Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Peter Schiff, Why It's Time To Dump Most US Stocks

Stock-Markets / Stocks Bear Market Sep 14, 2010 - 08:46 AM GMT

By: Peter_Schiff

Stock-Markets

Best Financial Markets Analysis ArticleStocks are widely believed to provide inflation protection since factories, equipment and inventories rise in value as prices generally increase. Historically, stocks have in fact tended to rise with inflation rates, but too much inflation has caused volatility and raised a question as to whether stocks really are a reliable inflation hedge.


Stocks in certain sectors have similarly earned a reputation as recession protection. Stocks designated as “defensive” are those in industries that make stuff we've simply got to have, such as food and drugs, or items in the category of “sin,” referring to things we may not need but will kill to get – traditionally tobacco and alcohol, and perhaps other things to newer generations.

Such rules of thumb are based on common sense and will always be valid, although whether they result in gains, simply lower losses, or neither, depends on the severity of the recession, the urgency of the demand and a lot of other factors that change as a downturn proceeds.

Of course, we are not talking here about mild inflation or a minor recession except as early or late stages of the main event. The situation we are facing is of a magnitude comparable to the Great Depression of the 1930s and the next-worst bear market, the stagflation period of the 1970s. There are parallels to both cases, but also ways in which the current crisis differs significantly.

THE 1930s

There is a very real possibility that the current recession will deepen into a repeat of the Great Depression of the 1930s, only with consumer prices rising, not falling.

In the 1930s, the problem was not inflation, but deflation. Cash grew in value, as did bonds held to maturity. Stocks went both down and up, and ended the decade down. Stocks that bucked the downtrends were generally the defensive and countercyclical issues. But hedging inflation was not a factor. Interestingly, price inflation was minimal during the bull market from 1921 to 1929.

The collapse that ensued bottomed out in 1930, with the Dow Jones Industrial Average down 89% from its 1929 peak. But it gave way to a bull market that lasted until 1937, when prices fell again until a few months after Pearl Harbor.

In 1930, every stock in the Dow declined except three. Those that gained slightly were Liggett & Myers [Tobacco Co.], General Foods [Corp.] and Borden Co. – one tobacco company and two food producers. In 1931, every Dow stock was down, and the same was true in 1937. In 1933, 1935, 1936 and 1938, 80% to 90% of the Dow stocks showed gains. Of course, the fortunes lost in the stock market of the 1930s were lost because so much stock was bought on margin, meaning that when prices tumbled, margin calls meant putting up more money. Holding for prices to come back was not an option for many people, and those who did hold waited until the 1950s for the Dow to recover.

But the 1930s proved that food and tobacco, traditional defensive stocks, bucked the trend during the worst stock market crash in history. Gold-mining shares, of course, were in a stratosphere of their own.

It also proved that markets don't like extreme deflation any more than they like extreme inflation. As I stated, though, deflation (at least as it leads to falling consumer prices) – which is getting increasing publicity as a present threat – is one “problem” we won't be facing this time. Sure, as the credit bubble deflates, asset prices will fall relative to goods prices, but the Federal Reserve stands ready to replenish the money lost with freshly printed bills. However, this new money will not reinflate the busted asset bubbles but simply drive goods prices even higher.

Of course, we will see, and are already seeing, instances where prices are declining. But inflation is now so pervasive that despite any trade-offs, the net effect will have to be rising prices.

THE 1970s

Very much like present times, the 1970s combined stagnation and inflation, notably in skyrocketing gas prices, giving rise to the term “stagflation.” What was different about the 1970s, though, is that government and consumer debt were relatively moderate, with both government and mortgage debt locked in over long time periods.

This gave the Fed the option of countering inflation with aggressive interest rate hikes when it reached double digits. Today, it doesn't have the option of raising rates significantly without triggering consumer debt defaults and mortgage foreclosures that would bring the economy to its knees.

Also, back then, any new government borrowing was financed internally. Interest paid by the government was offset by interest earned by American savers. The net effect was not a net drain on national income, though there were certainly social effects of a domestic transfer of purchasing power from the less to the more affluent. Now, however, approximately half of our national debt in public hands is held abroad, and an even larger share of new issues is sold abroad. As a result, significantly higher interest rates would result in meaningful drains on our national income. Furthermore, as the outstanding debt is now very short-term, higher rates would affect the total of what the government owed, not merely new borrowing. In other words, American taxpayers have been committed to the mother of all adjustable-rate mortgages!

While the 1960s, called then the Soaring '60s, will be remembered for its go-go mutual funds, its conglomerates and concept stocks – like Four Seasons Nursing Centers of America [Inc.] (bankrupt by 1970) and Performance Systems [Inc.], a franchiser of fried-chicken restaurants, all of which came to grief by decade's end – the 1970s became famous for the Nifty 50. These were a group of high-capitalization growth companies that big mutual funds and institutional investors, by then a dominant force in the market, could buy and never worry about again. Also called “one-decision” stocks and “all-weather” stocks, these big household names by 1971 were selling at 100 times earnings (when they had earnings), despite a general market decline led by everything else.

When the bear market of 1973–74 settled in, 27 of the Nifty 50 dropped an average of 84% from their 1971–72 highs. The Dow, which closed 1972 at 1,929.02, closed 1973 at 850.86 and 1974 at 616.24 before beginning its recovery the following year. In 1973, only six of the Dow stocks rose significantly, and in 1974, only five – and with one exception, they were different stocks.

But here's what's interesting: All six of the 1973 gainers were basic-raw-materials companies, consistent with a pattern whereby commodities and financial markets go in opposite directions.

Not only that, but their returns were strong, led by Allied Chemical [Corp.]'s total return of 73.4%, Alcoa [Inc.]'s 40.6% and Bethlehem Steel [Corp.]'s 18%.

In 1974, stagflation had begun, with unemployment over 7% and inflation over 10%. The Arab oil embargo was in full swing, causing fuel shortages and plant closings. Two companies benefiting from the oil crisis led the Dow in 1974: Johns Manville Corp., which sold fuel-saving insulation materials, and United Aircraft [Corp.], whose fuel-efficient jet engines were in demand from the aircraft industry.

In 1975, the market picked up again, this time led by cyclical stocks. Profiting from what was termed “a new era of pricing power,” the basic industries such as steel, chemicals, aluminum, paper and copper enjoyed a short-lived revival.

By the end of the 1970s, the cyclicals were back in a slump, and leaders were the energy issues and related technology stocks, small biotech issues and defense/aerospace stocks, reacting to the Iran hostage crisis and anticipating a Republican administration. On another tier, small-capitalization stocks did prove their worth as an inflation hedge, outperforming inflation and registering a positive return over the decade. In a global economy where the action is abroad, however, it is hard to imagine that small-caps, which would generally have minimal, if any, international exposure, would outperform in today's market.

With that exception, the 1970s proved that in extreme inflation, stocks in general do not hold up as well as an inflation hedge. Gold, of course, is in its own world; gold-mining stocks were off the charts. The 1970s experience proved something else of great and relevant importance: The inverse market relationship of commodities (including basic materials, agriculture, energy and metals) to stocks in general gains validity the more serious economic problems become. It's financial paper versus tangible stuff.

So what to do with your U.S. stock investments now? My basic recommendation is to restructure your domestic stock portfolio with conservative, dividend-paying foreign stocks that will produce currency appreciation and keep you out of the collapsing dollar and immune from any desperate measures or political gambits that the U.S. government might resort to as the economic predicament worsens.

Some domestic stocks are worth holding on to, such as mining companies and producers of basic materials, energy and agricultural commodities that trade worldwide in dollars and will benefit from a commodities boom. I would hold the major oil producers, but be prepared for an excess-profits tax. A better bet would probably be oil service companies, which benefit more directly from a strong oil market and are unlikely to be hit with excess-profits taxes. Makers of farm equipment or fertilizer companies are proven as a way of participating in the agricultural boom. Exporters and multinationals with good foreign exposure should also do well.

The most important part of any U.S. allocation would be to avoid like the plague any stocks largely dependent on American consumers, especially when it comes to discretionary purchases or repaying their debts. That includes financials, retailers, home builders and consumer discretionary. I would also avoid any high-multiple stocks, which excludes most technology or biotechnology companies.

Another thought: Any U.S. company not adversely affected by inflation and producing a good global earnings stream is a possible target for acquisition by a sovereign-wealth fund – or private foreign buyer. That's bad news for the American economy but potentially good news for some American shareholders. Witness Anheuser-Busch Cos. Inc.

Click here for a description of Peter Schiff's best-selling, just-released book, How an Economy Grows and Why It Crashes.

Regards,
Peter Schiff

Euro Pacific Capital
http://www.europac.net/

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

Peter Schiff Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules