Rationales & Targets
GDP came in at 1.9% for the fourth quarter and 1.6% for the year and yet stocks trade as if we are in the midst of a tremendous economic boom. In fact, the last time GDP was above 3% growth was a dozen years ago in 2005. As well, inflation grew to a 2.2% annualized rate in the fourth quarter, providing additional impetus for the Fed to raise interest rates another notch if the trend continues. Stocks have been able to shine with interest rates at historic lows, but a reversal will quickly kill that thesis. As a reminder, Shiller’s CAPE (cyclically adjusted P/E) is now 28.4, the highest since the tech mania. CAPE is a ten-year average. Over the last 12 months, the S&P 500 is trading a bit below CAPE at a 25.8 P/E but this is still way, way above the historic norm of roughly 16. Even more curious, over the last 12 months, earnings for the S&P 500 are down 1.7%. Long term, it is not unreasonable to look for a reversion to the mean, which would take stocks down at least 38%.
Other than one day in balmy July 2014, the so-called “fear” VIX index is trading at its lowest since early 2007, a year that wound up as tumultuous and almost fatal for the economy. The gap between bulls and bears is unusually wide. Historically, these are the perfect circumstances to catalyze a correction. On an hourly chart, a break below 2279 for the S&P 500 and below 19,908 for the Dow would be troubling for bulls.
Gold = Security
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It should come as no surprise that we remain bullish on the long term prospects for gold bullion and gold stocks. We do no analysis of other precious metals, including silver and platinum. We would rather just focus on our views of the super bull market that we strongly believe commenced with the tragedy of 911. The impact of terror still has the potential to damage economies and to direct investors to what is generally perceived as the currency of last resort.
Even if the new administration successfully follows through with the campaign promise to eradicate ISIS forces on the battlefield, there is no guarantee that the threat of terror attacks will be significantly reduced. The U.S. had the same objective in mind when the previous administration killed Osama Bin Laden on May 2, 2011. Only three days later, a suicide bomber detonated a car full of explosives at a local police station. The Islamic State of Iraq claimed responsibility and said it was revenge for the death of Bin Laden. The attack killed 24 recruits and injured at least 72 more. Since Bin Laden’s death, there have been 258 Islamist terror attacks claiming 9033 victims. In the November issue, we presented a chart of the five year average of incidents. Our chart illustrates the five-year average of people killed at the hands of terror.
If terror attacks ever extend to the financial markets, infrastructure or the internet, the consequences could be devastating. These are additional reasons we believe gold means security and has a place in every portfolio.
For more information, please contact us:
Alan M. Newman, Editor, Crosscurrents