Editor’s note: The following is a guest commentary from one of WND’s sponsors, Kevin DeMeritt, president of Lear Financial. If you would like to learn more about investing in precious metals, take advantage of the free information Lear Financial is making available to WND readers.
If you want to brew beer, you need malt, hops, water and yeast. If you want to brew a gold bull market, a really big gold bull market, you need the following ingredients:
1) A barrel of inflation
At the end of one of the worst weeks in American history – by Sept. 17 – $165 billion dollars had been added to the country’s money supply. That was just in the aftermath of the first week. It was accomplished largely through the Fed’s granting of a special right to lend money to American banks. It will prove to be the beginning of a brand new tidal wave of dollars.
Everywhere you look, there’s a billion here and a billion there for support and stimulation: $100 billion to pay for the Towers’ collapse … $343 billion for an admittedly much-needed defense budget … a $75 billion economic stimulus package, and that on top of the old one. There are billions for the airlines, billions for revamped security, billions for the victims and their families, for new unemployment claims, for all the various sectors of the economy suffering from these horrendous acts. Everyone from travel agents to aerial cartographers.
The surplus actually vanished last August, a few weeks before the attack, when there was a virtually unreported all-time record $80 billion deficit (overshadowing the earlier mark of $53 billion in May of 1991). So, no matter how you look at it, paying for the above and for the myriad of other “unlisted” terrorist-associated costs is now and will be an inflationary event, maybe the greatest of all time. There’s that much need out there.
2) A pinch of stocks
Turn on the TV most any time of the day and you’ll see happy-faced talking heads talking up the stock market. “We’re in a recession,” is what they’ll generally concede, “but signs point to a rebound sometime in the next few months. For now, stocks are cheap.”
The problem with statements like these is that they’re made totally in the face of history. One conveniently overlooked and underestimated rule of thumb is simply this: The depth of a bust is often inversely proportional to the height of the preceding boom. Markets always find their way back to their mean valuation (meaning the midpoint between their extremes), which holds particular significance to the greatest speculative bubble in the history of human beings: the Nasdaq. If this rule of thumb holds true, the Nasdaq will be revisiting the 500 to 700 range, not the 1,500s. What goes up truly does come down.
Valuations are still way too high. At the end of the third quarter of this year, the Nasdaq 100 P/E ratio was still at a relatively stratospheric 32 times earnings, while 13.5 is a more historically compatible outcome.
As to the assertion that “stocks are cheap,” the financial magazine Barrons recently took exception. It pointed out that despite the fact that the Dow has fallen 16.9 percent, the October 2001 earnings yield is only 4.46 percent compared to its 5.01 percent of last October. Earnings are heading the wrong way, even in this falling market. Clearly, there’s further room for stocks to fall, which would not make stocks cheap at current prices.
3) A huge helping of recession and consumer debt
While the talking heads just now agree that we’re in a recession, American industry has only been too aware of the slowdown for the past year.
It was just confirmed that U.S. industry is undergoing its longest slump since World War II. Last month, output from factories, utilities and mines continued a 12-month decline by falling a whopping 1 percent. You’d have to go back 57 years to the period from November 1944 to October 1945 to witness anything comparable.
Another dire milestone? U.S. industry is running at 75.5 percent capacity, the lowest level since 1983.
Whenever there is – as Jimmy Carter aptly put it at the height of his bumbling administration – “a crisis in confidence,” the average person tends to repent of their spending excesses and hunker down. And that means hunkering down to things of timeless, inherent value. Things you can actually hold – especially gold.
With total household debt now averaging an unthinkable $250,000, with unemployment, especially in the wake of the attacks, rising beyond 1992 levels, with the typical American family owing $8,000 in credit card debt – which is more than it typically pays in taxes each year – with the highest level of credit card default in second quarter 2001 in the 21 years the Bankers’ Association has recorded that statistic, with consumer credit absolutely, positively maxed-out, there is simply no engine left to drive the economy.
Consumer spending is responsible for two-thirds of our nation’s economic activity. But that spending wouldn’t be possible if consumers weren’t willing and able to take on debt, something that was a big factor in the miracle economy of the ’90s. But now, like the boa constrictor that’s just swallowed a huge jungle pig, it will take consumers months, if not years, to digest what it has already bitten off. You need only look at the recession of 1991 to see that it took consumers some 18 months to get back in the mood for debt again, and we’re only two measly months into the present consumer-debt contraction.
And it comes out gold
The last time we saw conditions even remotely resembling today was in the late ’70s. And, even as the stage was set back then, gold and other commodities (like oil) had already witnessed huge gains. That was before gold hit a record $850 an ounce.
Today, by contrast, the main indicator of tangibles and commodities – the CRB Index – is now at its lowest level in over 80 years. That means commodities are cheaper today in real terms than they were during the Great Depression of the 1930s. Think about it: These are real, useful and productive things of inherent value … and they’re almost criminally underpriced.
So, when you mix all of the economic ingredients, even if you overlook a few key ingredients, you still end up with this: Not only has there seldom been a more obvious recipe for a gold rally, but gold and other tangibles haven’t been this underpriced, relatively speaking, in 70 years.
The wise investor can see what’s brewing.
Special for WND readers, Lear Financial is making available free information on investing in precious metals.
With more than 20 years of industry experience, Kevin DeMeritt is president of Lear Financial, one of today’s fastest growing and most successful precious metals investment firms.
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