What We Know

By Bob Wood

As the old Will Rogers saying goes, ‘’It’s not what we don’t know that hurts. It’s what we know that ain’t so.’’

Bob Wood

In today’s world, such simple wisdom has never held such weight.

As investors, there is an over-abundance of information for us to manage our way through, especially for those trying to work through their information in the shortest time by getting it on the TV. for free, much seems to be not so.

We’re hearing again today that stocks are valued, much as we did at the peaks in 2000 and 2007. When those peaks gave way to brutal bear markets, too many looked back for signs they should have seen that foretold the crashes to come, or should have been alerted to by the financial media.

The signs were there and some who warned of them were not taken seriously enough. It’s easy to see why. We’d prefer to believe the hopeful view. We’d like to think our rising statement balances are real and will rise further. We look for confirmation of our bias.

But those biases can be truly harmful. My own bias towards hard assets like precious metals has looked very wrong this past couple of years. Given the vast performance difference between the metals and stocks since the start of this new century, and the underlying fundamentals that typically support gold and silver prices, I’m very prepared to wait for the resumption of that wonderfully profitable secular bull market.

Given that precious metals mining shares are strongly outperforming the broader stock market indices like the Dow, S&P 500 and the Nasdaq 100 so far in 2014, that bull market may indeed be back in force.

What’s amazing to me is to hear the financial media experts continually denigrate what has worked so wonderfully and hail the wonders of what hasn’t. Even considering the brutal corrections in gold and silver over this past two years, from the start of 2000, gold has risen over 500% while silver has gained 400%.

Over that time, the S&P 500 has risen about 32%. During that spell, how often do you recall being advised by anyone to dump stocks and load up on gold and silver? Do you hear it today? No, it’s still ‘’buy stocks and sell gold’’. Truly amazing to me is how many investors believe it is true and invest accordingly.

Now true, stocks have rallied historically this past five years while the metals have languished, compelling many so-called experts to declare ever rising stocks to continue higher, and a certain end to the Bull Run in the metals.

But again, are there any basic facts? As John Hussman of The Hussman Funds pointed out again recently, stocks are more over-valued today than they were at the peaks of 2000 and 2007. Weren’t we supposed to buy low and sell high?

As for the metals, we have witnessed with our own lying eyes the printing of trillions of dollars at no cost by the Federal Reserve in an effort to prop up the markets, and spending. If the economy is on such solid footing, why is the Fed keeping interest rates at all-time lows for six years with promises of easy money for ‘’as long as needed’’?

The U.S. is buried under debts and unfunded liabilities so deep that no one at the Fed or in government makes any pretenses that any of it is going to be paid back but with more printed money. We borrow more each month just to pay the interest on what’s owed. Does that sound like a sound fundamental support for the economy or the markets going forward?

I’ll quote very old timer Richard Russell on this; ‘’The US is now $17 trillion in debt, which is being carried at near zero interest rates. Looking to the future, the US has two choices: one is to renege on its debts, which is unthinkable, and the other is inflation or hyperinflation. So far, the US has chosen the path of inflation. If continued, this will lead to the purchasing power of the dollar declining to close to zero and the dollar becoming next to worthless since it won’t represent anything but the full faith and credit of a bankrupt nation’’.

Do you have an appreciation for long term trends? How about the longest ongoing trend in today’s markets, that of the 100 year fall in the purchasing power of the dollar? Does anything the Fed or the government is doing now signal a change there?

So yes, over the past five years stocks have rallied smartly while the metals have languished. Should that affect how I invest? To me, certainly not. There was a wonderful bull market in stocks from 1982 to 2000 that was interrupted by the Crash of ’87 and the long cyclical correction from the peak immediately preceding that event until the resumption of the secular trend in 1992.

For anyone bold enough to ride those out, life-altering gains were made. So the metals rally has paused with silver getting beaten well below its prior peak in 2011. But so what? Have the fundamentals for either one gotten weaker, or stronger?

Should the old highs in both be reclaimed, will I care about having endured the corrections in both? No, I certainly won’t.

What puzzles me is how so many are led the other way, into believing what ‘’ain’t so’’. How many still chase stocks at these levels at the behest of the Wall Street promoters who in one documented case referred to them as ‘’Muppets’’? How many forget being told to ‘’buy the dips’’ in 2000 and 2007? Remember all the ‘’new economy’’ and ‘’Goldilocks’’ talk at both of those peaks?

How many succumb to the pressure of seeing someone else doing better and feel left behind, compelling them to do something foolish?

I recently took a small short position in shares of IWM, an ETF holding shares in the Russell 2000 small caps. When I sold those shares, that index was priced at 85 times earnings. Amazing to me is that there was a ready buyer at that level!

Who does that? Who buys anything at 85 times earnings? Something or someone made them believe that was a smart thing to do. But tune into your favorite financial channel and you’ll hear that buying those shares makes perfect sense. And why? Because they’re going up! Yes, and shares of Lehman Brothers and Bear Stearns were going up too, before they went down.

I couldn’t think of a worse bit of advice to follow. Yes, recent history shows me wrong on this. But it’s widely acknowledged today that the only thing propping up the stock market is massive intervention by the Fed. And we know that ‘’tapering’’ is ending soon, meaning the overt Fed manipulations will end.

Then what? Is the economy really strong enough to support stocks with the S&P 500 selling at historically high levels?

Most confusing to me is how successfully the financial media has gotten investors to focus on the wrong things. Today’s investor has become detrimentally short term focused. We’ve all accepted to old adage that ‘’the trend is your friend’’.

While true, let’s take that a step further. The long term, secular trend is your best friend. Short term, cyclical trends are your fair weather friends only. The stock market is enjoying a cyclical rally only possible with Fed involvement.

The metals are in a cyclical correction within the greatest secular bull market of this new century. Yes, they’ve corrected meaningfully, but so what? Until the major trend is broken, until the underlying fundamentals for owning them changes, it’s still the place to be.

To be clear, I’m not as dogmatic or stubborn as to have stayed fully invested during the correction in the metals. Not taking The Big Loss is my Rule #1. At times, you must accept that you could be wrong, and stepping back is essential. But for the record, here in mid-August, I am loaded up on mining shares and leveraged ETF’s in the metals space. You could say I’m fully involved here.
Am I suggesting you follow my lead here? Only at your own risk. Make your own decisions and live with them. If you do and lose money, tell your psychologist. Consider my advice as but one view among many.

Successful investing requires an eye for value and above all, patience. That so many are ignoring both essential rules is worrying at best. But worst of all is how so many come to believe that what matters little matters a lot, and what matters a lot matters so little.

More on that next time as we broaden our view to the world around us and the media that covers it.

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