Wednesday, March 19, 2008

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The Stock Market and Economy: A Return to the 1970’s in Form?

Posted: 18 Mar 2008 05:11 AM CDT


We are entering, in my opinion, a period of economic and stock market turbulence that will affect the pocketbooks of our citizenry going forward. Commentators on financial television have been reluctant until recent days to make the analogy of the present period to the awful economic period of the 1970’s, which has been my thesis for some time.

As I have been pointing out for many months in my investment blog, at http://www.reiznersway.com/articles/index.html, the current strength in oil (reaching $100 per barrel), gold (over $850 per ounce), gold stock, oil stock and oil service stocks are mimicking in form the inflation racked 1970’s. As well, the dollar is a weak currency now, much like it was in the late 1970’s, when the Swiss franc was popularized as a hard money investment.
In the December 2007 period, unemployment stepped up to 5% and inflation has been rearing its ugly head in recent months. If unemployment continues to rise, I believe that we may find ourselves in a medium level stagflation. The combination of rising prices and a weakening economy is not a good formula for the welfare of consumers, not to mention the stock market.

The stock market has started out in 2008 on the wrong foot. I will stick my head out to say that the telltale similarities of the current gold, oil, currency markets, and inflation and potentially rising unemployment, to 1970’s market behavior leads me to the opinion that the stock market may continue downward or at least linger in a trading range in the spirit, but probably not the severity of the 1970’s. In other words, it is possible we may see a contraction in the price earnings ratio of the market.

A caveat here is that should the Federal Reserve step in aggressively to lower key rates to counter the housing and banking decline, it would be constructive for the stock market. But as has been said widely, this would put the Fed between a rock and a hard place, as the dollar and inflation levels would likely react badly to a looser monetary policy. Interest rates would rise in inflation, putting pressure on the stock market.

If it walks like a duck, then there are ways to make money on the 1970’s analogy. I have been invested in gold coins and bullion for some time and have seen the value of those investments soar. As well, I own international oil stocks and shares in an oil service company, which have done well. Even the railroads which did well in the late 1970’s have been resurging. On the other hand, we have seen bank and mortgage related stocks decline in the last few months, as I anticipated in my blog article, Bad Banks, Good Banks during a Credit Crunch: Opportunity Knocks.

Even national politics seem to be swinging back leftward, which, according to the platform of some major democratic candidates for president, would lead to more regulation, less free trade and the redistribution of wealth (an action which would not create any additional national wealth). The stock market might find itself in a bind if unenlightened 1970’s era policies are enacted after the election.

So even though the gold and oil markets have been extremely strong lately, and I have stated in my investment blog that I believed that there may be a temporary cresting of inflation hedges - the long run still appears to bode well for the oil and (especially) the gold sectors. I also anticipate writing a blog entry on the possibility of buying in the future, strong banks that have been depressed in pricein sympathy with the weak banks. So stay tuned. I suggest you to read more information at www.recursion.info, www.doktermuda.com, and dengarblogku blog.
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