The Smart Money Report

…what is going on now is going to lead to inflation. From Steve Saville:

We acknowledge that wealth destruction could lead to less money being borrowed into existence in the future, and, consequently, to deflation. After all, tens of trillions of dollars have been knocked off the market values of equities, houses and high-yield bonds, thus reducing the collective ability of the owners of these investments to borrow money. However, as long as the total supply of money continues to grow we can confidently conclude that the deflationary forces that stem from wealth destruction and credit contraction are being more than offset by the inflationary actions of the central bank and the government [my emphasis].

Amen.

The U.S. dollar as a safe haven? Today, it had its 5th biggest decline ever. When the dollar gets dumped, it gets dumped with a vengeance.

A few of my favorites, from The Big Picture:

• The S&P 500 hasn’t been this far below its 200-day moving average on a percentage basis since The Great Depression. (Doug Kass)
• The dividend yield on the S&P 500 is now greater than the yield on the 10-year Treasury. That hasn’t happened since 1958. (Barron’s)
• The 30-year return for BBB-rated corporate bonds is now greater than the 30-year return for stocks. So it has not paid to take equity risk for 30 years! (The Street.com)

Uncharted territory is an understatement.

Here’s a 4-part Financial Times interview with Jim Rogers.

He discusses his view of the U.S. dollar (he thinks the dollar rally is nothing more than short covering); what he thinks about the election of Barrack Obama and why he hopes Obama’s not going to do the things he said he was going to do during the campaign;  his view of China and the recent stimulus package; why inflation is going much higher and why all this talk about deflation is nothing more than the forced liquidation of assets.

He says “Hold on to your real assets.” The unprecedented massive printing of money on the part of central banks around the world is going to cause commodity prices to go much higher. (via Prieur du Plessis)

That’s the question that Steve Saville asks. There’s only one:

When considering the outlook for the next 6 months or longer, the only gold-bearish argument that currently holds any water is the deflation-related one. If the forces of deflation overwhelmed the efforts of central banks such that the total supply of money began to contract, then gold would probably keep performing well in terms of most other commodities but would perform poorly in terms of the deflating currencies. As a result, we would not be intermediate-term bullish on gold if we thought that genuine deflation (a contraction in the money supply) was a likely outcome.

So in order for deflation to occur money supply would have to contract even as central bankers continue to print more and more money. You want to bet on that one?

And then there’s the bullish argument for gold:

Our expectation that the outward evidence of inflation will dissipate is supported by the performance of the Future Inflation Guide (FIG) calculated by the Economic Cycle Research Institute (ECRI). Despite its name, the FIG has nothing to do with monetary inflation; rather, it is a leading indicator of the prices of goods and services. Specifically, it is designed to indicate what will be happening to prices in 6-12 months time. As illustrated by the following chart, the FIG (the blue line) has plunged over the past few months.

The superficial signs of an inflation problem will almost certainly subside over the next 12 months, but this should not create a significant headwind for gold as long as the rate of monetary inflation continues to rise. As discussed in the past, the reason is that savvy speculators will likely accumulate positions in gold in anticipation of the eventual/inevitable effects of the monetary inflation[my emphasis].

You probably want to be a savvy speculator.

GM declares itself essential to the world as we know it. Bail ‘em out or all kinds of terrible things are going to happen.

This is probably not a bad idea at all. Steve Alexander has identified the Magic Formula stocks with the highest relative strength.

He’s using relative stength to the S&P index for the past 12 months. I would probably want to shorten the time frame to get the strongest names lately, but the idea of choosing only the strongest stocks with the highest return on capital along with the highest earnings yield makes a lot of sense.

I think the most interesting thing about Jeffrey Saut’s article is the chart at the very end. We are in a stock market decline the likes of which we have only seen three times before in the last 100 years.

But notice on the chart what happened previously after one of these washouts. Each time represented a great long-term buying opportunity.

Mark Perry posts an amazing graph. The average total compensation per worker for Toyota is $48 per hour. For Management and Professional, $47.57 per hour. For Goods Producing, $31.59 an hour. For All Workers, $28.48 per hour.

What is it for for the Big 3 Automakers? Are you ready for this?……. $73.20 an hour!

Let them reorganize under bankruptcy protection, renegotiate their ridiculously expensive labor contracts, and see if they can make it. In the meantime, Toyota and Honda (who hire over one hundred thousand U.S. workers) are more than capable of taking up the slack.

John Hussman makes makes some great points. Here’s one of them.

While it’s true that the market established even deeper valuation troughs in 1974 and 1982 (near 7 times prior peak earnings, compared with the current multiple of about 11), it is important to remember that long-term Treasury yields were 8% in 1974, and 14% in 1982, compared with about 4% at present. While I’ve frequently argued that stock and bond yields are not related in anything near the 1-to-1 manner that the “Fed Model” suggests, it is already clear that a long-term investment in stocks here is likely to substantially outperform a long-term investment in Treasury securities over time. Even with very little adjustment for risk, U.S. stocks are likely to provide stronger long-term returns than the yields available on most corporate bonds as well.

That’s right. P/E’s may not be as low as they were at the market lows of 1974 and 1982, but interest rates were much higher then. So stocks had to get to ridiculously low valuations to compete with the high returns that could be realized from investing in Treasuries. That’s not the case today.

And on why nobody cares that Warren Buffett is bullish:

The most interesting thing about that op-ed piece wasn’t Buffett’s opinion about stock valuations. He’s absolutely right, in my view. Rather, it was fascinating how quick many investors were to dismiss Buffett’s advice, saying either that he didn’t understand how bad the economy was going to get, that he preferred to “get in early,” or that he was “talking his book” and trying to bid up the value of his own investments.

Also:

The rush to dismiss Buffett’s advice underscores the extreme level of bearishness among investors here. According to Investors Intelligence, just 22.4% of investment advisors are presently bullish. This matches the lowest extremes we’ve seen in decades. Extreme negativity of investors has generally been a useful contrary indicator of stock market prospects. That doesn’t ensure that stocks have registered their final lows, but it contributes to a set of historically favorable conditions here.

The best time to buy is during periods of extreme negativity. Some things never change. Read the whole thing.