July 18, 2016

Going long Gold and short Stocks, Bonds could be profitable now

The Nikkei 225 had its largest gain in six years this week, while other stock markets around the world continue to rip higher.

But this optimism isn't a function of improving corporate profits or better global economic growth. Instead, it's based on money for nothing -- with the Bank of Japan serving as the world's biggest source of easy money right now.

The three pillars of the current global bull market seem to be Japan's "helicopter money," "cold fusion" (funding fiscal policy with a monetary-policy printing press) and even debt forgiveness. Japan is even likely to soon sell a perpetual-rate bond that carries only a nominal rate above 0% -- essentially a 0% perpetual coupon bond.

But it's my view is that:
-    The idea of offering money for nothing forever will prove to be problematic.

-    Interest rates will soon move higher. As I've recently written, I believe we're already at a generational low for bond yields.

-    Although it doesn't feel even remotely possible now, the bull market's weak foundation will soon become exposed as investor confidence in central banks deteriorates.

-    Smart investors should consider gold.

I believe that global bond markets will soon catch on to what's going on with all of this money for nothing. When that happens, confidence in central banks will disintegrate as the psychology behind lower interest rates abruptly morphs. I think the idea of long-term deflation simply doesn't have a chance -- just look at yesterday's "hot" June U.S. Producer Price Index.

Now, some market watchers think that stocks' recent climb is justified, but I respectfully disagree. Consider that:

-    S&P 500 stocks currently sell at 18x non-GAAP earnings and more than 25x GAAP earnings, and that the spread between the two has never been wider.

-    The S&P 500's annual earnings have fallen for four consecutive years, and I believe that analysts' consensus estimates for 2016-17 are too optimistic.

-    U.S. political partisanship has never been more extreme, destroying any hope for responsible fiscal policy in the near future.

-    As yesterday's horrific terrorist attack in France shows, we as investors and citizens aren't as safe as the markets assume.

Add it all up and the current system of money for nothing -- which is the very foundation of stocks' current global bull market -- simply can't continue in perpetuity. If it could, then 0% interest rates with no consequence would have been with us for the past century.

This gets me back to the idea of investing in gold. As difficult it is for me to calculate gold's intrinsic value, I believe that going long on the metal while shorting stocks and bonds could be more profitable now than at any time in the past seven years.

After all, the bull market in stocks lies on a very weak foundation -- although it certainly doesn't feel that way amid the joyous celebrations that are going on these days in capital markets.

My advice? Yell and roar and sell some more!

Position: Long SPY puts, Short TLT, SPY

via thestreet