My friend Iggy called me this morning and asked what my friend Craig asked me last night: Do basic market fundamentals still apply, or are they historically irrelevant?
The speculation surrounding this is just silly. The recipe for investment success hasn’t changed since it began and neither have market fundamentals. In order to profit, you must sell something for a greater amount than you paid for it. The stock market is a function of the underlying economy and gold is a function of the condition of currency.
Now, I’ll be the first person to admit that it’s easy to get lost in “the market” on a day-in and day-out basis. But when you back up and expand your perspective, everything makes perfect sense.
For instance, Real GDP increased just 5% over the past five years (2006-2011). That’s 1% per year, which isn’t very good. In fact, it’s a no growth condition.
Cheap and Easy Money policy has plagued the U.S. dollar long before the “financial crisis” and continues to persist. Even though experts say inflation is not a problem, Nominal GDP increased 18% during the five year span. That’s 13% inflation (the difference between Nominal and Real GDP.)
Inflation weakens the dollar, and since gold is a currency hedge, basic market dynamics would expect it to increase with a falling dollar. And since all major world currencies are under stiff pressure and in crisis condition, market fundamentals would dictate a steep rise in gold.
The Dow Jones Industrial Average strives to be a market indicator – in other words, it tries to closely track average market activity (a.k.a. Nominal GDP.) The Dow posted an 8% gain in the five year period 2006-2011. The 15-51 Indicator, whose mission is to indicate strength, tries to achieve above-average performance returns. It should consistently outperform the DJIA.
The below picture tells the story succinctly.
The above picture is exactly what market fundamentals suggest – and would expect. Also notice that the DJIA is once again indicating recession. That, too, is no surprise.
Don’t believe in the fluff or buy into the speculative hype. Market fundamentals are operating as normal and continue to tell the proper story.
Stay tuned…