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The Sure Thing

The Casey Research, 3 June 2010

Digging through the entrails of the fundamentals associated with the global economy and markets, it increasingly strikes me that there is really only one investment I’d now consider a “sure thing” – and that is buying gold on dips.

In support of that contention, a quick review of the other primary asset classes is in order.

The broader stock market. we will say that with the S&P 500 currently selling at a P/E of 18.29 and with a dividend yield of a miserly 2%, it’s hard to say that these stocks are selling on the cheap. Especially when you consider that during the depths of the deep recession lasting from 1980 to 1982, the P/Es hit below 7 (averaged 8.4) while dividend yields reached above 6% (averaged 5.4%)... levels we’ve been nowhere near hitting at any point in this even more dark and dangerous crisis. Yet.

Worse, the underlying problems that delivered us to this place remain largely unresolved, having been “kicked down the road” by a numbing amount of government spending, topped off with a big dollop of meddling.

If anything, the problems are even worse now than they were in the early days of this crisis, because the bad debt is still out there – lurking in the portfolios of banks and other financial institutions, and in trillion-dollar portfolios held by the Fed, Fannie Mae, and other parastatal institutions.

While the stock market and the economy are not the same thing, they are connected at the hip. As such, unless and until the economy goes through the painful process of reducing debt levels to the point where they can be comfortably serviced, the stock market remains at risk.

On the topic of unsupportable debt levels, in an interview I just completed with real estate expert Andy Miller for the soon-to-be-released June edition of The Casey Report, he pointed out that the lending criteria for the government’s mortgage renegotiation program are even worse than those applied by the subprime lenders leading up to this mess.