“The wheels on the bus go round and round…round and round…round and round,” according to a familiar children’s song. The song never tells us what happens when the bus rips through a guardrail and plunges down a ravine. But the stock market might soon solve that mystery for us.
For the better part of a year, the wheels on the stock market have been going round and round. The ride has been delightful. The smooth highway of post-crisis optimism has whisked the stock market along its way. From the 12-year lows of March 9, 2009, the S&P 500 Index has advanced more than 70%.
But the road ahead looks much less inviting. The stock market must now try to steer through the narrow, rutted switchbacks of serious sovereign credit problems, resurgent inflation and a US economy that still struggles to get out of bed every morning.
Earlier this week, the credit rating of Greece and the reputation of Goldman Sachs were both downgraded to “junk” status. Neither downgrade was a surprise. But both downgrades seemed to jostle the bus a little closer to the guardrail.
Scary headlines should not necessarily scare the market. But scary headlines that contain subliminal messages like “the Western nations are bankrupt” or “America’s most influential Wall Street firm is systematically cheating” are the kind of headlines that should scare investors…at least a little.
We’re not talking doom and gloom (again), folks. We’re just saying that wishes aren’t truths. We wish Greece could pay its bills; and we wish Goldman wasn’t dishonest. But that doesn’t mean we’ll be tossing pennies in a wishing well and loading up on S&P 500 futures.
Greece and Goldman are both serious roadside hazards. Even though they have not caused any serious crack-ups yet, they have caused some serious delays. The stock market has gone nowhere for almost a month.
Commodities, by contrast, have gone somewhere. The CRB commodity index is up more than 8% from its February lows. Gold is up 10% since then. Why would commodities be rallying so noticeably, even when the stock market is not? Is the answer that the commodity market:
A) Senses a budding inflationary trend in the US?
B) Detects the European Central Bank will implement inflationary tactics in response to the credit woes of Greece, Portugal, Spain…and a roster of profligates to be named later.
C) Anticipates credit woes in the US that will prompt an even more inflationary response from the Fed and Treasury.
D) All the above.
“D” would get our vote. And we suspect the bullish tone in the commodities pits is something more than what Jim Rogers calls a “jiggle.” We suspect the commodity markets have re-awakened for good reason…and maybe for many good reasons.
One of the good reasons to buy a bit of gold, for example, is that the world is running out of good reasons to buy euros. This currency-by-committee is coming under serious pressure, as the committee struggles to devise ways to make one plus one equal three.
The chart above depicts the gold price in euros, compared to the gold price in dollars. Although gold is advancing both currencies, it is making much greater headway against the euro. Ergo, the euro is even more suspect than the dollar.
Clearly, investors are becoming increasingly concerned about the euro’s long-term purchasing power, and perhaps about its long-term viability. Your editors share that concern, and they are also concerned about the long-term purchasing power of a share of Goldman Sachs.
But we refuse to embrace any kind of doom and gloom about either Greece or Goldman. Instead, our message is positive and bullish.
We are bullish on inflation; bullish on gold; bullish on Goldman put options and most of all, bullish on volatility.
Buckle-up for safety!
By Eric Fry