Market and Meaning is our weekly update on market movements and their meaning for you as an investor. Market and Meaning is reserved for premium subscribers but is currently being offered for free to all our readers. As always, everything here represents our personal views and not official recommendations, please do your own due diligence and come to your own conclusions. To follow us more closely at Investor in the Family, be sure to subscribe by entering your info in the field to the right of this article and follow us on Twitter, Facebook, Scutify, and even Pinterest.
It has been quite a week around the world. The most significant news is the advancement of Islamist militants in Iraq. Russia has been identified “officially” bringing arms into eastern Ukraine to help separatists there. On a much more positive front, Thursday marked the beginning of the World Cup. For the next month, the eyes of the world will be on Brazil as the world holds its collective breath with every shot. On the home front, stocks are down, oil is up, and the U.S. dollar is getting an unwanted dose of reality.
In Iraq, the radical Islamist group called the Islamic State of Iraq and al-Sham (ISIS) has, in a matter of days, captured two major cities on their way toward Baghdad. As a result of the civil war in Syria and weakness of the Iraqi government, the border between the two nations is almost non-existent. This has opened the door for radical Islamists in Syria to spill over into Iraq. ISIS, an off-shoot of al-Qaeda, hopes to create a nation of their own out of territory now in northeastern Syria and northwestern Iraq. This would essentially be a remaking of Afghanistan as it was under the Taliban pre-9/11. ISIS is largely a Sunni group and the majority of Iraq as well as neighbor Iran are Shiite. These Shiite majorities will not likely lay down easily, expect a civil war.
Back in the U.S., this means great sadness. Suffering and death like this is always a tragedy and our prayers are with the people of Iraq. Seeing that this is a financially focused newspaper, expect oil prices to jump on any extended conflict. Stocks could take a dive if ISIS does make more dramatic advances, but if a prolonged civil war breaks out, people and the markets will get bored of the news and stocks will likely continue their climb. The suddenness of this flare-up goes to show that unexpected can happen at any time and often when you’re least prepared.
In Ukraine, Pro-Russian separatists shot down a Ukrainian military transport, killing all 49 on board. This marked the biggest episode of unrest in months. Also, there was confirmation this week that Pro-Russian separatists have received tanks and rocket launchers from Russia. We have said for months that these rebels were Putin-backed and it’s nice to have some validation of that point. The situation in Ukraine continues to be one of great importance as it will likely be telling of future expansion plans by Putin. Be careful to not give into the temptation to become bored by these developments in the search for “newer” news and exciting headlines.
The World Cup kicked off on Thursday with host nation Brazil defeating Croatia, but not until after an early scare that saw Croatia take a 1-0 lead. Reigning World Cup champion Spain took an early lead over The Netherlands before crumbling under the offensive force of the Dutch who cruised to a 5-1 victory. The United States enters the fray on Monday against Ghana.
This week the U.S. Federal Reserve will have their Open Market Committee meeting. We expect them to pull back QE by another $10 billion/month as the markets eagerly await any indications they may give of future moves regarding interest rates.
In the 1960′s the U.S. was claimed to have the “exorbitant privilege” of claiming a monopoly on the world’s reserve currency. Thanks to being the world military and economic superpower, the U.S. dollar has been viewed as the constant in the world financial system. All international trade is done in the dollar, this helps keep the currency in high demand and strong. The U.S. also has the privilege of creating more of this valuable asset at their own convenience. The reason for mentioning this now is to highlight how this privilege appears to be eroding away.
As a result of U.S. sanctions, Russia is now forming new trade agreements with China and wants to begin using the ruble, Chinese renminbi, and other Asian currencies to settle trade instead of the dollar. China has likewise made plans with other countries that eliminate the dollar. Brazil has replaced the U.S. as China’s number one trade partner and both exchange their own currencies in deals.
DoubleLine’s Jeffrey Gundlach recently offered a timeline showing which currencies have been dominate in modern history. Portugal reigned from 1450 through 1530, after which Spain, would predominate through 1640. The Netherlands were on top from 1640 to 1720, after which France had the dominate currency until 1815. Next, Great Britain held the top spot until 1920, when America then stepped up to the plate. The reigns have ranged between 80 and 110 years, the U.S. is currently at 94. As demand for the dollar diminishes, expect its purchasing power to follow. This is a great reason for owning other assets, whether it be gold and silver, real estate, or something else.
A German think tank recently outlined its growing concern of dangerous bubbles after the European Central Bank’s actions this past week. “We have all the ingredients of a bubble: The prices of real estate and stock markets continue to rise, and…bond yields are falling despite high risks,” says Clemens Fuest.
Amazon (AMZN) broke into the online payments market this week by launching its new role of managing subscription payments. The service will allow users to use credit card details stored at Amazon to pay for services such as a monthly phone bill or a digital music subscription. PayPal (EBAY) is set to feel the pressure, as Amazon steps into the sector it has long dominated. Amazon is also launching a music streaming service to compete with companies such as Pandora (P) and Spotify. On an unrelated note, eBay is looking to move away from auctions as it’s only selling operation and is opening a new online designer retail shop.
Google (GOOG, GOOGL) is rumored to be in talks with Virgin Galactic regarding a partnership in putting hundreds of satellites into low-Earth orbit to provide internet access to billions of people, and sees the opportunity with Virgin Galactic as a means to obtain its vision. Google will invest hundreds of millions of dollars into Virgin Galactic to develop its space tourism business.
What does all of this mean for the investor? As soon as we mentioned last week that things appeared to be calming down a bit, someone threw gas on the fire. With the uncertainty in the Middle East and Ukraine, it’s a good idea to not be complacent regarding your investments. These global developments along with the stock market around all-time highs, our yellow alert is remaining intact. We are still very invested in stocks and excited about the prospects of many of our holdings, but are also balancing that excitement with a healthy dose of sobriety.
Current Market Outlook: YELLOW ALERT
The Current Market Outlook is like our traffic light for investing. Green means all systems go, yellow means to be cautious, and red means we believe there are major reasons to be concerned.
Our opinion on gold and silver holds firm. As we have said for some time now, we are still looking for one more big drop. We made some small purchases as prices fell this week, but are remaining disciplined for the expected lower prices. Gold below $1200 is a good range for us, but we are hopeful for even lower toward the $1000 range. As always, we prefer to spread out our buying to get a better average cost. It’s possible these lows could come before the end of June, but we are holding that expectation lightly especially as this date draws near. It is possible there will be another rally before the new lows drop in.
That said, if we did not own any physical gold or silver, we would consider the current prices to be a very good entry point for long-term investment. One of our favorite gold sources recently said that he expects the metals to at least double from current levels in coming years calling this a “generational buying opportunity.” It is important to reiterate that we are talking about owning physical gold and silver coins and bars, not stocks or ETFs. Our favorite coins are U.S minted Silver and Gold Eagles, they are universally recognized and offer tax protection. For information on how to buy gold and silver, please see “How To Buy Gold And Silver.”
Bitcoin is sitting at around $572.03, down nearly $75 for the week. After weeks totally nearly 50% growth, the currency gave up 12% in the past week alone. The price chart in Bitcoin does look pretty bad with each high and low lower the than the last. At the same time, it appears that major players like PayPal (EBAY), Ebay (EBAY), and Apple are beginning to take Bitcoin more seriously. Acceptance on these levels could be exactly what the currency needs.
We continue to urge caution as we still think Bitcoin is a lottery ticket that could grow 10-100x or more and could even more easily go to $0.Caution and small amounts of money are strongly advised. For information on how to buy Bitcoin as well as our views on investing in it, please see our article, “How To Buy Bitcoin.”
Disclaimer: This article is for information purposes only. There are risks involved with investing including loss of principal. All readers must be responsible for and make their own investing decisions. Each reader bears the full responsibility for any decision to buy, sell, or hold any securities, precious metals, real estate, or other asset class as well as any decision regarding the starting or running of a business. Nothing in this newsletter is to be considered a formal recommendation. Investor in the Family LLC makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Investor in the Family LLC will be met. Please see full Disclaimer.