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When stock market defies logic, think long-term

FILE - In this file photaken Nov. 8 2006 gold bars are display 'Gold' exhibit American Museum Natural History New

FILE - In this file photo taken Nov. 8, 2006, gold bars are on display at the "Gold" exhibit in the American Museum of Natural History in New York. The price of gold continues to reach new records, crossing $1,290 an ounce on Thursday, Sept. 22, 2010, for the first time. (AP Photo/Seth Wenig, file)

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Updated: May 3, 2013 12:15PM



What do you do when the financial markets are upside down? What’s the strategy when bad news seems to be good news, and vice versa?

It’s a question stock market investors must be asking these days, when economic growth is stalling, fiscal policy is undecided, Europe is talking and not acting, and even the Fed can’t seem to find a policy to help.

Yet the Dow Jones industrial average closed out last week at 13,096 — within 8 percent of its all-time high of 14,164.53 set on Oct. 9, 2007. That was before the world generally recognized the global financial crisis that has engulfed us in waves over the past five years.

The subsequent financial fear pushed the Dow nearly straight downward for the next 18 months, to a closing low of 6,547.05 on March 9, 2009, as investors dumped stocks in a classic selling panic.

At current levels, the DJIA has now DOUBLED from that closing low point!

If you were dumping stocks along with the crowd in early 2009, you may feel humiliated — and far less wealthy. If you were buying stocks that week, you can brag to your friends and neighbors. If you were paralyzed with fear and did nothing, you can now breathe a sigh of relief. If you were this columnist, you can point back to a column you wrote on that day urging people to stay positive and continue investing and believing in the future of America. [http://www.suntimes.com/business/savage/savage2009/4488669-570/think-positive.html]

But what no one can do is take credit for consistently calling the turns in the market over these past five years.

That’s just something to think about as you keep making that monthly investment into your 40l(k) or IRA. You have no guarantees that the market will be higher when you are withdrawing during your retirement years. But historic odds say you’ll do better investing regularly in a diversified portfolio of stocks, than leaving your money in the bank.

Following that discipline is easier when you have some money safely set aside in a money fund to “hedge” your bets. That’s why you don’t put all your eggs in any one basket. And why you step back, gain perspective, then make a plan — and stick to it.

Long-term thinking is what generates prosperity over the long run.

A golden opportunity?

So if you buy into the idea that trading short-term market moves is better left to people who find roller coasters thrilling, then you might start looking around for additional historic long-term trends on which to base your investing philosophy. I’m talking about the kinds of very long-term cycles that are hidden in the shorter (one- and two-year) immediacy of the financial markets.

So what do we know about what historically happens to paper currencies? Very simply, we know that when an empire or a country runs up debt, the rulers eventually resort to “printing” more currency to pay down that debt — as opposed to trying to balance their budgets through policies that will generate economic growth. Rulers won’t cut spending and raise taxes if they are trying to “buy” support or compliance from the populace.

Once debt gets out of hand, they will “print.”

The problem in Europe now is that the individual countries cannot “create” the Euro currency. They are all bound to its standards. Only Germany has enough power to acquiesce in “printing” to rescue the banking system. And Germans have horrific memories of the currency printing spree in the late 1920s, which helped bring Hitler to power. While the United States remembers the Great Depression, Germany remembers the Great Inflation — and stands resolutely against a European bailout.

America, on the other hand, has a generational insecurity about recessions and depressions. We’ve seen what can happen when the government demands austerity as a solution to debt problems. And we’re hoping to avoid that at all costs. Eventually that cost may be inflation — money printing — especially if our government cannot organize around policies that promote economic growth.

Remember, these are not short-term political issues, but longer term economic trends that will defy politicians of both parties. And if you step back and take the larger perspective, you’ll want some protection against that possibility.

Historically, that protection has been gold — currently trading around $1600 an ounce. The idea of buying gold now may seem as outrageous as buying stocks in March 2009 at Dow 6547. But stocks doubled from that point, when no one was looking and few were buying. If our country doesn’t get its financial act together, you could see a similar percentage move in gold — the historic “hedge” against inflation.

Let me make my point clear. Gold could double from the current $1,600 an ounce if Congress doesn’t get its act together.

I have no time frame on that possibility, no deadline — and despite taking my own advice, I devoutly hope it won’t happen. Soaring gold prices would mean that something important has broken down in the American political and financial system, and that our paper currency — the U.S. dollar — would no longer be the safe haven the entire world seeks today.

It’s tough to think about but not impossible. And that’s The Savage Truth.

Terry Savage is the Chicago Sun-Times’ nationally syndicated financial columnist, and a registered investment adviser. Post personal finance questions on her blog at TerrySavage.com and blogs.suntimes.com/savage.



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