Politicians and economic pundits are celebrating the health of our economy, boasting of a vibrant Dow Jones Industrial index that has reached an all time high. There are some good reasons to question the conventional wisdom and to prepare now for economic trouble in coming months. First of all, the “good news” of this all-time high requires studied ignorance about one of the most important factors in our economy: inflation. Peter Schiff in “Don’t Buy the Dow’s New High” shows that taking inflation into account, the levels of the Dow and other major indexes are well below their levels in 2000. The average investor may think he or she has made substantial gains in mutual funds, bonds, and stocks, when in fact, after adjusting for inflation, wealth has been lost.
Second, the new high in the Dow appears to be based on heavy recent buying in just seven of the 30 stocks that make up the Dow, while more broad indicators are pointing to trouble, not health in the market. The Dow is an easy index to manipulate if people with access to big bucks want to generate some good news. Now I don’t know why anybody would want good economic news right before the November elections, but there is a divergence in reality between the economic news we are getting from economists and the actual performance of most stocks. Important indicators are pointing to trouble ahead, not the least of which is the strong down trend in the housing market, which has often been a powerfully accurate indicator of where the general stock market will be about twelve months in advance. There are many reasons to brace for trouble. Some are discussed by Roger Wiegand, who sees evidence for stagflation.
The same pundits who praise the health of the economy say that the bull market in commodities (gold, silver, oil, etc.) is over. I believe the opposite is true. Temporary corrections do not break commodity bull markets. If you had put your money into gold or silver instead of stocks in 2000, you would be far ahead of any major index on Wall Street. I suggest you diversity now and brace for a serious recession ahead. In your 401(k), for example, consider having components in the energy sector, precious metals (e.g., the GLD and SLV exchange traded funds), some foreign stocks and bonds to help hedge against a weakening dollar, and some cash, inflation-adjusted bonds, and some sectors that do well in recessions (perhaps pharmaceuticals or biotechs?). I’m just an amateur, so do your own research and make your own decisions – these are just suggestions to help protect your vanishing wealth.
And please, get out of debt, and get all the education you can.