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, US 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. US 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.
Investors, households, banks, the feds, or corporate America could not 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 five 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.
Source: Bonner and Partners
[Click to enlarge]
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, it 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.
For Markets and Money, Australia
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