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Stocks Soar, Gold to Benefit

How did I come up with this conclusion? Let's look at some trends, facts, and causes/effects.

1) Stocks soar: the only listed reason why stocks have rallied in 2013 that matters is italicized:
--The stock market is the only game in town, investors are coming off the sidelines
--The economy is stronger thanks to housing and auto sales
--The selloff in December 2012 was because only because of taxes, now were back
--The Fed will remain accommodative
--Europe is fixed and Japan beat deflation, this will help the global economy
--etc, etc, etc...
2) G7/G20 agreed to have controlled and agreed upon currency devaluations.
3) UST 10Y break 2% and zooms to 2.06%. Rising yields mean growth!
4) The FED will continue QE until 6.5% unemployment.
5) Sequester will cut government spending, many DOD jobs at risk
6) President Obama wants to raise minimum wage to $9

1) Despite increasing distortions with economic realities, stocks will likely continue to rally. This is because there is no conventionally acceptable safe haven to put your money in. If you listen to Pimco lately, they really don't like anything and stocks will benefit from the lack of alternatives.

2) America runs on Dunkin. The S&P runs on Bernanke. The currency fighting has already been labeled a CURRENCY WAR!!! Though after the G7, the major countries are trying to convince everybody that they support Japanese policy. After the Yen began falling off a cliff after the meeting, an official spokesperson assured that the markets misunderstood the statement. Since then, the Yen has been stymied at 93, and CURRENCY WAR!!! has turned to currency confusion. What supposed to be strong again? Uh... hmmm... The only currency traders are agreeing on is the British Pound... which is about to do its best impersonation of the Yen on the high dive. I'm sure the EU is looking forward to a weakening Pound on top of a strengthening Euro. Especially France, if the British pound falls below say 1.45, France will go bonkers.

At least for now, generally satus quo looks like the near-term currency picture. (It's almost funny how prices aren't allowed to move unless it is A: a stock or B: a house). Everything is ranged bound except for a couple of currencies which make a calculated move in an allotted time. Since everybody has to be essentially pegged to the dollar, all currencies will devalue at the same rate as the Fed's QEffinitiy policy. So, like the market, there is no safe-haven in the currency side of things.

3) I don't know if this is a glitch, but MarketWatch's charts had 10Y's touching 2.23% an hour before Asian trading. I think it’s a glitch, because I'm not seeing headlines screaming about it with exclamation points!!!! Either way, we have rising bond yields. Jim Roger's third attempt at shorting UST’s looks like a winner. Now, we have been conditioned into believing that rising yields mean ECONOMIC GROWTH!!! but... it could also mean inflation expectations. Heck, I could make the argument that this whole stock market rally is based on inflation expectations. Look around Fools... gas is at all-time highs, for this time of year, despite high unemployment (Who is driving to work?).

Rising yields, due to inflation expectations, will be a death knell to any fake image of economic progress. Let's see how housing does with rising mortgage rates, auto sales with no more 0% financing, and retail sales with people cutting back on their debt financed spending. Hello? No headlines for sharp rising interest rates? Really?

4) The prudent Fed will continue to conduct its modest $85 billion assets purchase program until unemployment ticks lower to 6.5%. Oh, okay... that's a good idea. Let's link monetary to a pseudo unemployment number to give us an excuse to continue monthly $85B assets purchases. Since the soaring market is not a true economic barometer, I do not seeing unemployment falling but rising....and

5)... even if the economy is adding real jobs, here's a nice headwind. Now, I know WW2 was not an economic stimulant, but the sequester consequence of cutting DOD jobs is not going to help the pseudo unemployment number. In other words, we are moving in the wrong way away from 6.5% with government spending cuts. Before you start fretting that spending cuts could lead to lower gold prices, any potential "damage" from cuts, will be replaced by more monetary policy other government spending....and

6)...even if they keep those jobs... I wonder what a $9 minimum wage is going to do to employment. Oh jeeze, labor is now MORE expensive, I'm sure businesses are going to bust out the red carpets to all the new job applicants. I didn’t want hire them at $7/hr, but at $9/hr, how can I not hire them. I mean, think about how much harder they are going to work for that $9. So, unemployment will be again going in the wrong direction.

Since the Fed won’t let the market fix the global imbalances of resources and capital, we are stuck in this feedback loop until we have a deleveraging super nova papered over by hyperinflation event…. or at least something to that effect. Actually, my gut tells me that the Fed will prevent a super nova event, but they have to be willing to act no matter what.

Despite real economic weakness, the market is at all-time highs because the bulls have won the argument in that no alternatives exist. Now memorize this next saying:

A strength can be a weakness, and a weakness can be a strength

Now, how much money is available for investment in the stock market? How high does the price of stocks, in this environment, need to be before people start shying away? If they don't invest in stocks or bonds, where can they invest?

I know, you all have been patient... so I will give you the answer.... the answer is GOLD!!! ... and other commodities. Now, we know the economic reason on why we should hate investing in gold. We should invest in productive assets that will be able to grow. However, the hedgies, retailers, fund managers, bulls, bears, CNBC, Fox Business, Jim Cramer, and (King Dollar) Larry Kudlow are going to find out that savings, on rare occasions, can trounce investments. When economic imbalances are so bad, we literally can't even make a buck... and even if we did make a buck... how much is a buck worth?

If the market has an aggregate PE ratio of 50, $1,500 gold is going to look like a good deal. Now the P/E ratios can make it the market overvalued because of higher stock prices or lower earnings… or wait for it… a combination of both! It doesn’t really matter, but what does matter is that the market, which is already overvalued, will become an even worse investment... the higher it goes. EPS growth will no outpace inflation. So, I guess I better save it in an inflation protected asset. Boom! Saving just beat investment… and you were here to see it!

So, in conclusion, the more the market rallies and the more gold falls, the more it makes that investment to savings decision more appealing. If the pseudo-economy falls, despite accommodative monetary conditions, what else can the Fed do? Print more? I guess...

I have been thinking about this scenario all week. I replay it over and over like a chess match, and I cannot come up with a different conclusion. The market/currency will either explode, implode, or a malaise in between. I'm betting explosion, because of the new spiffy powers given to the Fed and Treasury in 2008. Market selloffs can still happen, like Faber's 20% prediction, because even if the market is not based on reality, valuations are still indicators. If there are no underlying assets then value is perception... and perceptions can change on a dime. Just ask Lehman Brothers.

If you build your house on sand, you should not be surprised when it washes away.

P.S. I applaud your reading stamina!
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