Financial outlook: August 1, 2021

We are in the traditional dog days for the stock market. Here are monthly returns for the S&P 500.

  • The green line is the 75th percentile; only 25% of the time are returns higher.
  • The yellow line is the median; half the time returns are higher, and half the time they are lower.
  • The red line is the 25th percentile; only 25% of the time are returns lower.

As you can see, January and the period from Memorial Day to Labor Day are times to be cautious. For the adventuresome, they can be buying opportunities. But not this time.

According to the Shiller P/E ratio or CAPE ratio (10-year cyclically adjusted price-earnings ratio), stocks are more expensive compared to earnings than any time in the last 150 years with the exception of the dot-com bubble: https://www.multpl.com/shiller-pe

I have made the argument elsewhere that it is not quite as bad as it looks: that markets underwent a fundamental change around 1997 that justifies somewhat higher prices. Even I must admit that prices are excessively high, and earnings have been squeezed about as far as they can go.

This next item is not as easy to assess: the ratio of the S&P 500 to gold: https://www.macrotrends.net/1437/sp500-to-gold-ratio-chart

  • After a peak in 1929, the ratio collapses and stays stagnant through 1942. (13 years)
  • It then grows through 1967, staying elevated through 1971, when President Nixon ended the gold standard. (29 years)
  • The ratio plunges as gold soars, with the ratio bottoming out in January, 1980. (9 years)
  • The economy got used to the Volcker Fed, inflation started to fade, gold receded, and stocks took over to a peak in September 2000, the dot-com bubble. (20 years)
  • Stocks weakened relative to gold through the financial crisis on to September, 2011. (11 years)

The very long-term trend for this ratio is to increase. If the cyclical pattern discussed above continues, we should be on a long-term increase for the stocks/gold ratio. Either gold goes down, or stocks go up.

That is the long-term pattern, but I do not see either happening right now. I believe the ratio is about to enter a correction. I argued above that stocks are over-priced. Gold may become essential as America and the world finally begin to realize that behind the “full faith and credit of the United States Government” is less than the Wizard of Oz.

The real (inflation-adjusted) yield on the 10-year Treasury note (red line below) is a great inverse predictor for the price of gold (blue line below). The red line is at its lowest level since 1980. It is reasonable to surmise that gold should continue to rise.

Michael Snyder asks if you are willing to pay $40-50 for a hamburger. (He is talking about inflation, not social collapse.)

Inflation Shock: Are You Ready To Start Paying “$40 Or $50” For A Hamburger?

Economist Martin Armstrong argues that “the financial system has come to an end”:

This essay recommends gold to protect against “extreme financial deleveraging”:

https://www.zerohedge.com/commodities/time-buy-gold-hedge-against-extreme-financial-deleveraging-credit-suisse-says

Orange juice futures soar, due to frost in Brazil (currently in winter):

We are already experiencing “shrinkflation” (paying the same price for smaller packages):

https://mises.org/wire/shrinkflation-inflations-sneaky-cousin-rise

One final reminder: I am not a financial adviser. There is a risk of loss in all investments. Past performance is no guarantee of future returns. I am just sharing information I have seen online and sharing my thoughts.

2 thoughts on “Financial outlook: August 1, 2021

  1. The Wizard of Oz actually was a very bad man; his evasion of the issue by only admitting to being a “bad wizard” sounds a lot like the deflections and non-apologies of today’s left.

    Liked by 1 person

  2. If you buy gold / silver through ANY broker, understand this will be recorded and tracked. Which will set you up as an extremist who doesn’t trust the “full faith and credit” of the US government, and therefore needing to be watched and – ultimately – being worthy of a visit to relieve you of those coins.

    Like

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