The Dow fell more than 500 points today. The Nasdaq was down over 5%. Oil was down 6%. The silver ETF fell more than 7%. Gold hit new highs and then fell back, although not as violently as silver. There were two good investments to be in today: U.S. bonds and the U.S. dollar.
I am an advocate of the permanent portfolio. Part of that portfolio is to put approximately 25% into long-term government bonds. Some people think this is stupid. They wonder how anyone could possibly invest in bonds when interest rates are sure to go up. Well, today is your reason why. Although interest rates are at near historic lows, they can still go lower. For some reason, investors still flock to bonds for safety.
Today was also a good lesson on why the permanent portfolio invests in gold and not silver (although the mutual fund PRPFX puts a small percentage in silver). I am not against owning silver, but I do favor a much higher percentage in gold. Today was a perfect example as silver was off more than 7%. While silver has the potential for bigger gains, it also has the potential for bigger losses.
Today should not be a big surprise for readers of this blog. It should not be a surprise to libertarians and followers of Austrian economics. When the government's solution to a recession is more spending, more money creation, and more debt, it is not a surprise that the economy remains weak. Today revealed to many people that we are going into another recession. I think a better description is that it is a continuation of the recession.
The government and the Federal Reserve have pumped in massive amounts of money and "stimulus". It made things appear a little better over the last year and a half. The stock market was going up. But the so-called recovery was an illusion. It was not built on stable foundations. A recovery needs savings. A recovery needs for the correction to have taken place to correct all of the malinvestments. The government would not allow this to happen with all of the bailouts and spending.
This economy is in major trouble and it will continue to be until the government gets out of the way. Obama and his Keynesian advisors are morons. The Republicans rightly blame Obama for making the economy worse. But they lack specifics. Most of them also fail to mention that Obama is a continuation of the bailout and spending policies of Bush and the Republicans.
The trouble in Europe is also getting worse. There is now talk of Spain and Italy needing help. Greece is a drop in the bucket compared to these two countries. We are either going to see massive inflation from the European Central Bank or we are going to see a breakup of the European Union.
Meanwhile, the Bank of Japan is going to create more yen out of thin air because its currency has been too strong. This is more mercantilism. They are morons too. The Swiss have also announced a looser monetary policy for the franc. In other words, two of the strongest fiat currencies will also be inflated. This is why you should own gold and other hard assets. All fiat currencies are risky at this point.
This whole thing sets us up for more quantitative easing (QE3) from the Fed. This will eventually drive the dollar back down and will drive gold up even higher. Bernanke is a student of the Great Depression. He thinks that the Great Depression happened because there was not enough money printed. This is his only solution to the down economy. I expect more and more inflation. Prices will rise. I think "leaders" from other countries will tell him to stop. If he doesn't listen, then the U.S. dollar will no longer be the reserve currency of the world. It will lose this status quicker than most imagined.
Hold on to your hat. This will be another wild ride. I recommend keeping your money as safe as you can. I recommend the permanent portfolio. I recommend holding some extra cash (in the bank) and gold. I recommend getting out of debt. I recommend that you sit back and watch Obama and Bernanke continue to squirm. These clowns are absolutely clueless as to what to do next. Their only solution is to spend more and print more. This has not worked so far. It has made the problem worse.