What the Data Really Tells Us and How It Will Affect Gold and Stocks

The U.S. economy is on the cusp of something big. The questions on everyone’s mind are as follows;

1. Who will be our next President and how will that affect the stock market?

2. Will gold and silver be viewed as a safe haven or fall in price like they did in 2008 if the recession deepens?

3. Will the Fed follow through with QE3 or just “talk the talk?”

I am limiting the discussion to these three topics and will be adding a fourth topic on the banking system in the near future. The banking system deserves it’s own analysis.

Who Will Be Our Next President and How Will That Affect the Stock Market?

The real answer to this question is, “does it matter?” Data is data and we must look at the data to determine where we are and where we are likely headed. Whomever the person is in charge is just a side show, albeit their Executive powers can play havoc at some point should we enter into any economic crisis.

To speculate that one President will take over the oval office and make a difference in the economy or the stock market means you don’t have internet access and can’t read the alternative to mainstream media that provides you the awareness you need to profit in this day and age. For those you know who only get their news from the television or newspaper, please print this article out and hand it to them. The goal of this article is simply to bring awareness based on my own research, but you need to do your own research as well. These articles I write are a continuation of the research I started in the first four chapters of my book, Buy Gold and Silver Safely.

If Romney Becomes President

It’s not going to happen. I wrote about the reasoning here: Will Romney and the Republicans Lose In November?  Mitt Romney will be Bush 3.0. More wars, increase in defense spending and threaten every other country (Russia, Iran). This new type of Republican Party, or what some call “neo-conservative” and the people who vote for it think we’re going to somehow come out on top when we can’t pay our bills. This party gave us two wars and now its chosen leader wants to rattle the saber with more countries. How about we mind our own business and take care of ourselves for once? Or should we wait till the debt grows to $17 trillion? or $50 trillion? When do you say enough? When do you hold Congress accountable?

If Obama Remains as President

Expect higher taxes on the rich, but expect the rich to find ways not to pay the taxes. This strategy of soaking the rich by the Obama administration, and the main talking point of every talk show host on television besides those on Fox News, will backfire and we’ll be left right where we are. The so called rich (those making $250,000 or more) can simply employ a strategy of implementing Charitable Trusts and getting current income tax deductions that last up to 6 years and up to 50% of adjusted gross income. This immediately makes the $250,000 wage earner, a less than $250,000 wage earner. The wealthy will simply seek out advice on how to lower taxes. Those who are super wealthy will simply start a foundation and pay themselves a small salary (under $250,000) while writing off every thing they do as an expense.

Who does this benefit? The charities of the world. Who typically gives to charities to begin with? Well, even the widow who had no money gave two mites to Church, so I won’t distinguish between amounts that people give, but rich people have passions the same as those who have little money do. The bottom line is, the rich know their way out of paying taxes, and as long as the laws give those who have good income tax deductions, then Obama’s plan will fail.

Just look at Jim Cramer’s CNBC show where it consistently tells the viewers that “Jim Cramer’s charitable trust invests in XYZ stock,” the one he is discussing at that moment. How great is it that you get to plug a stock you are invested in on your own television show, and look like you’re this great charitable giver at the same time? Charitable trusts in general benefit the one who owns it (like Cramer) for their entire life. These trusts provide the income tax deductions, AND provide the opportunity to change investments anytime they want to the point of even deferring taxes! You can even make these trusts last a couple generations, deferring taxes for decades!

So don’t pretend that taxing the rich will solve all of America’s problems. But listen up America…it’s not your problem, but the government’s problem. You are the victim of their overspending. Who is the victim when you overspend? Who pays your credit card bill? Are you allowed to put that burden on someone else? No! You are responsible for your own debt. Unless of course you declare bankruptcy and wipe the debt out completely, albeit it’s difficult to even do that any longer. But you’re also responsible for our governments debt. Meanwhile Congressmen and women work for 4 or 6 years, serving our country (serving?) and get paid a lifetime pension and health benefits. Something’s not right here and you don’t have to claim superiority of being a Republican or Democrat to agree.

Obama is offering no real cuts and can’t even cut the military by the required amount as he bombs Pakistan and other countries with drones after sending more troops to fight in Afghanistan when he said first thing in office he’d bring the troops home. This is the problem. Whether Democrat or Republican, they can’t offend anyone (corporate interests) by making real cuts. But who ends up paying for all this? We the Sefs! They do talk the talk of reducing deficits, but they are only reducing an ever larger amount of perceived tax receipts based on an economic model of a stated future growth, historically in the 10% range, but reduced now to around 8%. Who makes 8% consistently this day and age?

What happens when those tax receipts don’t add up and we enter a decade of low or no growth? Congress never addresses the negative because they have the Federal Reserve at the ready to print more notes, bills or buy derivatives and failed companies. And who pays the interest to the Federal Reserve? We the Serfs!

So What Will Happen To the Stock Market Moving Forward?

The following charts provide us with the data we need to see what’s really going on. They don’t paint a pretty picture at all. While looking at the charts, one has to ask themselves, what will turn this bleak picture around?

Lets start with the Baltic Dry Index (BDI)

What is the Baltic Dry Index and why is it important?

According to Investopedia;

The Baltic Dry Index is a shipping and trade index created by the London-based Baltic Exchange that measures changes in the cost to transport raw materials such as metals, grains and fossil fuels by sea. Changes in the Baltic Dry Index can give investors insight into global supply and demand trends. This change is often considered a leading indicator of future economic growth (if the index is rising) or contraction (index is falling) because the goods shipped are raw, pre-production material, which is typically an area with very low levels of speculation.

Here is what the BDI looks like today. Please note the 2008 crash in the index, the subsequent rise, and the fact that we are now below the BOTTOM of the 2008 crash level. Does this paint a picture of “future economic growth?”

 

When there is supply, but no demand, what happens to prices? While there can always be short term bounces in the index, one has to ask where will the bounce come from? The only real engine that’s been running in the world of late is China, and that engine has seen its stock market drop to 3 1/2 year lows while seeing their manufacturing sector operating conditions (see chart below) worsening at the sharpest rate in 41 months.

Call it what you will, but the following charts show a disconnect between the reality above, and misplaced euphoria by investors or is it those darn trading programs or the Fed and banking collusion? – something that today I don’t discount at all based on the data.  Eventually, the data wins out. It always will.

The first chart shows the CRB Index compared to the BDI.

 

This chart can lead people to believe that we are experiencing inflation rather than deflation. This is because 39% of the index is related to energy, and oil has spiked higher of late because of turmoil in the Middle East (threats to Iran) and Obama’s involvement in other countries politics as noted here, here and here. As for another 13% of the index, corn, soybeans and wheat prices have risen because of one of the worst droughts in U.S. history this year. One can’t call the price increases of these commodities to be “inflation” related.  This is what occurs when, for example, 48 percent of the nation’s corn crop was rated in poor to very poor condition at the end of July.

But this next chart paints a clearer picture of how out of touch the stock market is with the underlying data. I think the stock market is a fools game right now because it’s not based on reality.

 

I dont’ know if I’ve seen a more out of whack chart. The S&P has followed the BDI up until about the beginning of this year. While the BDI has sunk to the 2008 lows, the S&P has continued to rise. Don’t believe the hype coming from CNBC or your financial advisor who told you before the 2008 crash that a buy and hold strategy is the best way to make money in a market. You were given a gift of the rebound in the stock market to where we are today. What you do with that gift is up to you. The data tells me where we are going tomorrow. The stock market just needs to correlate with the data.

The DOW is currently at 13,067 and the S&P at 1,406 respectively. Come October of next year, I expect to see these indexes down considerably.

The reality is, we have never fully recovered from the 2008 recession. Throwing trillions of dollars at the economy through quantitative easing did what exactly? It bailed out the banks (although not fully as you’ll read in a forthcoming article). It caused the stock market to become a bubble again. It has buoyed real estate for the moment.

But banks are still not lending as they have become stricter in their application process and they still don’t mark to market their assets. Unemployment hasn’t recovered except for some government jobs through various green initiatives and reconstruction acts. For lease signs are still prevalent everywhere. Food stamp distributions are at record levels. States and cities are deeper in debt. Pension plans are struggling to pay out benefits as their growth models aren’t reaching projections. Many government employees are still overpaid.

I don’t have to link to each of these things above. Just Google it and do your own due diligence (sorry to be crass, but people need to think for themselves and not rely on what others say by doing their own research). If you don’t have a computer, take a trip to the library or to a friends house and research. Get to know the facts. Your broker isn’t going to tell you the facts.

The problem is, most people just listen to their financial advisor because they are the perceived expert. I was a financial advisor for 20 years before I learned to do my own research and not rely on the advice we are taught by the system (Certified Financial Planner; CFP) on investments. When I received the investment book for the CFP course on investing about 7 years ago, I laughed at the advice it gave because it contradicted with what I was learning by doing my own research. I lost total respect for the CFP designation and the financial system as a whole, always pushing stocks to the moon via a buy and hold strategy when 80% of the Mutual Fund managers never beat the Indexes. One has to do their own research, I can’t emphasize it enough. If your advisor tells you to invest in xyz stock or fund, learn all you can about it. If your insurance agent says to buy annuities, ask what you would get for it if you sold it the next day after you bought it. Ask the hard questions and don’t be intimidated.

Hopefully the articles I write give you the basis to form your own opinion. That chart above tells me something fishy is going on with the stock market.

One last note on the stock market is the work of Ed Easterling over at Crestmont Research. His latest analysis of P/E ratios show where we currently are with the stock market and compares it to historic bull and bear markets. We have a long way to go according to Ed’s research as the following graph shows, illustrated by the blue line.

This brings us to gold.

Will Gold and Silver Be Viewed As a Safe Haven or Fall in Price Like They Did in 2008 if the Recession Deepens?

I think I have made the case for the recession to deepen above and could use much more data but this article is going to be over 3000 words long and many won’t make it through to the end. I’ve also made the case before that the next President will go down in history as one of the worst of all time. It’s simple math (with a few more issues thrown in of course). But it all comes down to math for me. The “issues” I speak of are what will the Fed do, and what will Congress do. I think both have shown what they will do at some point (See TARP, Money to buy houses, cars and appliances, QE1, QE2, Operation Twist, GM, AIG, to name a few). Throw a little money to the consumers and pretend we’re on their side. That is the Fed and Congressional mantra.

The reason you own gold is because they will fail. It is insurance against the inevitable collapse. While no one can tell you when the collapse will come, the math tells us what will occur when the projections don’t turn out as rosy as the President, Congress and the Fed claims. Answer this simple question; When has anything they have done worked out for you? Did Fannie and Freddie turn out to be good for you? Did GM?

Many people may claim that Bernanke saved the system when he and Congress gave us TARP. No, it saved a few banks and GM. The People were left holding assets worth nothing or at best a declining asset (GM).

But what about gold?

If it is true we are going to go through some tough times ahead, then please understand Europe will feel the brunt of things first. I have made the case in my articles that the Euro is in trouble. The last two weeks of the dollar falling and Euro rising has been overblown and gold and silver have benefited. Draghi, Merkel and the Eurozone haven’t done anything to cure the problems in Greece, who is asking for more time and money, Spain and their record high unemployment, and Italy. The strong countries of the Euro can’t bail out the weak. Even Bulgaria just said no to joining the Euro. Why would Bulgaria prefer to keep it’s own currency options open? Ask Greece who wishes they could. Ask Germany who wishes they could! Donny Osmond had it wrong when he said, “One bad apple don’t spoil the whole bunch girl!”

In my last article I said “the $1.26 to $1.27 range on the Euro will offer resistance for now and the dollar at that point should continue it’s climb higher.” I think we’re there now with the dollar index currently at $81.25. I know this goes against most gold bulls thinking, but I have to call it like I see it.

But what about the big picture for gold? Comparing the price of gold to the BDI doesn’t paint a clear picture of short term movement.

CNBC came out today with an article called Gold Set for Dramatic Fall If Central Bankers Disappoint. And that’s what it comes down to for the short term. What will Central Bankers do in Europe this week, and what will the Fed do next week. Alternatively, if they do anything, is it already priced into the metals? If so, it really wasn’t that big of a move, so the CNBC article would be correct in saying that a fall could come.

NOTE: You won’t find me quoting CNBC often, because they are extremely biased in their reporting. The article I referenced was referencing two guests, and not the opinion of CNBC.

This brings us to the Fed and if they will follow through with their comments.

Will the Fed Follow Through with QE3 or Just “Talk the Talk?”

People believe what they want to believe, but action is what I look for. Until I see real action taken, I am calling the bluff of those that make policy decisions. This doesn’t mean I don’t speculate some, but put on your Federal Reserve hat for a moment. You’re looking at the ECB and knowing they have to print money to “save” the countries that overspend. We here in the U.S. have the same problem. It’s just that we have an active Fed that will do anything to put out potential fires. This action they take however will just make matters worse, which is why gold and silver go up in value every year. Investors understand this.

But if you are Bernanke today, you also are aware that this pattern of throwing money at something can only work for so long before people become fed up with it not working and realizing our sink hole just got bigger and it will take us longer to crawl out.

The Fed has to keep its credibility. They haven’t done well in their mandate to stave off unemployment, so this leaves stability of prices for the most part as the only thing they can try and claim a success. While we can’t look at food and energy as a sign of inflation because of what I outlined above, we are at low inflation overall and I think this will continue as the world contracts (see China).

If Bernanke and the Fed continue to add more rounds of QE or call it something by a different name, and people have to start paying more for things, the Fed becomes irrelevant. This scenario will come one way or another in the future. The Fed is just pulling rabbits out of a hat to keep the waters calm today. As long as interest rates stay low, and Treasuries are where all of Europe and other countries invest for perceived safety, which is where we are today, why would the Fed want to make it worse? Why would they want to rock the ship and take on water when the stock market and treasuries are doing fine and the dollar is above 80 on the index? That’s a pretty stable picture is it not?

That’s why I think Bernanke, for now, will keep his mouth shut and just do what he did a couple Friday’s ago and just “talk the talk.” Why do anything drastic when your words still carry power?

But the stock market will at some point face reality and the cracks will start to grow larger for this Humpty Dumpty economy.

We will bottom out in gold and silver. Are we there now? I just don’t know. In 2008 when our economy headed south, gold and silver fell with it. It all depends on what comes from Bernanke’s mouth and the last think I think he wants is for gold and silver to go to the moon quickly. It would reveal just how weak the Fed is. While I believe the Fed is weak, it is still relevant in the minds of investors…..for now.