I am going to use this edition of Charts of the Week to accomplish a series of tasks that has gone undone for too long.  Forthwith:

1. To answer a brainless dolt called James West, whose name appears with some regularity on the otherwise respectable Kitco website.  This “writer” [oh, if only he could string a few words together without obfuscating] produced this gem just a week ago:

“Right now, the dollar is looking strong because of the massive repatriation of U.S. dollars now underway as a result of global U.S. denominated asset de-leveraging. So it looks [the “writer’s” emphasis] like the dollar is strengthening. This is however a temporary illusion, and the fact is that this is a perfect opportunity to unload U.S. dollars and everything denominated in same. When the export of dollars to the U.S. eases, the greenback will plunge.”

Hunh?  The dollar looks like it’s strengthening, but it’s really not?  It’s being bought, but it really isn’t?  Hmm…

Mr. West (if that’s your real name), you have been found out.  You are a know-nothing.  The dollar is, in fact, strengthening.  That is why a chart of the dollar vs. other currencies is rising.  This means it is strengthening. 

The dollar index is strengthening because the U.S. currency is seen as a safer bet and its economy is viewed as healthier than the rest of the diseased economies in the dollar index currency basket.  I have taken the trouble to draw up a simple lesson for you and your readers to illustrate how this works.  See below.

As to your nonsensical explanation of “repatriation” and “export of dollars to the U.S.,” do you stop to listen to yourself?

The dollar has increased in value against nearly every major currency and gold because, of late, it has inspired the confidence of investors worldwide.  Treasury yields dropped to virtually nothing because the entire universe wanted to own these instruments during a time of financial panic.  They bought dollars and dollar denominated assets, Mr. West, because they could find nothing so safe anywhere else.

With the audacity of a drunk clown, Mr. West also writes:

“Doug Casey, another famous newsletter writer…”

As if…

If you have time to kill, go have a look at the grunt and snort that issues from this ignoramopottamus.

2. NEXT: Is it time to buy common stocks?

According to the following, it’s as good a time as any.

• P/E ratios have fallen to historically reasonable levels (see the chart below).

• Every Dow Industrial stock is below its 200-day moving average.  This has only happened once before: after the 1987 crash.

• Insiders are purchasing stock at a rate of two shares for every one they sell – a spectacular phenomenon, considering that during “normal” bull market conditions insiders regularly sell more than they buy.  (The long-term, historical average is for insiders to sell between two and two and a half shares for every share purchased.
• According to three standard measures of valuation, world equities are better priced today than they have been at any time in the last twenty years.  The following chart clearly illustrates the point.

oCharted on a log scale, the last 90 years of market action looks anything but overdone. Look here:

The advantage of logarithmic scale charting is that it provides for equal distances for similar percent moves.  This chart shows a Dow simply reverting to its mean.  Overbought?  Oversold?  Not according to this.

3. Currently, is there something better than common stocks to invest in?

Of course, my dear ones: Silver and Gold – as Burl Ives used to sing.  But not just willy-nilly buying.  Please!  There are those who harp on the gold theme so regularly, asking if you’ve got your gold and urging you to buy when there may be far superior investments to consider.

Today’s brilliant – even historic – investment is not gold.  I say that with a certainty bordering on lunacy.  Why?

Because the Gold-Silver Ratio is now approaching historic extremes.  As of the time of this writing, the ratio stands at 82.55, a level reached for only limited intervals over the last 40 years.  Look here:

This chart, unfortunately, does not include the most recent ratio data, but it is valuable for historical comparison purposes.  As you can see, the ratio briefly rose to today’s levels between 1990 and 1993.  Since then, with one brief exception, the trade has been in silver’s favor – until today.

The best trade today is to sell gold and buy silver; and to sell it again for gold when the ratio collapses.  And so on, ad infinitum.  In this manner one is constantly accumulating a greater stock of precious metals, building slowly and surely with time.

4. Finally, where are we with respect to the essential crisis of liquidity that is at the root of the current panic in capital markets?

The answer to this question will be instructive on a number of levels.  For if banks are once again lending with confidence, then the system has been primed and we as investors can carry on – if not exactly as before, at least without the seizures of panic and fear that the financial press indicated we were experiencing.

But how will we know when the banks are lending and normalcy has returned to the credit universe? 

The answer, in a word: LIBOR.

Please explain what LIBOR is.

Very briefly, LIBOR stands for London InterBank Offered Rate.  This is the rate which banks reference to borrow on unsecured terms from one another for various durations.  When the rate is low, banks are generally secure with one another’s ability to repay and the risk premium on, say, overnight or three month loans, is minimal.

But if banks have reason to suspect they will not see their loans repaid, they get nervous, and the LIBOR spikes upward – as it did this last month.  Look here:

The closing of the gap between overnight LIBOR and the Fed Funds rate is indicative of a return to normalcy.  When three month LIBOR again approaches the three month Fed Funds rate, we will be back in business for good.

Keep your eyes peeled.

Cheers,

Matt McAbby
Analyst, Oxbury Research