They say you can just buy just about anything, even love. But the truth is you can only rent a bull market and the lease on this one is about to run out.
After devastating losses that pushed the Dow Jones Industrial Average to 6,440 in early 2009, the Dow broke above 10,000 last month for the first time in 53 weeks. All thanks to President Obama and his bagmen at the Federal Reserve.
You see, President Obama and Federal Reserve Chairman Ben Bernanke have already injected more than $1 trillion in new money.
Part of this has been in the form of bank bailouts. More has been given to Detroit automakers. And finally, Washington has inserted a whopping $850 billion directly into the U.S. banking system. It is this final act that will wreak the greatest havoc on the U.S. stock and bond markets.
When the credit crisis hit last year the Fed began “running the printing presses.” We are talking about the creation of hundreds of billions of dollars, so presses aren’t really running. Instead, the Fed has created all this money with the touch of a key-stroke. Soon this mountain of money will spill over into the economy and the markets.
The graph above shows the Fed’s unprecedented creation of U.S. bank reserves.
In his Nov. 2, column, Robert Murphy of PrisonPlanet.com explained: “The United States has a ‘fractional reserve’ banking system, meaning that if you added up all of the checking account balances for the customers of a given bank, the total amount of deposits would far exceed the amount of cash reserves in the vaults of the bank.”
As a result, said Murphy, all this fresh Fed money will soon be lent out at a multiple. A conservative estimate is five times the amount injected. That means that the $850 billion in new bank reserves will be transformed into more than $4 trillion in new money. That would take M1 money supply from $1.7 trillion to $6 trillion in just the next few years!
To read all of Murphy’s story, click here.
Even before the avalanche of new money, M1 has risen 50 percent since January 2001 (see graph M1 Money Supply).
With all this fresh cash on the bank’s books, M1 could easily double to more than $3 trillion in the next two years. That would make M1 money supply almost 10 times higher than it was when Ronald Reagan took office.
We haven’t seen this kind of excess monetary growth since the stagflationary 1970s. It was bad for stocks and bonds then and it will be just as bad for them today.
A Short History of Stagflation
Between 1970 and 1981, M2 money supply tripled. A record amount of liquidity was being injected into the economy by the Fed. But all this money wasn’t helping an economy that was just limping along.
From the beginning of 1971 to the end of 1979 the gross domestic product (GDP) rose by just one-third—from $3.9 trillion to $5.2 trillion (in constant dollars).
As the amount of money in the economy vastly exceeded the goods and services being produced, inflation was inevitable.
The consumer price index for the 1970s rose by a staggering 6.5 percent each year. By 1980 a 1970-dollar that had been stuffed in the mattress would buy you just 52 cents worth of goods and services. It marked the end of dollar stability and the post-war economic boom that fueled a bull market in stocks.
In January 1950, the Dow Jones Industrial Average was under 200. In January 1966, it breached 1,000 for the first time. Over the next few years, the Dow moved sideways, twice testing, but never again breaking above the magic 1,000 point level.
Stocks fell into a funk. Money supplied by the Fed was not producing real gains and the stock market reflected this.
In April 1980, the Dow was trading at 759. That might not seem too bad compared to its 1966 apex, but factor in inflation and the 1980 Dow, measured in 1966 terms, was really trading at $329. In real terms the Dow had lost two-thirds of its value in 14 years.
Bond investors also did poorly. In the late 1970s prices on 30-year Treasury bonds fell more than 25 percent as the yields-to-maturity on the bellwether 30-year Treasury bond climbed from a rate of 7.75 percent in 1977 to 14.7 percent in 1981.
The end result was a massive renunciation of paper as investors began switching out of dollars and buying real assets.
Yet while many Americans lost their savings in Big Board stocks and bonds, some investors made incredible gains in precious metals.
Pitfalls and Profits
I first began investing in gold when I was just a teenager and it was selling for $35 per ounce. I kept that gold until it topped out at $840 and corrected back to the $650 per ounce range. So even though I didn’t get out at the top, I did get an 18-fold profit.
If that sounds like ancient history and something that can’t be repeated, don’t be so sure. Nine years ago last month I started writing Outstanding Investments. I told subscribers then to buy gold, silver and platinum as well as precious metal equities. At the time gold was selling for less than $280 per ounce.
Today bullion is trading back over $1,050 per ounce and I have been bullish on the precious metals throughout the decade. I still believe that bullion prices could very well double in the next two to three years. Given the excess of Obamabucks, I can see gold trading for more than $2,000 per ounce by the end of 2012.
And don’t be surprised to see silver rising to $80 per ounce (versus $17 today) and platinum to more than $3,000 per ounce.
Action to Take
It is imperative that you get out of Big Board stocks and all long-term debt instruments including Treasury notes and bonds. Look for a major correction to come in the Dow, the S&P and the NASDAQ in early 2010. I wouldn’t be surprised to see the markets hit new lows. At the same time, bonds are just as susceptible to huge losses as I expect interest rates to go up. I urge you put your money into cash in the form of three-month T-bills.
A T-bill is simply a short-term debt obligation backed by the full faith and credit of the U.S. government. The key to a bill is that it’s very short-term (and pays an incredibly small interest return). It has a maturity of less than one year and is sold in denominations of $1,000. You can buy maturities of one month, three months or six months. I like the three-months T-bills because you are not locked in very long but you don’t have to constantly roll them over.
Three Ways to Buy T-Bills
- Go to your local bank and ask to buy Treasury bills. This may be the easiest option because you already make periodic trips to your bank.
- Call your investment broker. Tell him or her that you want to purchase three-month T-bills and roll them overuntil further instructions.
- Buy Treasury bills directly from Uncle Sam. The Treasury Direct Website will guide you through this process and give you lots of information as well. You can access that site at: www.treasurydirect.gov.
I also urge you to buy some physical gold. If you are just starting out, I suggest you buy 1-ounce U.S. American Eagle coins as well as 1-ounce Canadian Maple Leaf and South African Krugerrand coins.
Myers’ Energy and Gold Report
PS—Next week I will be writing the first of a two-part series on energy. If you think wind power is the answer to tomorrow’s problems you will want to read Part I. It will include why fanciful presumptions by the Obama administration are, at best, ignorance, and at worst, the purposeful deceit of the American public. In Part II, I will tell you the core truth about America’s dwindling petroleum reserves and I will give you a new energy stock pick that should be in your portfolio.