Thoughts and Questions

Thought: 1929-32 wasn’t just a decline, it was a fallout. Investors seeing a struggling economy, negative sentiment and seemingly undervalued businesses plowed funds into the stock market. Bits at first, and then in droves. As soon as enough investors thought they had bought value, came the ugly economy and bashed them again.

Question: What saves us from that happening again this time around as things don’t seem that different?

Thought: Greenspan has said that what we are experiencing is a once-in-a-100-year event. Even prior to the Depression of the 1930s there was no such speculation is the most important elements of the economy: Housing and Labor.

Question: What can give guide to investors, as everything they have based their framework on is at most only 70-80 years old?

Thought: Gold has generally been the relic of safety in times of fear. “Deflation” in the sense of deleveraging and credit implosion has always been favorable for gold. This should be especially true now as the Dollar is backed by nothing but its own credit and debt.

Question: What gives? Why has the Dollar remained so strong and gold prices so weak?

Thought: There are many schools of speculation and investment. Some base on growth, some on industry, some on cash flow, some by book value, some by earnings. These of course are all based on real-time factors. But even a company selling for less than its net worth can go under.

Question: In times of depression (worst case scenario we reckon) what does the prudent investor have best to focus on if safety is paramount? Survivability? Long-term worth?

Thought: The Dow/Gold ratio is one of the underlying fundamentals that has held up for more than a century of recessions, bear markets and speculative manias. Rising as high as 40 and falling as low as parity. The height of its top, seems proportionate to its corresponding bottom.

Question: Can we expect a Dow/Gold ratio at parity? Or even below it?

Thought: People say we can only have inflation or deflation. Yet that is only if one regards the Austrian term of deflation being a decrease in overall credit. If on the other hand, one refers to the Keynesian term of rising and falling prices, it is quite possible to have falling financial assets (stocks, currencies) and rising prices of physical assets (food and property).

Question: Could we be faced with such a situation if trust in the financial sector dwindles and the smart money moves toward safer methods of capital, in the form of commodities and real estate?

I do have many answers to some of the above questions and for some I do not. But these are question that I think many an investor must answer before he invests even 1% of his portfolio.

Remember, in tough times many people don’t even have portfolios. They have bread baskets that are either empty or not.


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