Why the economy is back in 1937
Not only is the economy unhealthy, it’s a lot like it was half way through the Great Depression, says a U.S. advisory that hedges with Canadian stocks.
Last week, Canada released highly encouraging job numbers.
But south of us, the economy is still dragging its feet. Could a sluggish America be the rather large tail that wags a lively Canadian dog back into recession?
It will be news to no one that the two economies are closely tied together. But they do not always move in lock step.
The recession of the 1980s ran deeper and lasted longer here than it did in the United States. The opposite appears to be happening now.
Still, it is always useful to take America's temperature. We do so today with a U.S. advisory that has very specific ways of measuring risk.
Risk Factor Method of Investing tells us that America's economy is not healthy and that it is not going to get better for a long time.
Comparing today's economy with that of the Great Depression, the editor, Mr. William John Kuhn, reckons we're a little more than half way through the bad times.
Before we travel back in time, we will take our customary look at the hedge portion of this advisory's portfolio, which holds several Canadian precious metals stocks.
7 per cent precious metals
This advisory takes four measurements of stock market risk - Overall, Long Term, Intermediate and Short Term risk.
Right now, Mr. Kuhn says, Overall Market Risk is actually very low, and he advises conservative investors to have a minimum of 7 per cent in cash. Two month ago, the number was 35 per cent.
Short Term Risk is also rather low - but that is after a conservative sell signal was issued on June 24.
In the meantime, this advisory remains consistent in advising investors to hedge their portfolios with at least 7 per cent in gold and silver.
Two Canadian stocks lead his hedge list - Agnico-Eagle Mines (TSX/NYSE-AEM) and Silver Wheaton Corp. (TSX/NYSE-SLW). The latter firm doesn't mine silver, but instead purchases silver "streams" from mines around the world and sells them on to the market.
Like a number of gold stocks, Agnico-Eagle took a fall last week. Standing at $65.56 in late May, it is now at $59.17. It continues to yield 0.3 per cent on its $0.18 dividend.
Silver Wheaton has held steady for two months and trades at $19.63. It pays no dividend.
On the other hand, big U.S. producer Newmont Mining (NYSE-NEM), has been moving up and now trades at $61.17, five dollars better than its price two months ago. It yields 0.7 per cent on a dividend of $0.40.
The final two hedge positions are ETFs. SPDR Gold Trust Gold Shares (NYSE: GLD) trades at $117.41 (slightly down since May) and Silver iShares ETF (NYSE-SLV) is at $17.52 (also slightly down).
Welcome to 1937
Ever since the late 1990s, when the Dow Jones Industrial Average approached 10,000, this advisory warned "that we would be in a plateau for a minimum of fifteen to twenty years," says Mr. Kuhn.
Price/earnings ratios would be pushed down, dividend yields would necessarily rise and the Dow Jones to gold ratio would fall precipitously, from above 40 to 2. This ratio peaked at around 42 in 2000 (that is, it took 42 ounces of gold to buy one share on the index). Now it's closer to 8.
In short, things have been happening pretty much as predicted.
But let's go even further back. Welcome to 1937, says Mr. Kuhn. It this were the Depression era, that's just about where we would be. The Democrats under President Obama have been attempting to stimulate the economy.
That's just what President Franklin D. Roosevelt was doing with his New Deal programs. And it simply couldn't be sustained.
"When Congress and FDR tried to balance the books in 1937 they cut the stimulus and the economy headed south again."
Only when the economy expanded with the war effort in the 1940s did it truly recover.
"I'm being a little simplistic with economic history here," admits the editor, "but either way we go, stimulus or not, we have many more years before we will see a booming economy again."
If America's economy stays in the doldrums, can Canada move ahead dynamically? Will our banks and resource industries come to the rescue?
Stay tuned.
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