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Posted on May 30, 2010 -
Read Reizner's Way to Wealth
By John Reizner |


The immediate force starting in May 2010 with which our investments may have to reckon may be deflation (lower or stagnant prices) throughout our economy and in asset classes such as the stock market, oil, silver and potentially gold.

The Dow Jones Industrial Average closed at 10136.6 on Friday, May 28, 2010. Gold closed at $1,212.20 per troy ounce and silver closed at $18.43 per ounce on this date. (Editor's note: oil traded at $74.09 when this post was written).

I previously wrote on this website that building pressures from the Federal Reserve's policy of monetary ease could potentially translate into price and asset inflation in the U.S. economy in the next few years.
 
My immediate fear is that a general liquidation of assets may be underway. I hope that I am wrong, but I am considering and hedging the bear market case in my own investments.
 
We were the largest creditor nation on earth in the 1970's in spite of our economic woes at that time. Now we are the largest debtor nation. As a result of the level of potentially unserviceable public and private debt that pervades our society's households and many financial institutions - that it extends to parts of Europe, and due to the current unsettled price behavior of our stock market and their potential outlook - investors need to be mindful of the possibility that our markets may breakdown. The potential for asset liquidation similar to a depression environment may exist. But rest assured, our central bank should do everything in its power to stop this from happening and should continue monetary ease if general asset liquidation occurs. After asset liquidation (falling asset prices), reflation of many of the same investment class may occur.
 
The Dow Jones average, after reaching a closing high of 11,205 on April 26, 2010, just shy of my lower price target of 11,129 proposed in my last blog entry, is trending down at least for the short term. The demand for the dollar (the dollar index is now at 86.88) is strong on a flight to "safety" as the risk of European contagion potentially increases.
 
The last secular bull market in the U.S. equities market lasted from 1982-2000 (eighteen years). Long term bull markets are usually always followed by long term bear markets. We have been in a secular bear market since 2000. If the duration of this secular bear trend follows the pattern the last one from 1966-1982 (16 years), then one may not expect the next long term bull market to begin until around 2016.
 
Until recently, we have experienced a shorter term bull market which took the Dow Jones to its highest closing price ever of 14,163 in 2007. Then the financial crisis imploded, cutting the average by more than 50% to the March 2009 low of 6626, From that low, the Dow Jones average ascended to 11,205 on April 26, 2010 until the recent sharp decline. There is potential for the secular bear market to trade within the area of the current defined range of Dow 6626-14,163 or to break the March 2009 lows. Once the long term bear trend plays out, a new secular bull market can begin.
 
I have recently reduced my general equities positions meaningfully, including some oil and gas industry securities and have placed the funds in a U.S. government money market fund. I still maintain a core position in an international integrated oil firm and some other equities. I still maintain my investment in the Franklin Templeton Hard Currency Fund.

Please see my earlier post dated February 3, 2009 which discusses the possibility of deflation:
Will the U.S. Suffer Inflation or Deflation in 2009-2010, or Both?

Addendum: Gold, Silver, and Oil:
The price of oil, now at $74.09, has the potential to fall further in the near term - though oil is still a very precious asset.
 
Silver, at $18.39 as I write this, has had a weekly momentum non-confirmation and potentially risks going lower.
 
There has been a ten year bull market in gold with the price rising from below $300 to over $1,200 per troy ounce. The 1970's commodities bull market also lasted ten years before collapsing.
 
The investing public is heavily in the gold and silver trade. These asset prices may follow the stock market down as liquidation of certain asset classes I describe potentially takes hold. Gold and silver prices may be in their peak range for the intermediate term. I have sold my silver holdings bought for speculative purposes and look to re-enter in the future. I still maintain a core position of gold and silver holdings as insurance or to participate should these assets continue to rise in price.
 
Please see my post: dated June 23, 2009, which describes why I realized profits in physical gold bought at much lower levels:
 
Why I Sold Part of My Gold Position After a Six-Year Hold?
 
Should liquidation of asset prices take hold for the intermediate term in the financial markets, our stock market, silver, oil, and potentially gold may suffer, at least for a while. If this is the case, it may play out gently in our stock market as a slow decline such as the Japanese stock market and economy experienced in its "lost decade," or it may be more rapid. We now have our own "zombie banks," just as occurred in Japan. At that point, the Fed may be desperate to inflate - and the assets that may have suffered during asset liquidation may then potentially rise in price exponentially.
 
Editors note: My website readers and subscribers to my RSS feed have likely noticed that I have not posted since October 2009. I have been on sabbatical from the website and am still very busy analyzing the markets from my point of view and always attempting to understand the markets better. This long weekend has provided me the time to post an investment update, especially timely as it offers a different outlook for many of the investments about which I have written in the past. Please refer to the "site map" for the complete list of blog entries and articles.
 
I want to personally thank all the readers who have followed this website since its inception. I hope to provide more investment updates as time allows.
 
This blog contains the opinions and ideas of the respective authors of the blog's various entries and is designed to provide a forum for general discussion of the subject matter covered. Each of John Reizner (together with this website, "Reizner") and the participants in this blog (the "Participants") may or may not have current positions in the investments mentioned in this blog, and each of Reizner and the Participants may from time to time make investments in a manner that is not described here. Past investment performance is no guarantee or predication of future results and any investments made, based on the opinions and ideas contained in this blog, may or may not be successful. The strategies (if any) contained herein may not be suitable for every investor or situation, and neither Reizner nor any of the Participants is engaged in, or may be construed to be, rendering legal, accounting, investment advisory or other professional services to the reader or any other person. Readers should consult their own advisers for advice particular to their individual circumstances. Reizner is not, and may not be construed to be, responsible for the content of any entries made by the Participants. By viewing this blog, you expressly consent to the terms of this site's Terms of Use Agreement.

 

 

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This blog contains the opinions and ideas of the respective authors of the blog's various entries and is designed to provide a forum for general discussion of the subject matter covered. Each of John Reizner (together with this website, "Reizner") and the participants in this blog (the "Participants") may or may not have current positions in the investments mentioned in this blog, and each of Reizner and the Participants may from time to time make investments in a manner that is not described here. Past investment performance is no guarantee or predication of future results and any investments made, based on the opinions and ideas contained in this blog, may or may not be successful. The strategies (if any) contained herein may not be suitable for every investor or situation, and neither Reizner nor any of the Participants is engaged in, or may be construed to be, rendering legal, accounting, investment advisory or other professional services to the reader or any other person. Readers should consult their own advisers for advice particular to their individual circumstances. Reizner is not, and may not be construed to be, responsible for the content of any entries made by the Participants. By viewing this blog, you expressly consent to the terms of this site's Terms of Use Agreement.

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