What to believe about gold, stocks and bonds in 2011
Guest blogger Bill Bonner offers a 'prediction-plus' about the stock market.
Yesterday, we promised to give you a “Prediction-Plus” about the stock market. You remember what a “Prediction-Plus” is, don’t you? It’s better than a prediction. It’s what you should believe…even if it turns out to be wrong.Skip to next paragraph
Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning (dailyreckoning.com).
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What should you believe about bonds? They’re going down. They’re a “suicidal” investment, says our old friend, Marc Faber.
What should you believe about gold? It’s going up. Yes, we know…it might go down. Yesterday, gold dropped $44 dollars. Whee! We’ve been warning you for months that gold could correct. No bull market goes up in a straight line. And gold has already attracted too many speculators who don’t really know what they are doing.
Remember what happened during the last big gold bull market in the ’70s? Gold lost 50% (from memory) of its value, in ’74, before finally hitting its high in ’80. Gold could drop down below $1,000.
We wish it would. So we could buy more!
But what about stocks? What should you believe about the stock market?
You should think they’re going down.
Because there’s more downside than upside. Because stocks are good things to buy during an expansion, but not during a contraction. Because the bear market that began in 2000, or in 2007, has never fully expressed itself; it has a rendezvous with the bottom…which should be at less than half today’s levels. Because stocks normally rise when interest rates go down; today, we’re probably facing rising yields for the next 5 or 10 years.
And because there are potential crises coming up in 2011 – which could trigger a big sell-off in stocks.
You have to play the odds. The last big run-up in stocks began in 1982. At that time the Dow was barely over 1,000, the yield on a 10-year US Treasury note was around 15%, and the US was just arriving at its Reagan-era peak.
Today, the world is practically the inverse of ’82. The Dow is over 14,000 and yields are close to zero. And the US is tired, slipping down like a used-up empire. Yields have nowhere to go but up. The Dow will probably go down.
And even if it doesn’t, you should think it will. Because investors are overwhelmingly bullish. They’ve plumped their money down on stocks. The smart money is taking the other side of that bet. You should too.
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