Tuesday, August 16, 2011

How's Your Consumer Confidence?

So the market is all better, right?  Here's the DJIA chart from StockCharts.com
the average is up about 600 bucks since it's low last week, and it has apparently recovered from the shocks of last week.  Talking heads on Tout The Market TV are reminding you the time to buy is when there's blood in the streets.  Ready to dive back in?

Bill Bonner is one of the founders of Agora Financial, and co-host of the website "The Daily Reckoning".  Bill is one of the financial guys who gets it.  From a link on Lew Rockwell I got to Bill's 8/12 column, "Mr. Market's Next Attack".  You should read it if you're thinking of getting back in and following the early '00s advice of "just buy into an indexed fund and never look at it".  A few choice observations:
Mr. Market is a cagey fellow, no doubt about it.  And if he has a story to tell, he keeps it to himself.  That said, he’s only natural.  And there are certain natural laws that even he has to obey.

For example, he can’t allow debt to build up forever.   There always comes a moment of awful recognition, when lenders realize they’ve been idiots…when they see that they won’t get their money back.  Savvy speculators try to sell the debt short before lenders catch on.

..... But Mr. Market is a fooler.  He doesn’t make it easy.

All over the world stocks are down about 20% from their recent peaks and about 5% to 10% for the year.  But they’re far from cheap.  Shiller’s normalized earnings put the P/E on US stocks today at about 20.   Major bear market bottoms come with the P/E down at 6 to 8.   The typical bottom, according to Shiller, comes at about 13.

So, if this were a bear market (we don’t know)…and if it were a typical bear market (we don’t know that either)…it would bottom out at about 8,000 on the Dow (now, 11,143).

If this were a major bear market, we’d look for a bottom in the 4,000 to 6,000 range.
This 4000 to 6000 range is where another prediction comes to mind.  Peter Schiff of Euro Pacific Capital predicted a Dow to Gold ratio of 1:1.  No specific price; just that an ounce of gold will be the same price as the DJIA. It could be $4000 or $6000 - or it could be $2000 or $10,000, but with the current prices and spread, somewhere close to $6000/oz makes a lot of sense to me (FWIW). 

Bonner's article is a good read that goes from discussing how such a bear market would likely unfold to watching the UK riots and deciding that the zombie wars have already started.  Go read.   And speaking of zombie wars, Bonner's piece really fits in nicely with the article at Sword At The Ready, linked to by Borepatch and lots of others  Obama's Amerika: Inciting A Race and Class War to Achieve a Dictatorship.


  1. Scrawwk! But we're in a gollllld buuuuuble! Scrawk! Polly wanna cracker! Scrawk!


  2. Yeah, it's interesting the bubble talk is back again (I read April article when you posted it).

    I've lived through a couple of big market bubbles in my day, and one of the Deadly Warning Signs is a newspaper article about the kid who didn't go to college but was making a ton of money in the (tech first, then housing) bubble. I remember in the high inflation 70s reading about a kid at my college who was running between classes to go get to the payphone to call in stock orders. Same thing.

    The list of signs you point out for knowing it's a bubble is still as good as the day they were written.

    Meanwhile, I'll continue a steady buying plan, not caring a bit about price, because that just won't matter someday. Maybe soon.

  3. I still don't hear any neighbors or colleagues telling me how much money they're making in the "gold market". Or how I "gotta get into gold or you're losing money". Funny, I'm just not hearing that.

    I'm still hearing how there's never been a better time to buy a house. Or buy stocks.

    It's like a broken record. Or a deranged parrot. Go figure.

  4. Oh, and if, as some gadflies say, this is a gold bubble, what praytell is inflating that bubble?

    Lack of confidence in the system, mmmmkay?

    Fear of an economic collapse, mmmmkay?

    Perhaps a deep-down feeling that there's something really wrong with our economy, mmmmkay?

    Seriously, if the price is 'inflating' beyond any 'reasonable' value, one might do well to ask why that is.

    Because, even if the price is rising beyond any reasonable value (define reasonable in the context of monetary devaluation over the last 80-100 years), perhaps it's being purchased as insurance rather than an investment.

    And we know that most people don't buy insurance with profit in mind. They buy it in order to prevent something far worse from happening.

    Like, perhaps, standing idle while their life savings are flushed down the toilet by the Entitlement State(TM), Helicopter Ben and QE(x), mmmmkay?