An incredible market development occurred recently as the Dow Jones Industrials (Dow) broke below 6,700 – its lowest level since 1997.

Stocks are now at the same level adjusted for inflation since 1966. Stocks have done absolutely nothing for your portfolio over the last 43 years and have badly lagged bonds and even T-bills.

Should stocks crash another 50% from current levels – an unlikely event – that will put the Dow at the same inflation-adjusted level as 1929.



Amazingly, common stocks have gone nowhere since 1966 after including the consumer price index in the total return equation. The last time equities were in similar dire straits was back in 1982 when the same matrix saw stocks return a loss adjusted for inflation from 1966 to 1982.

No Reagan in 2009

Yet in 1982 the United States was at the cusp of the Reagan Revolution, the nadir of the Volcker high interest rate era and the commencement of the biggest bull market in history. That’s certainly not the case today as tax rates increase, deficits skyrocket to the moon and the banking system continues to deflate.

Spectacular Loss of Wealth

U.S. stocks have now lost $11 trillion dollars in market value since their 2007 peak, based on the Wilshire 5000 Index, which includes large-cap, mid-cap and small-cap stocks. Global stocks have seen more than $25 trillion dollars wiped-out over the last 17 months.

Incredibly, nearly half of all U.S. stocks in the Wilshire 5000 Index are now trading at less than $5 and 37% are under $3 a share. In the 18 years in this business I have never witnessed such a depression of values, which, under normal bear market circumstances, would warrant a second and third mortgage to buy depressed stocks. History does strongly suggest this is an incredible buying opportunity.

Don’t Underestimate Deflation

The problem with adopting a bullish stance now in the midst of the first credit deflation in 75 years is the unusual nature of this bear market; deflation, unlike inflation, is an investors’ worst nightmare as asset values plummet and the cost of debt financing grows stifling. History doesn’t recall any precedent for such a sharp economic contraction – both in the United States and overseas – combined with a breakdown of financial intermediation. Indeed, we’re in a deep financial hole and, thus far, we’ve been unable to break the shackles of deflation.

Since late 2007, the Federal Reserve and other major central banks have attempted to counter falling asset prices but only with limited success. The only solution at this point after 19 months of creative monetary stimulus and unprecedented bank bailouts is to inflate the national debt. It’s literally “inflate or die” for the world’s central banks.

Gold as a Store of Value

Meanwhile, investors have a limited choice of assets to protect their purchasing power. My favorite remains gold, even though it was not freely traded in the last two economic depressions (1930s & 1890s).

From its closing price on July 31, 2007, just ahead of the subprime explosion in August, gold prices have rallied from $666.90 an ounce to $935 now – a cumulative 40% return. This compares to almost 36% for benchmark 10-year Treasury bonds, which recently saw yields collapse to their lowest levels since the 1950s in December.

The only assets to “officially” appreciate in the 1930s deflation were government bonds and the dollar – the same duo leading the performance brigade since late 2007. Gold, of course, is also in the spot-light since 2007 as it continues to trade freely; I have serious doubts gold will remain a publicly-traded asset for much longer because the way the United States is expanding credit and printing money is alarming. At some point I do believe gold nationalization is inevitable and not just in the United States.

Will the Dow and Gold Cross Paths?

The upcoming buying opportunity of a generation lies upon us as common stocks eventually hit a floor in this dangerous economic cycle.

It is possible that both stocks and gold can rally together as the dollar is compromised to finance renewed risk in equities. Also, any significant bear market rally for stocks should support gold prices because of the perception that inflation is making a comeback, which is consistent with accelerated corporate earnings and rising pricing power.

There’s also the possibility the Dow and gold will cross paths like they did ahead of the last bear market low in 1982. If that happens, I’ll liquidate almost every asset I own, possibly even selling some gold to finance my purchase of stocks.

History doesn’t necessarily repeat itself but it comes darn close.