Sometimes you get what you need. It’s funny and it’s not. Home sales are plunging again, durable goods sales slowing, and the markets are running scared.

If this is news to you, then you haven’t been paying attention to what we’ve been saying. This is what a train wreck looks like in slow motion. It started when the government in all of its wisdom decided to print money to try and bail out a natural boom/bust cycle. It was only postponing the inevitable. The inevitable might just be here now.

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With home prices falling even in the face of lower interest rates, buyers are still on the sidelines. And why not, no one wants to catch the proverbial falling knife. It will turn, but not yet. Homeowners are taking advantage of lower rates by refinancing, but this time they are not pulling money out. They are in de-risking mode. That’s the new catchword for individuals and for most countries…except for one. The US is going the other way as a country. Spend more, tax more and print more. It worked before, but it’s not working right now.

Maybe, just maybe, what we need is the type of discipline that makes smart investors richer, not poorer. But, that type of discipline is going to hurt. Though, could it be any worse than it is now. I mean really, maybe what will finally turn this ship around is a dose of reality and not the type the country is so enamored with every evening on ABC or MTV. Maybe the populous is finally waking up to the fact that printing money like using credit cards is problematic when the user or printer has the discipline of a drunken sailor.

The Mean Season

In three months the direction of the country and markets could change completely. It will be time for mid-term elections and if the Democrat Party sustains huge losses, it will mean good news for the market. The market and individuals are looking for restraint and clarity. Right now we have clarity but no restraint.

We know that taxes are going higher, spending is going higher and the market is going lower. For those three things to change, there has to be a change in the way the current administration approaches the world of business. They are not entirely to blame for the current situation…it has been decades in the making. But, there is a time and place for everything, and right now is not the time to boost the burden on individuals. Too much austerity will kill the goose, but so will too much spending. The happy medium here is to reduce spending and not increase taxes.

Businesses especially are hamstrung. They are not interested in hiring or investing. Mergers and acquisitions while a measure of health are also a measure of future layoffs. It’s cheaper to buy a company and make it more efficient than it is to hire people to grow a business in an economy that is not growing. Recently we have seen a spate of buyouts, but they have not helped the market despite their healthy valuations. This might be an aberration, or the continuation of the ominous trend put in place when the Federal Reserve confirmed that the economy was not responding to the stimulus in place.

All the While…

Our top recommendation for a while now, gold, has been rallying. In the face of deflation gold is rallying. In the face of inflation, gold is rallying. How can this be? Gold’s rally has nothing to do with either right now. Gold is rallying as a store of value in the face of an economic catastrophe. This is a good thing. There are few indicators like gold and it’s an indicator that many Central Bankers, including Ben Bernanke pay attention to. Each day it quotes the likelihood of an economic Armageddon. It’s good to have a measure of disaster so readily available and in real time!

As gold continues to move higher, my hope is that the saner minds will finally prevail. It is your signal as well. If gold continues higher, the situation around you will deteriorate. As it moves lower, the situation will improve. So, despite our rabid bullishness about the metal, we are hoping it doesn’t make new highs daily. Because as rich as we will get on paper or when we sell it, there will come a time when the only gold we own will be on paper…and we all know how much paper is ultimately worth.

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Best Regards,

Kevin Raymond