Q: In Feb. 2005 you wrote an article "Someone is going to be very right" outlining your expectation (correct) of a big drop in the stock market. I have recently heard talk of a sudden devaluation of the dollar happening in 2011 or 2012. What do you think? What can one do to prepare?
A: That is a good question. Let me start by comparing the scenario from 2005 to today. There was clearly a real estate bubble taking place and history would suggest at the time that we were heading for a bear market. Having said that, I could have never forecasted the type of crisis we ended up facing. Much of that was due to the unprecedented nature of the situation. We had some idea how a real estate bubble would end.
Today, the only bubble that I am seeing is in gold. As far as a dollar devaluation…I think that it is inevitable just because the politicians will never do what is needed to save our currency. However, I also don’t think that it is something that is a present concern. If I had to break out the crystal ball, this is what I would forecast.
First, I don’t think that inflation is going to be our problem in the near future. A debt crisis produces deflation instead and deflation tends to stick around for a long time. Although the Fed is printing money with no end in sight, this money is not circulating in the economy. It is going to replace losses. It is tough to get inflation from that scenario.
Second, the dollar actually strengthens in deflationary environments. Gold, in my opinion, is in a bubble and due to see a serious devaluation in price that might have already started to occur.
Third, the markets are ripe to transition back into the long-term bear market that started in 2000. I think that the bull market between March and now has been nothing more than a pause in an ongoing long-term secular bear market.
Having said all of that, I am in the minority in my opinions and the vast majority would say that I am wrong. I certainly could be wrong and I am not trying to be right. I am just looking at history and the environment and sharing my conclusions.
What do you do about it? In the event that we have a dollar devaluation, I couldn’t even begin to specifically recommend what to do. That is an unprecedented situation and could end in many different ways. However, as a matter of good stewardship, regardless of what happens, know your risk in everything you do and be comfortable with the risk that you are taking. That is with EVERYTHING that you do financially.
