‘Global warming: Siberia struck by a wave of exceptional cold; temperatures of -50C.’
Headline news in France (20 Minutes)
It gets hot. Then, it gets cold. Markets heat up too. Then, they cool off. On Monday, it was the Martin Luther King holiday in the US. Stocks didn’t trade. We’ll have to wait until later today (Tuesday, US time) to take the market’s temperature.
But we see no purpose in guessing about whether stocks will go up today or down tomorrow. The real money is not made by checking stock prices every day. It’s made by getting on the right side of a major trend — and staying there for years.
For the 39 years — 1982–2021 — that meant buying good stocks…and just holding on. As long as interest rates were falling, the Primary Trend was towards higher and higher asset prices.
We were reluctant to participate in the last part of that boom. Our model called for us to bail out of stocks in the late ‘90s. Then, we bought gold.
High after high
The plan, then and now, was to stick with gold until the Dow fell below five times the price of an ounce of gold. That hasn’t happened. Instead, after the dotcoms led the market down in 2000, the Fed came to the rescue, lowered interest rates, and the correction was aborted. So, we never switched out of gold, never got into the techs…never seriously bought crypto (our sons experimented with it on our behalf)…
Instead, we sat it out. Was this a good idea? Depends on when you wanted to ‘cash out’. We had no intention of getting out, so we didn’t mind waiting. And it was a long, humbling wait! After hitting a peak in 2011, gold went nowhere for the next nine years — just when the stock market was hitting new high after new high. There’s nothing more galling than watching your friends and confederates getting rich…while you miss one of the greatest bull markets of all time.
Then, in August 2020, interest rates finally bottomed out. It was the beginning of something new. Bonds turned down (yields went up), signalling the end of the bull market era. Then, it took more than a year for the stock market to get the news. But it finally did, in January 2022. Since then…well…you know, investment assets and speculations fell. Gold went up. From a low near US$1,000 in 2015, gold finally seems to be catching a bid, trading this morning at more than US$1,900.
Curiouser and curiouser
The curious thing about all this is that despite the embarrassment of missing the Great Bubble Market, 2009–20…we did just fine. The Dow rose from 11,500 points at the end of 1999 to 34,300 today — a gain of nearly 200%. Gold rose from US$280 an ounce to US$1,900 today — a gain of 570%.
But let’s take the whole bull market, from 1982 to the peak; it raised more than 36,000. Gold began the period at US$350 and went down for the next 18 years. But by today, it is up 5.4 times. The Dow began the period below 1,000 and rose 36 times. You would be way ahead in stocks.
That’s just the point. In 1982, you could buy the whole Dow for less than three ounces of gold — well below our 5-oz limit. It was not the time to buy gold; it was the time to buy stocks.
As we saw yesterday, everything tends towards its opposite. At least in markets. From undervalued to overvalued…from cheap to expensive…from red to green and ask to bid. That tendency can be described as the Primary Trend.
From want to need
Today, most investors expect a repeat of the last 20…30…40 years. Not likely. Why? Enantiodromia. Markets are always seeking to become the opposite of what they are. A bull market keeps getting richer and richer until it has to become a bear market. In a bear market, prices drop until they are such bargains shrewd investors begin buying; soon, it is a bull market once again.
And here we are…the bond market has already signalled and confirmed a major change. The benchmark 10-year Treasury yield has gone from less than 6/10th of 1%…to more than 3.6% now.
What is really amazing is that it hasn’t corrected even further. But the Primary Trend takes time to reveal itself. Old habits persist. Old impressions linger. And want becomes need. The investor who bought Tesla on margin at US$400 must have even higher prices…or he could go broke. And the US Government, back in 1982, when it had less than US$1.2 trillion in debt, barely wanted to borrow at all. In 2022, its debt went to more than US$31 trillion; now it must borrow US$2 trillion this year alone…and it must have low rates to do it.
But if we’re right, interest rates — which had been at record low rates — are now headed to record high rates. Oh yes…and the world’s safest, most liquid asset — the US Treasury bond — is on its way to becoming one of the worst investments you can make.
For The Daily Reckoning Australia