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How to Invest in the Crisis

July 3, 2013

Stocks

The stock market will continue to be profitable as long as money printing continues. Recently Bernanke has alluded to the possibility of ending the purchasing of mortgage-backed securities. If and when that happens, we will see a decline in the stock market.

So when will the bubble pop? In the past, stocks have fallen within weeks after the quantitative easing ended. In the future, it may not be so clear cut. The stock market bubble will still pop, but it’s difficult to set a clear expiration date right now. Stay tuned and I will keep you updated as this develops.

In the meantime, high-dividend stocks of stable, conservative, large-cap companies such as electric utilities, Johnson & Johnson, and Procter & Gamble are still worth looking at in a conservative portfolio. There is less potential for short-term growth,  but they also carry lower long-term risk.

Bonds

Interest rates on bonds in the United States are about as low as they can go—meaning the potential for capital gains from bonds is pretty slim. There could be some small gains to be had in 2013, but not as much as in 2012 or 2011 and I don’t think there will be any gains in 2014. Bernanke has mentioned recently of putting the brakes on QE, if that happens, even a relatively small increase in interest rates could send bonds downward very quickly.

So I would recommend keeping shorter-duration high-quality bonds, such as two-, three-, and five-year Treasurys. There are also special bonds such as mortgage-backed bonds and TIPS (which stands for Treasurys Inflation-Protected Securities), but with Bernanke saying he may stop the purchase of mortgage-backed securities soon, this makes this investment even riskier. I believe the same for mortgage-backed bonds “MBB”. To summarize, if you have the kind of luck I have, don’t even bother getting into bonds.

Europe

In 2013 we can expect more QE from the ECB. Countries with large debts and weak economies, such as Italy, Spain, and Greece, will continue to run into liquidity problems that threaten to topple the banking system. The ECB will continue to print money to save the day. Of course, this will lead to more inflation, eventually, but in the meantime it will have the intended effect of keeping the European banking system from collapsing. Ultimately, saving the banking system is the primary goal of the ECB.

In summary, I don’t expect the Eurozone to collapse this year or the euro to be abandoned. What I expect is that the ECB will take a page from the United States and Japan and continue printing more money. Some will like it as it is the easiest solution and politicians usually choose the easiest solution.

So no Lehman Brothers type of meltdown for the ECB but I make no guarantees. International equities are not worth the risk of a longer-term hold. Could there be short-term gains? Of course, if you know what you are doing. If you don’t, stay away and continue to avoid international equities as they are full of too much risk and volatility.

 

Gold

First, let me be clear in saying that gold is a long-term investment. With governments around the world turning to money printing in order to artificially prop up struggling stock markets and banking systems, the fundamentals in our economy are set up perfectly for a long-term rise in gold. When inflation goes up, interest rates follow, which will spell doom for stocks, bonds, and real estate. At that point, gold is the only place to turn for many investors, and it is likely to have explosive growth. According to some estimates, gold comprises only 0.14 percent of investable assets in the world. Less than a quarter percent is not much, so any movement out of stocks or bonds and into gold will have a big effect on gold.

Even in the past decade, with very low inflation, gold has been an excellent investment, quintupling in value over that span while the stock market performed poorly—the S&P 500 was flat, and the Nasdaq fell 50 percent. But I like gold for its future ahead, not for its past performance. Many see gold’s rise in the past decade as another bubble. But as I see it, the bubble has barely started. I think it will go as high as $10,000 an ounce by the time I am old enough to retire.

So why has gold dropped so far down between April and May of 2013? There are plenty of reasons why gold can go down in the short-term, and I still expect some volatility between now and the dollar bubble burst. I have said this before that there are signs of central bank manipulation, and we’ll likely see more of that in the years to come. The drop in gold price may also have a lot to do with the situation in Europe, where liquidity problems increase demand for dollars and make it necessary for financial institutions to sell assets like gold. This is similar to what happened in 2008, when the liquidity crisis sent the price of gold tumbling 30 percent in a matter of months. The important thing to remember is that gold has more than doubled since that low point of around $700/ounce. Even if you bought gold at its peak before the 2008 financial crisis, your investment would have increased 60 percent by now.

By comparison, the recent drop in the gold price is still five hundred dollars higher than in October 2008, and gold had increased by 50 percent between 2008 and 2012. Among the factors driving gold in 2013 will be increased physical demand in China, continued buying by peripheral central banks such as Turkey, Korea, and others, and continued financial uncertainty. I see no reason why the growth trend in 2012 won’t continue in 2013. There is the question of premiums when purchasing physical gold. I think the best website to review in order to assess how much you should and should not pay as a premium is: http://sprottphysicalbullion.com/sprott-physical-gold-trust/net-asset-value/

 

Silver and Commodities

In the long run, I expect silver to track gold pretty closely, meaning it will go up over time. In the short run, however, I expect silver to be more volatile than gold. You can see this already in the past couple of months. This is partly because silver is an industrial metal as well as a monetary metal. Over half of silver’s production each year is used for industrial purposes. Silver’s long-term rise will be tempered over the next year by the declining demand for electronics, particularly from China.

Most commodities, including silver, are dependent on demand from China, which in recent years has radically increased its demand for food, coal, metals, and other commodities. This doesn’t bode well for the commodities market, because there are signs the Chinese economy is slowing down dramatically. It’s difficult to be precise because the Chinese government has a tendency to be less than truthful with its economic statistics. So don’t expect economic readings from the Chinese government to indicate that. Most likely, Chinese government statistics will indicate perfect government management of a controlled slowing of economic growth from white hot to red hot. Would you expect anything less from government? Of course, many people on Wall Street will believe it because they want to believe it. Also, inaccurate inflation reporting, as here in the United States, can make many economic numbers look better than they are.

Falling Chinese demand will take a big toll on commodities over the next few years, so I would expect some downward pressure on commodities in 2013. The International Energy Agency announced that the growth in oil demand for 2013 will be as limited as it was in 2012 due to a slowdown in the world economy. China is terribly important in commodities such as steel. Since last year, China has consumed more steel for its construction industry alone than the demand for steel for all uses in the United States, Europe and Japan combined. As further evidence of its voracious demands, it used almost half of the cement production in the world. A big decline in Chinese construction demand would have a big effect on commodities.

Offsetting this to some degree will be money printing by the Fed, which could cause a temporary upturn in commodities. Of course, as inflation begins to get stronger, commodities will push upward even with declining demand. If the United States ends up going to war with Iran, the price of oil will skyrocket.

Democrat in the White House

President Obama has retained the White House, we have seen no big changes since last year with the exception that the Federal Reserve has recently announced that it may stop the money printing. There have been talks about sequestration but this is referring to spending cuts at a future date with the exception of unemployment which they have decided to make the cuts now. The new healthcare law includes two new taxes that some people thought would be blocked by Republicans.

There is no change and nothing new will get done to save our economy. The budget deficit is remaining the same and our total debt will continue to grow. Investors are less optimistic than if Romney would have won, although in reality it wouldn’t have made a difference. The winning of Obama as our president for the next four years will make little difference for the falling multibubble economy in the longer term. No matter what happens in politics in the next three years, falling bubbles cannot be propped forever.

In Conclusion

Overall, 2013 should bring us short bouts of excitement followed by long periods of relative boredom—kind of like 2012 and 2011.

There is always the chance that the financial situation might get surprisingly bad this year. I don’t think that will happen in 2013 but I certainly can’t rule it out. Also, there is always the chance for a Black Swan event, some may think it’s a natural disaster or a cyber-attack, maybe it’s the Edward Snowden affair, but I think if anything it would be a war with Iran. I will be keeping my eyes wide open for any sign of a big surprise or for more incremental evidence that we are moving along toward the inevitable crisis ahead.

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