As the year draws to a close, we can only say that we're sure this will be a year we'll all remember for a long time.
It'll probably fall into the category of 1974, when the country was in a steep recession and gas lines wrapped around blocks, or like 1979. At that time, inflation was raging and interest rates soared to 20%. Even though the circumstances were very different, those landmark times are well remembered and this year will be similar.
DARKEST BEFORE DAWN
Even though it's been a tough year and we wish things were better, in the spirit of the holiday season, we also have to put everything into perspective and be grateful for what we have, be it health, loved ones, income, a home and so on because there are many who don't have these basics this year.
As for the markets, despite the gloom and doom, there are some positive signs. Remember, it's always darkest before dawn and that may be what we're seeing now. It sure seems like it, but we can't yet be sure. Nevertheless, we'll be watching certain guideposts for signs that the situation is improving, which will hopefully tell us that the worst is nearing an end.
Listening to the news, however, you'd never know it. It's been one bad day after another but keep in mind, the markets lead and they'll start up months before the economy actually improves. In fact, they'll turn up when pessimism is its strongest.
U.S. IN RECESSION
This month, for instance, it became official. The U.S. has been in a recession for one year. Of course, that didn't come as a surprise considering the huge drops in consumer confidence, spending, stocks, home prices and manufacturing throughout the year. Then there's the credit crisis, bank failures, one bailout after another, panic, business failures and the huge jump in job losses, the most since 1974. Unfortunately, there's also been more suicides and heart attacks.
Considering most of the above, the bottom line is that 95% of all investors have lost about half of the value of their assets over the past year. It's literally been the worst crisis since the 1930s. But again, there is some good news amidst the bad...
MONEY SUPPLY IS SOARING
Every major country worldwide is doing all they can to soften the blow and bring this crisis to an end. The last thing anyone wants is a deflation/depression. And as these signs have intensified, governments are taking stronger, even desperate measures. Chart 1 provides a great illustration of what we mean.
This shows the Federal Reserve's Monetary Base, which is essentially the money supply in its most liquid forms, going back to 1959. As you can see, it has exploded in a way never seen before. The last we heard it was soaring at an annual rate of 75%, which is beyond unprecedented.
That's a ton of money, and this alone is going to help avoid a depression and boost the economy. But as we've said many times, all those trillions will eventually also lead to a massive inflation. It's inevitable, but that's not the concern right now.
INVESTING IN INFRASTRUCTURE
Currently, Obama and his team are busy working on how to get the economy moving again. This is their top priority and one plan involves the largest infrastructure investment since the 1950s when all of the super highways were built. This will provide jobs and it'll hopefully help spur the economy.
Other countries are planning to do the same. China, for instance, already has two huge stimulus packages in the works, focused on infrastructure building. They're determined to keep their economy strong, which will help Asia. And all of these global projects will keep upward pressure on commodity prices too.
Also impressive have been Obama's picks for key posts so far, especially his economic team. Former Fed Chief Paul Volcker, for instance, is widely respected and has decades of hands-on experience, and he's been warning of economic disaster for years if policies continued on the path they were on. Timothy Geithner, the new Treasury Secretary, is also well respected, knowledgeable and he's been instrumental in helping to resolve the current crisis.
For now, Paulson is extending government assistance to other non-banking companies involving credit cards, auto loans and so on. And following the Citigroup bailout, the auto companies will be helped as well. The point is, save the economy. And so far, the markets seem to like what they see.
BOMBED OUT MARKETS: Ready to bounce
Most of the markets have been extremely oversold for months now. That means they're poised to rise in at least a good sized rebound following their steep declines. Several of the markets are clearly bottoming and a few are now beginning to punch up.
As we've previously mentioned, it's very possible that the initial reaction to the new presidency will fuel a rebound rise in most of the markets. That's because it's coinciding with this oversold situation.
This month this scenario seems even more likely than it did before. If so, it will be a super sign that the situation is going to work out, one way or another. We're not there yet but again, the guideposts will tell us if things are headed in the right direction.
KEEP CASH AND GOLD
In the meantime, keep your gold and cash, which are best regardless of what happens. In this year of extreme market drops and volatility, for example, gold has held up best and it's been the best investment. It's also one of the most important guideposts to be watching. If gold can now stay above $857, it'll be very bullish, strongly suggesting it's headed higher and the above, more positive scenario will likely unfold.
Cash is important for dozens of reasons, and it'll enable you to take advantage of the many bargains now available and during 2009 in order to add or buy new positions, especially in precious metals, stocks, currencies and most gold shares. Whatever you do, don't sell now. We think we could soon be in for some long overdue good news.