The Profits of Doom
Gold to Infinity?
After a five-year bender, it looks like the market is finally waking up with a massive hangover...
Last week the Dow dropped 2.3% in a single day and suffered a 550-point loss over a two-day bloodbath. Gold prices hit three-year lows and basically every other area of the market plummeted after the mere mention of Ben Bernanke tapering the Fed's bond-buying spree.
It was the single worst day of the year from both the S&P and the Dow.
And somehow, it was as if investors never saw it coming!
It validates everything the Outsiders have been saying for a while now. And we're in good company.
There's a group that we refer to as "the prophets of doom." These individuals have predicted each and every crash of the last 20 years — and have been sounding the alarm about the next one to come...
Let's check in with our favorite soothsayers and see what they have to say about the most recent crash — and why things could get worse before they get better.
Marc Faber: I'm Buying Gold
The new highs in the market were never to be trusted, and Marc Faber has proven to be right on.
Faber warned in March that the entire world was acting as a massive bubble factory, that there was nowhere to hide. He was so hyper-bearish, in fact, that he claimed he wanted to "jump out the window" and even advised people to buy machine guns.
Dr. Doom's outlook hasn't gotten much rosier in the few months since; and he sees further downside ahead. Last month he noted that his asset allocation was 25% in equities, 25% in gold, 25% in bonds and cash, and 25% in real estate.
But now he sees the opportunity to buy gold and gold stocks at a discount: "Technically, commodities look horrible — precious metals also look bad. But some technical factors would suggest we are approaching at least an intermediate low," he told CNBC.
"Where as gold is close to $1,300 compared to say $700 in 2008, the conditions in the mining industries are horrible! The exploration companies are running out of money and industry conditions are worse than they were in 2008. So I think that a lot of supply that would have potentially come to the market through new exploration will simply will not be there."
He also noted that emerging economies — sovereign funds, central banks, and individuals — will continue to accumulate physical gold.
Peter Schiff: Waiting for Godot
Peter Schiff is head of Euro Pacific Capital — and notorious for predicting the housing crisis. Schiff didn't mince words when he said he doesn't believe anything Bernanke said, and never has... especially when it comes to ending the quantitative easing program:
"People are jumping to the wrong conclusion. They think the Fed is going to tighten—they're not. In fact, the next move from the Fed is to expand QE," Schiff said last week.
"Are we richer or are we poorer? Are we growing our liabilities, or are we growing our assets? America is getting poorer. We're consuming our way into poverty. We're borrowing from the rest of the world, were trying to reflate a phony economy based on assets prices stocks."
All the while, the real economy has been deteriorating right under our noses. Take a look at the numbers:
- Despite inflation running at record lows, the CPI has actually risen 1.4% over the last 12 months
- Over 25% of Americans are dipping into their 401(k)s to pay off bills, mortgages, and credit cards
- 30% of workers in a 2012 Employee Benefit Research Institute study had less than $1,000 in savings and investments; 60% of workers have less than $25,000
- The real unemployment rate (without the fudging and obfuscating by the Bureau of Labor and Statistics) is actually around 11.3%, not the 7.6% that has been widely reported
Schiff says these rotting fundamentals are evidence that we've simply put a Band-Aid on a bullet wound.
"Rather than focus on the long term, the Fed is guided by the short-term realization that any significant withdrawal of support will cause a steep sell off on Wall Street, a spike in interest rates and an end to the reflating housing bubble," he added.
Obviously none of those scenarios would be acceptable to the politicians in charge. So instead of allowing the market to naturally correct itself, they'll simply squash the tapering and rev up the presses again. This would, by Schiff's estimate, make for a huge rally in gold when investors realize that the Fed had basically been lying to them about the recovery...
"The gold traders are preparing for something that's not going to happen," Schiff explains, "and they're going to be caught by surprise. You're going to see a vicious rally in gold as people look to rebuy the gold that they sold based on the false premise that the economy was improving and the Fed was going to tighten."
The Fed is going to call it off, wave the white flag, and UP the size of QE.
"Although many haven't yet realized it, the financial markets are stuck in a 'Waiting for Godot' era in which the change in policy that all are straining to see, will never in fact arrive."
Ron Paul: Gold to Infinity!
Dr. Ron Paul may have the bleakest outlook of all: a total collapse of the U.S. dollar.
When asked why gold hasn't responded more in the face of dire news, Paul said despite the bloodbath this year, overall it's responded pretty well...
"Markets do these types of things—they go up sharply, and sometimes they take a rest," Paul told CNBC. "I was never very good on short term, whether it's the stock market, or whatever. But if you look at the record of the value of the dollar since the Fed's been in existence, we have about a two-cent dollar. And gold used to be $20 an ounce. So I'd say the record is rather clear on the side of commodity money."
Dr. Paul went on to say if things keep up this way, as Schiff has suggested, then gold could go to infinity. "Six thousand years of history shows that gold always retains value," Paul added, "and paper always self-destructs."
While we recognize the hyperbole in saying gold will go to infinity (and pray it doesn't for everyone's sake), it is refreshing to hear these guys talk about the things nobody else bothered to mention as the market ran up to all time highs without the fundamentals to support it.
All we've been hearing from the mainstream media all year is buy, buy buy!
But there are plenty of us who have been more than skeptical of the Fed's influence on the market. And it's interesting to note the results of a recent Marketwatch survey asking who Americans would like to see replace Ben Bernanke when he rides off into the sunset...
10% of respondents nominated Ron Paul for the position.
And the best part: He wasn't even on the survey; all of his votes were written in by voters.
People are waking up. The fact that Bernanke's rather obvious and tepid remarks could be enough to slay the raging bull market is cause enough for concern.
The stock market ran up on artificial terms, and now that it may come time to pay the piper, those in the know have been looking for a time to jump ship while the rest of us rearrange the deck chairs on the Titanic.
Jimmy is a managing editor for Outsider Club and the Investment Director of the personal finance advisory The Crow's Nest. You may also know him as the architect behind the wildly popular finance and investing website Wealth Wire, where he's brought readers the stories behind the mainstream financial news each and every day. For more on Jimmy, check out his editor's page.