Budget talks: This is getting nasty

Lots of bad economic news of late and there's a big one looming Friday -- July unemployment.

 

It makes sense if that is what you believe. I won't argue with you, because I don't know.

Markets are a matter of supply and demand. Maybe demand is in an irrational frenzy right now.

Or maybe the major world's currencies, starting with the U.S. dollar in which gold trades are denominated, have been debased by irresponsible monetary policy, and gold, which trades on its scarity, is acting as a de facto currency showing the true value of a dollar.

Gold as an asset class, is still way very underrepresented in investment portfolios. Which would suggest it isn't a bubble, in terms of a lot of money flocking in. At the same time, it's largely seen as a retail investment. Institutional investors are taking part, but they are not driving the run in gold anymore. And that might suggest it is near bubble territory.

Bubbles are only a problem for me, if you put money into an asset and don't pay attention. All I really care about is that the price of something is going up or going down. And in that environment, you can make money.

But based on the fundamentals, it absolutely makes sense to me that the price of precious metals has gone through the roof. Our Federal Reserve is dangerous and being run people who are debasing our currency for politicized reasons. As long as that happens, inflation in general is a consequence, and a run up in precious metals, which traditionally are the purest hedge against that kind of monetary policy, should be inevitable. The price of gold has appreciated has appreciated for 10 or 11 years in a row. During that time, the U.S. Federal Reserve has been flooding our economy with more and more fiat paper money--before 2008, it gave us "false" economic growth. Since 2008, it has been justified as the way to "stimulate" the economy. It's just no coincidence that when they are debasing our currency, gold has seen steadily rising prices.

If it gets ahead of itself, it will correct. It did when it had a very quick run up to $1570 in May, and got below $1500. And some people thought that was the pop in the bubble. But after catching its breath, it traded sideways and then started rising again. The fundamental things driving that market are not changing. It's a safe asset class when countries can't handle their debt loads, and everyone naturally knows one way governments deal with debt is by trying to create inflation to decrease the burden of that debt. And inflation and devalued currencies = higher and higher precious metals prices.

 

That is what financial planners sell people on. And if that works for you, I won't argue with it for you.

But I would never stick money somewhere and not pay attention to it. I also learned about 10 to 15 years ago not to touch equities, and haven't since. They don't trade in ways I can predict. You have a company with steady earnings, a low price to earnings ratio, and if the "hot" area is somewhere else, that stock won't get rewarded. There are plenty of unsexy looking companies right now trading really cheaply relative to their earnings and the stock market just ignores them. That makes no sense.

At the same time, you'll have some hot stock that is really overvalued in comparison, and because retail money is piling into it, the price goes up, despite the fact that on a P/E basis, the thing is overvalued and expensive relative to all these perfectly good companies out there that are cheaper, and should represent better value.

It's why I haven't touched equities in years and won't. And it's why I decided not to be an investor (what you described) and instead a trader. An investor believes in the value of something and its ability to keep performing and reward investors by its performance, and buys it with the intention of owning it. A trader is just looking for ANYTHING he or she can buy or sell at a price and then sell or buy back for a profit. I find that much easier.

Right now, the economy is sputtering. Earnings have looked decent enough considering that, but in an an economy that looks like it won't even be growing at 2 percent, how can anyone have any faith in earnings growth moving forward? And earnings are SUPPOSED to drive stock prices (despite what I said above).

I can think of only two or three stocks I'd even consider investing in. At the top of the list is Apple. It's based on my trading philosophy, which is price momentum related. When prices are rising, they tend to keep going up. When they are dropping, they tend to continue to drop. And the price of Apple just seems to keep going up. Also, from what I know about the company, it's sitting on $76 billion of cash (which is more than the U.S. treasury has right now with the debt ceiling still not raised). And it's P/E ratio is only around 15 to 16 times earnings, which is relatively low for that amount of growth. None of that matters, really, because what is driving Apple's price is that it is the hot stock and it is attracting hot money.

Which is why all of that said? I won't touch Apple, or any other stock. At $400 a share, or whatever it is, I see more of a bubble there than I do in any commodity. The stock is cheap enough, and the P/E ration is actually pretty reasonable. But at any moment, I know people who are not investing on fundamentals might flee and then I am going to be left holding the bag. It's not enough about fundamentals anymore with equities, which is why I can't be an "investor." More hot money has been flowing into Apple than has been flowing into any commodity I talk about. And even if it is the greatest investment on paper, as I said, stocks just don't trade predictably. I want no part of that.