Weekly Market Update by Retirement Lifestyle Advocates

Stocks advanced again last week for the third consecutive week.  The Standard and Poor’s 500 rallied 2.54% while the Dow followed closely with gains of 2.40%.

Precious metals were largely unchanged with gold advancing slightly and silver declining a bit.

The US Treasury yield once again bumped over 3%.

One of our favorite ratios to track the very long-term stock and gold forecast is the Dow to Gold ratio.  As seen in the databox above, it now stands at 18.63.  That’s down from more than 20 fairly recently but still a long way from our ultimate target of at least 2.

We once again restate this target with the understanding that it seems improbable at this point in time.  However, nearly every time markets have significantly corrected in the past, it has also seemed improbable.

Stocks, as measured by the Standard and Poor’s 500 have risen 10 of the last 12 trading days.  Many analysts have offered the opinion that the market’s correction has run its course and the bull is back.

We believe that those analysts are likely not correct and the highest probability for stocks moving ahead over the longer term is more downside.

We would credit the recent market rally to a holdover “Santa” rally as we stated in last week’s issue of “Portfolio Watch”.

Chart One is a weekly chart of the Standard and Poor’s 500 Index.  Each bar on the chart represents one week of price action with the green bars representing weeks the market finished higher and the red bars representing weeks that the market finished lower.

Notice from the chart that the almost horizontal blue line drawn on the chart once served as support and may now be resistance to prices rising much higher from this point.

We would advise caution when it comes to owning stocks moving ahead.

Meanwhile, quietly, gold has once again moved into a technical uptrend by our proprietary measures.  Chart Two, a weekly price chart of an exchange-traded fund with the investment objective of tracking the price of gold seems to confirm this.

Note the blue uptrend line drawn from bottom left to top right.

The intangible here that is impossible to know is whether or not the Federal Reserve is behind this rally.  While we have our doubts about this time, don’t dismiss this notion that the Fed manipulates or “intervenes” in markets as fiction.

It is clearly not fiction.

Richard Fisher, former Federal Reserve Board member had this to say in a CNBC interview in 2016 about the Federal Reserve’ role in intervening in markets (emphasis added):  (Source:  https://www.cnbc.com/2016/01/06/dont-blame-china-for-the-market-sell-off-commentary.html)

I spent 10 years (through last March) as a participant in the deliberations of the Federal Open Market Committee, setting monetary policy for the U.S. The purpose of zero interest rates engineered by the FOMC, together with the massive asset purchases of Treasurys and agency securities known as quantitative easing, was to create a wealth effect for the real economy by jump-starting the bond and equity markets.

The impact we had expected for the economy and for the markets was achieved. By February of 2009, the Fed had purchased over $1 trillion in securities. With interest rates throughout the yield curve moving in the direction of eventually resting at the lowest levels in 239 years of history, the stock market reacted: It bottomed in the first week of March of 2009 and then rose dramatically through 2014. The addition of a third round of QE, which had the Fed buying $85 billion per month of securities to ultimately expand its balance sheet to over $4.5 trillion, juiced the markets. 

I voted against QE3 but the majority of the committee embraced it. One could argue — as I did — that QE3 and its predecessor rounds front-loaded the equity market. Stated differently, I believe we engineered a version of the “Wimpy philosophy”: We gave stock-market investors two hamburgers today in exchange for one or none tomorrow. We pulled forward the price-reaction function of markets.

While this statement by a former Federal Reserve Board member should make anyone who believes in free markets and open capitalism cringe, it is a fact that cannot be changed.

Here is our view.

The basic rules of economics cannot be changed.

When debt levels are too high to be paid with honest money, they won’t be paid.  As we often state, we like to use our “historical crystal ball” to examine potential outcomes.  This is a strategy that has been employed by many prominent and respected historical figures.  Winston Churchill said that if one wants to predict the future, one needs to look deeply into the past.

When we do that, we see two possible outcomes.  The first is that we will move directly to deflation.  Given that most money today is debt, when there is too much debt to be paid and defaults occur, money disappears from the financial system.  That, by definition, is deflation.

The second possible outcome is that the Fed will respond to these deflationary pressures as they have in the past and reduce interest rates, which has a money creation effect, or even engage in another quantitative easing type program as Mr. Fisher described in the excerpt above.

History teaches us that is a temporary solution and when the money printing stops, deflation will kick in.

We are pleased to announce the return of the radio show and podcast.  Last week, we stated that the first “Retirement Lifestyle Advocates Radio Program” episode would air on January 13, 2019 on WOOD radio, 1300 AM and 106.9 FM.  For technical reasons, the debut of the show has been delayed until January 20.

Thanks for your encouragement and support in this endeavor.

 

“An appeaser is one who feeds a crocodile, hoping it will eat him last.”

                                                          -Winston Churchill