“YOU AIN’T SEEN NOTHING, YET”
“GOLDRUNNER–DOW STOCK CRASH!!!- PART 1”
“RETURN OF CAPITAL, NOT RETURN ON CAPITAL”
Several years, ago, the very savvy Richard Russell stated that the investment times were changing. He said that with huge debts everywhere, cash flow would be the most important issue for everybody going forward- for business, for investment, and for everyday life. He said that it was no longer a game of “Return on Capital”, but a need for “Return of Capital.” What Richard was saying was that good and consistent investment and income gains would be more difficult for a decade, or so, and that just keeping the same value of one’s savings would be an important goal.
Richard Russell was correct for many reasons, examples of which are:
1) The Stock Bubble popped, adversely affecting stock investments.
2) The Real Estate Bubble popped- leaving people with more mortgage than house.
3) The Economy tanked leaving less cash flow for businesses and households.
4) Unemployment and under-employment increased, leaving less personal cash flow.
5) Rates dropped precipitously, giving savers of all kinds less interest income.
6) Prices for essential needs rose dramatically.
7) Social Security and Pension increases did not track real price inflation on the street.
8) In some cases banks and pensions failed, dropping personal cash flow for some time.
Richard Russell was correct for all of these reasons that you could easily see, but there was also a very important reason that is not so easy to see. This “unseen” reason has played havoc for investors and for savers for a full decade, and it is about to get worse if history repeats. It is about to get a whole lot worse for most people, because they have not “protected themselves.”
THE GOVERNMEN IS PRINTING DOLLARS LIKE THEY ARE GOING OUT OF STYLE
We entered the year 2000 with huge levels of debt that cannot be paid off. The government had two choices, either to allow the markets to enter a waterfall price decline like the 1929 period where the Dow Stocks, for instance, fell 90%; or to print lots of Dollars- to devalue the US Dollar, instead. They chose to print lots of Dollars, to increase the Dollar Supply. Thus, as more Dollars were printed, Dollar Supply went up, and the value of the US Dollar went down. Each US Dollar of lessor value “buys less”, or conversely, it takes more, cheaper Dollars to buy something. This is the real basis of “price inflation.” This is how supply and demand works. And with more Dollars being printed causing the value of the Dollar to drop, other countries that hold lots of Dollars quit buying our Bonds- demand for the Dollar started to fall. The bottom line is that more Dollars and less demand for Dollars caused the value of the US Dollar to fall, dramatically. Yet, there is no index for the value of the US Dollar. You can only find an US Dollar Index which is a “ratio of a bunch of different paper currencies to the US Dollar”, and in this environment most all of those paper currencies are being printed rapidly along with the Dollar. Per supply/ demand logic- all of these currencies are simultaneously falling in value at the same time so that the Dollar Index is a false pricing hoax that people will assume refers to US Dollar Value.
The value of the Dollar falls as more Dollars are printed so it takes more, cheaper Dollars to buy the things you need. This is how price inflation occurs. At the same time we see the same effect on our investments that are bought and sold in Dollars, “denominated in Dollars.” The Dow Stocks suddenly bottomed in late 2002 as the aggressive Dollar printing started. The Dow Stocks ran to new highs into 2007, all based on the Dow being priced in cheaper Dollars because it then takes more, cheaper Dollars to buy the Dow. But the real effect of all of this was generally lost on Dow Stock Investors. Think about it. Huge numbers of Dollars are printed so each Dollar is worth less, AND everything in the US is denominated in Dollars. If you had $1,000 in a savings account in the year 2002, you lost some part of the value of your savings as the Dollar value dropped into 2007. Say the Dollar dropped 50% in value, and you received 5% in your savings account. Well, the losses in your savings account would be 50%, minus the 25% you earned in interest income. Yet, you paid taxes on your interest income so over the 5 year period, your savings account dropped around 30% in what you could buy- even though your savings account figures grew during that time period. The same was true if you owned Dow Stocks, or bonds. The same losses occurred in your fixed income streams, whether they were Social Security, or pension plans. Let’s look at a chart so we can better picture what I am saying because from 2002, on for investment and income items, “price has risen while value has fallen.”[To be continued in Part 2.]
Goldrunner maintains a subscription site covering Gold, Silver, and the Gold and Silver Stocks at GOLDRUNNERFRACTALANALYSIS.COM. He is also anticipating the start of a new free and public blog Fractal Letter via e-mail the week of Labor Day. If you are interested in The Fractal Letter, you can send an e-mail note to [email protected].
For the moment,
Please understand that the above is just the opinion of a small fish in a large sea. None of the above is intended as investment advice, but merely an opinion of the potential of what might be. Simply put: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions. In the interest of full disclosure, GOLDRUNNER is personally invested in the Precious Metals sector including various Precious Metals and other individual stocks. GOLDRUNNER reserves the right to modify or eliminate any or all positions at any point in time.