It’s not hard to find divergences in the markets today, with the divorce between fundamentals and large-cap stock prices fully evident and undeniable.
As seasoned investors know from experience, though, the final divergence in a late-stage economic expansion occurs when retail traders hit the gas pedal while institutional traders hit the brakes.
When inexperienced traders pile in, I view this as a signal to exercise caution and reallocate towards assets that tend to outperform in situations like this – and particularly gold, which has provided me with portfolio protection for many years. Actually, it’s done more than that, as gold has easily outperformed the large-cap stock market since the turn of the century.
Besides, gold doesn’t rely on corporate share buybacks or Federal Reserve contortions to maintain its value.
You’d have to wear a pretty sturdy tinfoil hat to believe that the Fed isn’t directly influencing stocks, though America isn’t the sole culprit because 49 international central banks enacted 71 bond yield cuts last year.
We now have $17 trillion in negative-yielding debt floating around in the world, so bonds clearly aren’t the safe haven they used to be.
This, along with a sputtering dollar and election-year uncertainty on the horizon, makes gold more appealing than ever. Or you can take your chances in a stock market that’s grossly overpriced by just about any measure:
To call the S&P 500 “frothy” would be an understatement at this point.
Institutional investors understand that violent market melt-ups don’t end well, and to put it bluntly, they’re not buying.
Oaktree Capital Management’s Howard Marks, for instance, is a legendary investor, and he’s advising extreme caution even while newbie traders are loading up.
Observing that “we’re in the longest bull market, the longest expansion in history, profits are not rising, stock prices are, it’s what we call a liquidity-driven rally,”
Marks warns that anyone buying the S&P 500 at the current nosebleed levels will likely lose. Indeed, the data supports this: with U.S. corporate earnings having declined for four consecutive quarters, it’s hard to fathom why anyone’s buying now.
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Trying to time the coming downturn isn’t a game that Marks is willing to play, but his ominous forecast is direct and unmistakable: “It doesn’t mean that the market’s going to go down tomorrow, but it does mean that the odds are not, in my opinion, in the investor’s favor.”
Another voice of reason in euphoric times is Bridgewater co-CIO Greg Jensen, who manages $160 billion for what happens to be the world’s biggest hedge fund. Like Howard Marks, Jensen has access to data and resources that the average retail trader doesn’t.
Like Marks, Jensen sees the S&P 500 as overcrowded and unappealing at the current level. Noting that “most of the world is long equity markets in pretty extreme situations,” Jensen anticipates “political turbulence” on the horizon, leaving unsuspecting stockholders to pick up the pieces when the market inevitably retreats.
Even so, the same Federal Reserve that’s backstopping the S&P 500 for the time being will also be the driver of higher gold prices.
Jensen is predicting $2,000 and higher for gold as the Fed allows U.S. inflation to “run hot” – an obvious catalyst for a gold bull run since it has a history of moving inversely to the dollar.
Gone are the days of the long-standing inflation target because the Federal Reserve “won’t be pre-emptive” anymore if inflation reaches 2%, explains Jensen. Historically, Jensen adds, the Federal Reserve’s mismanagement of inflation marks the final phase of economic expansion: “For most of the post-World War II recessions, the Fed dealing with inflation has ended the cycle.”
It’s decision time for informed investors: will you side with the impassioned crowds or the legendary billionaires? As for me, I’ll pass on the tinfoil and stock up on gold, my steady stand-by when reason takes a backseat to froth and frenzy.
Looking for a good gold stock? Be ready because I’ll be revealing what is sure to be the most important recommendation of 2020!
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This work is based on SEC filings, current events, interviews, corporate press releases and what we’ve learned as financial journalists. It may contain errors and you shouldn’t make any investment decision based solely on what you read here. It’s your money and your responsibility. We are invested in every idea mentioned in today’s letter, we will not sell any investment mentioned in this letter for thirty days of any email or article mention. The information herein is not intended to be personal legal or investment advice and may not be appropriate or applicable for all readers. If personal advice is needed, the services of a qualified legal, investment or tax professional should be sought.