Only idiots believe in the gold standard

By Jani Ziedins | Intraday Analysis

Aug 28

S&P500 daily @ 3:02 EDT

MARKET SENTIMENT

Another dull day in the markets.  Indexes are again trading in a tight range, this time around the 1410-ish level.  The markets are creeping slowly higher in a stealth rally, defying all the problems generating headlines in the financial press.  Going against the market is a dangerous game and shorts are feeling the pain of the market’s stubbornness as it continues to chase them out for a loss.

I don’t expect we’ll see a material pullback until most of the bears have given up because it is their skepticism that is putting the floor under the markets.  Of course a shockingly bad headline could rattle the markets, but if the only thing we get are the bearish headlines we’ve recycled for the last six months, the markets should continue its slow, steady climb.

KORS daily @ 3:05 EDT

TRADING OPPORTUNITY

Stay long the names that are working.  While the indexes are trading sideways, the calm environment is allowing breakouts to work.  Stick with these leaders until you have a respectable 20% profit or the broad market starts getting more volatile.  But don’t get greedy and take your worthwhile profits off the table once they hit your targets.  Markets typically move in 20-25% steps before pulling back.  Take the elevator up, but avoid riding it back down.

During corrections it is often easier and more predictable to short indexes, but in uptrends the best gains will be found in individual stocks.  As always, the market is constantly changing and the best traders change their strategies along with the market.

INDIVIDUAL STOCKS

I updated the watch list with some of the stocks I’ve been mentioning over the last couple weeks.  These are not buy recommendations, but simply leading stocks showing interesting price action and worth consideration.

OTHER IDEAS

All this talk about returning to the gold standard is just asinine.  Anyone promoting this idea is exposing just how little they understand economics and global current events.  Europe is on the verge of imploding because it lacks meaningful flexibility in its currency.  They are back in a recession and possibly headed for a depression because of all the austerity measures forced on them due to a rigid currency.  Unemployment is above 20% in certain areas and they are cutting spending and programs at the worst possible time. Other examples include Argentina blowing up because of their peg to the USD.

Sure fiscal responsibility sounds great in theory, but like any theory it needs to be tested and this is where the gold standard and austerity falls flat on its face.  Similarly Communism is a wonderful idea in theory, but it failed miserably in practice.  Debt is scalable and analogies can be made between personal, corporate, and government debt.  For the government to pay for everything in cash would be like telling young couples that mortgages are bad and they should save up money to buy a house in cash even if it takes 20 or 30 years to save up.  Have you ever heard financial gurus recommending renting for 30 years so you can save and avoid having a mortgage?  Of course not because it is a stupid idea.  Or how dumb it is for recent college graduate to get a car loan so she can commute across town to a high paying job versus working for minimum wage at the corner grocery store?  Or how about advising young people to work for ten or fifteen years in low-wage jobs so they can save up and not take any student loans?  These are some of the worst financial advice a person can receive, yet this is exactly what all these ‘smart’ people are recommending for the US government.

Of course there is both good and bad debt.  Above I listed beneficial debt that pays huge dividends far above the interest payments.  But there is bad debt too, such as racking up credit card bills to finance for a vacation, a big screen TV, a fancy dinner, or pair of $300 basketball shoes.  A typical guideline is use cash for things that have a near-term benefits and use debt to finance things that provide benefits over multiple years.  Translating this to government, social services and public employee salaries should be paid in cash, but public work projects and supporting R&D should use debt so those benefits can be moved forward and start benefiting the community right away.

No doubt many people who have their head stuck in the sand will argue against this, but all they have to do is look around the world to see the these different policies in practice and the economies resulting from these decisions.  We’ve been off the gold standard since the 70s and racked up a staggering debt, but the world has never witnessed as much prosperity as the US has over the last 40 years.  This debt financed an innovation explosion like the human race has never seen before and it kicked off an economic boom that advanced the standard of living and life expectancy for everyone around the world.

There is a point at which additional debt can create drag for the system, but we are not at that point yet, mostly because of the flexibility we have with our currency.  Had we been on the gold standard as gold went from $80 to $1,800, it would have crushed our economy and made us one of the least competitive countries in the global economy.  I’d even go so far as to say it would be stupid for the government not to lock in long-term debt at these absurdly low 1.5% rates.  That is practically free money and if invested properly in our economy could provide returns many times greater than the interest payments.  If I could get loans at 1.5%, I’d buy as much rental real estate as I could get my hands on and let the money flow in.  Uncle Sam can do the same thing by investing in our country and increases in productivity and economic growth will more than pay for this trivial interest rate.  Of course having the government spend the money wisely is a different issue all together.  But even if only half of the money was invested wisely it would only accelerate the prosperity we’ve seen over the last forty years.

Stay safe

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.