WEST PALM BEACH, FLORIDA – The stock market is manic-depressive. It swings from oversold to overvalued every generation or so.
The simplest market-timing system, therefore, is to be a contrarian.
As regular Postcards readers know, that means buying stocks when everyone else is selling… and selling stocks – and then waiting on the sidelines in gold – when everyone else is buying.
I first understood this idea at school, studying the Crash of ’29 and the Great Depression in history class. I was just getting interested in investing. I bought my first stock at age 11, and it’s been my “guiding star” ever since.
The chart below shows that contrarian idea. It tracks the P/E ratio of the U.S. stock market going back 120 years. (The P/E – or price-to-earnings – ratio measures how much investors are paying for every $1 of a company’s earnings.)
You don’t need to understand everything that’s going on in this chart.
Just notice how valuations have oscillated around the mean (horizontal black line), moving between overbought and oversold. And notice the towering peak in 1999.
It was with this perspective that I watched the tech-stock mania and the bursting of the bubble in 2000.
The internet and technology had caught the public’s imagination.
Taxi drivers were recommending stocks. Grandmothers were forming investment clubs. And the press was talking about a “new era” in which stocks would never fall again…
“This is straight out of the textbooks,” I thought at the time. “A classic mania.”
I didn’t have any money to invest at the time. I had just graduated from university.
But I did have the insight that this moment would positively, absolutely mark the beginning of a new market cycle… that gold would outperform stocks… and that valuations had begun their long walk down the mountain.
That was 20 years ago. Since then, stock market valuations have been in a bear market. And gold has outperformed stocks by about 6-to-1.
I’ve been bearish on stock market valuations the whole time. And I will continue to be bearish on them until we reach the cycle trough.
If my hypothesis is correct, the prescription is simple: own gold, sell stocks.
When we reach the cycle through, it’ll be time to sell gold and buy stocks. But that’s still years away. For now, gold is the place to be. Stocks are the place NOT to be.
When the valuations bear market began in 1999, the Dow-to-Gold ratio reached 41. It’ll be below 5 when the valuations bear market is over sometime in the next five to 10 years.
– Tom Dyson
P.S. I can’t stress this enough… If you haven’t read Bill Bonner’s urgent briefing, After Armageddon, don’t wait. Bill writes about the crisis we’re in… the feds’ role in it… and what he sees coming. Just go right here.
Like what you’re reading? Send your thoughts to [email protected].
FROM THE MAILBAG
On readers’ minds today… the economic aftermath of the COVID-19 crisis… and the Feds’ role in it…
Reader comment: I see, read, and hear a lot of different opinions about COVID-19 from all the experts, media, and opinion writers. My view is that we will land somewhere between a severe worldwide recession and an outright depression. The stock market is still expensive and is counting on a v-shaped recovery and yet another miracle by the feds. I suppose with all the money printing, etc. it’s possible, but I believe the can has run out of road.
Reader comment: I read Bill Bonner’s After Armageddon report, thanks for that. I get it, I am heavily invested in gold and property. You’d think the feds would have an army of people aware of the consequences of everything Bill wrote about in the report.
I thought they were out of ammo way back in the dot-com crash days. Also thought the game was over during the housing crisis. It always seems like they have one more trick up their sleeve.
Meanwhile, another reader shines the spotlight on Kate…
Reader comment: I was reading the feedback from readers and it made me think of something. Many years ago, my buddy said, “Behind every good man, there’s a better woman.” Not to put you down in any way. I highly respect you for the person you are and especially for the family man you are. I just imagine what a wonderful person your wife is. Keep on keeping on. Stay safe.
Tom’s note: Thanks to everyone who wrote in! Kate and I read every message. As always, please keep writing us at [email protected].