Weekly Market Update by Retirement Lifestyle Advocates
exception of the US Treasury long bond, all markets were up last week.
With the advances experienced by
stocks and gold, the Dow to Gold ratio didn’t change significantly, remaining
at about 18.5.
As long-term readers of Portfolio
Watch know, our long-term forecast is for the Dow to Gold ratio to reach a
level of 2, but more likely 1.
As far out as that forecast may seem presently, when one looks at this level from a historical perspective, it’s not that far out. Since markets often move from one extreme to another over long periods of time, and since the last extreme saw the Dow to Gold ratio exceeding 40, we are of the belief that the next extreme will be at the low end of the spectrum.
Given the direction that Fed policy
seems to be taking, we expect that gold will continue to move higher over time
as will other tangible assets.
We would be remiss if we didn’t
point out that gold, silver and other tangible assets will move higher
nominally but probably not much higher in real terms.
If you are planning your financial
future or are planning for retirement, this is one of the most important
concepts to understand. And,
incorporating strategies that will allow you to potentially capitalize on this
concept could be the most important thing that you do to have a bright
We’ll give you an example and then
discuss some strategies.
In nominal terms, stocks are much
higher today than they were 20 years ago at the turn of the century.
As one can see from the databox
above, the Dow Jones Industrial Average stands at about 28,800. Also noted in the databox above is the Dow to
Gold ratio which stands at about 18.4.
This ratio is calculated by taking the price of the Dow Jones Industrial
Average in dollars and dividing it by the price of gold in US Dollars.
Historically speaking gold has
always been money.
Going back to ancient Egypt over
5000 years ago, gold and other precious metals were used in commerce.
An ounce of gold 5000 years ago had
exactly the same intrinsic or tangible value as an ounce of gold today.
The same statement could be made
about an ounce of gold 20 years ago and an ounce of gold today. An ounce of gold has not changed.
Yet, when pricing that ounce of
gold in US Dollars, one gets a different picture. 20 years ago, an ounce of gold sold for about
$250 in US Dollars. Today, that same
ounce of gold sells for more than 6 times as much.
Does that mean an ounce of gold is
worth more than it was 20 years ago?
Obviously not. It’s the same ounce of gold.
Gold has not gained tangible value; the US Dollar has lost purchasing power. That’s why we like to use the Dow to Gold ratio to determine the real value of stocks.
Let’s go back to calendar year
2000. The Dow was at about 11,700 in
January of that year which was, at the time, a record high. At that same time, gold was selling for about
270. That’s a Dow to Gold ratio of about
In other words, it took about 43
ounces of gold to buy the Dow. Today, it
takes about 18.
So, looking at it from that
perspective, what might one conclude about the price of stocks?
They are higher in nominal terms,
but they are lower in real terms.
We are of the opinion this is
almost totally due to the monetary policies of the Federal Reserve.
The Federal Reserve’s balance sheet
was about ½ a trillion in 2000. Today,
it’s more than $4 trillion.
How does the balance sheet of the
The Fed creates money to buy assets
from member banks.
More recently, the Fed has been
‘injecting liquidity’ into the repo market which is the overnight lending
market between banks.
What does this mean?
Simply put, for whatever reason,
some banks are not willing to loan money to other banks on an overnight basis.
While no one knows exactly why, one
does not have to be a financial genius to conclude that the only reason one
would not loan a person or entity money on a short-term basis is because you
perceived that there was too much risk to do so.
That’s what we believe is happening
presently; money is being created to stabilize this overnight lending market.
But, looking ahead, there are other
reasons that we believe the Fed will continue this loose money policy.
The biggest reason is the state of
the nation’s finances and debt levels.
This is a topic that we have often discussed, but the problem continues
to get larger.
John Mauldin, in his excellent
newsletter “Thoughts from the Frontline” had this to say on the topic this past
week (emphasis added):
To think that we have somehow eliminated recessions
and risk, or that central banks and the government have somehow become adept at
managing the business cycle, is simply foolish. Yet we keep doing it, every single time.
Debt seems harmless enough at first. You have reliable
cash flow, repayment is no problem, and you’re going to spend the borrowed
money wisely. But human nature tends to make us overdo otherwise good
things. And, with debt, you may also have lenders actively urging you to borrow
even more. Everything is fine… until it’s not.
Personal debt, while sometimes excessive, isn’t the
main problem. Government and corporate debt are the bigger challenge and
the reason we will spend the 2020s living dangerously. All that debt is
ultimately personal debt, too, since most of us are either taxpayers,
shareholders, or both.
In Part 1 of this forecast I
described my relatively benign outlook for the next 12 months. The calm may
last into 2021 and even beyond. But beneath the surface, pressure will still be
increasing. It will grow slowly, almost imperceptibly, but eventually
Or, to use another metaphor: We are frogs in the
kettle and someone just turned on the heat. By the time we notice, our good
options will be gone.
be clear, money creation is NOT a good option, but given the size of the debt,
it is the only option that the politicians will consider to be viable.
only other two choices are to raise taxes or cut spending both of which are not
very viable politically.
budget can be balanced by cutting spending but the level of cuts that would be
required to solve the deficit problem would create a deflationary environment
that would be so severe, politicians would be voted out of office in droves.
simply cannot raise taxes to a level that would be high enough to solve the
deficit problem. There is not enough
money in existence.
only other option is money creation.
our view, that’s what will continue to happen.
money is created, moving more toward tangible assets in your portfolio may be
the best way to preserve purchasing power.
week’s RLA Radio program features Dr. Chris Martensen, author of “The Crash
Tubbergen, chats with Chris about his book and his economic forecast. His insights are valuable, and his
perspective is one that we always appreciate.
show is now available at www.RetirementLifestyleAdvocates.com.
are many other valuable resources available on that site as well. We’d encourage you to visit the site and
check it out.