S&P 500 Will Finish 2010 Poll Results

I would like to thank all (301) that participated in the poll.

• Higher: Nearly 1 out 5, 18%, responded that the S&P will be higher in 2010.


• Lower: 3 out of 4, 75%, responded that it will be lower.


• Unchanged: The rest said it will end exactly where it started.

My Comments

The high frequency of bearish votes was understandable. The market has gone up a lot since March 2009 and voting took place during definable weakness in equities. Traders/investors tend to talk or vote their book (positions).

How would I have voted?

For this poll it would have been higher. My actual, historically-consistent vote would have been Higher* (with an asterisk). What this means is that I expect higher nominal equity prices - us dollar denominated from weaker dollar, but I do not expect higher real price - gold denominated . In other words, gold will continue to significantly outperform equities for a large portion of the depressionary trading box.

Why?

As I have written many times before,

Gold is the tool used to combat the effect of debt implosion to maintain the economic status quo. Those that suggest that stocks and gold are nearing an imminent decline ignore historical cycles/patterns.

A study of the Weimar Republic illustrates a classic example of how devaluation pushes up equities but not as fast as gold. The rise in equities occurred under dire economic circumstances. When the illusion broken, nearly all were wiped out and great social unrest ensued.

While the Weimar Republic may be an extreme devaluation case that pushed the limits of fiat money, it is unwise to assume that it cannot happen again. If fact, what happened in Germany has already taken and is taking place in the U.S.

The following chart illustrates how gold is used to minimize the negative effects of debt build ups after a long expansion. In order to reduce the burden of high debt levels and minimize the adverse economic effects of failing debt, the U.S. dollar has been devalued in large "devaluation steps". In the second great depression 1929-1951, the currency was fixed to gold, so the gold price adjustment was mandated by law. Once currencies began floating after 1973, the birth of fiat actually occurred in 1971, the devaluation steps became quasi market-directed. I say quasi, because gold is not freely traded. It is way too important for that. The U.S., currently within the third great depression, is undergoing or attempting a third devaluation step. That is, a the third gold revaluation since 1860.

Devaluation Steps: S&P 500 Total Market Return and Inverse price of Gold:


The key to the success of these devaluation steps is confidence. As long as the public never questions the dollar as a storehouse of value, the controlled devaluation will continue. If confidence ever fades, then look no further than the Weimar Republic as an example of devaluation that reaches critical mass.