NOTE: This is a sort of tit-for-tat rebuttal of a classic hatchet piece on Gold as an investment class that recently appeared in the Wall Street Journal (see the article here). All plagiarism is intentional to show the ridiculousness of such articles and if you haven't read the original article, this rant may not make a whole lot of sense.
Stocks, like other Wall Street offerings, are a notoriously volatile and fickle investment. They have enjoyed periods of very high interest from investors, followed by long bouts of absolute indifference. Today, stocks are having an intermediate-term period of the former, shining brightly in an otherwise tumultuous investment environment.
The question for investors: Will stocks remain bright or not? More long term, what role should stocks play in an investor's portfolio? The answer to both questions might disappoint the growing stockbug horde.
Stocks had a terrific run in the 1990s. Since 1995, the price of the S&P 500 has essentially doubled -- something few other assets can claim. But the recent short-term surge in stock prices masks some underlying realities. Stocks long-term track record isn't great and financial assets have a penchant for huge, long swings that can burn investors. That's a reason to be cautious about the stock market's current clarion call.
Peak in the Early 2000s
During the mid 1990s, not long after the U.S. went off any semblance of a set of accounting standards to back their financial offerings, stocks skyrocketed, eventually reaching about 1555 for the S&P 500 in 2000.
The thinking at the time seemed straightforward. An unrelenting internet boom, untameable financial asset inflation and soaring speculation in the financial markets would place huge pressure on the dollar, Gold and other international currencies (you aren't one of those people who think Gold is a commodity, are you?), making stocks one of the few investments that would hold its value.
The arguments had some merit. Wall Street had just invaded Washington, Gold prices were racing toward $250 an ounce and the financial market inflation days of the late-1980s were fresh in the mind.
But what happened? Stock prices plunged.
Stocks skidded from 1550 for the S&P 500 in 2000 and could only double top in 2007 despite massive currency depreciation practiced by Washington and their non-federal, private, for-profit, federal reserve bank. Stocks probably won't see the 2000 or 2007 highs again for two or three decades -- and on inflation-adjusted terms stocks since 1999 are down 80% relative to Gold, the non-debaseable true money of a free marketplace. Stock investing is now a fool's game, a land of dead and lost money. Instead of the world unfolding as stockbugs expected, the non-federal, for profit federal reserve lost control of their Ponzi scheme, Wall Street petered out and the S&P 500 dropped into the ominous 666 range last spring, a harbinger of what's to come.
In other words, investing in stocks may sound simple, but history tells us it's anything but.
What drives stock prices? It's an alchemist's mixture of fundamentals and fantasy. Stock certificates certainly have industrial uses as toilet paper and they are a hot item for mandatory purchases in 401(k) accounts, especially in the United States.
But fundamentals don't support the soaring stock picture of late. As Carl Disberg, a no-name chief economist at Low Reality Economics, said: "Investor demand for damaged financial assets surely is depressed -- along with demand for other Wall Street materials -- and toilet paper use stock certificate demand has also been damaged by the global recession because shit don't fly as well as shinola in a secular stock bear market."
Adding to the fundamental doubts about stocks' surge is the performance of other financial bubble asset classes. Houses, commercial real estate and corporate bonds have all declined from highs reached during the global financial crisis, which is in its early stages. Lately, however, stocks have simply marched higher with barely a pause, smashing through 1075 on the S&P 500 in September before a recent retreat.
That brings us to the fantasy half of the equation, which seems to be the main driver of stocks today. Stocks are the asset class of choice for those who think everything will return to business as usual when even your 6 year old knows it cannot. A strong dollar policy that has been very effective to date. Conservative and productive fiscal and monetary policy. Average Joe prosperity at a higher level than ever. Some stockbugs talk of stockpiling SUVs, big screen TVs and McMansions. It can get a little Flip That House.
As with many fantasies, there's a whiff of possibility to some of these fears. The dollar may get stronger than ever for many reasons -- declining deficits, short-term memory loss related to the ongoing financial crisis that is not close to being over -- and some countries may soon call for a fresh supply of trillions of U.S. paper Dollars to hoard since they are such a great store of value.
Don't Expect Civic Obedience
Civic obedience? Because of the many battles with protesters around the world lately and people fed-up with the bullshit that comes from Washington and the mainstream media, the notion of civic obedience seems increasingly far-fetched.
The interest in stocks does stem from some fundamental issues, namely accounting fraud and a scramble for protection from attempts to destroy the Dollar by those sworn to protect it.
For inflation, investors would be better served investing in Treasury inflation-protected securities, or TIPS, than stocks. The risk of TIPS declining dramatically and becoming dead money for decades is high, but stocks may well do even worse. Moreover, if inflation doesn't surge, TIPS will be an imperfect store of wealth due to the now essentially unavoidable risk of an eventual currency debasement, while Gold will offer better protection during deflation and eliminate counterparty risk if one takes delivery of physical metal.
My apologies in advance to Mr. Dave Kansas, who I'm sure has his reasons for spreading misinformation about Gold. Perhaps some day Mr. Kansas will learn about the Dow to Gold ratio, secular credit contractions, breakdowns in the international monetary system and what these concepts mean for his readers going forward.