Financial Fitness & Life Planning

The stock market advanced resoundingly in October based upon both generally strong corporate earnings and the perceived solution to the European soverign debt and banking crisis.  I do not share the market's enthusiasm with either of these situations.  Corporate profits, along with other recent economic statistics, such as gross domestic product, are lagging indicators  I expect that next year's earnings for most companies will be down versus this year as the stimulus-fueled expansion of the last few years comes to an end.  In particular, I expect the debt crisis to escalate further.  The European agreement is a farce.  The plan is essentially to issue new debt to pay off old debt.  There is not remotely enough money to pay for the problem.  Simply put, there is no solution.  Accordingly, invfestors might be advised to be wary of mainstream equities.
 
While Europe is to be commended for resisting money creation to plug the hole, it is obvious that ultimately that will be their end game.  Here in the United States, the Fed is much less hesitant to apply monetary stimulus.  Inflation is already running now close to 4% according to official statistics and in reality is much higher.  The central bank, however, has changed its tune from “inflation is unacceptably low” to “the more serious risk is unemployment so we can relax our inflation targets.”  Regardless of when the third round of quantitative easing is officially launched, and in reality it might already be going on via Operation Twist, the Fed is on a path that shows no signs of abatement.  They have already painted themselves into this corner and there is no way out, unless there were to be a complete abandonment of the current philosophy.  I certainly do not anticipate that such an event will occur.  Therefore I expect that the debasement of the dollar, as well as other national currencies, will continue indefinitely.
 
Given the aforementioned state of affairs, the nominal price of monetary commodities – namely gold and silver – must rise.  As such, investors need to consider having a significant position there.  I continue to focus upon this area so heavily because of its importance.  The integrity of the money that we have earned and saved completely overwhelms the significance of other financial matters.  Eventually I believe we will encounter inflation in excess of 20% and perhaps by then the crisis would be severe enough that the gold standard would be reinstituted, hopefully thereby escaping hyperinflation and currency collapse.
 
Within the precious metals space, silver as well as mining stocks have become increasingly disconnected to the gold price and therefore cheap on a relative basis.  If one is inclined to believe as I do that gold will climb higher, it is logical to expect even greater percentage gains for silver and mining stocks.
 
Michael can be contacted at mberlin@mhbpartners.com and at (631) 629-4928.
 
The information included in this article is not intended to be used as a basis for making investment decisions nor should it be constructed as a recommendation to buy or sell any specific security. Consult your investment professional for additional information and guidance.