OUZILLY, France – Markets seemed to stand still yesterday.
Like autumn leaves on a tree, they wait for a stiff wind and a cold frost.
This week, the Fed is scheduled to make a weather forecast.
Bloomberg reports that only two of the Fed’s 23 “primary dealers” – banks that buy bonds directly from the government – expect a rate hike decision tomorrow when the Fed meets.
Of course, anything is possible.
But the Fed’s position is clear: It may raise rates tomorrow, or it may not.
It hardly matters. Either way, it will not – it cannot – stick with a credit-tightening cycle in the face of the inevitable selloff on Wall Street and the recession on Main Street.
The days of former Fed chief “Tall Paul” Volcker are over.
Back when Volcker took over the Fed in 1979, the economy could still survive a hard freeze. The new debt-based money had not yet done its mischief.
In 1980, Volcker’s first full year as Fed chief, U.S. national debt was below $1 trillion (now it is more than $19 trillion). If you wanted to buy a house, you had to pay 12% interest on your mortgage. And the stock market had been drifting down for the previous 14 years and trading at valuations not seen since the 1930s.
And with consumer prices rising at a nearly 14% annual rate, Volcker had to do something.
Unlike his ultimate successor Janet Yellen, he did not announce a wimpy program of rate hikes – one-quarter of a percentage point every three months – and then not do it.
Instead, he boosted short-term interest rates from 11% to a peak of 20% in June of 1981.
A frost? Volcker brought on a blizzard.
And the politicians wanted his head for it.
A group of eminent economists demanded he be removed from office. An effigy of him was burned on the Capitol steps.
But Volcker’s program stuck. And it worked. Two years later, consumer price inflation was running at just 3% a year. Volcker could lower interest rates. The economy boomed.
Today, no one is concerned about inflation. U.S. stocks are near an all-time high. And mortgage rates are at all-time lows. The prime rate – the benchmark rate for mortgage lending – is at 3.5%, a long way from its high of 21.5% in 1981.
And neither investors, households, banks, the feds, nor corporate America could survive even a mild monetary winter.
Of course, the weather changes without anyone’s say-so. And so, ultimately, do markets.
In 1980, for example, share prices were so cheap that you could buy all the stocks on the Dow with one ounce of gold. Today, stock prices are so high, that you would need 14 ounces of gold to buy all the Dow stocks.
We once proposed a simple trading model…
When the Dow is worth less than 5 ounces of gold, buy stocks and sell gold. When the Dow is worth more than 10 ounces of gold, sell stocks and buy gold.
Gold is real money. It is connected to real wealth. The quantity of gold increases, but only about as fast as the quantity of goods and services that it can buy.
Stocks represent real wealth, too. It makes sense, at least to us, that there should be a more-or-less predictable relationship between real money and the companies that produce real wealth.
Just eyeballing the chart below, we see stocks going up and down. But we see a pattern, too.
Had you stuck with our trading model, rigidly, over the last century, you would have had five opportunities to double your money.
You could have turned 10 ounces of gold – worth about $180 in 1917 money – into 320 ounces, worth over $400,000 in today’s dollars.
Assuming the dollar lost 95% of its buying power, that represents a real gain of about 1,000%.
What should you do now?
The chart is unambiguous: Sell stocks. Buy gold.
And root around in the closet for your mittens.
By Chris Mayer, Chief Investment Strategist, Bonner Private Portfolio
There’s one question I get from readers over and over again…
Why invest in stocks if the world is going to pot?
I’m going to cite one piece of remarkable evidence I uncovered in my own massive study of the stock market’s biggest winners.
I call these winners “100-baggers” (stocks that returned 100 to 1). And after spending three years and $138,000 investigating them, I discovered they all have certain aspects in common.
I’ll tell you about those attributes in another essay. For now, let’s agree that there is plenty to worry about. And the stock market is not cheap.
As Bill likes to point out, the S&P 500’s CAPE ratio (a stock valuation measure designed to smooth out earnings volatility) has only been this high or higher three times in the last century – right before the crashes of 1929, 2000, and 2007. That means many stocks are expensive.
But just because a stock market index like the S&P is pricey doesn’t mean there aren’t good values out there. Unless you are a buyer of the index itself, it is not relevant to the business of finding great stocks today.
Let me give you a historical example: 1966 to 1982.
This 17-year stretch was dead money for stocks – or so many people would have you believe. The Dow Jones Industrial Average basically went nowhere. And if you factor in the period’s high inflation, the performance was even worse. Thus, you might conclude you didn’t want to be in stocks.
But here’s what my research on 100-baggers found: There were 187 stocks you could’ve bought between 1966 and 1982 that would have multiplied your money 100x.
In fact, during that 17-year stretch, you’d have had at least a dozen opportunities each month to multiply your money 100x if you just held on.
In some cases, you didn’t even have to wait very long. Southwest Airlines returned more than 100x in about 10 years beginning in 1971. Leslie Wexler’s L Brands (owner of Victoria’s Secret, among other retail properties) did it in about eight years starting in 1978. In 1966, you could’ve bought H&R Block and turned a $10,000 investment into $1 million in under two decades.
So, the indexes can tell you what kind of environment you are in. But they don’t predict what will happen to individual stocks.
It’s certainly harder to find great opportunities in highly priced markets. And it’s easier to find big winners at market bottoms (but perhaps not so easy as to make yourself buy them, as fear is rife at such times). These facts should surprise no one.
However, my point is simply this: Don’t fret so much with guesses as to where the stock market might go. Keep looking for those 100-baggers.
If history is any guide, they are always out there.
Tomorrow… what 100-baggers have in common.
Editor’s Note: Yesterday, Chris kicked off a brand-new investment masterclass. For the first time ever, he’s showing viewers how to find stocks that can return 100x your money… the kind of stocks that can fund your retirement with just one win.
This powerful strategy closely matches the way Chris invests his personal money.
The masterclass is absolutely free to Diary readers, so don’t miss another minute. To sign up, click here.
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In Case You Missed It…
In the last 24 hours, nearly 6,000 of your fellow Diary readers checked out the first part of Chris Mayer’s investment masterclass… and now part 2 is available as well.
Don’t miss this special opportunity to learn Chris’s tips for identifying “the next Starbucks,” “the next Apple,” and “the next Wal-Mart” years in advance of anyone on Wall Street. Watch here now by registering for the class.