has risen this year compared to previous years, and the last few months have been the most volatile of all – an indication of investor ambivalence. But any uncertainty about the increasing price of gold may have been waylaid by the Fed’s recent rate cut and its dampening effect on the dollar and Treasuries.
Consequently, don’t expect this rally to be short-lived. As we pointed out in our 2009 Outlook Report on Gold, the fundamentals in the market hold the promise of more gains ahead.
It appears unlikely central bankers around the world will stop stimulating economies, printing money and doing whatever it takes until growth and confidence are restored – even if the cost is rampant inflation.
Consider these wild card inflation indicators that Money Morning Contributing Editor Martin Hutchinson believes will carry gold prices to $1,500 an ounce by the end of 2009:
- Over $7 trillion of freshly minted U.S. dollars are now in circulation with the aim of saving the global financial system.
- The incoming Obama administration has promised another $1 trillion or so stimulus package is on the way.
- It’s likely the Fed’s interest rate cuts will soon be followed by central banks around the world.
These economic stimuli are designed to do one thing – get the consumer spending again.
The bailout of the banks was the first step, but the banks are still keeping a tight rein on credit. Now the government is trying to get easily available, cheap money back into the hands of the consumer by running the printing presses around the clock.
“The government is pumping money in so many banks, and that money has to come out somewhere,” said Hutchinson.
Some of that money will “come out” into the economy in the form of higher stock prices. That will make consumers wealthier, and could give them more confidence in the economy. More confidence means more spending. As that happens, prices for goods should begin ticking upward, giving another booster shot to gold prices.
For instance some of that money is already going into gold bars and coins. In fact, the U.S. Mint was forced to suspend sales of the popular American Eagle and Buffalo gold coins for extended periods twice in the last year. The mint was unable to secure enough gold blanks from suppliers to match demand.
“I’ve never seen a case where demand was so high and supply was so short,” Chicago coin dealer Harlan Berk told the Associated Press.
With massive amounts of capital floating around, the time it takes to re-inflate the global economy will be far shorter than most analysts expect. Governments fear deflation more than anything. It appears they will only fight inflation when they are assured they have won the first battle, which is growth at any cost.
When inflation kicks in, the dollar’s buying power will suffer long-term. In fact, we expect a decline in all the world’s paper money, over time. Historically, investors in gold have prospered during periods of weakening fiat currencies.
That leaves gold as a bright light in the investment world, making it an odds-on favorite to open a new leg of a long-term uptrend
News and Related Story Links:
- Fortis Metals:
Fortis Metals Monthly – December 2008
- Associated Press:
Woes on Wall Street coincide with gold coin rush
- Money Morning:
Five Ways to Play Gold’s Rebound to $1,500 an Ounce