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Jim Nickerson
03-03-07, 12:18 PM
From Alan Abelson, Barron's 03/03/07



The almost universal conviction is that Tuesday's plunge was not the start of a full-fledged bear market. Even the savviest sage we know, who has been unequivocally skeptical for a spell now, thinks the odds are against it being the start of a bear market. He reckons there's one more big move up likely and, after that, perhaps a few month hence, stock prices will begin their journey to the nether depths.

Perhaps. But we wonder. That virtually everyone agrees that Tuesday wasn't the start of a bear market strikes us as more than reason enough to suspect it just might be.


The S&P 500 hit 1461.57 on 2/22/07 and then there was 2/27/07 which was a day of "panic selling."

Is the top for this cycle in or does what we have now represent a buying opportunity for more gains to come?

What do you think?

Jim Nickerson
03-03-07, 01:42 PM
Mike Burk http://www.safehaven.com/article-7050.htm just posted an analysis concerning Nasdaq advancing volume / declining volume.

Last Tuesday the down volume was 24 times the advancing volume.

Since 1978, the extent of his data, Tuesday's decline ranked 8th.



The top 10 are:
http://www.safehaven.com/images/pixel.gifhttp://www.safehaven.com/images/pixel.gifDate Ratio
http://www.safehaven.com/images/pixel.gifhttp://www.safehaven.com/images/pixel.gif10/19/1987* 42
10/27/1997 40
10/9/1979* 38
1/28/2004 36
3/27/1980 35
10/10/1979* 31
4/14/2000 25
2/27/2007* 24
3/17/1980 22
12/8/1980 21

Four of the 10 occurred during the 3rd year of the Presidential cycle (marked with an asterisk), other than last Tuesday, they all occurred in October. A common characteristic is they occurred near, but not at, short term lows. The charts below show a few of them.


My impression is that his comments suggest the market will go up from here.

I don't know much about cycles, but out there on the web there are arguments that the 4-yr cycle low, rather than occurring in the fall of the 2-nd presidental year, occurred last summer vs. those (few) who think the the low due last fall has been delayed.

Finster
03-03-07, 06:40 PM
From Alan Abelson, Barron's 03/03/07



The S&P 500 hit 1461.57 on 2/22/07 and then there was 2/27/07 which was a day of "panic selling."

Is the top for this cycle in or does what we have now represent a buying opportunity for more gains to come?

What do you think?

As you may have already gathered from my comments elsewhere in this forum, I think the odds are quite high that it is the beginning of a new bear market. Aside from the tangible reasons I've already cited elsewhere, there just seemed to be a palpable change in the whole financial structure. Very much unlike the correction we experienced last May-July. One never knows - it's conceivable we could be looking back on this in a few months as nothing more than a hiccup - but IMO it's not worth betting on it.

This calls to mind the earlier thread In the Shadow of 1937 (http://www.itulip.com/forums/showthread.php?t=739), where EJ compared the current landscape with that of 1937. I think the comparison is compelling. That was about when the principal aftershock to the infamous 1929-1932 debacle occured. If history rhymes, it would be just about right for us to get the same for the 2000-2002 bear.

bart
03-03-07, 08:05 PM
This calls to mind the earlier thread In the Shadow of 1937 (http://www.itulip.com/forums/showthread.php?t=739), where EJ compared the current landscape with that of 1937. I think the comparison is compelling. That was about when the principal aftershock to the infamous 1929-1932 debacle occured. If history rhymes, it would be just about right for us to get the same for the 2000-2002 bear.

Too many charts, not enough time... I've had this one in my web archives since 2005 I think, and just updated it.
I know I posted it on DR and SI but don't recall if I ever linked it here.

http://www.nowandfutures.com/download/dow1929_2000.png

WDCRob
03-03-07, 08:34 PM
Would be very interesting to put the 1966 peak on there too.

jk
03-03-07, 08:47 PM
Would be very interesting to put the 1966 peak on there too.

and then to correct for cpi+lies

bart
03-03-07, 08:57 PM
Would be very interesting to put the 1966 peak on there too.

It doesn't track very well. The 1966 peak around 950 was also hit in 1968 & 1971 and then exceeded in 1972 & 1973 when the Dow broke 1000.

bart
03-03-07, 08:58 PM
and then to correct for cpi+lies

Well... ok... if you insist... ;)
This is the closest I have and putting one together for 1929, 1966 and 2000 is quite non trivial.

http://www.nowandfutures.com/images/dow_cpi_lies1900-current.png

jk
03-03-07, 10:26 PM
thanks, bart. i knew you couldn't resist.;)

Finster
03-03-07, 11:32 PM
Too many charts, not enough time... I've had this one in my web archives since 2005 I think, and just updated it.
I know I posted it on DR and SI but don't recall if I ever linked it here.

http://www.nowandfutures.com/download/dow1929_2000.png

Ha! You've captured it perfectly. If the parallel persists, the only major difference would be that the generally upward relative bias we've seen thus far continues. Not because the stock market has a real upward bias, but because of the persistent inflationary downtrend in the currency unit we're now using to measure the value of stocks. That is, in terms of gold, the pattern ought be very similar, but this time, due to the general depreciation of the currency unit in terms of gold, we see a nominally more rising overall bias.

bart
03-04-07, 12:23 AM
Ha! You've captured it perfectly. If the parallel persists, the only major difference would be that the generally upward relative bias we've seen thus far continues. Not because the stock market has a real upward bias, but because of the persistent inflationary downtrend in the currency unit we're now using to measure the value of stocks. That is, in terms of gold, the pattern ought be very similar, but this time, due to the general depreciation of the currency unit in terms of gold, we see a nominally more rising overall bias.


Good point on inflation. The CPI adjusted Dow low in 2002 was about 7100 and adjusted with shadowstats data about 6500 (with a starting point matching on March 2000)... and I'm sure I could fiddle the scales to make the lows match too. ;)

jk
03-04-07, 02:46 AM
i think if you use the naz it lines up even better.

bart
03-04-07, 03:06 AM
i think if you use the naz it lines up even better.

It would I'm sure, and also get closer if I did use CPI or CPI+lies data, and that chart is also one that's very sensitive to the starting date and the scale... as shown by this small change.

http://www.nowandfutures.com/download/dow1929_2000a.png

Finster
03-04-07, 01:05 PM
i think if you use the naz it lines up even better.

Good point, JK. What we now call "technology" companies are the analog of what used to be called "industrials". The Dow Jones Industrials of yore was in significant part a tech index.

Finster
03-04-07, 01:10 PM
Good point on inflation. The CPI adjusted Dow low in 2002 was about 7100 and adjusted with shadowstats data about 6500 (with a starting point matching on March 2000)... and I'm sure I could fiddle the scales to make the lows match too. ;)

Of course your point is valid regardless ... even without the scale adjustments the general form of the plots is similar. The peaks and valleys correspond pretty well.

But it wouldn't really take any fiddling to get them to match up much more closely. Just plot the stock prices in terms of gold rather than dollars. The resemblance will be striking enough to make your chart heart skip a beat.

bart
03-04-07, 02:07 PM
Of course your point is valid regardless ... even without the scale adjustments the general form of the plots is similar. The peaks and valleys correspond pretty well.

But it wouldn't really take any fiddling to get them to match up much more closely. Just plot the stock prices in terms of gold rather than dollars. The resemblance will be striking enough to make your chart heart skip a beat.

http://www.nowandfutures.com/grins/kinky.wav ;)

I'm a little hesitant to plot stuff in terms of gold since it doesn't hold well over the last 35 years or so, but it sure is true since the markets started to turn back towards hard assets. One of these days, I'll run across some decent long term PPP data and maybe then I can do it more fairly.

I should note and agree with you that it was EJ who originally brought up the whole area here some months ago.

Finster
03-04-07, 02:15 PM
...since it doesn't hold well over the last 35 years or so, but it sure is true since the markets started to turn back towards hard assets.

???:confused:

Sure it holds. You see the cycle go back and forth between actual assets and claims on assets:

http://users.zoominternet.net/~fwuthering/Posts/StockGoldTrend.png


I'm a little hesitant to plot stuff in terms of gold ...

Okay. I'll bite again. I'll do it. Got a couple household chores to do and hopefully will get it posted here later today.

Finster
03-04-07, 03:49 PM
Here’s a chart of the S&P 500 in terms of gold from 1920-1945, overlaid with the same displaced from exactly seventy years later - that is, from 1990-2015 (though the data extend only through March 3 of 2007). Also, note that although the S&P 500 itself dates only back to 1957, the Cowles Foundation at Yale University has constructed an index extending back further using compatible methodology, and made it available online (http://www.econ.yale.edu/~shiller/) in conjunction with Professor Robert J Schiller’s book Irrational Exuberance. The below plot is simply the S&P (extended by the Cowles Index), converted from USD into ounces of gold, with taking of the natural log and adding two for plotting purposes.

http://users.zoominternet.net/~fwuthering/Posts/SPGold19251945.png

WDCRob
03-04-07, 04:04 PM
As does EJ's "Real Dow" graph on the front page, this would suggest that the serious post-bubble drop in stocks has yet to occur.

Finster
03-04-07, 06:28 PM
As does EJ's "Real Dow" graph on the front page, this would suggest that the serious post-bubble drop in stocks has yet to occur.

At least in gold terms. Conceivably the Fed could inflate and manage to depreciate the dollar faster than the market, leaving the averages nominally levitated.

But that's why it's illuminating to show the prices of stocks in an alternative - and not so easily devalued - form of money. Looked at this way, it's interesting to note that over the entire 25-year span from 1920 to 1945, stock prices went a net nowhere as priced in gold. If the same were to hold true from the start of the upper line in that chart, the one beginning in 1990, either the S&P would have to decline by some 60% while gold prices held steady, or remain flat while gold increased by about 2.5 times over the next seven-and-change years. And if the stock market actually rose in nominal terms over that time frame, the gold would have to rise proportionately more than 2.5 times.

Any combination that would increase the price of gold by 2.5 times relative to the S&P 500 would get us there. History never repeats exactly, but I am quite confident that gold prices are indeed going to substantially outperform stock prices over the next few years.

grapejelly
03-04-07, 07:24 PM
Any combination that would increase the price of gold by 2.5 times relative to the S&P 500 would get us there. History never repeats exactly, but I am quite confident that gold prices are indeed going to substantially outperform stock prices over the next few years.

That's what I'm banking on. I expect to buy the market for 5% of what it costs today, in gold terms, at some point in a few years. That's how I read history and if anything, it could get even cheaper...

I don't see a thing wrong with holding gold and then eventually seling the gold and buying stocks...

jk
03-04-07, 09:32 PM
That's what I'm banking on. I expect to buy the market for 5% of what it costs today, in gold terms, at some point in a few years. That's how I read history and if anything, it could get even cheaper...

I don't see a thing wrong with holding gold and then eventually seling the gold and buying stocks... 1. your 5% is a bit different than predicting gold to rise 2.5x relative to stock. that would come out to a 40% price in gold, not 5%. you are predicting something far more drastic, for gold to rise 20x relative to stocks. come to think of it, though, the current dow:gold ratio is around 20, and it could indeed go to 1, as it did in 1980, so perhaps what you predict will come to pass.

++++++++++++++++++++++++++++++++++

2. we should be careful in assuming the curves will continue to parallel that of 70 years ago. if i recall, there were some exciting global events in the late 1930's into the mid 1940's. this is not to say that we don't live in interesting times, ourselves....

Finster
03-04-07, 10:42 PM
That's what I'm banking on. I expect to buy the market for 5% of what it costs today, in gold terms, at some point in a few years. That's how I read history and if anything, it could get even cheaper...

I don't see a thing wrong with holding gold and then eventually seling the gold and buying stocks...

JK has a good point ... 5% seems a little on the aggressive side. But the general idea is sound. I also wouldn't attempt to go 100% gold and then switch to 100% stock. Too many things can go wrong. My preference is to start with a general long-term asset allocation, overweight gold near term, and gradually shift to an underweight over time as conditions warrant. Not only do you avoid the risk of switching at the wrong time, but also the temptation to bail on your strategy due to potentially extreme volatility.


1. your 5% is a bit different than predicting gold to rise 2.5x relative to stock. that would come out to a 40% price in gold, not 5%. you are predicting something far more drastic, for gold to rise 20x relative to stocks. come to think of it, though, the current dow:gold ratio is around 20, and it could indeed go to 1, as it did in 1980, so perhaps what you predict will come to pass.

++++++++++++++++++++++++++++++++++

2. we should be careful in assuming the curves will continue to parallel that of 70 years ago. if i recall, there were some exciting global events in the late 1930's into the mid 1940's. this is not to say that we don't live in interesting times, ourselves....

You can say that again, JK. On the other hand, there are some compelling reasons to suspect that even if history doesn't repeat, it will at least rhyme. Not least among them is that it already has at least once. By my count, this is the third time since the inception of central banking here in the US that we've seen this general kind of pattern developing, not just the second. Curiously, another roughly similar cycle appeared about midway between this cycle and the first one. Below is a modified version of the above chart, showing not only 1920-1945 & 1990-2015, but also 1955-1980.

As an aside, it is also interesting to note that US stock prices have made zero net progress in gold terms over the past 35 years. This underscores a point I made elsewhere about the dividend yield on stocks being a good proxy for the prospective real return you can expect. Given today's very low yield, prospective real stock returns are not especially promising...

http://users.zoominternet.net/~fwuthering/Posts/SPGold.png

WDCRob
03-05-07, 08:13 AM
Finster, I'm having trouble converting the log scale into real #s. If stocks fell to .5 again on your chart, where would that leave them? ~2000 (i.e. 1/6th)?

Oh. Nevermind. There's a denominator here too, so it would depend on the price of gold. (??)

And am I reading your chart right that in 1980 stocks measured in gold were worth half what they had been worth 30 years earlier?

Finally, thanks for making the point multiple times that dividend yields are a likely predictor of real stock returns over the long run. I didn't follow previously, but it made sense this time around.

Finster
03-05-07, 01:39 PM
Finster, I'm having trouble converting the log scale into real #s. If stocks fell to .5 again on your chart, where would that leave them? ~2000 (i.e. 1/6th)?

Oh. Nevermind. There's a denominator here too, so it would depend on the price of gold. (??)

And am I reading your chart right that in 1980 stocks measured in gold were worth half what they had been worth 30 years earlier?

Finally, thanks for making the point multiple times that dividend yields are a likely predictor of real stock returns over the long run. I didn't follow previously, but it made sense this time around.

Sorry about the difficulty in translating the log scale, WDC. When charting this kind of stuff, it's the lesser of the evils. Plotting this linear would create an unacceptable visual distortion.

For plotting purposes, the vertical scale is the natural log of the S&P in ounces of gold plus two. The "plus two" part is totally arbitrary, and all it does is shift the whole line above zero. To deconstuct it, we can just apply the reverse. Subtract two, and raise e to that power. Starting with 0.5, we get exp(-1.5), or about 0.2231.

Now remember the S&P 500 is conventionally quotes in dollars, not gold, so this says nothing about the S&P as measured in dollars. Rather that this is the ratio of the S&P 500 to the price of gold. So a value of 0.5 on the chart corresponds to the S&P between 1/5-1/4 of the price of gold, or looked at the other way, a price of gold in the range of 4-5 times the S&P 500 index.

Just for illustration, then, if we assume today's dollar price of gold of ~640, this would put the S&P 500 at 142.80. An incredible ~90% drop. Looked at the other way, if we assume today's dollar price of the S&P of about 1400, this would translate into an equally incredible near dectupling of the gold price to around $6,274 per ounce.

It bears emphasizing this uses your assumption of that 0.5 line on the chart. I am not forecasting that, but it does give you an idea of the possible. In fact at the end of 1980 the S&P did indeed stand at about 109.30 versus a gold price of about 543.30 per ounce. This was near the extreme for the cycle. IMO no one should be investing on the basis of expecting such an extreme, but in qualitative terms it is eminently reasonable to expect substantial movement in that direction.

bart
03-05-07, 05:39 PM
Just for illustration, then, if we assume today's dollar price of gold of ~640, this would put the S&P 500 at 142.80. An incredible ~90% drop. Looked at the other way, if we assume today's dollar price of the S&P of about 1400, this would translate into an equally incredible near dectupling of the gold price to around $6,274 per ounce.


And here's another out there view of possible gold targets, based on relationships between two money numbers and some logic.

http://www.nowandfutures.com/images/gold_target_m1_custodials.png

The M1/gold line simply shows what gold could be prices at now if gold again is priced to match just the total amount of outstanding cash and checking account balances as it did in 1980. The other one, custodials, is very conservatively charted (doing it the way I think it should be done gives a similar target of over $6,000) and assumes that gold would need to match the outstanding balances from other central banks being held by the Fed in "custody" for those banks in various US gov't instruments like bonds and agencies.




Sure it holds. You see the cycle go back and forth between actual assets and claims on assets:



IMO no one should be investing on the basis of expecting such an extreme, but in qualitative terms it is eminently reasonable to expect substantial movement in that direction.

Well... not to pick a nit or anything... and to also note that log(gerhead) charts are useful sometimes and I'll lower myself enough to create one... ;) ... here's an even longer term view of the Dow and gold, plus various other similar relationships showing the shift back & forth over time between "paper" and "hard" assets.

The basic point here though is that the longer term picture is actually getting more volatile and it's not beyond the pale that gold could go to under 1:1 with the Dow.

http://www.nowandfutures.com/images/dow_gold_oil_crb1900-current.png

grapejelly
03-05-07, 06:48 PM
interesting to speculate if gold stocks do as well as bullion in these cycles...I doubt it. But of course if you are a good stock picker you can get outsize returns on gold miners as opposed to bullion. Overall if you were to buy an index such as the $HUI and hold, would you outperform gold or is that a myth? I think towards the more advanced phases of this thing, all stocks will suffer...

Any thoughts?

And...one more thing. On your last chart, Bart, great stuff...notice how the recessions get rarer and rarer. And in terms of severity, although it's not on your chart, the last real recession I can remember is 1981. The early 1990s and the 2001 recession each were of diminishing severity.

I think this adds up to a pattern...but of what?

Finster
03-05-07, 06:58 PM
And here's another out there view of possible gold targets, based on relationships between two money numbers and some logic.

[chart]

The M1/gold line simply shows what gold could be prices at now if gold again is priced to match just the total amount of outstanding cash and checking account balances as it did in 1980. The other one, custodials, is very conservatively charted (doing it the way I think it should be done gives a similar target of over $6,000) and assumes that gold would need to match the outstanding balances from other central banks being held by the Fed in "custody" for those banks in various US gov't instruments like bonds and agencies.

Well thatís an eye-opener. Iím a little reticent to use the 1980 peak for an equivalent target. Partly because itís such an extreme - perhaps due to the gold having been off-limits for ordinary investors so long - and partly because there is a very long term trend towards gold prices actually falling a bit short of stock prices. That very long term trend is denoted by the straight lines in the below chart. Nevertheless, it is very difficult to make a case that the stock/gold ratio will not be quite a bit higher in the coming years.

I think weíre on more solid ground with the stock/gold ratio than a specific dollar price. In the (admittedly unlikely) event that the CBs were to (belatedly) get serious about restraining inflation, the stock averages could go down (in dollar terms) more than gold rises. But your money growth analysis is especially interesting here because it is more directly germane to a gold/dollar ratio. Gold in dollar terms may struggle until Uncle Ben gets his helicopter loaded and in the air, but at that point all bets are offÖ


Well... not to pick a nit or anything... and to also note that log(gerhead) charts are useful sometimes and I'll lower myself enough to create one... ;) ... here's an even longer term view of the Dow and gold, plus various other similar relationships showing the shift back & forth over time between "paper" and "hard" assets.

The basic point here though is that the longer term picture is actually getting more volatile and it's not beyond the pale that gold could go to under 1:1 with the Dow.

[chart]

There are fundamental reasons for gold to (as mentioned above) fall a little behind stocks in the very long term; mostly relating to the ability of technology to reduce the man-hours (real cost) required to mine each ounce of gold. On the other hand, as you point out, there also seems to be a trend towards increasing volatility, and the scale of the inflation we have just been through probably exceeds both what was experienced in twenties and sixties-seventies, which would augur for a correspondingly amplified reaction.

The above chart, BTW, differs in two ways from that which I posted earlier (and reproduced below) in that it is more of a close-up of putatively corresponding historical periods, and in that it focuses on the S&P (US market) as opposed to global markets. The below is broader in that it treats essentially the entire asset class of equities - globally - and it simply strings together in one continuous chart the whole history I have available.

Again, also note the overall rising trend of equity versus gold.

http://users.zoominternet.net/~fwuthering/Posts/StockGoldTrend.png

bart
03-05-07, 08:11 PM
interesting to speculate if gold stocks do as well as bullion in these cycles...I doubt it. But of course if you are a good stock picker you can get outsize returns on gold miners as opposed to bullion. Overall if you were to buy an index such as the $HUI and hold, would you outperform gold or is that a myth? I think towards the more advanced phases of this thing, all stocks will suffer...

Any thoughts?


Very tough question as you know since there are so many variables on miners. There's little question that someone who is a great picker will outperform but those folk are *very* few and far between, but I think it's unlikely that the average index will outperform physical - i.e., it's a myth. The huge performing juniors aren't generally in the index, at least until they get big and well known.

The long term Barrons index shows it well (from sharelynx.com - great charts)(and Finster will have a moralgasm since it's a log chart ;)):

http://www.sharelynx.com/chartsfixed/Barrons/ADH.gif

http://www.sharelynx.com/chartsfixed/Barrons/ADH.gif

Here's another that may be easier to read:
http://www.nowandfutures.com/download/BarronsGoldMiningStockIndex1938-2004-lundeen022106a.gif





And...one more thing. On your last chart, Bart, great stuff...notice how the recessions get rarer and rarer. And in terms of severity, although it's not on your chart, the last real recession I can remember is 1981. The early 1990s and the 2001 recession each were of diminishing severity.

I think this adds up to a pattern...but of what?

Be a bit cautious on any recession conclusion. Not only has the definition of a recession changed over the years but when money is created at more rapid rates, recessions are fewer... in other words, central banks and "loose" money is the primary reason for the pattern change. There are lots of other factors, but in my opinion, it and inflation are by far the most important ones.

bart
03-05-07, 08:32 PM
Well that’s an eye-opener. I’m a little reticent to use the 1980 peak for an equivalent target. Partly because it’s such an extreme - perhaps due to the gold having been off-limits for ordinary investors so long - and partly because there is a very long term trend towards gold prices actually falling a bit short of stock prices. That very long term trend is denoted by the straight lines in the below chart. Nevertheless, it is very difficult to make a case that the stock/gold ratio will not be quite a bit higher in the coming years.

Nice nit-for-nit trade... ;) ... and I basically agree that the $6,000 target is at least as good as $2,000, $4,000 or $10,000. I actually hope that it peaks nearer the lower numbers, since the social and cultural impact that the higher numbers would represent are not exactly pretty.

By the way, I stole the custodials concept from Jim Sinclair - would that I were 1/10 as sharp as he is.




I think we’re on more solid ground with the stock/gold ratio than a specific dollar price. In the (admittedly unlikely) event that the CBs were to (belatedly) get serious about restraining inflation, the stock averages could go down (in dollar terms) more than gold rises. But your money growth analysis is especially interesting here because it is more directly germane to a gold/dollar ratio. Gold in dollar terms may struggle until Uncle Ben gets his helicopter loaded and in the air, but at that point all bets are off…

You got it and we agree as usual - the gold/dollar ratio is the final arbiter, especially in a free market. The main central bank was the one that got wise before things almost went pow in 1979-80, and Bernanke doesn't seem much like Volcker to me. *sigh*




There are fundamental reasons for gold to (as mentioned above) fall a little behind stocks in the very long term; mostly relating to the ability of technology to reduce the man-hours (real cost) required to mine each ounce of gold. On the other hand, as you point out, there also seems to be a trend towards increasing volatility, and the scale of the inflation we have just been through probably exceeds both what was experienced in twenties and sixties-seventies, which would augur for a correspondingly amplified reaction.

The above chart, BTW, differs in two ways from that which I posted earlier (and reproduced below) in that it is more of a close-up of putatively corresponding historical periods, and in that it focuses on the S&P (US market) as opposed to global markets. The below is broader in that it treats essentially the entire asset class of equities - globally - and it simply strings together in one continuous chart the whole history I have available.

Again, also note the overall rising trend of equity versus gold.

http://users.zoominternet.net/~fwuthering/Posts/StockGoldTrend.png


mmm... more nits... aka http://www.nowandfutures.com/grins/mmm_something.wav ;)

The biggest problem with comparing any non static stock or other index against gold over a long period is that it's not an apples to apples comparison. As I recall, there's only one or two stocks in today's Dow that were also in it during the '20s. There's also substitution bias and also dividends as well as shoddy Wall St. practices to take into account.

If I was able to vary the purity of gold the way that Dow Jones or Standard & Poors change their index content (and even after adding in dividends etc.), I believe gold would have outperformed substantially.

And I wouldn't even have to make it a log chart... ;)

Finster
03-05-07, 09:46 PM
Nice nit-for-nit trade... ;)

Iíll scratch your nit ifÖ


... and I basically agree that the $6,000 target is at least as good as $2,000, $4,000 or $10,000. I actually hope that it peaks nearer the lower numbers, since the social and cultural impact that the higher numbers would represent are not exactly pretty.

By the way, I stole the custodials concept from Jim Sinclair - would that I were 1/10 as sharp as he is.

He should be so lucky as to be as sharp as you are.


You got it and we agree as usual - the gold/dollar ratio is the final arbiter, especially in a free market.

To paraphrase Alan Greenspan, if you think we agree, you must have misunderstood Ö ;)

But seriously, I think it depends on what exactly we are talking about. Because the gum-mint can do just about anything it wants to the value of the dollar, the stock/gold ratio is a more reliable mean-reverting datum. In the long run CBs can do nothing to make either gold or productive capital worth more or less (except perhaps really muck up the economy for goodÖ). The gold/dollar ratio, though, is where your monetary data come in. Stock/gold canít tell us anything about what to expect for stock/dollar or gold/dollar individually.


The main central bank was the one that got wise before things almost went pow in 1979-80, and Bernanke doesn't seem much like Volcker to me. *sigh*

I donít remember Volcker talking about sending out a fleet of helicopters!


mmm... more nits... aka http://www.nowandfutures.com/grins/mmm_something.wav ;)

The biggest problem with comparing any non static stock or other index against gold over a long period is that it's not an apples to apples comparison. As I recall, there's only one or two stocks in today's Dow that were also in it during the '20s. There's also substitution bias and also dividends as well as shoddy Wall St. practices to take into account.

If I was able to vary the purity of gold the way that Dow Jones or Standard & Poors change their index content (and even after adding in dividends etc.), I believe gold would have outperformed substantially.

Right. This is one reason why I like to use the broadest indices possible. As in the global stock/gold chart above. Such averages are made to reflect the aggregate experience of all the worldís stock investors. Obviously they donít own the same stocks today as were in the DJIA in the 1920ís either.

Dividends are another matter. Stocks are by nature an investment, not merely a store of value. Over time, they should provide investors with a real return, which they do in the form of a dividend. Of course that "over time" part is a mighty big caveat, because as we all know there can be prolonged periods where the total real return is negative. And thatís before taxes.

Gold, on the other hand, over the long run, provides a slightly negative real price return, and no dividends at all. For this reason, in the aggregate and over the long run, investors are better off owning stocks. But again, we have that "over time" bugaboo Ö there can be prolonged periods where it can beat the tar out of stocks. And if these here charts are any indication, this is one of them.


And I wouldn't even have to make it a log chart... ;)

At least as long as you donít mind getting finned mercilessly Ö

bart
03-06-07, 02:03 AM
He should be so lucky as to be as sharp as you are.

Thanks, manor enhanced one... but he's rich!
I might be able to beat him in a grunt (http://www.nowandfutures.com/grins/timgrunt.wav)contest though... ;)



To paraphrase Alan Greenspan, if you think we agree, you must have misunderstood … ;)

But seriously, I think it depends on what exactly we are talking about. Because the gum-mint can do just about anything it wants to the value of the dollar, the stock/gold ratio is a more reliable mean-reverting datum. In the long run CBs can do nothing to make either gold or productive capital worth more or less (except perhaps really muck up the economy for good…). The gold/dollar ratio, though, is where your monetary data come in. Stock/gold can’t tell us anything about what to expect for stock/dollar or gold/dollar individually.


Poor Bubbles Al - he's so abused... ;)

True, although there is that small fly in the ointment about confiscation of gold or perhaps even other "strategic" metals that could even trash the gold/dollar or gold/stocks ratio... at least at official prices.





I don’t remember Volcker talking about sending out a fleet of helicopters!

Didn't you get the change in armaments bulletin back in the '90s? They switched back to liquidity missiles & drops... ;)





Right. This is one reason why I like to use the broadest indices possible. As in the global stock/gold chart above. Such averages are made to reflect the aggregate experience of all the world’s stock investors. Obviously they don’t own the same stocks today as were in the DJIA in the 1920’s either.

Dividends are another matter. Stocks are by nature an investment, not merely a store of value. Over time, they should provide investors with a real return, which they do in the form of a dividend. Of course that "over time" part is a mighty big caveat, because as we all know there can be prolonged periods where the total real return is negative. And that’s before taxes.

Gold, on the other hand, over the long run, provides a slightly negative real price return, and no dividends at all. For this reason, in the aggregate and over the long run, investors are better off owning stocks. But again, we have that "over time" bugaboo … there can be prolonged periods where it can beat the tar out of stocks. And if these here charts are any indication, this is one of them.


True that they don't own the same stocks too, as well as the indexes having changed substantially. Agreed too that stocks *should* produce superior returns over a long period.
But it still doesn't address comparing an unchanging item like gold or many other "hard" assets with items that change composition. One of these days, I'll hopefully run across a decent long term PPP dataset and it "should" show the point too.

As far as gold not paying interest or having dividends, neither do non dividend paying stocks or housing or gemstones or antiques or art, etc. and many of them have done quite well...





At least as long as you don’t mind getting finned mercilessly …

http://www.nowandfutures.com/grins/argh.wav ;)

Finster
03-06-07, 09:35 AM
Thanks, manor enhanced one... but he's rich!
I might be able to beat him in a grunt (http://www.nowandfutures.com/grins/timgrunt.wav)contest though... ;)

Well Iíve seen his charts and Iíve seen yoursÖ


Poor Bubbles Al - he's so abused... ;)

I love to heap disrespect on those who so richly deserve itÖ


True, although there is that small fly in the ointment about confiscation of gold or perhaps even other "strategic" metals that could even trash the gold/dollar or gold/stocks ratio... at least at official prices.

True again. One can never say never, but for the foreseeable future at least, confiscation seems remote. Now that Wall Street has ways to make money from it, such as ETFs, hedge funds, proprietary trading, etceteras, Washington may be more reluctant.


True that they don't own the same stocks too, as well as the indexes having changed substantially. Agreed too that stocks *should* produce superior returns over a long period.
But it still doesn't address comparing an unchanging item like gold or many other "hard" assets with items that change composition. One of these days, I'll hopefully run across a decent long term PPP dataset and it "should" show the point too.

It just doesnít matter if they change composition. Take, just for example, a commodity futures index like that published by Goldman Sachs or Dow Jones. They likewise donít represent anything unchanging; as you know as well as anyone, futures contracts expire and have to be "rolled over" to get anything resembling a continuous return. Yet you can chart that continuous return. Same with stocks; the individual components may change over time, yet you can buy, say, the S&P 500 and have a continuous, evolving, index.

Even though the form and names of individual bits and pieces may change, the broad entity of "corporate capital" is still a continuous thing. It has existed as long as capital has, and thatís a very long time. It also tends to be tenaciously constant over the passage of decades as a proportion of the global economy. Even though it rises and falls with secular cycles, it is strongly mean reverting with respect to the total global net worth and GDP. As long as you are looking at an index that is sufficiently comprehensive - and not just some selected fraction of corporate capital (like an individual stock, the Dow 30 or whatever), you have something comparable.


As far as gold not paying interest or having dividends, neither do non dividend paying stocks or housing or gemstones or antiques or art, etc. and many of them have done quite well...

Iím not knocking gold, here Ö not hardly! Iím simply distinguishing between savings and investment - i.e. things that act as stores of value versus things that produce real returns. And whether a stock pays a dividend or not, it nevertheless still derives its value from the prospect that it may someday pay one. If a stock never pays anything to its shareholders, it is fundamentally worthless and the market will eventually reflect that. Eventually a dividend must be paid, whether its a regular quarterly or whether it gets bought out (by another entity that also must eventually pay a dividend!), or whether it eventually liquidates and pays out its profits to shareholders at that time. In this latter case, the dividend is simply deferred, just as in the case where it eventually pays a regular quarterly.

Gems, antiques, and art are fundamentally different in that they do not represent productive capital. They are more similar to gold in that they are stores of value. Individual pieces may appreciate or depreciate, but in the aggregate they do not produce a real return. If they appear to collectively have "done well", that is because you are comparing them to currency units that are "doing unwell".

Again, this is not to say there havenít been or wonít be very significant periods when stores of value handily outperform things that fundamentally produce a return, because the latter can get waaaay overvalued and underperform for years at a time. (Thanks largely to efforts to artificially expand credit.) Of course, it can get undervalued, too and then correspondingly outperform. But they are generally very comparable in terms of price Ö itís the dividend - the economic profit resulting from the productive deployment of capital - that represents the difference between a store of value and something capable of producing real returns.

grapejelly
03-06-07, 10:22 AM
Again, this is not to say there havenít been or wonít be very significant periods when stores of value handily outperform things that fundamentally produce a return, because the latter can get waaaay overvalued and underperform for years at a time. (Thanks largely to efforts to artificially expand credit.) Of course, it can get undervalued, too and then correspondingly outperform. But they are generally very comparable in terms of price Ö itís the dividend - the economic profit resulting from the productive deployment of capital - that represents the difference between a store of value and something capable of producing real returns.

There seem to be cycles between gold, as a proxy for tangibles, and income-producing assets in terms of highest returns.

I think this is mainly due to the effects of inflation.

I would suppose that most tangibles will, absent inflation, tend to decline in value over the long run. That is due to technology increasing productivity, decreasing the need for commodity inputs. OTOH of course there is expanding population making new demands on tangibles, such as we are seeing in China and India.

But I think cycles tend to decrease real returns eventually below zero on income producing investments (e.g. stocks)
due to the effects of inflation. Inflation allows more money to be created that then intermediates any investment opportunity away.

At this point in the cycle, gold is best. Gold is a proxy for cash, a store of value as you say. But it produces a real return through appreciation.

Then there is a big blowoff a la the Great Depression. Perhaps the 1970s qualifies in a small way. When the dust clears, you can buy income producing assets extremely cheaply. This is the time to re-enter the market.


I think these cycles have a lot to do with longevity. For decades after the Crash of 1929 and the Depression, Wall Street and investors were repulsed by debt. This allowed inflation to take advantage of them because they were so set on avoiding debt they failed to understand the new fiat regime and what it did to creditors. Think all the low fixed interest 30 year mortgages left in the 1970s.

These people died off and then there was no more memory of the Great Depression which set the stage for the current state of affairs.

bart
03-06-07, 12:56 PM
Well I’ve seen his charts and I’ve seen yours…

True enough and I sure do have him beat on variety and depth, but the site purposes are very different and his charts also have much more of a short term and TA focus.



I love to heap disrespect on those who so richly deserve it…

*hug* ;)




True again. One can never say never, but for the foreseeable future at least, confiscation seems remote. Now that Wall Street has ways to make money from it, such as ETFs, hedge funds, proprietary trading, etceteras, Washington may be more reluctant.

Agreed, but I'm also on the alert for indications of "painting" gold or whatever as "bad".




It just doesn’t matter if they change composition. Take, just for example, a commodity futures index like that published by Goldman Sachs or Dow Jones. They likewise don’t represent anything unchanging; as you know as well as anyone, futures contracts expire and have to be "rolled over" to get anything resembling a continuous return. Yet you can chart that continuous return. Same with stocks; the individual components may change over time, yet you can buy, say, the S&P 500 and have a continuous, evolving, index.

Even though the form and names of individual bits and pieces may change, the broad entity of "corporate capital" is still a continuous thing. It has existed as long as capital has, and that’s a very long time. It also tends to be tenaciously constant over the passage of decades as a proportion of the global economy. Even though it rises and falls with secular cycles, it is strongly mean reverting with respect to the total global net worth and GDP. As long as you are looking at an index that is sufficiently comprehensive - and not just some selected fraction of corporate capital (like an individual stock, the Dow 30 or whatever), you have something comparable.

Depending on the commodity itself, many actually are only apparently unchanging. Most of the softs (agricultural and food items) for example actually have changed over the decades. The ear of corn or beef from the '70s is not anywhere near the same as today's, both from an actual quality and productivity view... but gold and silver and oil are. I submit that stocks are more comparable to softs than gold & silver, etc. and that true apples to apples comparisons are dicey and subject to conclusions that are misleading (at best) in the big picture.

Don't get me wrong too - gold and stocks is a workable comparison for sure and much can be learned and derived from slicing & dicing them (all hail the Ronco Veg-o-matic! ;)), but they're not even 80% directly comparable due to their underlying differences and probably a lot less.

"It ain’t so much the things we don’t know that get us in trouble. It’s the things we know that ain’t so."
-- normally attributed to Will Rogers



I’m not knocking gold, here … not hardly! I’m simply distinguishing between savings and investment - i.e. things that act as stores of value versus things that produce real returns. And whether a stock pays a dividend or not, it nevertheless still derives its value from the prospect that it may someday pay one. If a stock never pays anything to its shareholders, it is fundamentally worthless and the market will eventually reflect that. Eventually a dividend must be paid, whether its a regular quarterly or whether it gets bought out (by another entity that also must eventually pay a dividend!), or whether it eventually liquidates and pays out its profits to shareholders at that time. In this latter case, the dividend is simply deferred, just as in the case where it eventually pays a regular quarterly.

Gems, antiques, and art are fundamentally different in that they do not represent productive capital. They are more similar to gold in that they are stores of value. Individual pieces may appreciate or depreciate, but in the aggregate they do not produce a real return. If they appear to collectively have "done well", that is because you are comparing them to currency units that are "doing unwell".

Again, this is not to say there haven’t been or won’t be very significant periods when stores of value handily outperform things that fundamentally produce a return, because the latter can get waaaay overvalued and underperform for years at a time. (Thanks largely to efforts to artificially expand credit.) Of course, it can get undervalued, too and then correspondingly outperform. But they are generally very comparable in terms of price … it’s the dividend - the economic profit resulting from the productive deployment of capital - that represents the difference between a store of value and something capable of producing real returns.

No question from here too on dividends, although the general area is much more your forte than mine... and I've learned more than a little from you about them too.

Probably yet another nit (YAN in Mogambo-ese ;)), but when gems or art outperform and you say it's due to currency units that are "doing unwell", that should also be applied to stocks when they do well. Some of stock gains is certainly productivity and wise use of productive capital, but when even just CPI adjusted values on long term indexes like the Dow only about triple since 1900 and have less than doubled since the mid '60s (only up by 10-20% when using shadowstats CPI lies correction factors during the same period), we have to be exceedingly careful to use as valid a comparison as possible... and use stuff like the FDI to help level the playing field too. :)

Finster
03-06-07, 05:18 PM
True enough and I sure do have him beat on variety and depth, but the site purposes are very different and his charts also have much more of a short term and TA focus.

Sinclair is no dum-dum, but he is vastly over-rated. He’s just another competent analyst that happens to have developed a cult following. Sure he made a lot of money in the seventies, but as with success in many fields, a lot of is has to do with being in the right place at the right time. For my money, his scope is too narrow. Whether and how much to invest in the field he follows is far more important than the specifics of which securities and minute timing details. Also in part due to his oracle-like image, he has tendency to get away with ambiguity that others cannot. As with the infamous Greenspeak, if something can be interpreted in more than one way, in hindsight - after the fact - people will tend to credit him with the interpretation most consistent with what actually transpired. I’m no Sinclair follower, so I might be being unduly hard on him. But the reason I don’t follow him is that I found nothing in my first couple exposures that was useful.

Your material, in contrast, has proved useful on numerous occasions. The USD is a security which none of us can escape dealing with and its value is relevant to every investor on the planet. The Fed, in turn, is the most important player in that equation, and you, in turn, help us understand what it is doing. Maybe I am somewhat biased due to the complementary nature of our work (like yin and yang), but to me it’s like the difference between a guy with a seismograph and laser core sampler and another one with a divining rod and silver cross.


Depending on the commodity itself, many actually are only apparently unchanging. Most of the softs (agricultural and food items) for example actually have changed over the decades. The ear of corn or beef from the '70s is not anywhere near the same as today's, both from an actual quality and productivity view...

Totally on board with you on the changeable nature of many commodities. This is not your father’s corn and beef we’re talking about. But I’d assumed - perhaps wrongly - that if you had futures contract that called for delivery of, say, the original (non-GMO) corn and someone actually delivered the frankenstuff, they’d be in default. The next contract might allow for delivery of the latter, but then that wouldn’t be treated in the index as the identical thing.

Or am I all wet here?


… but gold and silver and oil are. I submit that stocks are more comparable to softs than gold & silver, etc. and that true apples to apples comparisons are dicey and subject to conclusions that are misleading (at best) in the big picture.

Perhaps so, but that’s exactly what makes gold useful for comparisons. This time In 1972, the S&P traded around 105. Now it trades around 1395. But in 1972 we were using a far different dollar to measure it with than we are here in 2007! How can you conclude the S&P is actually worth 13.3 times what it was 35 years ago?

Answer: You can’t!

A far, better way to approach the question is to throw out those changeable (i.e. shrinking) dollars and use something that is the same now as it was then. Enter the venerable ounce of gold. At today's ~ 650 versus 1972 ~ 47.5, it also is trading about 13.3 times what it did 35 years ago.

So it turns out that when we do so, the S&P is the same price today as it was 35 years ago.

Anyone besides me tempted to conclude that the bonar is just worth around 1/13.3 times what it was then?


Probably yet another nit (YAN in Mogambo-ese ;)), but when gems or art outperform and you say it's due to currency units that are "doing unwell", that should also be applied to stocks when they do well.

Exactly. But we can factor out the common denominator - the currency unit - and ask how much of either the gems or art or whatever traded at the same prices as the same amount of stock. When we do so, we find that commodities do actually depreciate just a little compared to capital over long periods (multiple cycles) of time. It must be so, because it takes less labor to produce them as technology advances. Moreover, capital pays dividends, which allows us, by looking at price only - to make a more direct comparison. If we are to compare productive business capital with commodities on a total return basis, we are better off comparing stock returns to commodity futures returns - the latter effectively pay a dividend as well, providing a real return to the futures buyer derived from the economic service he provides. Indeed, over these very long periods of time, total returns from stocks and from commodity futures have been comparable. This was shown in the now-famous study done by researchers Gary Gorton and K. Geert Rouwenhorst at the National Bureau of Economic Reasearch (NBER), Facts and Fantasies about Commodity Futures (http://fic.wharton.upenn.edu/fic/papers/06/0607.pdf).

bart
03-06-07, 08:41 PM
Sinclair is no dum-dum, but he is vastly over-rated. Heís just another competent analyst that happens to have developed a cult following. Sure he made a lot of money in the seventies, but as with success in many fields, a lot of is has to do with being in the right place at the right time. For my money, his scope is too narrow. Whether and how much to invest in the field he follows is far more important than the specifics of which securities and minute timing details. Also in part due to his oracle-like image, he has tendency to get away with ambiguity that others cannot. As with the infamous Greenspeak, if something can be interpreted in more than one way, in hindsight - after the fact - people will tend to credit him with the interpretation most consistent with what actually transpired. Iím no Sinclair follower, so I might be being unduly hard on him. But the reason I donít follow him is that I found nothing in my first couple exposures that was useful.

Your material, in contrast, has proved useful on numerous occasions. The USD is a security which none of us can escape dealing with and its value is relevant to every investor on the planet. The Fed, in turn, is the most important player in that equation, and you, in turn, help us understand what it is doing. Maybe I am somewhat biased due to the complementary nature of our work (like yin and yang), but to me itís like the difference between a guy with a seismograph and laser core sampler and another one with a divining rod and silver cross.

I think that by virtue of your longer range investing horizon and that you seldom do trades lasting days or a few weeks, it's not surprising you feel that way about Sinclair. He's one of my regular daily reads, partly due to his background, partly due to his track history of trading success and partly for his charts and overall views. I agree that he is narrow too, but it's both his area of expertise and I wouldn't expect him to not talk some from "his book" too.

I also greatly respect his overall ethical approach and the occasional little bits of trading wisdom and of course the "behind the curtains" zingers and tips. Some of that ambiguity is intentional too - many floor and big traders read his stuff too and can "set up" to counter any recommendations he makes.

But you're right too - my charts and approach are both much broader than just gold, silver and mining stocks and also a bit more "everyman"... and I can hear the shock too, considering some of the "out there" stuff I track like TIOs.






Totally on board with you on the changeable nature of many commodities. This is not your fatherís corn and beef weíre talking about. But Iíd assumed - perhaps wrongly - that if you had futures contract that called for delivery of, say, the original (non-GMO) corn and someone actually delivered the frankenstuff, theyíd be in default. The next contract might allow for delivery of the latter, but then that wouldnít be treated in the index as the identical thing.

Or am I all wet here?

To tell the truth, I haven't looked that closely at contract specs but I doubt that it would distinguish between GMO and non GMO corn, just given the priority to pricing & costs. If a farmer is willing to deliver corn at a given price, it's likely acceptable. Hybrids have been around for decades too.






Perhaps so, but thatís exactly what makes gold useful for comparisons. This time In 1972, the S&P traded around 105. Now it trades around 1395. But in 1972 we were using a far different dollar to measure it with than we are here in 2007! How can you conclude the S&P is actually worth 13.3 times what it was 35 years ago?

Answer: You canít!

A far, better way to approach the question is to throw out those changeable (i.e. shrinking) dollars and use something that is the same now as it was then. Enter the venerable ounce of gold. At today's ~ 650 versus 1972 ~ 47.5, it also is trading about 13.3 times what it did 35 years ago.

So it turns out that when we do so, the S&P is the same price today as it was 35 years ago.

Anyone besides me tempted to conclude that the bonar is just worth around 1/13.3 times what it was then?


True - and you can also do similar comparisons with the FDI, and I with CPI plus John Williams adjustments (it's about 9x now, CPI being about 5x, and the trade weighted dollar being another 3.5x). That's the real value in my opinion - when similar conclusions can be reached with wildly varying approaches, the probabilities sure can make for better trading/investing returns.




Exactly. But we can factor out the common denominator - the currency unit - and ask how much of either the gems or art or whatever traded at the same prices as the same amount of stock. When we do so, we find that commodities do actually depreciate just a little compared to capital over long periods (multiple cycles) of time. It must be so, because it takes less labor to produce them as technology advances. Moreover, capital pays dividends, which allows us, by looking at price only - to make a more direct comparison. If we are to compare productive business capital with commodities on a total return basis, we are better off comparing stock returns to commodity futures returns - the latter effectively pay a dividend as well, providing a real return to the futures buyer derived from the economic service he provides. Indeed, over these very long periods of time, total returns from stocks and from commodity futures have been comparable. This was shown in the now-famous study done by researchers Gary Gorton and K. Geert Rouwenhorst at the National Bureau of Economic Reasearch (NBER), Facts and Fantasies about Commodity Futures (http://fic.wharton.upenn.edu/fic/papers/06/0607.pdf).

Soothsayer... and more shameless indirect FDI promotion too... ;)

Nice pickup and insertion of that study. I note it on my futures page too since it goes a long way to remove false information from the general area. The leverage and "gotcha's" in futures can be quite dangerous and I don't intend to appear to be promoting them... but huge leverage is not required and they can be a very direct play for those with the correct attitude and education and experience.